10Nov 2015

The lithium-ion battery market is large. For consumer devices, it will exceed $10B in 2015 corresponding to a total output capacity of 40 GWh. The promise of even greater markets in stationary energy storage and electric vehicles is attracting interest and investment. Goldman Sachs estimates that the energy storage market could reach a demand greater than 700 GWh in 2015, eclipsing the expected 175 GWh capacity demand for electric vehicles.

But these large market figures belie the harsh market realities of building batteries, in particular manufacturing cells for lithium-ion applications. This post will dive a little deeper into the financial challenges that cell manufacturers are facing today and will most likely face as the battery markets expand rapidly in the coming years.

Let’s start by looking at the present state of cell manufacturers. The bulk of the manufactured cells goes to fulfill the demand in consumer devices, including some 1.4B smartphones and 400+ million laptops and tablets. To first order, 4 major cell suppliers deliver 80% or more of these cells, mostly polymer cells.

The $10 Billion-battery consumer market is serviced primarily by 4 large Asia-based suppliers.

By virtue of the market size and volume, batteries for consumer devices have been and continue to be under immense pricing pressures. On average, the pricing is about $0.25 per Wh, but that can be as low as $0.10 per Wh for some of the vintage low energy density batteries. This competitive landscape left these battery suppliers with, let’s just say, less-than-attractive financial statements. For example, a visit to LG Chem’s website reveals the financial situation for their “energy division.” For this most recent 3rd quarter in 2015, it recorded revenues of approximately $640m, about 80-85% of it from consumer devices, and the rest from their sale into xEVs (Electric and hybrid electric vehicles). Against these revenues, the company recorded a meager profit of 1.3%. It had reported a 6% loss in the prior quarter. Gross margins for battery manufacturers tend to be in the range of 10 – 20% at best. That’s nothing to write home about.

Such strained financials seldom give the company’s management any latitude to invest in extensive R&D — the expectation of future returns on invested R&D is often missing in such scenarios. The result is diminishing innovation, rising pricing pressures, and the onslaught — more rapid than one might imagine — of new low-cost manufacturers, especially ones based in China.

Instead, the management teams of battery manufacturing companies begin to look at alternative markets that can be financially more rewarding. After all, they are all watching Panasonic reap the rewards of their relationship with Tesla. Panasonic recorded nearly $800m of sales to Tesla in 2014, and the markets expect the number will grow to $3.35B in 2020 if and when Tesla succeeds in shipping 250,000 electric vehicles.

 We can witness this change of direction from a number of observations. First, Nikkei published on 28 October a report that Tesla is in discussions to source batteries from LG Chem, in addition to Panasonic. Second, let’s take a look at Samsung SDI’s revenue projections for their battery division.

One can immediately see flat revenues from their mobile product line, but growing projected sales from energy storage as well as transportation. In other words, the unstated strategy of these giant conglomerates is to controllably relinquish their mobile market share to their Chinese competitors and focus on winning in the growing but hopefully more profitable storage and xEV markets. In these markets, there is also room for them to add value beyond building cells — they can also build packs and the complex battery management systems.

So where does this leave innovation in consumer devices? most likely stranded! Increasing pricing pressures from Chinese manufacturers makes it quite unattractive to invest in consumer batteries — thus leaving the mobile device OEMs at the mercy of decreasing cell quality and possibly performance.  Of course, I am sure someone will argue why can’t the innovation trickle down from energy storage and xEVs to consumer? The answer is that these are complex systems where innovation is often at the system-level and less so at the cell-level where consumer devices demand it. Additionally, the cost points for these large-scale systems are vastly different from the relatively simpler consumer device; hence the dilemma that is creeping up rapidly on both battery manufacturers and consumer device OEMs. This is also the commoditization of the lithium-ion battery.