It was only a matter of time, but the transformation of the $3 trillion global auto industry is now underway, and automakers are spending billions to catch up and develop electric powertrain capabilities. Even though batteries are by far the costliest component in an electric vehicle (EV), automakers around the world have been content until recently to source battery cells and systems from a handful of well-established Japanese and Korean battery companies, and a growing number of battery upstarts. With the prospects for EVs getting rosier by the day, however, not a week goes by, it seems, without news of yet another battery investment by an automaker.
Widespread skepticism as to whether the electrification of the auto industry would, in fact, happen has undoubtedly played a major role in the reluctance of automakers to get into battery production. After all, EV sales accounted for less than 2.5% of all the vehicles produced globally in 2019, despite the hype that has surrounded EVs in the fourteen years since Tesla (TSLA), a Silicon Valley startup, was founded. The fact that battery making is essentially a chemical process, not a mechanical process like much of auto manufacturing, may also have been a contributing factor. As recently as July 2020, Jim Hackett, the former CEO of the Ford Motor Company, told investors that Ford saw “no advantage” in producing EV batteries.
Given the industry’s historic commitment to vertical integration, the willingness of automakers to leave the supply of such a critical component to newcomers is nonetheless surprising, and particularly ironic in the case of Ford, whose founder was a strong believer in vertical integration. Henry Ford’s 15.8 million square foot River Rouge complex was the largest industrial facility in the world in the 1920s and 1930s, and was the only place on earth where the entire process of making autos could be seen in one day. Raw materials from Ford owned mines and rubber plantations around the world were unloaded at River Rouge docks, and then processed in steel furnaces, coke ovens, rolling mills, glass furnaces, plate glass rollers and tire making, stamping, engine casting, transmission and radiator plants at the facility. Complete cars were then assembled before being shipped to dealers across the country.
While no automaker has ever come close to replicating the vertical integration achieved at River Rouge, no respectable automaker would be caught dead outsourcing the internal combustion engines (ICEs) that are the single highest cost component in ICE powered vehicles, and that have been the power source of choice for over 100 years. Every automaker has designed, built and managed its own engine manufacturing facilities over the years, including factories that produce the “5C” parts of an engine—-cylinder heads, cylinder blocks, crankshafts, camshafts and connecting rods.
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As is often the case, industry newcomers were the first to appreciate how radically electrification might transform the auto industry, and as importantly, the paramount role that battery technology would play in that transformation. In 2003, two milestone events occurred. BYD Company Limited (BYDDF), a Chinese company which at the time was the world’s largest battery producer, integrated forward into car assembly as a way to sell more batteries. In the same year, Tesla was founded, and Elon Musk quickly recognized that a proprietary position in batteries would help Tesla to sell more cars. In 2012, the Great Wall Motor Company Limited (2333.HK), China’s largest SUV company, followed BYD’s lead and formed a Battery Business Unit, which has since been spun out as SVOLT Energy Technology.
The Changing Battery Landscape
With some experts predicting that EVs might account for 58% of new car sales by 2040, automakers are now in a hurry to catch up. While BYD, Tesla and Great Wall are still the only automakers to be fully integrated in battery production, global automakers are now seeing the wisdom of their business models and integrating into batteries. Given supply chain concerns, particularly following the Covid-19 outbreak, automakers are also localizing their supply in order to have battery production near their assembly operations. With investments in Chinese, European and U.S. based battery companies, Volkswagen AG (VWAGY) has been the most aggressive as far as integrating and localizing battery production.
In late May, Volkswagen announced that it would acquire a 26% stake in Gotion High-Tech Co. (002074.SZ), China’s fourth largest battery produce, for about €1.0 billion and become the battery maker’s largest shareholder. In 2020, Gotion sold 2.3 GWh of batteries and ranked eighth in the world, just ahead of Korea’s SK Innovation. Betting heavily on the development of China’s EV industry, Volkswagen announced at the same time that it would invest an additional €1 billion to increase its stake in JAC Volkswagen from 50% to 75%, and to acquire 50% of JAG, the parent company of its Chinese partner in JAC.
Also in May, Volkswagen announced that it would invest €450 million into a new battery plant located in Salzgitter, Germany, in partnership with Swedish battery producer Northvolt AB. When it begins operations in early 2024, the Salzgitter facility will have 16 GWh of capacity. In its announcement, Volkswagen said that it is “optimizing the Volkswagen Group’s strategic position in the key future field of batteries. In addition to a very secure supply base with external producers, we are also systematically building up further capacities.”
Finally, in order to stay abreast of new developments in battery technology, Volkswagen announced in June that it will invest an additional $200 million in QuantumScape Corporation (QS), a U.S. based developer of solid state batteries, bringing its total investment in the company to $300 million. Volkswagen believes that solid-state batteries will significantly increase range and shorten charging times in the future, and has also established a 50-50 joint venture with QuantumScape to enable industrial-level production of this next generation of batteries.
Volkswagen is not alone among the legacy carmakers to invest in battery technology and production. In July, Daimler AG (DAIGn.D) said that it would invest €480 in the initial public offering of Farasis Energy (Gan Zhou) Co. (688567.SS) for a 3% stake in the company. Farasis is the seventh largest battery producer in China and will supply Daimler with lithium-ion battery cells from its factories in China and from a factory which it is building in Germany.
In the United States, General Motors and LG Chem (051910.KS) announced late in 2019 that the two companies will invest up to $2.3 billion in a joint venture to produce battery cells in the Lordstown area of Ohio. Apart from its cooperation with LG Chem, GM is also developing its own battery technology. At an “EV Day” in March, GM outlined its aggressive plans for an electric future and unveiled an innovative modular propulsion system, powered by its proprietary “Ultium” batteries.
In China, Geely Automobile Holdings (HK.0175) committed to electrifying its fleet as early as 2015 and is now focused on the powertrain. In June 2019, Geely announced a new 50-50 joint venture with LG Chem, capitalized with $188 million of Registered Capital, to produce batteries in China. On December 25, just as 2020 was drawing to a close, Geely’s founder said that a company under his control would cooperate with Farasis to set up a joint venture to supply batteries to Geely’s commercial vehicle unit. The capacity of the new venture will ultimately be 120 GWh, with construction of 20 GWh of capacity to begin in 2021.
Meanwhile, other Chinese automakers are completing joint ventures with Contemporary Amperex Technology Co. (CATL), China’s largest battery company, in order to ensure a supply of batteries.
A Window On Battery Technology
Apart from addressing supply chain concerns, one of the key objectives of the recent spate of battery investments is to provide automakers with a window on new battery technologies as they develop. The rosy predictions for electric vehicles are predicated on continual advances in battery technology that extend range, reduce charging times and bring the cost of an EV to parity with ICE vehicles. In the giant game of musical chairs that is now playing out as the auto industry transforms, no automaker wants to be left without a seat at the table.