The decision of Bosch not to enter battery production may prove to be a historic mistake, writes Gerard Reid. Bosch was no doubt motivated by its failure in the solar power market, but according to Reid the battery market is very different. It is much more complex, involves much more technology and will be a critical pillar of the new economy. If Bosch and others don’t get over their solar complex, European industry may get seriously hurt.
Bosch was one of the first global industry players to actively invest into solar. They saw huge growth opportunity. They bought some very interesting businesses such as Ersol, Aleo Solar and Johanna Solar. However, they could not make any of them work and exited solar production some years ago, having lost over €3bn.
Painful though it was, it did not really impact Bosch’s core business which is automobile. Bosch is the biggest automobile supplier in the world. What does impact Bosch’s core business is the electrification of the automobile and their efforts to date in batteries, which are the most expensive component in the electric car, have been negligible.
The majority of investors are scared of investing in upstream batteries believing that batteries will be like solar with manufacturing both low margin and dominated by China
It was thus not too much of a surprise when Bosch recently announced they would not be going into battery production. And they are not the only ones. The majority of investors and strategists I talk to are scared of investing in upstream batteries believing that batteries will be like solar with manufacturing both low margin and dominated by China. This is what I call the Bosch Solar complex. But this is a mistake.
Bosch should have known better: they and other solar producers made it too easy for the Chinese to come in and dominate global solar production. For a start, firms like Bosch and Q-Cells never took control of the intellectual property in manufacturing they had often co-developed with their equipment providers, who then took that know-how and sold it to China.
Unsurprisingly, there is no competitive European solar manufacturer left. There is one major American manufacturer left in First Solar who controlled their manufacturing know-how and tied their equipment manufacturer, Von Ardenne, up under a long-term contract.
The other advantage the Chinese had was financing. Not only did they have low-cost debt available to them from Chinese banks, but many of them raised lots of money on the public markets in the United States and they used that cash to drive scale and costs down. In contrast, many of the European players built lavish offices, invested into new technologies and across the value chain. The rest is history and, as a result, Chinese companies like Trina Solar, Jinko, GCL and Longi are global solar leaders.
Batteries, however, are an order of magnitude more complicated than solar. For a start, it is impossible to find one equipment manufacturer who can build a fully integrated and automated battery factory. This implies that there is real know-how in the manufacturing area, most of which is in Japan, South Korea and increasingly China.
There is also massive intellectual property and manufacturing know-how around the battery cells themselves and the various components that make them up. Key battery cell components such as anodes, cathodes and electrolytes are often brought in from third parties. Most of these components are wet systems which are difficult to control and develop with lots of unknowns.
Solar cells, in contrast, are dry systems which are inherently stable, which also means that they are less prone to explode.
There is no clear winner either when it comes to future battery technologies. Lithium-ion may be the choice of major automobile manufacturers to power EVs, but we will still have uses for other forms of batteries such as lead acid, alkaline and flow batteries.
And even with lithium-ion batteries, there are lots of different chemistries such as LFP (lithium iron phosphate), NMC (nickel manganese cobalt), NCA (nickel cobalt aluminum), LMO (lithium manganese oxide) and LCO (lithium cobalt oxide), each of which have different strengths and weaknesses.
If Western producers do not react soon, by the time they do, Japanese, Chinese and South Korean competitors will have firmly cemented their grip on the whole lithium-ion battery value chain
And even there we have more complexity and technology. The standard NMC battery, for instance, is currently called a 333 meaning it uses three parts nickel, three manganese and three cobalt. Going forward, we will see 811 NMC batteries which will use more nickel and less cobalt which will, in turn, decrease cost. This is a complex technological challenge with the winner gaining significant competitive advantage over its competitors.
Meanwhile, back in the world of solar, the dominant technology is known as crystalline silicon. It has been the leading technology for the last 25 years. Technology improvements over that period have been small; in other words, it is a commodity. But batteries are not a commodity and they are critical to the electric car.
Europe currently produces one in four of the world’s internal combustion engines not to mention the exhaust and transmission system. This is worth $50bn per year to the European economy. And as the car electrifies, all those producers, including Bosch, will come under significant pressure.
Meanwhile in Asia, companies such as Panasonic, LG Chem, Samsung, Murata and CATL see the electrification of the automobile as a massive growth opportunity noting that the global automotive battery market is worth $6bn per year. And that is only going to grow.
And if Western producers do not react soon, by the time they do, Japanese, Chinese and South Korean competitors will have firmly cemented their grip on the whole lithium-ion battery value chain, which will make it almost impossible for even companies as big as Bosch to enter the market.
Gerard Reid is founding partner of Alexa Capital in London, a leading corporate finance business focused on energy and mobility. He has over two decades of experience in equity research and fund management in the energy area.
This article was first published on Energy and Carbon, a blog hosted by Reid and energy journalist and advisor Gerard Wynn. It is republished here with permission.