Auto Industry Headed For EV Battery Glut

Lithium-ion battery technology may be considered a solutionto the struggles of the auto industry in some quarters, but analysts are sayingthat manufacturers of the batteries may be facing an industry glut five yearsfrom now.

Studies by Lux Research Inc. and Pike Research indicate that lower-than-expectedelectric vehicle (EV) sales, combined with federal subsidies that encouragebuilding of EV batteries, will create a situation where supply of lithium-ionbatteries exceeds demand. Lux Research predicts that worldwide capacity oflithium-ion batteries will reach 18.2 GWh by 2015, with sales coming to just11.0 GWh.

"When theU.S. government and other governments offer billions of dollars in subsidies tolithium-ion battery manufacturers to build new plants, they're going to buildnew plants," says Jacob Grose, an analyst for Lux Research. "Unlike the market,which is pretty good at matching supply and demand, governments aren'tconsidering demand, and they're creating conditions that are just right for aglut."

Analystssay that the key to the situation lies in the public's acceptance of electricvehicle technology. Right now, projections of EV sales over the next five yearsare low, which doesn't bode well for the battery makers. In a 2009 study, PikeResearch predicted that electrified vehicles would represent 1.12 percent ofworldwide production in 2010, climbing to just 2.41 percent by 2015.

"To reachany level of success, you need to get a substantial portion of the car-buyingpublic to buy into (EV technology), not just the environmentally conscious,"Grose says.

No Shortage ofSupply

Analysts estimate that there are currently about two dozencompanies worldwide that are building monolithic electric vehicle batteries. Alist of major automotive lithium-ion battery suppliers reads like a who's-whoof auto industry suppliers, including such big names as Panasonic, LG Chem,Samsung, Johnson Controls and NEC, along with small up-and-comers, such as A123 Systems. Some battery manufacturersthat now make lithium-ion cells for consumer markets, however, are said to beconsidering a move to vehicle batteries.

The goodnews for engineers is that a battery glut could result in a dramatic drop incosts. "The glut is a big reason why we are projecting prices of lithium-ionbatteries to drop by a factor of two," Grose says. "The higher manufacturingvolumes will contribute to the lower prices, but the downward pressure of an oversupplywill play a big role."

Prices oflithium-ion batteries are currently estimated at more than $900/kWh, buteconomies of scale and oversupply could push that number down to less than$500/kWh by 2015. If those numbers are accurate, big EV batteries, such as thatof the Nissan Leaf, could drop from about $20,000 to $12,000. Chevy's Voltbattery would go from about $14,000 to $8,000.

EVproponents suggest that two factors might change the potential oversupplyscenario. High gasoline prices could motivate more consumers to lay out thelarger initial cost for a pure EV or a plug-in hybrid. Also, continued governmentsubsidies for car buyers could bring the costs of electric vehicles down to alevel that's acceptable to a broader swath of consumers.

Given a$7,500 federal government subsidy, car buyers are already lining up to buyupcoming electric vehicles. At last count, more than 19,000 consumers had deposited$99 to reserve Nissan's all-electric Leaf, which doesn't debut until December.The Leaf costs $32,780, minus the $7,500 federal subsidy.

Still, analysts believe that someof the electric vehicle euphoria will die down over the next few years. In ablog earlier this year, senior analyst John Gartner of Pike Research wrote thatautomakers  "are viewing consumer demandfor the not inexpensive (starting at $35K) and unproven electric vehicles withrose-colored glasses, with several companies expecting to individually sellmore vehicles per year than Pike Research's estimate of the size of the entiremarket."

In a 2009 study, Gartner andfellow-analyst Clint Wheelock also predicted that consumers could "gravitatetoward less expensive vehicles with smaller battery packs," such as plug-inhybrids that offer 20 miles of electric driving. Such vehicles, however, woulduse much smaller lithium-ion batteries than the pure electric cars, such as theLeaf and the Tesla Roadster. As a result, battery manufacturers would sellfewer cells and smaller batteries.

Some analysts believe that batterymanufacturers may be able to sell some of their large-scale lithium-ionbatteries to utilities, where they could be used for storage as part of thesmart grid. The size of that opportunity, however, isn't fully understood yet.

Ultimately, researchers say that batterymakers will have to hope that EV sales rise beyond their current projections.

"There are a lot of big batterymanufacturers and a lot of start-ups," Grose says. "There's going to be noshortage of supply. Right now, the evidence points to an oversupply."