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Summary:

Compact Power, a Michigan subsidiary of South Korea’s LG Chem, is starting to look like the player to beat in the competition to supply lithium-ion cells and battery packs for electric vehicles, having bagged deals with General Motors, Eaton and Ford.

Compact Power, a wholly owned subsidiary of South Korea’s LG Chem, is starting to look like the player to beat in the competition to supply lithium-ion cells and battery packs for electric vehicles, having bagged deals with General Motors, Eaton and Ford Motor.

Based in Troy, Mich., the company hosted President Obama this week at the groundbreaking of a new $300 million battery plant backed by the Department of Energy. What’s driving Compact Power’s momentum, and what will it take for competitors to turn the tide their way?

Drive for Scale

One of the biggest challenges for automakers looking to sell electric vehicles on the mass market is cutting costs, and the battery — the most expensive chunk of an electric car — is where those costs need to come out in order to make the purchase price competitive with gas-fueled counterparts. This drive to cut battery costs (along with billions of dollars in government funds for battery manufacturing) underlies a race to ramp up economies of scale in manufacturing.

Early supply contracts could give Compact a leg up in that race.  “Compact’s prices will most likely drop due to its supply contracts with Ford, Chevy and Eaton,” predicted Lux Research analyst Steve Minnihan. At the same time smaller battery companies, “will have a harder time” cutting costs “without a significant automotive contract,” he said, adding that Compact’s string of deals is “a very bad sign for smaller companies that are looking to manufacture cells and packs on their own.”

While even one supply contract with a global automaker could be a huge coup for the battery makers beginning to crop up in the U.S., the deals that Compact Power has racked up amount to only a drop in the bucket for LG Chem, which recorded $11 billion in revenue in 2009. For Compact Power, however, the supply contracts with electric vehicle makers could give the subsidiary (which recorded $35 million in revenue last year) a real shot in the arm — on the order of hundreds of millions of dollars in revenue, by Minnihan’s rough estimates.

Ticking Clock

In other words, whichever company can offer technology and scale now will be grabbing plug-in deals with auto companies that are racing to get their first-generation plug-ins onto the market. The battery supply deals we’re seeing today don’t necessarily reflect long-term strategic decisions, said Minnihan, but rather a sense of urgency as automakers hurry to get a foothold in the hybrid and electric vehicle market.

Back when GM announced that it would be using Compact Power cells in the battery pack for the Chevy Volt, Bob Lutz (GM’s vice chairman at the time) explained to the Michigan Business Review that the automaker decided against A123 in part because it was “still sort of a startup, they’re still ramping up….LG Chem is just farther along.” (Another key factor was that LG Chem had more experience with prismatic, or flat cells, as opposed to the cylindrical cells A123 has made for power tools.)

However, the sense of urgency in this industry can in some cases benefit a smaller, more nimble player. When German automaker Daimler tapped electric car company Tesla Motors to supply battery pack tech (such as cooling systems and controls) for a limited run of Smart Fortwo electric models it explained that the primary motivation was to get a plug-in model on the market as soon as possible. Similarly, Toyota Motor Corp., which invested $50 million in Tesla following its IPO and is now working on electric prototypes with the company, has said that it hopes to learn from Tesla’s “quick decision-making” and “flexibility.”

But when it comes to manufacturing the actual cells, scale is king. And as car companies search for “the best battery supplier that can get them on the road as soon as possible,” said Minnihan, “Compact is an obvious choice since its connection with LG Chem will enable it to rapidly deliver the scale of batteries that the automakers demand.”

It’s not just automakers under the gun. For young battery companies building out manufacturing capacity during the next few years, Pike Research analyst John Gartner has told us that excess capacity could present a major hurdle. U.S. battery developers planning to set up new plants in the next few years (some of them with ambitious production goals tied to government funding), “are not sitting on a lot of cash. Once they establish that manufacturing, they need to be instantly generating revenue.”

Room for New Players

For the long term, Minnihan emphasized that despite Compact Power’s recent gains over competitors, the very early stage of the market for rechargeable batteries in automotive applications means “it would be foolish to think that Compact has a stranglehold on it.” According to Christina Lampe-Onnerud, CEO of battery maker Boston-Power, there’s a common perception that “all automotive companies have picked their batteries. Not in our experience,” she told us in an interview earlier this year. “Everybody will need multiple sources.”

There’s room not only for “large, competent battery players” that are “very likeminded” with legacy automakers, said Lampe-Onnerud, but also for “agile battery players able to respond” quickly to an evolving market.

Images courtesy of Compact Power and General Motors

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