Just in time for today’s tour of Michigan’s “battery belt,” the Obama Administration has released a study [full PDF here] of its electric vehicle stimulus efforts which concludes that the money was all well spent. Though the report covers a number of programs, from the ATVM “retooling loan” program which is backing companies like Nissan, Tesla and Fisker, to charging station subsidies, the major accomplishment of these billions of dollars is encapsulated in a single claim:
By 2012, thanks in part to the Recovery Act, 30 factories will be online and the U.S. will have the capacity to produce 20 percent of the world’s advanced vehicle batteries. By 2015, this share will be 40 percent.
As you can see from one of the report’s graphs (above) the US will achieve this 40 percent share of the world’s EV battery production just as two-thirds of the cost is beaten out of the things. And because batteries don’t follow Moore’s Law, it’s all diminishing returns from there. So what happens come 2015?
The obvious answer: oversupply. A study released earlier this year projects that
Planned investments will thus result in significant overcapacity between 2014 and 2017, especially in the US and in Japan. Given the announced investments, capacity in 2015 will already reach 200% of the demand projected for 2016. In addition, not all investments have been announced; as-yet unknown investments by key players will lead to further overcapacity, and national subsidies will stimulate even more investments.
Though that number likely includes the Obama Administration’s spending, it certainly doesn’t include the just-announced $12.5b investment by the Korean government into its Li-ion battery industry. And that investment comes at a time when two Korean firms (LG Chem and Samsung) already control 40 percent of the world’s Li-ion cell production. That investment will not only water down the Obama administration’s claimed benefits of EV stimulus, it will also greatly accelerate fears of oversupply. Given the beating that EV battery maker stocks (like A123 Systems) have taken of late, it’s not a fear to be taken lightly either.
Meanwhile, let’s look at the Obama stimulus’s main claim to fame: a stark reduction in battery costs between now and 2015. That claim is already looking like a red herring, considering the starting point of the Obama study’s graph. Since the hypothetical battery used for the graph is 33.33 kWh (100 mile range at 3 miles per kWh), the Obama administration’s estimate values currently-available batteries at about $1,000 per kWh. That number flies in the face of the Nissan Leaf, which has reportedly cracked the $400/kWh mark with its current battery pack. In short, the Obama Administration’s 2015 battery price of $10k would be a mere $3k reduction in price from currently-available prices… realized over 5 years and at a cost of billions of taxpayer dollars.
These lower-than-anticipated prices are yet another indication that oversupply is on the way, and that multi-billion-dollar governmental investments in the Li-ion sector are simply inflating a bubble that will have to pop at some point. Meanwhile, Obama’s much-touted stimulus program funneled nearly as much money to foreign firms like Nissan and LG Chem as it did to homegrown outfits. These foreign firms, which are able to double-dip into US and (say) Korean government investments will be able to beat prices even lower, squeezing out the more marginal recipients of only US investment. Meanwhile, the limited range, capacity degradation and relatively high cost of EVs compared to gas powered cars will keep demand relatively inelastic even as competition and overinvestment drives competition.
And then there’s one final element to this story that can not be ignored: just as global battery supplies hit 200+ percent of global demand in 2015, a number of firms are planning to release their first generation of hydrogen fuel-cell cars. Toyota, Honda, GM and Hyundai have all targeted 2015 for the release of $40k-$50k production fuel cell cars, which should suck a lot the early-adapter oxygen out of the (by then) oversupplied EV market. At this point, the lessons learned by Toyota with its hybrid program will start to be felt: having binged on high-priced early-adaptor sales, Toyota was able to pay off its hybrid development program, but big profits are proving elusive as EVs are coming into their own. Firms like Nissan are positioned to do for EVs what Toyota did for hybrids, but as a result, Toyota can sit out the five-year cycle, and slowly build on its hybrid technology, before creating a whole new fad for the well-heeled and greener-than-thou segments just as EVs start to pay for themselves and reach a reasonable price point.
With cutting-edge consumers migrating towards hydrogen cars, and battery oversupply reaching dangerous levels, 2015 will not be a happy year for firms that have invested heavily in EVs. Government stimulus between now and then might help, but it won’t be the major factor in driving down prices, nor will it guarantee a sustainable business model. With competitors (namely Nissan) already established to serve much of the market by 2015, and with other competitors already looking past EVs for 2015 and beyond, the government can’t expect stimulus alone to keep EV startups (like Tesla and Fisker) and EV catch-ups (like Ford and Chrysler) on a solid footing.