In advance of this fall’s launch of plug-in hybrid and electric vehicles, lithium ion battery manufacturers are breaking ground on manufacturing plants
nearly every month. About $2 billion in federal stimulus funding has spurred the
building of facilities in Michigan and Indiana that will start churning out battery
packs by the end of the year. But the escalation in production has the potential to outstrip the demand for the batteries by as early as 2012.
As I said on NPR’s “All Things Considered” earlier this week, the battery companies have understandable motivations to quickly ramp up production. For battery companies to receive the full amount of stimulus grants and loans, they must meet specified goals for production capacity. What happens if these production goals exceed the high consumer demand for electrified vehicles anticipated by automakers?
During 2010 and 2011, consumers and fleet operators who are eager to own EVs will scoop up the first units that off the line without much concern for economics. For these early adopters, the first electric cars and plug-in hybrids are “must haves.” But that is likely to be a niche market, numbering in the thousands to 10s of thousands. Remember that only about 1,000 Tesla Roadsters have been sold so far. The market appeal of EVs will have to be broadened beginning in 2012-13 to attract a more cost-conscious consumer, and that adjustment period could impact battery manufacturers who are likely to then be in full production.
Battery Glut: Bad for Battery Makers, Good for Consumers
If gasoline stays under $4 per gallon for the next few years, the EV audience is unlikely to take off as quickly as the auto industry hopes. Other confounding factors for the battery market include possible delays in new vehicles, and a slower than expected rebound by the global economy. A slower than expected increase in the size of the EV market could hurt start-up battery companies more than their larger diversified competitors because they will feel pressure to lower the prices of the batteries—to make the vehicles more appealing to consumers—and to run plants at lower volumes will further reduce revenues.
On the other hand, lower prices for batteries could mean lower prices for electric cars, considering that batteries are the most expensive component. Battery costs are forecast to drop by as much as 15 percent year in the next two to three years. A lithium ion battery glut could push prices even lower. The effect on start-up battery companies could be deadly, but a glut could speed up the transition from petroleum to battery-powered vehicles.