11Jan 2016

A lithium-ion battery cell for a smartphone costs the device OEM somewhere between $2 to $4 depending on its capacity and other design attributes. It constitutes about 1 to 2% of the entire cost of the mobile device. In contrast, a lithium-ion battery for an electric vehicle can range between $7,000 and $20,000, making it by far the most expensive item in the cost of the vehicle. So what drives these cost figures?

The primary cost metric of a lithium-ion battery (not including the pack electronics) is dollars per kilowatt-hours, abbreviated as $/kWh. That’s the cost of each unit of energy measured in kWh. A small smartphone lithium-ion battery stores about 10 Wh, or 0.01 kWh. A Nissan Leaf has a battery capacity of 24 kWh; the Tesla Model S can reach up to 85 kWh.

Today’s metric stands near $200 /kWh (or $0.20 /Wh) for consumer-grade batteries, and the cost continues to decline. See this earlier post to learn how these costs declined by 10X from 1995 to 2015, primarily as a result of increasing installed battery manufacturing capacity. Cost of lithium-ion batteries for electric cars is also declining…recent announcements from General Motors suggest a cost of $145 /kWh for their EVs declining to $100 /kWh in 2021. Now that’s GM’s numbers and they don’t necessarily reflect the cost structure for all EV makers — albeit it is highly rumored that Tesla’s figures are in the same vicinity. At $145 /kWh, the estimated cost of the lithium-ion battery of the newly announced Chevy Bolt is $8,700, plus an additional $3,000 for the pack electronics, for a total of nearly $12,000 — not too bad for an electric car that is advertised to go 200 miles and priced at about $40,000 before government incentives.

While the cost structure of manufacturing batteries is usually confidential to the battery makers and their large customers, there is sufficient information from various market reports and intelligence that provide insight into the components that make up the total cost figure. The chart below breaks down the cost for consumer-grade batteries into three basic categories: i) material costs, ii) labor costs and iii) overhead costs and profits.

Cost components of a lithium-ion battery

Cost components of a lithium-ion battery

The material costs are by far the largest contributors — about 60% of the total cost. For lithium-ion batteries made using lithium-cobalt oxide cathodes (LCO, used in consumer devices) or nickel-cobalt-aluminum cathodes (NCA, used in Tesla), the price of raw cobalt is a major component, presently priced at $10.88 per lb. That translates to nearly $10 to $15 /kWh just for the cost of raw material for the cathode — before processing and manufacturing. If you are wondering about cobalt sources, mines in Africa are the largest production sites. The good news are that cobalt pricing is at its lowest since it hit a peak of $50 per lb in 2007, and the US Department of Energy does not deem its supply at risk.

Labor is a relatively minuscule component of the overall cost — battery manufacturing combines significant automation in countries with low labor costs, in particular China. Overhead costs are, however, much more significant at 30% — they include depreciation of the capital, energy costs, R&D, sales and administrative…etc. As I have mentioned in prior posts, profit margins tend to be in the single digit…the financials of a battery manufacturing business are nothing to write home about.

This situation and increasing dominance of China in battery manufacturing has led many companies to be material suppliers. For example, the cathode material market is nearly $2.5B dominated by large conglomerates such as Tanaka and Mitsubishi in Japan and 3M in the US. Another example is the electrolyte market: at nearly $1B, it is dominated by the Japanese companies Stella Chemifa and Kanto Denka Kogyo.

Looking at the chart above gives an idea on where future cost-reduction measures are likely to be. First, reducing overhead costs…one can think of Tesla’s Gigafactory in Nevada as an example. Second, reducing the material costs. This is a longer term process with larger players, e.g., the large automotive manufacturers and to some extent the large consumer manufacturers such as Apple, exerting influence on their supply chain to improve efficiencies and reduce costs. The result: A goal of $100 /kWh by or before 2020 is within reach. This is widely accepted as the cost point where EVs can become affordable to larger segments of society and compete effectively against traditional combustion-engine vehicles.

However, at these cost levels, it becomes really hard to justify amortizing large R&D costs that may be necessary for major future battery breakthroughs. Instead, what is more likely to happen is a gradual evolution of battery materials and designs funded by modest R&D investments, and consequently continued commoditization of the lithium ion battery. This is not a bad thing to happen.