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The big battery problem

22 Nov 2023

Apparently EV manufacturers have a problem.

A shortage of batteries is resulting in constraints on manufacturing and potential job losses within the EV industry.

Without a sufficient supply of batteries it will be difficult for manufacturers to meet the growing demand for these vehicles. You'd think the answer would be simple... right?

Just build more battery factories and make more batteries... right?

Unfortunately, there's a problem.

The problem has nothing to do with supply of raw materials such as lithium.

The problem is that investing in the manufacture of current lithium-ion battery manufacturing is an incredibly risky proposition.

Manufacturers have two options when it comes to sourcing batteries for their EVs.

The first, and likely most preferred option, is to simply purchase the batteries from a supplier who has already invested the capital in building manufacturing facilities.

The second option is for EV makers to build their own battery manufacturing plants.

Option number one has the benefit that no capital or lengthy delays are required to start shipping EVs. Simply purchasing batteries and throwing them onto the production line is simple and easy when compared to developing, building and operating your own battery factory.

However, this option does leave you at the mercy of the markets and, as now, when demand exceeds supply it pushes prices up whilst also limiting production volumes due to a lack of availability. Since the EV market is becoming quite price-conscious, higher battery prices can adversely impact sales.

Option number two has the potential to ensure that the price of batteries is able to be better-controlled and supply assured. However, huge amounts of capital are required to design, build and operate battery manufacturing plants so only the largest of EV companies can afford to roll their own.

Whichever route is taken, the capacity of battery manufacture needs to increase dramatically but there's something stopping both the dedicated battery manufacturers and the EV companies from building new battery factories.

I'm talking about the risk associated with new battery technologies appearing that totally usurp the lithium-ion based chemistries in price and/or performance.

Imagine if you'd just invested hundreds of millions (or more) in building a plant capable of churning out enough lithium-ion batteries to keep EV production lines running to capacity -- and suddenly a new battery tech is developed that offers far more for for a far lower cost.

If you've already invested huge sums in gearing up to manufacture li-ion batteries then you have a real problem. Those batteries will no longer be in demand because EVs using the newer tech will provide superior performance for a lower cost. Suddenly, everyone will want only the new batteries.

Pivoting an existing battery production line to use a new chemistry or perhaps a whole new technology could be just as expensive as building a whole new facility and there's also the time involved in such a change.

This is the window of opportunity that new entrants into the battery market could use to gain a strong market position by coming in fresh, without any legacy costs or overheads.

In the case of an EV manufacturer that decides to build their own battery manufacturing facilities based on this new tech then they have a clear advantage over their competitors who may have already invested heavily in manufacturing what would now be decidedly inferior batteries.

So the decision of the day must be: do manufacturers ramp up their li-ion production or do they wait just a little longer in the hope that they can be first to market with new tech that eclipses all else?

Timing will be *everything* in this situation.

I would not want to be the guy in the battery company or the EV manufacturer considering the commissioning of new capacity at this point. Making the wrong decision will be incredibly costly but there seems to be little hint as to if/when the next generation of battery tech will arrive.

Carpe Diem folks!

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