Tough Times for U.S. EV Battery Makers

The U.S. government’s effort to create an electric-vehicle battery industry suffered a setback last week when one of the companies it funded as part of this effort saw its parent company file for bankruptcy protection. Battery maker Enerdel had been awarded a $118.5 million grant to build a lithium-ion battery factory in Indiana as part of a $2 billion grant program for electric-vehicle component and battery manufacturing; its parent company is Ener1.

Ener1 hopes to emerge from bankruptcy, and says Enerdel will continue operations during bankruptcy proceedings. Yet its difficulties point to the challenges of creating a new industry: at least for now, there are too many companies chasing too few contracts for making electric- and hybrid-vehicle batteries.

Demand is expected to grow over the next few years as government regulations and incentives push automakers to roll out more battery-powered cars, and as technical and manufacturing advances make batteries cheaper. But for now, U.S. battery makers are competing in a tight market. Those that win key contracts—or that have large amounts of funding—will likely survive the next few years, while others could collapse.

Ener1’s troubles are the result of a heavy reliance on a single major customer, the electric-car company Think. Last summer, Think itself failed after poor sales of its expensive two-seater car, in the face of stiff competition from GM’s Volt and Nissan’s Leaf, which are both cheaper and more practical vehicles.

According to a filing with the U.S. Securities and Exchange Commission, Ener1 had been counting on the market for electric cars to grow quickly, creating enough demand to sell its batteries alongside ones from Asia. “The demand for EVs, however, did not develop as quickly as anticipated,” the company’s filing says.

Dan Galves, an analyst at Deutsche Bank, says battery makers simply need to bide their time while the electric-vehicle market grows. “We are convinced that factories that can be built will be utilized over the long term,” he says. “It’s a question of timing, and how long battery companies can wait.”

Nine companies received grants to build advanced-battery factories from the U.S. government as part of the 2009 Recovery Act. A 10th factory, proposed by a joint venture between Nissan and NEC, is being built with the help of a $1.4 billion federal loan guarantee.

Galves says most of the companies that received funding can afford to wait a few years for the market for lithium-ion car batteries to grow. The exceptions, he says, are Ener1 and A123 Systems. Ener1 is getting help from one of its largest investors, wood pulp mogul Boris Zingarevich, who also bought the automaker Think after it failed last year, and who plans for the company to restart electric-vehicle production.

A123 Systems, a relatively small, young company that got its start making batteries for power tools, faced a setback late last year when one of its major customers, the startup Fisker Automotive, decreased its orders, forcing A123 Systems to lay off workers. The company has other customers that could eventually take up the slack, but in the meantime, it is limiting the growth of its production capacity.

Like Ener1, some of the other companies that received government help don’t have major customers lined up. However, “they have very deep pockets,” Galves says. “If demand for batteries is not where it needs to be—if it comes two to three years later—that’s not a problem for them.”

Deutsche Bank predicts that, as a result of federal funding, battery production capacity worldwide will exceed demand until at least 2015. The prediction is significantly better than the forecast made in 2009, when it said capacity would be almost double demand in 2015. Since that earlier prediction, companies have decided to build smaller or fewer factories. The bank lowered its forecasts for electric-vehicle sales after weaker-than-expected sales of the GM Volt last year. It still expects the market to grow, however. “Every automaker has electric-vehicle plans. By the end of the decade, regulations essentially require them,” Galves says.

These predictions depend upon several assumptions about the growth of the electric-car market and the cost of battery manufacturing. Galves says that lithium-ion batteries for electric cars cost about $600 a kilowatt-hour, compared to $250 a kilowatt-hour for laptop batteries. “There’s no reason automotive batteries can’t get that low,” he says, but if these targets aren’t met, demand may not grow as quickly, and the overcapacity could last longer than expected.

Based on sales of about 20,000 to 30,000 for cars such as the GM Volt (compared to less than 10,000 last year), U.S. battery manufacturing capacity could exceed demand by five times or more by the time all of the Recovery Act money is spent, says Menahem Anderman, president of Advanced Automotive Batteries. That’s in part because much of the demand for automotive batteries will be met by Asian manufacturers, as it is today.

But a recent trend might help companies with factories in the U.S. compete with their Asian counterparts: automakers are seeking to reduce freight costs by using components made close to where cars are built, something that is particularly important with heavy lithium-ion electric-vehicle batteries.