Gigafactories, batteries, and the economies of scale

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It sounds so cool: “The gigafactory is an extraordinary ambitious venture to build lithium ion batteries at a size and scale that hasn’t been done before…[t]o bring down the cost of lithium ion batteries, the scale of their production must be increased by a whole order of magnitude than what currently exists” according to Business Insider.

But the reality is that lithium ion batteries are already being made at scale, and although there are people who talk excitedly how building gigafactories will cause a 30% or greater drop in the cost…NONE OF THOSE PEOPLE SEEM TO BE BATTERY EXPERTS.

Maybe you don’t trust BI, so here’s a quote from the Wall Street Journal last week: “There’s a lot of cost that can be taken out at larger scales of battery manufacturing,” according to Professor Peter Wells at Cardiff Business School’s Centre for Automotive Industry Research, in Wales. I am sure Dr. Wells is a great guy, and according to the Cardiff website he has “vast experience of research into the global automotive industry.” But none of that experience (or his publications) seems to display any expertise in lithium ion batteries. Or batteries of any type, come to that.

There are battery experts out there, and one was even quoted in the same WSJ article:

We are already reaching the limit on the energy density you can get in the lithium-ion battery. Next-generation chemistries, such as lithium air, are another 25 years away from commercialization.

It won’t be as simple as it has been so far. We’ll need scientific discoveries in the electrode materials. Usually, from invention of battery materials to production it takes 15 to 20 years, and we haven’t invented it yet.

 

As far as scale manufacturing, it’s an already perfected business; just doubling the world production wouldn’t get that much improvement per unit. The major producers in Korea, Japan, are using massive amounts of material already. And battery manufacturing is a very, very low-margin business at scale.

 

K.M. Abraham is a research professor at the Northeastern University Center for Renewable Energy Technology, has worked for 30 years on lithium battery technology, was one of the first to demonstrate rechargeable lithium batteries and invented next-generation lithium air batteries. He also has a battery consulting company called E-KEM Sciences.

As part of Deloitte’s TMT Predictions for 2011, we wrote about battery technology, specifically lithium ion. We predicted that as a mature technology, Li Ion was never again going to improve by more than 5% per year, and in fact was more likely to decline to around 1% annual improvements. Nothing I have seen since has changed my mind.

I don’t blame Professor Wells. In almost all industries, it is true that dramatically expanding the scale of manufacturing will cause prices to drop, often by a lot. Further, it was true of lithium ion in the early years: the very first commercial versions were expensive because they were made on sub-economic scales. But for the last five years, that has not been the case: Li Ion was a $20 billion annual business in 2009. It is nearly 35 gigawatts in annual manufacturing capacity in 2013. It is 20 year old technology and already highly automated (see a picture from a Chinese manufacturer below.)

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Doubling global capacity with a gigafactory may be a good thing. It may help save the planet. It may meet demand for batteries in electric cars. It may make money. But, in isolation, that increase in scale is not likely to have the dramatic effect on the cost of batteries that many people are expecting.

[When the press is talking about lithium ion gigafactories, they are mainly discussing Tesla’s plans. To be clear, Tesla appears to make wonderful cars. Everybody I have talked with who owns one loves it, and I have friends who are buying them. My comments on battery cost declines are not about how good the Tesla is, how many will sell, how much money the company will make, or what the share price will do. It isn’t even necessarily about Tesla: it is purely a discussion around the idea that a gigafactory — anybody’s gigafactory — will cause a sudden drop in the cost of lithium ion batteries.]

 

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