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February 26, 2022


Electric Vehicles
Nadim Maluf

Christopher Mims of the Wall Street Journal writes on 26 February 2022: “In the superheated market for batteries, promising lab development often get overhyped by startups.” He quotes an oft heard phrase: liar, liar, battery supplier. On the day before, Heather Somerville and Eliott Brown, also of the Wall Street Journal, describeSPAC startups made lofty promises” that “aren’t working out.”

It seems that all of a sudden, we have a credibility crisis in batteries and electric vehicles. Is it true?

The development of batteries and large battery systems for electric vehicles (EVs) is a complex task bringing together a multitude of advanced disciplines and skills. Chemical, materials, mechanical, electrical, and software engineering in addition to excellence in manufacturing are all core to building batteries for EVs. The development of next-generation batteries, especially solid-state batteries, involves bringing together a new set of materials into a new battery structural design, then scaling this design to be manufacturable while retaining all key battery properties…and do it cost-effectively. There is no easy way to explain how difficult and complex this process is. It is just hard! Really hard! Just because the basic technology works in the lab is no guarantee that we fully understand the complexity of this process, in particular, its duration and cost to completion. The technical and manufacturing challenges become increasingly clear as the development progresses. The result is often delays, cost overruns, project revisions and reset expectations.

Batteries were historically developed by giant manufacturing conglomerates such as LG in Korea or Panasonic in Japan. Battery development delays and cost overruns were often hidden or offset by other sources of funds. For example, batteries were one of several product segments within LG Chem, a giant chemical company in Korea with revenues in excess of $25 billion. As battery revenues increased with EVs, LG spun out in 2021 its battery group as a separate company named LG Energy Solution with revenues now in excess of $10 billion. LG Chem, and subsequently LG Energy Solution, spent many billions of dollars on battery development and manufacturing expansion. The diversity of LG Chem’s product lines afforded their battery division more latitude, and to some extent, less scrutiny as they slowly built up the business over the past decade.

In comparison, QuantumScape (NYSE: QS) projected in its financial filings that its battery business will grow to $6.4 billion in 2028 from near zero at present, faster than Google’s early meteoric rise. Its SPAC merger with Kensington Capital in 2020 brought the company $1.15 billion in cash to support its battery R&D efforts and building new factories. Any delay in revenues and/or cost overruns will not be met with the same degree of forgiveness that LG received from its investors. And therein lies a disconnect between the reality of battery development and the expectations of investors, in particular, impatient investors.

Naturally, that begs the question whether startups (even well-funded startups) should consider the high-stake, high-capital challenge of battery development. Unquestionably, startups bring innovation and agility that is often unmatched by large behemoths. But history has also been unkind in this sector. A123 Systems was a startup battery developer that became a darling of Wall Street when it went public in 2009, only for its assets and intellectual property to be acquired out of bankruptcy in 2012 by Wanxiang Group Corp. of China. It should serve as caution to all startups racing to succeed in batteries.

If today’s battery startups cannot deliver on what they promised to their customers and investors, history will again prove to be unkind. Whether these companies raised money through private or public markets, their credibility in delivering quality products will determine their degree of success. No amount of irrational exuberance in the financial markets will shield them from an unyielding scrutiny from their customers and EV drivers.

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