The auto industry knows that it needs to embrace electrification of powertrains as a new incremental technology – but is troubled by the huge costs and risks it will incur in doing so. Car makers are wary about the long term prospects of the new technology, yet have little choice but to embrace it – owing to government influence and incentives, and competitive and customer pressure. They must move ahead, not only in choosing technologies – e.g. range extended versus full electric vehicle (EV), regular hybrid versus plug-in, and battery chemistry ‘A’ versus battery chemistry ‘B’ – but in choosing the most appropriate suppliers they will work with. While the suppliers of many of these technologies are amenable to evaluation by the established actors in the auto industry, the type of high capacity batteries and associated systems required for electrified vehicles represent a completely new challenge. Increasingly, car makers and investors in the automotive sector will need to be able to accurately evaluate battery companies, ranging from suppliers of the cells and of the assembled packs, to the control systems forming the battery management systems (BMS). This article focuses primarily on choosing a good supplier, although a few introductory points will be made on technology choices, based on Ricardo’s considerable experience in hybridized and electrified powertrains (see box on page 5). Once the car maker or investor has made their technology choice, the remaining major challenge – that of selecting a battery cell, pack, BMS maker as a supplier or investment choice – faces three initial obstacles:
Obstacle 1: The absence of ready standards for chemistries and performance, as compared with an established technology like gasoline or diesel engines.
Obstacle 2: The relative lack of industry experience: there has been 75 years of industrial progress on mechanical processes and just 25 on electrical and electronic technology, and (electro) chemistry is a relatively new development at the scale required.
Obstacle 3: A “gold rush” mentality around battery production, in which many young companies see an opportunity and chase it.
The challenge, essentially, is to identify the most capable battery producers for each application – taking that term loosely, though the focus here is on suppliers of finished battery packs – at a point in time when standards are scarce, experience is minimal, and many industry players are not yet ready to fulfil automotive series production quality standards.
Key Commercial Criteria
The current battery supplier evaluation process employed by the industry tends to focus on technical criteria. It is inevitable that this focus should dominate while the technology is young, but commercial criteria become increasingly important as it matures and volumes seriously begin to ramp up. Thus any customer or investor should look at both sets of criteria: simply picking the ‘best’ technology is not enough. The auto industry’s past is littered with examples of ‘good enough’ solutions displacing ‘best’ solutions ( fully hydraulic braking, for example, has still not been superseded by electronic braking, and advanced steel formulations have kept aluminium body panels at bay for decades longer than most experts expected).
Commercial criteria are derived from the business realities of the industry as it evolves. This development is likely to feature:
•• A likelihood of near-term oversupply of vehicle traction batteries, followed by a much more balanced situation, perhaps by 2020 – with supplier shake-outs predicted to start soon.
•• High R&D costs being matched by an equally high capital expenditure burden, as technologies move out of laboratories and small-batch shops into highlyautomated and more expensive high-volume factories.
•• An unstable marketplace while Tier 1 and OEM customers and sellers (battery firms) go through a “dance card” phase, as – against a background of concern lest they select the wrong technology – they seek to find the optimal commercial partners before committing to longterm contracts.
•• An unstable and unpredictable relationship between quality and cost levels will emerge as a key issue. Output from some firms (particularly those in China, perhaps) will appear to be lower in cost than output from other locations (Korea, Japan, and the US, for example), but with unknown differences in quality levels, potentially giving rise to warranty problems down the line. The battery industry has not in the past been challenged to meet automotive quality standards other than for conventional low capacity lead-acid units. For products based on more advanced chemistries this has yet to be Key Commercial Criteria
achieved: A firm that makes cell-phone batteries with a 1/200,000 failure rate has to cover a replacement phone for only one customer in 200,000; but if a car battery pack uses the equivalent of 4,000 cells the same failure rate means one in fifty cars sold will be coming back for a major warranty claim, and that is just unacceptable.
Given these commercial realities, any commercial criteria for evaluating battery suppliers will include the following questions:
1. Does the company have a product that is unique?
Generic batteries will become a commodity, and will suffer from increasing price pressure. While standard batteries do not exist as yet, it must be expected that standardization will occur as soon as the industry increases in scale and attempts to decrease costs. So how does a particular battery compare to competitor products and their expected technology and commercial roadmaps? In what key areas will the product demonstrate incremental value – for example, in safety, charge/discharge resistance, weight, and/or temperature behaviour?
2. Does the company have a clear plan to manage rapid and aggressive cost reduction?
Typically, this capability could be extrapolated from past achievements, but many of these firms are too new to have a track record in cutting costs. As volumes ramp up, battery prices are likely to plummet, and technologies and companies that look attractive today may be left high and dry by falling prices. It is therefore important to look past impressive technical specifications to the more mundane matter of cost-down possibilities. When looking at cost-reduction capability, raw materials are the primary concern. Does the company have supply contracts in place which allow for long-term (i.e. beyond three years) control of raw materials? How much will raw material volatility influence the cost position? Secondly, it is important to differentiate between cells and packs. Dramatically cutting cell costs may require design changes e.g. material selection: the future for a firm currently active in lithium iron phosphate (LFP) may lie in lithium titanium oxide-lithium manganese nickel oxide (LTO-LMNO), for example. Cutting pack costs will likely require a broader range of skills: for example, the introduction of design-for-manufacturing principles in the design stage, but also better supply chain selection and integration in the actual production stage.
Between a superior technology at a high cost and an adequate technology at a lower one, the history of automotive supply argues that the latter will win. An added complication here, however, is TCO (Total Cost of Ownership). Typically, automakers have tended to prefer lower piece prices today over longer term concerns over warranty claims. But with battery packs, given their very high unit costs, there is an intense focus on their useful lives from consumers and industry observers alike. A supplier may therefore find that it has a better chance than is normal to sell a battery pack at a higher initial price, if it can prove a lower lifetime TCO.
3. Has the company tested and validated the battery product (cells and pack) for quality and durability performance for both calendar-life and cycle-life on the road, as well as in its own labs?
E very battery company tests its products extensively, but on-road reliability and durability performance greatly differs from the controlled lab environment, and must be measured against international standards such as those from UN and Eucar. Too often these more rigorous tests are omitted or de-emphasized, which is inexcusable; no major automaker wants to be associated with the automotive equivalent of the first car-based “battery fire.”
Battery start-ups must therefore demonstrate superb quality control and validation processes which are failure proof, as well as substantial levels of investment, for example, in clean rooms, assembly automation, and process controls. It is very important for any customer or investor to insist on validated and demonstrated product performance in calendar and cycle life tests. If companies cannot demonstrate this capability, they may find themselves losing ground quickly to larger more established firms – especially from Japan and Korea – which, while perhaps lacking the most advanced
When it comes to benchmarking battery packs, the technical criteria are well known – for example, energy density, power density, depth of discharge percentages, charging efficiency, cycle life, and working temperature range. These can be evaluated by competent engineers, with the primary challenge being that this needs to be done by application area and against a defined baseline.
Making the right technology choices: look, and look again
In terms of focus of technological due diligence, a rational investor or automaker customer will need to be assured of the suitability of the technology (battery, BMS and controls, pack size and weight) and understand threats from competing technologies during the investment or development horizon. The field of competing battery chemistries is rapidly evolving, with the most simplistic segmentation of NiMh and Li-Ion itself fracturing into dozens of different cell chemistries. The mix is further confused by competing storage and generator technologies in the form of new super-capacitors, high speed fly-wheel systems and fuel cells.
An example of why technological evaluations must be regularly undertaken is the emerging challenge to two industry truisms: firstly, that high energy density battery systems are best suited to full electric vehicles, and secondly, that high power density systems are right for most hybrid powertrains. As multiple “xEV” drivetrains appear beyond BEV and HEV to PHEV and REEV and more, these truisms will become blurred at the edges, requiring a deeper examination of the applicability of an individual solution to the system within which it is integrated. The choice becomes, again, not what is best in an absolute sense, but what works best for a certain application.
Investors and automaker customers alike will need to keep an eye on all the parts of a battery system – not just on the cells and the pack. Just making sure the pack works well is akin to buying a home sound system based on the amplifier’s specifications, without evaluating the speakers. It is becoming increasingly clear that, as battery chemistries mature to some extent, battery electronics have not kept up: in China, for example, the short-term bottleneck in electrified vehicle battery systems is in flexible, capable battery management systems (BMS), rather than in cells and packs.
technology, have a better ability to turn out thousands or even millions of battery assemblies at a rock-solid quality level.
The linkage between cost reduction and quality improvement must be stressed. A recent visit to several Chinese battery firms revealed first-time yield rates (a quality measure) of 98% or more for cell phone batteries, but only around 92% for automotive batteries. Typically the cells were aged for a month before leaving the factory, in order to identify and rectify problem units, so actual quality levels at dispatch were higher than this. However, a first-pass failure rate of 8% with the consequent scrappage is an expensive way to maintain quality levels. Battery pack – as opposed to cell – manufacturing, still has a long way to go in terms of automating assembly to keep quality up.
4. Has the company tested and validated the product fit to application, and is it clear on the application it is targeting?
As yet there are no standard automotive battery products, and a traction battery for a pure electric passenger vehicle has very different requirements from a range-extended vehicle, to take just one example. Application requirements will also tend to be country or region-specific, since the typical drive cycles and customer requirements differ greatly, for example, between China and the United States. Good battery companies understand this, are very specific on the targeted application for their products, will have developed application-specific test procedures and cycles, and will have rigorously tested their products against them.
5. Does the company have either a proven track record of smooth but fast volume ramp up, or a technology that has the clear potential to be easily scalable, and a plan to execute such scaling?
As volumes increase, the company that can deliver on purchase orders will overtake the firm that has a better finished product but cannot build enough of them. It is especially difficult to make the transition from hand-assembled low-volume packs to automaticallyassembled high-volume products. An intense focus must be made on the firm’s automation skills and process engineering depth, as many companies may have skimped on process engineering while trying to get the product engineering right. The strength of a company’s management must likewise be scrutinized: are the people who took the company out of the single lab the right team to guide it to the next, multi-factory, level?
Related to the ability to handle production growth is the ability to handle product growth: is the company already working on next-generation technology, or is it more comfortable with simply fine-tuning its current designs? Typically, the initial product design will have been the work of one or two people – are they already working on the next generation design, or was their success a one-off? Essentially, how can the company be sure not to lose out against competition with the next product generation?
6. Does the company have access to on-going development funding?
As companies move out of expensive laboratories into even more expensive factories, while keeping up spending to stay in the battery R&D race, funding availability becomes crucial. Funding support may come from commercial investors, government support (especially in China), or via solid commitments from automakers or Tier 1 customers willing to fund supplier growth to a reasonable extent via generous commercial terms. A company management’s assertions about robustness of funding must be pressure tested, as all three sources can be fickle, slow-moving, and reluctant to offer written commitments.
7. Is the company’s intellectual property secure?
Finally, especially in the ’dance card’ phase of shifting buyer and seller partnerships, it is more critical than ever to ensure that a given firm’s intellectual property is secured. With rapidly-evolving technologies and fluid commercial relationships, the challenge is to ensure that the next generation products are already in the pipeline and the related IP is secured. Check with independent observers regarding claims of technology ownership, look for current and past IP lawsuits, investigate personnel changes, and count and examine both patents filed and scientific papers delivered.
For a car maker or an investor looking to put money to work in this dynamic industry by betting on which of the fifty or more existing battery firms will emerge from the shake out – either as a long-term success or a useful acquisition target – the changing commercial environment means that it is no longer enough just to evaluate the technology. The company must be evaluated too – and the same holds true for a buyer of batteries looking to make making intelligent long-term supply choices.
For both investor and buyer this means looking for unique product characteristics, proven skills in cost reduction and quality control, robust evidence of fit-forapplication testing, a demonstrable ability to grow and to ensure next generation products, the support of a solid funding base, and a clear lock on core intellectual property. A battery company with those assets will most likely outperform a company with slightly better technology but weaker skills in these crucial areas.
Notes on the authors:This paper was prepared by Ricardo Strategic Consulting with contributions from Simon Arbuthnot, Markus Doerr, Ian Kershaw and Christian Koehler.
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