UPDATE: Disappointing electric vehicle sales in the past 18 months were highlighted recently by data showing that the American battery industry overestimated EV battery demand in 2013 by a factor of ten. And prior to this recent data, the successor to Solyndra in the cleantech political football game has been battery maker A123 Systems, which is effectively being rescued from bankruptcy by Chinese auto supplier Wanxiang. A123 took $249 million in federal grants and $125 million in tax credits from the state of Michigan, angering many who feel that the US bankrolls R&D only to have it bought on the cheap by East Asian conglomerates. So what’s the battery industry to do?
Well, there are no easy answers in cleantech, partially because most of the success stories in the broadly defined industry have come from great design companies like Nest and Tesla, which serve largely unsubsidized markets full of customers with lots of disposable income. But that said, there are some simple lessons that the solar industry learned that would serve the battery industry.
1) Be wary of capital scaling costs: Often referred to as the “valley of death,” it’s the problem that occurs when you have great technology but can’t afford the hundreds of millions needed to build factories to deliver your product to market. When Solyndra went under, many analysts referenced cheap solar panels from China, which played a role in Solyndra’s demise but the real issue was that Solyndra actually couldn’t scale its unique solar panel technology at a reasonable price (and ran out of money trying to make the economies of scale work).
There are already signs that the companies behind next generation battery technology have learned this lesson. When I caught up with Phil Giudice, CEO of Khosla Ventures and Bill Gates funded Ambri, he was clear that when his grid battery storage solution hits the market in 2014, he’d be contracting with regional manufacturers in the markets he was intending to sell into. “The process isn’t about us having to raise hundreds of millions of dollars to build new factories and get economies of scale. Our cells are stuff that could be built within the context of existing capabilities,” Giudice told me. Ideally, he’d also like manufacturers to help with marketing.
We’re seeing this trend even in VC as recent figures from the Cleantech Group suggest latter stage deal size has been smaller, pointing to investments in “capital light” companies.
2) It’s nice to be on the installation and services side of the equation: Solar installer SolarCity filed for its IPO recently just as 10 Chinese solar companies pulled their IPOs during Q3. We’ll see if the capital markets can warm to the installation side of the equation but we know they don’t like the manufacturing side.
Installers actually benefit from falling solar panel prices, and are insulated from global pricing competition. Similarly, battery startups that offer services like power management and add on hardware to help integrate batteries onto the grid are in better shape. Greensmith Energy Management Systems has raised $7 million for its turnkey power management software that integrates its physical hardware with whichever battery it believes is best and most cost effective for the application at hand. CEO John Jung was pretty clear about this strategy when he told me in September that “if you’re battery agnostic, not capital intensive, and buy the best, cheapest batteries from around the world, you can focus on the numerator, how much ROI is on the top line.” It’s much better to be the beneficiary of cheap manufacturing than trying to compete with it.
The irony here for American battery makers is that it can actually be harder to scale technology than to make a technology breakthrough.
3) Consider innovative financing schemes: SolarCity is overcoming the biggest barrier to rooftop solar by waiving upfront capital costs, which run about 20K for a residential system, and instead locking in long term power purchase agreements or capital leasing contracts. There’s even talk that Wall Street is going to package the contracts as asset backed securities.
Whether you’re talking about EVs or grid storage, you’ve got rate paying customers buying electricity at reliable monthly payment rates. Sounds like the making of a debt instrument to me. It’s more obvious how this could work at the utility level. Battery installers could offer utilities free capital installation in exchange for long terms contracts that stemmed from the amount of energy stored per month. This would be in turn taken as a strict cut from rate paying customers. In EVs, it’s not unthinkable that automakers might be able to lower the sale price of the actual car in exchange for some sort of contract to provide the power to the EV.
Perhaps the biggest lesson from the ups and downs of the solar industry has been how difficult it can be to navigate a fluctuating subsidized environment. But focusing on developing great tech, easy customer financing options, and high value services without big scaling costs or East Asian competition could give the industry a chance to find a place in a decreasingly subsidized global market.
UPDATE: On Tuesday battery maker A123 Systems filed for bankruptcy, unable to make a payment on debt. The company says the Wanxiang investment will not be completed and it will now sell its automotive assets and factories to Johnson Controls for $125 million.