Lithium-ion Batteries and 8-Track Tapes
In three years of writing about investing in energy storage, I’ve learned that most public relations nightmares encountered by battery companies are self-inflicted wounds. They do an appalling job of managing the expectations of investors and potential customers. Then, when the inevitable delays, disappointments and cost overruns arise, everybody suffers. It may not be their fault, but it is most certainly their problem.
Most of my long term readers have seen this timeless and blistering 1883 Thomas Edison quote:
“The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying.”
Edison understood innovation problems well, but he didn’t understand innovation problems in the battery industry until he tried to develop a better battery for use in electric cars and failed to win the hearts and minds of a grateful nation.
The essential truth most battery developers fail to recognize is that the problem isn’t their products or even their development plans; it’s the fertile imaginations of investors and potential users who read about gee-whiz discoveries in research laboratories, overestimate the importance of the developments and make wildly optimistic leaps from the possible to the absurd. Battery developers don’t lie to investors and potential users; but the investors and potential users lie to themselves and then blame the industry for failing to meet their patently unreasonable expectations.
My first job after law school was in the Houston office of a Big-8 public accounting firm that had a substantial oil and gas tax practice. On my first day at work, the partner in charge of our group hauled me into his office and explained that every oil project in history could be explained with a simple Venn diagram.
Over the last 30 years I’ve learned to my chagrin that this Venn diagram is not just an overview of the oil industry, it’s a fundamental truth that applies to every form of human interaction and endeavor from sex to science to business to politics, especially politics. Over the years I’ve worked with some of the finest minds on the planet, but I’ve never been involved in a project that didn’t take twice as long, cost twice as much and deliver half the expected result – and that’s when everything went right.
A truly bizarre twist that I’ve only encountered in the energy storage industry is that developers report modest results, but a hyper-imaginative public adds a couple layers of expectations, eliminates all time and materials constraints, assumes a roll-out speed that would make Steve Jobs jealous and fabricates outlandish promises developers didn't make and can’t possibly keep.
I think it all boils down to the fact the world desperately wants better batteries but doesn’t understand the magnitude of the challenge and isn't really willing to pay the price. At last year’s ELBC I spoke with an executive from India, who described batteries as “a grudge purchase.” The sad part is he’s right. We don't buy batteries because we want them. We buy them because we need them. In most cases, we don't even think about batteries unless they need to be recharged or replaced. Is it any wonder that the adjective most commonly associated with batteries is “damned?”
The finest examples of horrible expectations management are found in the advanced battery space where Secretary Chu of the US Department of Energy frequently says things like this:
"And what would it take to be competitive? It will take a battery, first that can last for fifteen years of deep discharges. You need about five as a minimum, but really six- or seven-times higher storage capacity and you need to bring the price down by about a factor of three. …
Now, how soon will that be? Well, we don't know, but the Department of Energy is supporting a number of very innovative approaches to batteries and it’s not like it’s ten years off in the future, in my opinion, it might be five years off in the future. It's soon.”
This is a fair statement of the DOE’s goals. They’re pushing very hard to develop new technologies that will leapfrog the state of the art in the battery business. What the DOE never explains, however, is that any major advance will make all of today’s spiral-wound batteries obsolete before their developers have a chance to become profitable.
The data in the following graph was taken from quarterly and annual reports that A123 Systems (AONE) has filed with the SEC over the last 30 months. It compares their quarterly revenue per kWh of batteries shipped with their adjusted cost of goods sold (after backing out unabsorbed manufacturing costs) and their gross margin per kWh.
The purchase prices paid by A123's customers have been gradually declining, but their manufacturing costs have climbed and their gross margins have turned sharply negative. Without gross income, net income isn't even a pipe dream. I expect the dynamic to change when A123's new factory is brought on line, debugged, optimized and ramped to reasonable capacity utilization rates. But that transition is not going to happen quickly and until it occurs A123's stock price will continue to languish.
My next graph comes from the current issue of Science and shows why the spiral-wound lithium-ion battery can never be a viable long-term solution.
It doesn’t take a rocket scientist or electrochemist to see that lithium-ion batteries can’t ever meet Secretary Chu’s goals of six or seven times more energy at a third of the cost. That will require a different kind of battery and a different kind of battery manufacturing infrastructure. No matter what you believe the next big thing will be, it’s clear that today's lithium-ion batteries are a dead end – the 8-Track tapes of the battery world and little more than a transition technology from what we have to what we need. This Jan Darasz cartoon from the current issue of Batteries International Magazine is too true to be funny.
Readers frequently assume I’m a Luddite who can’t or won’t see the future. The fact is I see the future all too clearly and know to a certainty that lithium-ion batteries are the barest of beginnings, not the Holy Grail. The true Luddites are the EVangelicals who are so enthralled with the EV dream that they refuse to see that our very best batteries are not good enough for the short term and can never be good enough for the long term.
The global fleet of 800 million cars and light trucks all depend on lead-acid batteries for starting, lighting and ignition functions. Within a few years, all new cars will come with stop-start idle elimination systems as standard equipment. No matter what happens in the sexy battery space over the next five to ten years, that fleet will need replacement batteries for decades to come. Established lead-acid battery manufacturers like Johnson Controls (JCI), Enersys (ENS) and Exide Technologies (XIDE), together with advanced lead-acid battery innovators like Axion Power International (AXPW.OB), will have a long and profitable run regardless of what happens in the sexy space.
While I can’t make any predictions about timing, it is only a matter of time before one of the scientists in one of the labs that are working on better batteries has a Eureka! moment. When that moment arrives, the new technology will become the darling of EVangelicals, automakers and maybe even utilities, and the market potential of lithium-ion batteries will be capped forever at the number of vehicles that are made between now and then using a bridge technology.
As a broker friend of mine once observed, a bridge that only connects with land at one end is more properly called a pier.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.