Interest in revitalizing U.S. manufacturing combined with COVID-19 supply chain disruptions is driving new action in Washington to support strategic industries and protect strategic supply chains.  The Wall Street Journal recently reported Intel’s offer to partner with the Pentagon in building a silicon chip foundry in the United States.  Taiwan Semiconductor Manufacturing Co. just announced plans to build a chip factory in Arizona based on unspecified incentives from the federal government.  NAATBatt believes that a federal initiative to support domestic manufacturing of lithium-ion batteries may soon be announced as well.

While NAATBatt can be expected to endorse any initiative to support the advanced battery supply chain in North America, it is important to understand why supporting the advanced battery supply chain would be objectively important to the United States.  National industrial policy is a slippery slope.  Every industry believes that it is strategic and will fight for every dollar of federal subsidy.  So it is important to define objectively exactly what factors make an industry or a technology strategic and worthy of federal support.

The need to designate certain industries and supply chains as strategic is a function of globalization.  Although globalization sometimes gets a bad name, it is overall a positive economic force.  Countries, regions and companies that specialize in making certain goods will generally make them more efficiently and less expensively than others.  Those others are then freed up to specialize in and make other goods.  This results in lower costs and greater efficiencies for everyone.

But globalization comes with two catches:  The first is that if certain strategic goods are manufactured only offshore, the supply chain for those goods can become subject to disruption.  The second is that not all goods are created equal.  It is better to specialize in manufacturing some goods rather than others.  Some goods command higher margins in the market than others.  Also, the process of manufacturing certain goods generates more know-how and spin-off opportunities than can others.

The goal of a good national industrial policy should be twofold:  First, to secure a country’s access to strategic goods free from reasonable risk of disruption.  Second, to identify the highest value products that a country’s manufacturing base can make and ensure that the country gets “first pick” of those premium products in the global competition for manufacturing.  Over the past decade, the Chinese have excelled in this second goal of industrial policy.

Advanced battery technology today are strategic goods made primarily offshore that are subject to a reasonable risk of disruption.  This column has long sounded the alarm about the fundamental importance of electricity storage to a wide range of 21^st Century technologies and the erosion of the U.S. domestic supply chain for it.  A sound U.S. national industrial policy should make a detailed study of the advanced battery technology supply chain, both as it exists today and as it will likely evolve in response to expected technological improvements.  It is not necessary that all elements of the supply chain be located in the United States.  But great care should be taken to domesticate any parts of it that are significantly concentrated in the hands of only one or two foreign producers.

Advanced battery technology also meets the second qualification of strategic goods.  Because electricity storage is fundamental to so many of the technologies and devices that will shape the 21^st Century economy, the opportunities for those making batteries to see and exploit new opportunities will be profound.  Batteries and battery makers will be at the fulcrum of new technology innovation.  Those who place great confidence in the innovative skills of American scientists and entrepreneurs should take sober note of the adage that 80% of all innovation takes place on the shop floor.  Without domestic manufacturing, American innovation prowess will become a thing of the past.

Finally, a word about margin.  Some products command higher profit margins than others in the marketplace and securing a manufacturing base for those products is an important goal of national industrial policy.  Of course, manufacturing advanced batteries is not a high margin business.  The opposite is and may always be the case.   High margin products tend to be those that have a direct relationship with the ultimate customer.  No customer buys a car, cell phone or computer because of who makes the battery inside.

But what batteries do provide is a platform to move up in the supply chain, into other segments that have a direct relationship with the consumer.  This was the concern that drove the founders of SEMITECH to resist Japanese penetration of the semi-conductor market in the 1980’s.  It is also the opportunity that the Chinese saw in the last decade: using lithium-ion battery manufacturing as a way to break into the 21^st Century automotive market without having to compete with companies having a hundred years of prior experience making traditional ICE cars.  The objective was not really to make the battery.  The objective was to eventually make the car and establish valuable relationships with consumers willing to pay for the vehicles.

NAATBatt has contended since its inception that he who makes the batteries will one day make the cars.

Advanced battery technology is about as strategic a technology as there will be in the 21^st Century.  If the U.S. government is serious about a national industrial policy that will support the manufacture of strategic and high value goods in the United States and ensure the long-term prosperity of the American economy, advanced battery technology must be a primary focus of that policy.

Twelve years ago a group of U.S. businessmen and battery experts came together to create a consortium to make sure that American companies would be an important force in the global competition to dominate lithium-ion battery manufacturing. The founders named the consortium “NAATBatt”, at the time an acronym for National Alliance for Advanced Transportation Batteries.

The idea behind NAATBatt was based on the SEMATECH consortium founded by leading companies in the American semi-conductor industry in the 1980’s. SEMATECH was to help U.S. semi-conductor manufacturers fight off competition from an aggressive Asian competitor, which was seeking at the time, perhaps by nefarious means, to capture and push U.S. manufacturers out of the semi-conductor market. The “bad guy” back in those days, of course, was Japan.

SEMATECH proved highly successful and by most accounts it assured U.S. dominance of semi-conductor manufacturing for the better part of two decades. SEMATECH seemed an ideal model for the U.S. battery industry. The relationship between SEMATECH and NAATBatt was more than just passing. NAATBatt’s CFO at the time, and its CFO today, Sandy Kane, a former senior executive at IBM, was a founder of SEMATECH.

Unfortunately, twelve years ago the concept behind NAATBatt (and formerly the concept behind SEMATECH) was not well understood. NAATBatt was never intended as a consortium for manufacturing batteries. The idea was that American battery manufacturers would make the batteries. Those manufacturers would compete to design and manufacture the best batteries with the free market to determine the winners and losers.

NAATBatt’s role was to focus on one thing: The technology of making lithium-ion batteries. It was clear that the principal barriers to entry by U.S. companies into the lithium-ion manufacturing business in the 2000’s was the steep manufacturing learning curve and the huge capital investment in tooling and equipment that would be required to challenge Japanese and South Korean dominance of the industry (China not even being a factor at the time). By focusing exclusively on traversing that learning curve and by making the capital investments in tooling and equipment that for-profit companies were reluctant to make—and then by sharing freely the results of its learning and resources with its members in the same way as did SEMATECH—NAATBatt intended to get U.S. battery companies into the business of lithium-ion battery manufacturing.

Ultimately, in 2009-10, the U.S. government decided not to pursue the NAATBatt idea. Whether that was a good or bad idea at the time, we will never know. But we do know for certain that the following decade has been a disaster for the United States in lithium-ion battery manufacturing. Today the United States and U.S. companies are clearly losing the race to dominate what will be one of the most important technologies of the 21st Century.

Is it time for NAATBatt 2.0? The importance of lithium-ion technology is becoming increasingly clear to American leadership in government, at the Pentagon and in the automobile industry. The warning NAATBatt sounded back in 2009-10, “He who makes the batteries will one day make the cars”, is finding new resonance. The U.S. Department of Energy’s new Energy Storage Grand Challenge is discussing how to make the United States competitive in advanced battery technologies. But it is unclear whether that concern will manifest itself in much more than some increased funding for battery R&D.

The challenge the United States and U.S. companies face in lithium-ion battery manufacturing today is not a technological challenge of battery design. It is a commercial challenge. No one will out-innovate American entrepreneurs when it comes to designing better batteries. But to address the commercial challenge that bedevils U.S. industry, U.S. manufacturers need to be able to make lithium-ion batteries in the United States as cheaply and as consistently as anywhere else in the world. The U.S. government and U.S. industry must focus on that problem in order to get back into the lithium-ion battery race.

Perhaps it is time to take another look at the NAATBatt/SEMATECH model?

One of the most interesting sessions during the NAATBatt 2020 annual meeting was the Industry Leaders Roundtable: How To Make the U.S. a Leader in Lithium-Ion Battery Manufacturing.  The session featured a discussion among government and industry leaders in energy storage about what the United States might do better to support the domestic manufacturing of lithium-ion battery cells.

The panelists generally agreed on a number of points:  that building a supply chain is important but building demand for the batteries may be more important;  that the U.S. does not have the same tools to work with that China does; and that while the U.S. may not be a leader in lithium-ion battery manufacturing, some American companies are world leaders in other battery technologies, such as lead acid and zinc battery technologies, which should not be ignored.

But a more fundamental question underlies the topic the panelists discussed:  Should the U.S. care whether it is a leader in lithium-ion battery manufacturing or not?  In other words, is lithium-ion technology itself so strategic that the United States should invest public money to ensure that world-class lithium-ion battery manufacturing technology takes root in North America?

If the answer to that question is yes, it is so for two reasons.  The first is that lithium-ion battery technology will be the key to controlling the auto industry of the 21^st Century.  Automobile manufacturing is a major driver of the U.S. economy.  Vehicle manufacturing directly or indirectly employs about one out of ten U.S. workers.  Only the healthcare industry employs more.  Loss of automobile manufacturing would be a huge blow to the American economy and to America’s economic position in the world.

During the industry leaders’ discussion session at NAATBatt 2020, the moderator asked the panelists:  Is the following statement true:  He who makes the batteries will one day make the cars.  At least two panelists strongly opined that the statement was not true.  American automakers, they argued, can partner with trusted foreign suppliers to obtain lithium-ion batteries.  There is no need for U.S. companies to get into the battery business themselves.

I would respectfully but profoundly disagree.

Lithium-ion batteries are expensive and highly complex automotive components.  Somewhere between 30-60% of the component value of future electric vehicles will be in the battery.  The rise of autonomous drive technology might push that percentage down a bit.  But lithium-ion batteries will still be the most complex and expensive components in the vehicles of the future.

While vehicle manufacturers can acquire lithium-ion batteries from trusted suppliers in the short term, the market is a highly competitive place.  All companies, even trusted supplier/partners, naturally look for ways to capture higher-margin portions of the product supply chain.  Manufacturing lithium-ion battery cells is and might always remain a low-margin business.  But it is an ideal starting point for companies, and countries, looking to move into the higher margin businesses of vehicle assembly and consumer brand development.

In the 1980’s the U.S. computer hardware industry faced a similar issue.  Japanese companies, with heavy government support, made a concerted effort to dominate the semi-conductor industry.  Although semi-conductors were but one component of the mainframe systems that were the strategic business focus at the time, U.S. hardware companies recognized the threat that loss of control of that component to foreign manufacturers would pose.

In 1987, 14 U.S.-based semiconductor manufacturers came together to form SEMATECH.  With about $500 million of funding from the U.S. government (and the leadership of NAATBatt’s own Sandy Kane), SEMATECH went on to make revolutionary advances in semiconductor manufacturing technology. Those advances ensured that U.S.-based companies such as IBM, AT&T, Intel, Hewlett-Packard and Texas Instruments, retained their leadership in semiconductor and computer hardware technology for well over a decade.

The historic significance and efficacy of SEMATECH is subject to debate.  Contrarians point to Apple as an example of a company that eschews component manufacturing but maintains a secure leadership position in its business sector.  But that argument ignores an important fact: Apple owns the key technologies within its devices.  Offshore manufacturers only assemble the devices.  Apple is successfully because it has maintained control of its critical technology while sending only low-margin assembly services offshore.

That is not what is happening in lithium-ion battery technology.   The Asian companies that are assembling lithium-ion battery cells are investing heavily in lithium-ion research and development.  Today the patent landscape in lithium-ion technology is dominated by the Asian companies making the batteries, not by the American auto companies hoping to partner with them as trusted suppliers.

Predicting the future is a risky business.  But there is good reason to believe that he who makes the batteries will in fact one day make the cars.  If that is the case, and 1 in 10 American workers depend upon vehicle manufacturing for their livelihoods, lithium-ion technology is about as strategic as technology gets.

The second reason why lithium-ion battery technology may be strategic is because of the nature of 21^st Century technology itself.  The next thirty or forty years will see the rise of new technologies we may not yet conceive of but which may be as transformative to the 21^st Century as the personal computer and the cellular phone were to the 20^th.  It is a good bet, however, that no matter what those new 21^st Century technologies may be, they will be powered by electricity and unattached to the grid.

The principal technology story of the 21^st Century is likely to be the rise of electric power.  A huge variety of electrically powered devices operating at everything from high to ultralow voltage may well be what most significantly distinguishes 21^th Century technology from 20^th Century technology.  All will share a single technological challenge:  How to deliver electric power to the device as efficiently as possible.

The most significant feature of lithium-ion battery technology is that it is the most efficient way we know of to deliver electricity to a device in any particular point in space using the least possible mass and the lowest possible weight.  Other electricity storage or energy generation technologies might one day prove more efficient.  But as near we can tell lithium-based battery technology will be the most efficient way to deliver electricity to remote devices for at least the next thirty or forty years.  What might come next is pure speculation.

If he who makes the batteries will be he who makes the cars, the same logic will apply to next-generation electrical devices.  The sole consolation of losing the race to build automotive-grade lithium-ion batteries is that we know exactly what industry we stand to lose.  As to what we stand to lose if foreign manufacturers use their expertise in lithium-ion battery technology to dominate the development and manufacture of next-generation electrical devices, we can only guess.

The United States has historically been adverse to industrial policy, trusting the free market to pick winners and losers over government bureaucrats.  That approach has served the U.S. well.  But every good rule allows for good exceptions.  If lithium-ion technology is a strategic technology, and if other governments are actively pursuing its domination, the United States may have little choice but to play the same game.

China recognized the strategic importance of lithium-ion technology ten years ago.  In ten years its companies have grown, with massive government support, from irrelevance to domination of the lithium-ion battery industry.  Europe grasped the significance of lithium-ion technology belatedly but now seems waking to the challenge.  Only the United States slumbers on, dreaming of partnerships with trusted suppliers.  The history of business does not lend confidence to such dreams.