How to Make Money Manufacturing Batteries (And Why It’s So Hard) Part 1

  • Voltaiq
  • July 19, 2022

Part 1: The Battery Manufacturing Boom

Granted, “boom” may not be the most elegant choice of words given the many headline-grabbing battery safety incidents of the last several years, but the sector is poised for tremendous growth. These days news from the battery ecosystem speaks to severe supply constraints and of the dozens of companies seeking to fill the coming supply gap by building gigafactories and cranking out lithium-ion cells by the billions. “Semiconductors are a small appetizer to what we are about to feel on battery cells over the next two decades,” stated RJ Scaringe, CEO of Rivian. Indeed Benchmark Mineral Intelligence projects global battery manufacturing capacity to grow sixfold by 2030, to a staggering 6 terawatt-hours per year (that’s 6,000 GWh, from a baseline of under 1,000 GWh in 2021). Even with anticipated cost declines, this level of production will amount to a market size for battery cells into the many hundreds of billions of dollars. It’s an enormous opportunity!

We founded Voltaiq with the mission to accelerate the transition to a battery-powered world, so this megatrend toward dramatically expanding global battery supply excites us tremendously. We’re also left with a sense of trepidation, as we hear each new announcement along the lines of “it’ll take us a year to build the factory, and a year to ramp to full production”. For existing Tier 1 battery suppliers, new entrants such as Auto OEMs seeking to vertically integrate battery supply, or ambitious startups with promising technology and loads of financial backing, we expect many of these would-be battery manufacturers are in for a rough ride. In these posts, we’ll lay out some of the challenges ahead,ideas on how to avoid some common pitfalls, and how to find the shortest path to full production.

It’s hard for everyone, even the “Big Six”

On paper it may seem possible to achieve the timeline of “two years from breaking ground to full production” for a new battery factory. However, the recent experience of two of the largest players in the industry, Panasonic and LG Energy solution, would suggest a sobering dose of reality may be in store for those with such aggressive timelines in mind. (The other “Big Six” Tier 1 battery suppliers are CATL, Samsung SDI, SK Innovation, and BYD.) Looking at the launch timeline for the Panasonic gigafactory outside Reno, Nevada, we note the following milestones:

  • July 2014: Gigafactory announced
  • January 2015: Construction begins
  • January 2017: Production begins
  • 2017-2021: Production quality issues and financial losses
  • Q1 2021: First (announced) profitability

This is the company whose battery cells enabled Tesla’s meteoric rise. They should be the best in the world at battery factories, and probably are. Yet, it took them four years from turning on the production lines to achieving profitable operation. The LG Energy Solution battery factory in Poland reveals a similar narrative, with production shortages forcing their major auto OEM customers to delay deliveries and shut down production lines (with the VW Group, Jaguar Land Rover and FCA suffering delays, to name a few) as that battery plant ramped up.

The following chart illustrates the challenge from a financial perspective:

From the day you break ground, it takes enormous cash outlays just to get to the point where you can turn the production lines on (more on why below). Once you actually start production, it can again take multiple years (as illustrated by Panasonic and LG) to reach the point where you are making enough cells (throughput) with high enough quality (“yield” percentage, i.e. the portion of cells that are good enough to sell to someone else), that the factory is neutral from a cash flow perspective. On the chart, this is marked as the “self-funding point”. If you can maintain sufficient throughput and yield, you’ll eventually get to the point where the initial large investment has been repaid (“breakeven point”). Continue along that path, and you’ll (finally!) start to see a positive net return on this initial investment.

The key takeaway is that you want to get to the self-funding point as quickly as possible so cash starts coming in and your massive investment starts paying off.  With our firm belief that batteries will power the way to a sustainable future, we’re sincerely rooting for everyone. 

This first post details the high-level financial drivers when trying to manufacture batteries profitably. In our next post in this series, we’ll lay out the technical and logistical challenges when building a gigafactory, and how they impact profitability.

  • Voltaiq
  • July 19, 2022