My Lithium Battery Manufacturing Industry Analysis

Hello everyone,

I wanted to share my very own industry analysis regarding Lithium Battery Manufacturing as I'm interested in Electric Vehicles and I currently own a Nissan Leaf. I'm also a huge fan of Tesla and I pre-ordered a Model 3. Upon completing this analysis I searched for Lithium mining companies and have since traded stock for Lithium Americas Corp (LAC) turning profit. So I wanted to share this and feedback is what I'm looking for. I submitted this analysis as part of my Strategic Management Course.

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Introduction
The Lithium Battery Manufacturing industry used to be focused on manufacturing lithium batteries for niche markets that consisted of electronics manufacturers and defense contractors. This changed as new applications arose following heavy investments in research and development initiated by the US Government. Such incentives have helped reduce production costs and increase viability of the technology’s use in many different applications. The largest application was the use of lithium batteries in electric vehicles that were tried using substitutes but didn’t succeed. The rise in demand from the automobile manufacturers increased production of lithium batteries by and this demand is expected to grow resulting in 16.4% annual revenue increase. (Carter, 2015, para. 1, p.1)
However, the industry is not without competition. China is investing heavily in lithium battery production which would flood the market thus lowering prices and revenues for US manufacturers (Carter, 2015, para. 2, p.1). In this industry analysis report, the lithium battery manufacturing industry and its structure will be defined. The industry will also be analyzed using Porter’s Five Forces of competition framework. The purpose for the analysis is to define the five forces (Potential Entrants, Substitutes, Buyers, Suppliers, and Industry Competitors), determine if the industry is attractive or not for new entrants, and its potential for growth.

Industry Definition
The Lithium Battery Manufacturing Industry primarily manufactures lithium batteries most commonly used in electric vehicles and electronic devices.

Industry Structure
In this industry, the main players are Nissan Leaf, Ford Motor Company, General Motors and Tesla Motors. These firms are both buyers as well as manufacturers of lithium battery packs. The customers for this industry include but limited to Automobile manufacturing, Audio & Video Equipment Manufacturing, and Communication Equipment manufacturing. The suppliers are Metal Wholesalers, Lithium Carbonate and Hydroxide mining companies. Substitutes to Lithium battery packs for automobile manufacturers are Gasoline, Hydrogen, and Natural Gas. New entrants into this industry are firms that are setting up manufacturing plants for lithium battery packs. Finally, industry rivalry are the firms that established manufacturing plants competing locally in the US and globally.

Potential Entrants
Threat of entry is one of the most important forces that affect any industry earning a return on capital in excess of cost of capital. This differential is the magnet attracting new firms into the industry and leads to profits falling to a competitive level. One major factor that determine the competitive level is the barrier to entry. Barrier to Entry is analyzed by considering the capital requirements, Economics of Scale & Absolute Cost Advantages, Legal barriers, and Industry Incentives.

Capital Requirements
Since the industry is already established yet growing and is very technology intensive, it requires medium level of start-up capital in order to purchase and setup the advanced machinery and equipment required for production. The investment requires is $0.18 for every dollar spent on labor (Carter, 2015, p.32). In addition, depending on the size of the manufacturing plant, the cost would vary from a few hundred million dollars to $5 billion, a price tag for Tesla’s Giga-factory. Moreover, skilled workforce in this niche field is required to operate the equipment prior to commencing operations. This is costly due to the long hiring process and training the workforce is required to accomplish. Therefore, capital requirements are high.

Economies of Scale & Absolute Cost Advantage
A new firm entering the market may have a patented technology for producing cheaper lithium batteries or at least using current technology. High Competition is expected as established firms are researching new ways to lower the cost per Kilowatt hour (kWh). Such an example, 24M developed and patented a new process that would lower the cost to less than 100 per Kilowatt-hour of capacity (Massachusetts Institute of Technology [MIT], 2013). Where the current cost ranges from $300 to $500 per Kilowatt-hour of capacity (Kurzweil, 2015). However, for such cost savings to be effective, large capital is required to invest in a plant large enough to mass produce the new batteries. Until then, current manufacturer lower costs through increased productions.

Legal Barriers
Since lithium batteries are hazardous, the industry is subject to different regulations and laws at Federal and Sate levels as well as local environmental laws. Such regulations govern the storage, handling, disposal, emission, transportation, and discharge of hazardous materials and waste products involved in all processes involving the lithium batteries. As a result, manufacturers are required to meet several federal and industry standards which cost firms to maintain in order to operate. For example, for a firm to get a battery pack authorized for the commercial market and for air transport can cost between $10,000 to $20,000 (Battery University, 2015). Such a high price is an issue as the technology changes and firms will have to incur these costs when shifting to newer battery types.

Industry Incentives
As part of the government’s initiative to advance technology in search of alternatives for fossil fuels, subsidies were introduced via two major programs. The Advanced Technology Vehicles Manufacturing Program (ATVM) and the American Recovery and Reinvestment Act (ARRA). The ATVM program authorized up to $25 billion in loans aimed at domestic development of fuel-efficient vehicles. However, only $8.4 billion has been loaned to a few manufacturers of electric vehicles where most of the investment was in lithium batteries. The ARRA program focused on battling the recession granted $2.4 billion for building battery production facilities. Moreover, $80 million was allocated to lithium battery research and development. In addition, several states offered their own tax incentives to manufacture in batteries locally. Such incentives include Nevada’s $1.25 billion to Tesla motors to assist in the construction of the Giga-factory (Carter, 2015, p.35). Such incentives may attract entrants but the requirements are not easy to achieve in order to qualify for them.

Substitutes
The substitutes to this industry include Fossil Fuels and Hydrogen Fuel Cells. The threat of substitutes is mainly from Fossil fuels and affects demand for electric vehicles. Whenever the price of Fuel rises, demand for electric vehicles increases which increases demand for lithium batteries. This is simple because consumers can the see the large potential savings in operating an electric vehicle. Since the price of electric vehicles is still high, price drops in fuel drives sales for traditional vehicles but to a certain extent. In addition, the demand for electric vehicles is driven by its popularity hence driving demand for lithium batteries.
The link between Oil prices and demand for electric vehicles has been weakening since consumers are becoming aware of climate change. Demand for electric vehicles means a drop in demand for fuel vehicles and thus reduced demand for Oil. Hence a drop in the price of Oil. “Automakers [..] are investing billions in developing plug-in cars that run [electricity]” (Time Inc., 2016, “Electric Cars Could Tank Oil Prices Even Further”). With such investments, substitutes competition and power is reduced as such investments displace demand for them.

Suppliers
Lithium battery manufacturers compete in the US to purchase from only one supplier of lithium metal. The mine, Albemarle’s Silver Peak, produced 6,000 metric tons of lithium carbonate per year. The global supply in 2015 is accounted to be about 175,000 metric tons which puts the US production at about 3.42% of global production. Current US reserves are estimated to be 36 million tons which is about 16.5% of global reserves (Fortune Inc., 2016). With growth in lithium demand for lithium battery production due to increased demand for electric cars, the price of lithium is increasing and thus attracting new entrants into the mining industry such as Pure Energy Minerals. Since there is only one lithium mine in the US in Nevada that is developed, supplier power is currently high but is expected to fall as more firm enter the lithium mining industry. In addition, a new lithium deposit has been discovered in Wyoming is estimated to be 18 million tons of lithium, roughly worth $500 billion (InfoMine Inc., 2013). Such a deposit will not be mined until it is profitable enough for more entrants to find the capital investment worth while. However, it must be noted that with more entrants and larger deposits found, the supplier power will drop as lithium supply into the market increases.

Buyer’s Power
Lithium battery manufacturing generates 44% of sales revenue from domestic electric vehicle manufacturers. However, it must be noted that 38.4% of the major companies involved in lithium battery manufacturing are also electric vehicle manufacturers. Such manufacturers are Tesla Motors with a market share of 8.4%, GM with a market share of 8.5%, Ford with a market share of 8.9%, and Nissan with a market share of 12.6% of lithium battery manufacturing. Nissan received a load of $1.4 billion dollars to begin production of lithium batteries and its Nissan Leaf with a forecasted annual revenue growth of 318.3% from 2010 to 2015 for its lithium battery manufacturing. Ford Motor Company and General Motors have received loans to being manufacturing electric vehicles and advancing lithium battery technology. Both companies source lithium batteries from LG Chem while expanding their own lithium battery manufacturing facilities. Tesla Motors has a supply contract with Panasonic for lithium battery packs while it constructs its $5 billion dollar Giga-factory in Nevada that would supply more lithium batteries than all manufacturers combined. The remaining 61.6% of the market are companies that manufacture disposable lithium batteries such as Energizer (Carter, 2015, p.26-31). Such investments that increase demand for a limited supply of lithium places the bargaining power in the hands of the suppliers. For example, Tesla’s Giga-factory will require about 24,000 tons of lithium hydroxide in order to manufacture lithium batteries which puts Tesla in a position trying to buy the commodity from different suppliers globally in order to meet its own demands (The Financial Times Ltd., n.d.). Hence, buyer power is not expected to rise until lithium productions rise significantly exceeding demand.

Industry Competitors
Competition within an industry between firms determines the profitability of the industry. In addition, firms of different sizes are compared and the market share is determined to show the leading firms. For example, the dominant firm in electric vehicles market is Nissan and as such it has the power to set the price for its mass market vehicle, the leaf. Moreover, Tesla dominates the market in luxury electric vehicles and thus exercises discretion in setting its prices. In this industry, the concentration ratio is the combined market share of the electric vehicle manufacturers of 38.4% which is low and shows an Oligopoly and prices are restrained.
The industry does not present diversity in competition as only a handful of firms are producing electric vehicles and lithium batteries. As a result, product differentiation is average, but high enough that it is clear that Tesla offers high quality luxury electric vehicles and other firms offer mass market affordable electric vehicles. Customers that can afford a Tesla would switch, but otherwise would stick to their respective electric vehicles.

Conclusion
In conclusion, the lithium manufacturing industry is growing with the other industries that demand lithium batteries and the lithium mining industry providing the lithium supplies. This is a positive growth that attracts new entrants with enough capital and new technological innovations that would differentiate the firm from existing ones. Therefore, increasing competition, driving innovation, and lowering costs and prices for lithium batteries and finished products. In addition, the industry’s success is dependent on the quality of lithium batteries manufactured due to the nature of uses that rely on the batteries. Hence, demand is directly proportional to the supply of quality lithium batteries as well as the firm’s quality control processes and integrity. Finally, this industry is dependent on highly skilled labor in order to develop and manufacture lithium batteries (Carter, 2015, p.21).
It is important to note that this industry is in Quality growth phase where Companies with strong financials and capital support grow as they can invest in quality products and weaker companies close down. Firms continue to invest in developing new technologies in order to reduce costs, improve efficiency, and increase performance of their lithium batteries. Markets are developed as a growing customer acceptance of products dependent on lithium batteries is key to a revenue growth (Carter, 2015, p.10). Therefore, this industry is profitable for firms that are capable of raising large sums of capital not just for manufacturing but also for research and development in order to remain competitive and gain a large market share.

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References

• Carter, B. (2015). Lithium Battery Manufacturing (IBISWorld Industry Report OD4499). IBISWorld Inc. Para. 1. P. 1
• Carter, B. (2015). Lithium Battery Manufacturing (IBISWorld Industry Report OD4499). IBISWorld Inc. Para. 2. P. 1
• Carter, B. (2015). Lithium Battery Manufacturing (IBISWorld Industry Report OD4499). IBISWorld Inc. P. 32
• MIT News – On campus and Around the World. New Manufacturing approach slices lithium-ion battery cost in half. (2015, June 23). Retrieved May 5, 2016, from http://news.mit.edu/2015/manufacturing-lithium-ion-battery-half-cost-0623
• Kurzweil – Accelerating Intelligence. New Manufacturing process cuts lithium-ion battery cost in half. (2015, June 24). Retrieved May 5, 2016, from http://www.kurzweilai.net/new-manufacturing-process-cuts-lithium-ion-battery-cost-in-half
• Battery University. BU-305: Building a Lithium-ion Pack. (2016, May 4). Retrieved May 5, 2016 from http://batteryuniversity.com/learn/article/building_a_lithium_ion_pack
• Carter, B. (2015). Lithium Battery Manufacturing (IBISWorld Industry Report OD4499). IBISWorld Inc. P. 35
• Time Inc. Electric Cars Could Tank Oil Prices Even Further. (2016, February 24). Retrieved May 7, 2016 from http://time.com/money/4235833/electric-cars-could-tank-oil-prices-even-further/
• Fortune Inc. A Lithium Gamble That Could Win Big for Tesla. (2016, March 29). Retrieved May 6, 2016 from http://fortune.com/2016/03/29/lithium-tesla-mine-nevada/
• InfoMine Inc. New Wyoming Lithium Deposit Could Meet All U.S Demand. (2013, May 3). Retrieved May 6, 2016 from http://www.mining.com/web/new-wyoming-lithium-deposit-could-meet-all-u-s-demand/
• Carter, B. (2015). Lithium Battery Manufacturing (IBISWorld Industry Report OD4499). IBISWorld Inc. P. 26-31.
• The Financial Times LTD. Tesla in stand-off over Lithium Supply. (n.d.). Retrieved May 6, 2016 from http://www.ft.com/intl/cms/s/0/4a924a64-99df-11e5-987b-d6cdef1b205c.html#axzz480xyEUmE
• Carter, B. (2015). Lithium Battery Manufacturing (IBISWorld Industry Report OD4499). IBISWorld Inc. P. 21.
• Carter, B. (2015). Lithium Battery Manufacturing (IBISWorld Industry Report OD4499). IBISWorld Inc. P. 10.

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Tesla's Giga-factory

https://www.tesla.com/en_CA/gigafactory