Although the restriction of Chinese graphite may cause a short-term disruption in the supply of battery-grade graphite in North America, that restriction may be a long-term blessing.  The real threat is not that the Chinese will continue to restrict their export of graphite.  Rather it is that the Chinese will soon change their minds (as they have in the past with export restrictions) and flood the North American market with graphite.  That flood would predictably bankrupt any North American company that makes a major investment today in the graphite market.  The resulting paralysis of domestic graphite investment is the real threat.

As I have often said at NAATBatt meetings, every business has two problems:  a balance sheet problem and an income statement problem.  The government is great at helping businesses solve their balance sheet problems.  A large grant or large loan does wonders for a company’s asset value.  But companies cannot survive long-term unless they can use those assets, whether government-funded or not, to produce repeatable income and profits.  Here the government has been of less assistance.

The restriction of Chinese graphite exports should be a call to action.  But the action should not be the government spending more money to build domestic graphite plants.  The focus should instead be on ensuring a floor price for battery-grade graphite made in North America that cannot be undercut by the Chinese or by anyone else.  If American industry had that assurance, it could do what it needs to do to build a sustainable supply of battery-grade graphite in North America.  And it could probably do it in short order.  All the government would need to do is get out of the way.

The Chinese graphite export restrictions are part of an ongoing tit-for-tat battle over trade policy between China and much of the developed world.  That battle is regrettable.  But this particular battle is well-timed in that it has not occurred during a time of crisis.  North America has the ability, the resources and the know-how necessary to meet this challenge.  Let us resolve to look back on this event in two or three years and thank the Chinese Ministry of Commerce for spurring us action.

The first opportunity for members of NAATBatt to see the Database will be during the meeting of the Manufacturing in North America Committee at 4:30-5:30 p.m. EDT on Wednesday, September 15 in the Emerald Room of the Suburban Collection Showcase in Novi, Michigan during the Battery Show.  If you will be at the show, please plan to stop by.  If not, note that members of the Manufacturing in North America Committee will be able to attend the meeting via Zoom.  I will e-mail a link to the final Database to all NAATBatt members on the evening of September 15.

The Database will be the first comprehensive directory of the companies in North America that participate in each significant element of the lithium-ion battery supply chain.  The Database builds off the work of the NAATBatt Manufacturing in North America, Battery Recycling and Battery Markets Committees, which earlier this year produced a map of all significant elements of that supply chain.

The Database is intended to be a valuable resource for any company looking for goods, services or supplies in North America relating to lithium battery technology.  As of the last week of August, NREL had identified 409 companies operating a total of 439 manufacturing facilities which meet the criteria to be included in the Database.  This number is expected to grow as NREL adds more companies and facilities prior to the Database’s initial finalization on September 15.

NAATBatt’s plan is for the Database to be a living document.  NAATBatt is currently exploring mechanisms by which the Database will be continuously updated as new companies and facilities in North America participate in the lithium-ion supply chain.  We are also exploring ways to make the Database more easily searchable and user-friendly.  Discussions among NAATBatt, NREL and the U.S. Department of Energy to that end are in progress.

NAATBatt members will be proud know that NAATBatt membership dues have paid for 100% of the cost of the Database.  The Database will note whether the companies it identifies are NAATBatt members.  But the Board of Directors of NAATBatt has determined that the Database will be a public resource accessible to anyone.  This is consistent with NAATBatt’s mission of promoting pre-competitive cooperation among all companies and governments in the North America in order to build a vibrant and successful advanced battery supply chain.  Making the Database public is just the right thing to do.

Thanks to all NAATBatt members who have done the right thing in helping to develop the Database.  I look forward to sharing it with you on September 15.

By the standards of expectation, the meeting was a great success.  NAATBatt 2021 managed to incorporate the usual high-quality content of past NAATBatt annual meetings despite the disadvantage of its virtual format.  Most remarkable was the success of the networking sessions:  the on-line breakfast table discussions and the meeting and greet sessions.  Those proved immensely popular, proving that interactive sessions can work even in large virtual meetings and that good, productive conversations can still be had among participants.

The theme of the NAATBatt 2021 meeting was promoting the development of an advanced battery industry in North America, with an emphasis on lithium-ion battery manufacturing.  Several panels and discussion groups covered that topic.  It was clear that most all meeting participants had a clear understanding of the importance of developing a lithium-ion battery supply chain in North America.  The important question is:  How exactly do you do that?

Based on the conversations and content at NAATBatt 2021, I suggest a three-part plan to develop a robust lithium-ion battery manufacturing industry in North America.  I would emphasize that the following is not the official position of NAATBatt International.  It is only the musings of its Executive Director:

Increase Domestic Demand

The first and most important part of the plan is to ensure high demand for products powered by lithium-ion batteries in North America.  It is pointless, and even arrogant, to talk about building an advanced battery industry and supply chain in North America if demand for lithium-ion batteries is centered off-shore.  There are few examples in modern history first-world countries building new industries supported primarily by export markets.  What few examples there are owe their success in large part to U.S. geopolitical considerations.  To grow a domestic battery industry, the domestic industry must have domestic battery customers.

Since approximately 90% of demand for lithium-ion batteries is expected to come from electric vehicles, any significant domestic demand for batteries will be from the transportation sector.  Demand for electric vehicles can only come from two types of customers:  public sector customers and private consumers.

Public sector procurement of electric vehicle fleets is the most direct way the government can build a market for domestic battery production.  The U.S. government operates the largest civilian fleet in the world with more than 640,000 vehicles as reported in the Federal Fleet Report (2015).  In addition, as of January 2018, there were 66,116 transit buses, 69,316 demand response commuter vehicles and 15,670 transit vans deployed in the United States, the large majority owned by public agencies.  Converting a sizable portion of the replacement vehicles for these fleets to electric drive each year would create a significant domestic market for lithium-ion batteries.

Incenting private consumer and commercial purchases of electric vehicles is the second way of promoting lithium-ion battery demand.  The Section 30D tax credit for new qualified plug-in electric drive motors vehicles is old news and should be extended.  But other effective financial incentives can be brought to bear.  One take-away from NAATBatt 2021 is that electric vehicle makers (primarily bus and heavy-duty vehicle manufacturers) are increasingly looking to battery leasing business models in order to relieve themselves of warranty responsibility for the batteries and to lower the initial capital cost of vehicles to their customers.  Permitting accelerated depreciation for vehicle batteries and other tax incentives for battery owners could help reduce the cost of electric drive for commercial fleets and consumers.  Importantly, these tax incentives should only be available for domestically manufactured batteries.

Substantial thought must also be given to non-economic incentives.  For example, in many urban areas electric vehicles have priority access to high-occupancy vehicles lanes.  The federal government should consider mandating that same priority access on all federally-funded highways.

All around the world, governments realize that the race for electric drive is not just about a race for a better environment.  It is about a race for dominance of many of the technologies that will shape the economies and workforces of the 21^st Century.  For the United States even to be competitive in that race, there must be a robust market for lithium-ion batteries and the electric vehicles they power in North America.

Stand Up National Battery Champions

The second part of the plan is for the U.S. government to stand up one or two national champions in the large-scale lithium-ion battery fabrication business.

As I have written in this column before, the structure of the advanced battery industry is such that the fabricators of lithium-ion battery cells control much of the rest of the supply chain.  The cell fabricator determines whose electrode materials are used, whose separator is used, whose manufacturing and testing equipment is purchased, and whose R&D is commercialized.  Most of the social and employment benefits of advanced battery manufacturing are associated with those other enterprises and not with the fabricator itself.

The conundrum of lithium-ion battery manufacturing is that although the cell fabricator gets to choose the suppliers who will garner most of the social and employment benefits of battery manufacturing, the business of cell fabrication itself is a lousy economic proposition.  Cell fabrication involves huge capital costs, wafer-thin margins and the assumption of large warranty liabilities.  Every major North American company that has looked at getting into the business of high-volume lithium-ion battery cell manufacturing over the last twelve years has taken a pass on the opportunity.  And for good reason.  The only reason Asian companies have entered the cell fabrication business is because their governments understand the larger social benefits that accrue from those companies fabricating cells.  The EU has done the same analysis and is proceeding down the same path.

A robust supply chain of lithium-ion battery production—including energy materials production and refining, electrode production, manufacturing and testing equipment production, and battery R&D—will only grow up in North America if there are one or more national champion cell fabricators willing to buy those products.  To stand those national champion fabricators up the government needs to do two things:  ensure that the fabricators will have a guaranteed, large scale customer for their cells and backstop any losses the champion companies might suffer as a consequence of being forced into the lousy cell fabrication business.

National battery fabrication champions will, of course, need to be true national champions.  Although foreign technology assistance may be needed in the short term, the national champions will need to take direct responsibility for cell manufacturing.   Under no circumstance can a national champion be allowed to lay off its manufacturing responsibilities onto a joint venture in which U.S. employees cannot even go into certain parts of the manufacturing plant.  Lithium-ion cell fabrication is a know-how business.  Critical to the success of the plan is insuring access of U.S. employees and engineers to battery cell fabrication know-how.

Who those national champions should be and what the nature of the economic backstop should be are questions beyond the scope of this article.  But neither should be difficult to figure out.

Fund a Next Generation Manufacturing Consortium

The third part of the plan is to establish and fund a national consortium to develop next generation manufacturing technologies for lithium-based batteries.

At NAATBatt 2021, Chloe Holzinger of IHS Markit showed a simple but insightful slide illustrating the principal drivers of battery cost reduction.  Basically, battery cost reduction is a function of three factors: decreasing material costs, decreasing manufacturing costs and increasing the energy density of the battery.  Ms. Holzinger’s slide begs the question:  Among materials costs, manufacturing costs and energy density improvements, which represents the best opportunity for reducing the battery cost?

Long term cost reductions in basic energy materials seem unlikely.  As several speakers warned, increasing demand for lithium-ion batteries is likely to put substantial price pressure on energy materials, including lithium, Class I nickel and cobalt.

Improvements in battery energy density are certainly possible.  This is the sexy part of the battery business.  Investors are sinking billions of dollars into solid state technology, improved silicon anodes, high voltage electrolytes and a variety of other technologies intended to improve the energy density of cells.  Some will succeed.  But speakers at NAATBatt 2021 were in general agreement that there are no breakthroughs on the horizon that are likely to improve dramatically the energy density and overall performance of today’s lithium-ion battery technology.

That leaves battery manufacturing technology.  As NAATBatt’s CTO, Bob Galyen, pointed out, the basic roll-to-roll process of fabricating battery cells and batch processing of energy materials, while subject to continuous refinement, is more than half a century old.  Current lithium-ion battery manufacturing processes are by their nature inefficient, consuming large amounts of heat, space and time.  Incumbent battery manufacturers have invested billions of dollars in current manufacturing technologies.  Those investments are sunk costs, which have not been amortized.  Accordingly, incumbent manufacturers have little incentive to invest in expensive new manufacturing technologies.

In short, battery manufacturing technology is ripe for disruption.

In 2008, NAATBatt advocated the formation of a national consortium, based on the example of Semitech in the semiconductor industry, to study and improve the manufacture of lithium-ion batteries in the United States.  It is time to dust off and reconsider that proposal.

A national battery manufacturing consortium would study and develop next generation tools for manufacturing lithium-based battery cells at scale.  The consortium would license and test manufacturing technologies from multiple North American-based companies.  It would also draw on the expertise of U.S. semiconductor manufacturers, as next generation electrode printing technologies could draw heavily on manufacturing processes developed in the semiconductor industry.

It is worth noting that while the European Commission’s recent approval of $3.5 billion in subsidies for European battery supply chain companies threatens to leave their potential North American competitors behind, none of those subsidies appear directed towards developing next generation manufacturing technology.  Advanced semiconductor manufacturing technology is also not an area in which China has world-leading expertise.

A North American battery manufacturing consortium would be expensive.  Capital costs for battery cell manufacturing equipment are very large, just as in the semiconductor industry.  But the consortium could generate revenue to offset its cost to the government by toll manufacturing battery cells for North American battery companies serving smaller markets.  This would be an important resource for battery consumers in North America, most particularly for the U.S. Department of Defense, which has a critical shortage of domestically-manufactured lithium-ion batteries.

Establishing a consortium to develop next generation manufacturing technology for lithium-based batteries is the third part of an advanced battery industry plan for North America.  While this is the longest-term part of the plan, it is the part that may one day make North American companies and workers leaders in the advanced battery industry rather than just consumers of other nations’ superior technologies.

Where those batteries are made and who makes them matters.  Ensuring adequate supplies of lithium-ion batteries will be an important national security issue.  Lithium-ion batteries are also an important tool in the fight to reduce greenhouse gas emissions.  But most importantly, lithium-ion batteries and the technologies they enable are likely to create substantial wealth and many jobs in the 21^st Century.  Nations around the world are already competing to see which can best capture this important economic development opportunity.

The importance of developing a lithium-ion supply chain in North America is widely acknowledged.  But what that actually means is a bit unclear.  For example, a bill of materials for a completed automotive lithium-ion battery pack would list thousands of items.  Few would argue that all those items need to be made in North America.  Instead, the North American supply chain discussion should focus on those elements of the supply chain that are strategic.

But what does it mean to be a strategic part of the North American lithium-ion battery supply chain?  The answer lies what we want a domestic lithium-ion supply chain to do.  While energy security and environmental responsibility are important reasons to develop a domestic source of lithium-ion battery supply, the principal reason for building up a domestic supply chain is economic.  It is a way to generate new wealth and new jobs.  It is also necessary to preserve jobs in existing industries, such as the automobile industry, that may well be lost to foreign competition in the absence of domestic lithium-ion battery expertise.

So the measure of something being strategic in the lithium-ion battery supply chain is whether that something is an important driver of wealth and job creation.  Unfortunately, identifying those strategic elements is complicated in the lithium-ion world.

In 1992 Stan Shih, the founder of Acer Inc., proposed something called the “smile curve” as a way of explaining where value is created across different stages of product development.  According to Mr. Shih, the highest values are created in the first stages (technology creation) and last stages (consumer branding) of the product cycle, while the middle stage (fabrication) creates the least.  It is called a “smile curve” because if you plot these stages of development on a graph against value created, you get a smile.

Apple is an example of a business based on the smile cure.  Apple tightly controls the development of the technology that goes into its iPhones and the branding and sale of those phones to consumers.  But Apple does no manufacturing.  It happily outsources the less valuable middle stage of its product development–fabrication–to companies such as Foxconn and its low-wage workforce.  If you wonder how this strategy is working for Apple, just take a look at its stock price.

At first blush, the lithium-ion automotive battery business would seem to have a lot in common with the cell phone business.  Creating new lithium-based technologies and their spin-off products can be quite profitable.  At the other end of the product development cycle, controlling the customer is also highly lucrative. Tesla and its stock price vividly illustrate the value of using a lithium-ion battery-based product to control consumer sentiment and loyalty.

But the middle part of the product development cycle in batteries–the fabrication of battery cells–is a lousy business.  It involves huge capital investment, razor thin margins and extraordinary risk.  Every major U.S. corporation that has considered getting into the business of manufacturing lithium-ion automotive batteries at scale has taken a pass.  Even the most enthusiastic supporters of domestic lithium-ion supply chain development must grudgingly admit that every one of those corporations made a good business decision.

Based on the smile curve and the lack of North American corporate interest in large scale lithium-ion battery production, it is tempting to conclude that lithium-ion battery cell fabrication is not strategic, that it can safely be offshored much as Apple has offshored the manufacture of its iPhones.  But that conclusion would be wrong.  In fact, the lousy business of fabricating lithium-ion battery cells that no major North American corporation wants to do is the key to controlling the entire supply chain.  That is the great conundrum of the lithium-ion battery business.

The lithium-ion business is not the cell phone business.  Unlike makers of cell phones, lithium-ion battery makers do not have a direct nexus with customers that battery makers can leverage and turn into value.  Few consumers know or care who makes the battery that powers their electric car.  Fabricating battery cells is the last step in the lithium-ion battery supply chain.  There is no branding opportunity or consumer contact.  As a result, in Stan Shih’s model the lithium-ion battery product development cycle looks more like a half smile than a full one.

But the fact that a battery cell maker cannot extract a lot of value from the fabrication itself does not mean that fabrication is without value.  In fact, it is the lithium-ion battery cell maker that controls the supply chain, including the much higher value processes towards the early part of the development cycle.  Cell makers determine what R&D will be commercialized, what manufacturing machinery will be used, and what cathode, anode and separator materials will be employed in the cell.  Car manufacturers may provide cell makers with specifications that the cells must meet.  But how the cell maker meets those specifications is up to the cell maker.  It is that discretion which gives cell makers their inordinate power in the supply chain.

Even more important is the possible ability of cell makers to move downstream. It will always be tempting for cell makers to move downstream, into assembly of the applications their batteries power.  Selling those applications, rather than battery cells, is where the highly valuable nexus with consumers lies.  In electric vehicles the battery accounts for nearly half the cost and most of the complexity of the vehicle.  It would not be overly complicated for a cell maker to try to get into the business of assembling the rest of the automobile in order to capture the important second half of Stan Shih’s value creation smile.

When China went all in on its lithium-ion battery manufacturing sector 10 years ago, China was probably not really interested in fabricating lithium-ion batteries.  What interested China was, and still is, the global automobile market.  There is little doubt that as the market for electrified vehicles grows, a large number of Chinese consumer-branded electric vehicles will be competing for market share, perhaps successfully, with offerings from incumbent manufacturers in North America, Europe and Japan.  It is from the manufacture and sale of those vehicles that the Chinese government hopes to earn a return on its substantial investment in battery fabrication.

The challenge to building a robust lithium-ion battery supply chain in North America is this conundrum:  the strategic part of the supply chain you most need to build (i.e., cell fabrication) is the most commercially unattractive part of the entire supply chain.

There are two approaches to solving this conundrum.  The first is the China Approach and the second is the Tesla Approach.  They are not mutually exclusive.

The China Approach recognizes that battery cell manufacturing is lousy commercial business but that it has long-term benefits for other parts of the supply chain.   The Chinese government expects to recoup its investment in cell fabrication not through the cell makers but through the product applications that the cells enable.  Over the last 10 years, the Chinese government has supported its domestic cell manufacturers in many ways.  The most successful has been a hard push for vehicle electrification combined with a “white list” of domestic cell manufacturers from which the vehicle batteries effectively had to be purchased.  The China Approach anticipates a return on investment.  But the return will come from other businesses, not from the cell makers themselves.

The Tesla Approach is vertical integration of the entire lithium-ion battery supply chain, including cell materials, cell fabrication and the vehicles that the cells power including their important and highly valuable relationship with the ultimate consumer.  This appears to be what Tesla has in mind and announced at its last Battery Day.  Whether Tesla will ultimately follow through with its ambitious battery cell manufacturing plans is anyone’s guess.  But the principal behind the plan is clear.  Tesla hopes to recoup its investment in what would otherwise be an unprofitable cell fabrication business from the sale of its cars.  Cell fabrication will, in theory, allow Tesla to sell its vehicles at a lower price and in higher volume.  Like the China Approach, the Tesla Approach anticipates a return on its investment in cell fabrication.  The return just comes in a different way.

North America can choose the China Approach or the Tesla Approach, or both.  But it is difficult to see how North America can build a robust lithium-ion supply chain without including domestic lithium-ion cell fabricators at the core of that chain.  In the lithium-ion battery world, the cell makers control the supply chain.  Without one or more domestic cell maker champions that have the ability and inclination to purchase goods and services from other domestic supply chain companies, developing a robust North American lithium-ion battery supply chain may not be possible.

For me, the most noteworthy content was not the technical detail of where Tesla is going with its battery technology.  The move to tabless 4860 cells, more silicon, less cobalt, away from solid state technology (apparently), and the road map to a 56% reduction in battery costs were all very interesting topics, if not entirely novel.

For me the most interesting take-away from Battery Day was that Tesla now apparently sees itself as a battery company rather than a car company.  Car sales may drive its revenue growth.  But Tesla recognizes that reducing battery costs is the key to increasing vehicle-driven revenue growth and that efficiently manufacturing of battery cells at very large scale is the key to reducing battery costs.

This, of course, is what NAATBatt has been saying for 10 years.  He who makes the batteries will one day make the cars.

The big news about Tesla from Battery Day is that, having recognized efficient battery cell manufacturing as the principal challenge of its business, Tesla has decided to address that challenge directly and manufacture battery cells itself.  This decision stands in contrast to so many of its automotive OEM competitors, who, seeing the same fundamental challenge to their businesses, have elected to outsource the problem to third party contractors.

Lithium-ion battery cells will be one of the most important technologies of the 21^st Century.  Batteries will power the myriad of devices that run on electric energy unattached to the grid.  Those devices are what will make the 21^st Century fundamentally different than the 20^th Century.  The spin off opportunities and supply chain linkages that lithium-ion battery manufacturing will provide make it no less strategic from the standpoint of economic development than AI or 5G.  Companies and countries that do not to compete in lithium-ion battery cell manufacturing will miss huge opportunities for job and wealth creation in the coming century.

The challenge that Tesla has decided to undertake in manufacturing lithium-ion batteries at scale is daunting.  Success is in no way guaranteed.  Tesla’s core competence is not electrochemistry.  It is unclear how much know-how Tesla has actually acquired from Panasonic since it started manufacturing battery cells at the Nevada Gigafactory in 2016.  Manufacturing lithium-ion battery cells at mass scale is an extraordinarily complex business.  But Tesla can take some comfort from the fact that CATL in China went effectively from nothing to being the largest lithium-ion battery company in the world in little more than five years.

NAATBatt has been calling for years for the creation of lithium-ion battery manufacturing champions in North America.  Domestic champions are critical to the development of a robust domestic supply chain for lithium-ion technology.  They are also critical to the continued support of lithium-ion R&D in the United States, a traditional strength of the American research institutions that may be waning.

The question is whether Tesla is up to the challenge of being a national champion.  To date Tesla has been extraordinarily successful in moving its stock price to eye-popping levels.  It has mastered the game of being a Silicon Valley start-up.  If that is its only goal, it may continue to know that kind of success for a while.

I hope that Tesla’s ambitions, and Elon Musk’s vision of his legacy, are bigger than that.  North America needs a champion in lithium-ion technology.  It needs a champion that can help create jobs and economic opportunities at the hundreds of other companies that will be benefit if lithium-ion battery manufacturing can find a vibrant home in North America.  This no small thing.

To become the lithium-ion battery manufacturing technology champion of North America, Tesla need to step up from being an introverted start-up and focus on a larger social and economic development role.  This would be a change but not a novel transition for a successful, industry-leading business.  Companies such as General Motors and McDonalds did the same sort of thing during the 20^th Century.  It will be interesting to see whether Tesla has the appetite to do the same.

The importance of lithium-ion technology, however, goes well beyond cars.  Most of the technologies that will make the 21st Century different than the 20th Century will depend on electric power supplied free of a fixed electricity grid.  Consumer electronics, implantable medical devices, wearable technology, the Internet of Things, drones, light air transport, the integration of variable renewable energy into the electricity grid, and important weapons systems such as rail guns and high energy beams will all depend at least in part on lithium-ion batteries to supply them with electrical power.

It is almost axiomatic that the United States needs to be a leader in lithium-ion battery technology in order meaningfully to participate in the other 21^st Century industries that batteries will power.

But in 2019 it is undisputed that the United States is falling farther and farther behind in the Great Battery Race.  Today about 73% of all lithium-ion batteries are made in China, a country that has spared little expense to dominate this very strategic technology.  Europe has just announced several major initiatives to ensure that it will have substantial domestic lithium-ion battery manufacturing capacity.  The United States is standing still.

What can the United States do to catch up?  Does the United States have a chance?  Does it even really matter where lithium-ion battery cells are made?  Over the next several weeks, NAATBatt will use its weekly blog to solicit the views of U.S. industry leaders, academics and government officials as to these questions.

This is an important conversation.  NAATBatt invites your participation.  Feel free to contact me at jgreenberger@naatbatt.org if you have a view.