What is the ubiquitous question that should be asked surrounding the sustainability of electric vehicles (EV): if the consumer embraces the idea of EVs, would we have sufficient lithium supply to feed demand? Whatever the academic debate, the underlying fact is that investments into the various supply chain companies may yield significant returns as the demand ramps up. As a team we share the support in investments in battery, lithium-ion and electric engine/motor companies.
State of the Lithium Market
The Meridian International Research reports “[i]f existing demand from the portable electronics sector for 99.95% Lithium Carbonate continues to grow at the current rate of 25% per annum, by 2015 if optimum production increases occur, there will be only 30’000 tonnes of Chemical Grade Lithium Carbonate available to the Automotive Industry (including from Chinese sources). This would be sufficient for less than 1.5 million GM Volt type vehicles worldwide.”
What about the electric engine market – who are the players, who may be the winners?
We firmly believe that the electric engine industry could change the shape of the automotive industry altogether. Who is to say that in-house developments of engines may lead to a sustainable advantage over time? Germany’s Bosch has signed a 50%/50% JV with Samsung SDI that promises at least $500m in investment over five years. As organizations both have a diversified customer base and second, have the financial backing to explore other revenue streams. In fact, we think that there may be a strategic discussion whether, under a Porter 5-forces analysis, the Tier-One Suppliers will make up the bulk of the investment returns going forward. Owning the underlying domain expertise may yield significant future value. Imagine the slogan on a Mercedes or BMW car: “Bosch Inside” analogously to “Intel inside”. The brand value may continue to sit with the car companies based on the ‘perceived value’ of design, clients, distribution channels, and marketing $-spent (think “Formula One – for Battery powered cars” etc. McKinsey put out a recent quarterly report ‘Electrifying cars – how three industries will evolve‘ that gives an insight to the dramatic disruptive changes that may be ahead. In addition, Boston Consulting Group (BCG) looks at the outlook for the $25bn electric battery market by 2020 and observes that cost of the electric car infrastructure, mainly charging stations, will amount to some $20bn.
Where is the money?
As an investment opportunity, Credit Suisse suggests that the Saft Groupe could be an interesting play on the battery sector. Their report states that “[t]hanks to potential further technological gains, mainly in lifespan, faster charging times and safety, we expect a 13% rise in the sales of secondary lithium-ion batteries to nearly USD12bn by 2013.” Saft Groupe 2009 turnover accumulated to nearly €560m. The firm specializes on the design and manufacture of high-tech batteries. Its clients include firms such as EADS, Boeing, Bombardies, Alstom, Raytheon and Thales to name but a few. For the first 9 months, the Lithium Ion segment made up about 11% of sales with Primary Lithium adding another 30%. The Transportation sector made up about 22% of total sales. Compared to other battery firms, its customer base appears relatively more diversified and less EV centric although projects with Mercedes, BMW, and Volkswagen are in the works.
New Technologies on the Horizon
The outlook for the Lithium Ion market could turn even more interesting. Next generation Lithium Air/Water batteries may be able to store 10x the energy density over current Lithium Ion batteries. Scientists from the Argonne National Laboratory (a US DOE lab) cite that there still are a number of technical hurdles to overcome before mass market is likely. In our earlier post “The time for Batteries is now” my colleague Brett eludes to opportunities and threats that come with the battery/ electric car industry. In another post on EEstor we highlighted that the technology may still be two years+ away. But if someone can break the back of the technology hurdle, the market opportunity that comes with it will be enormous (see ‘What does $1.5bn buy‘). We are not scientists but investors and although we respect the technology risk inherent in so many new battery start-ups but if it is not a firm like EEstor there will be others looking to take a leadership in the battery supply chain. The winners of this race will be rewarded handsomely.
What is happening in China – still catch-up or market leadership in sight?
Focusing on China, Roland Berger conducted a comprehensive study on the automotive sector 2020. The overriding statement in the report is that “China realized that they cannot close the technology gap in internal combustion engine based mobility.” Instead the Chinese government has layed out new policies following its 11th 5-year plan (2006) that will see significant subsidies flowing into the industry. ATKearney supports the thesis that Asian players are currently controlling the Lithium Ion battery market.
The Chinese competitive landscape
Going forward, we need to explore how companies like BYD, backed by one of the greatest investors of all time, may be able to change the automotive industry landscape and whether a firm such as BYD has what it takes to take a leadership role. This time it will not only be about fast track scaling but also about sustainability as the historic rules of a successful car company are about to be challenged. Cost leadership may be one aspect that makes Chinese manufactures attractive. But different rules apply from chasing the Number 1 position to being the Number 1. Then, the world will look for leadership and strong corporate social responsibility. That’s where it may go wrong for some.
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