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    The Evolution of Electric Vehicle Batteries: Part 1

    Veronica Zhang ,Analyst
    March 07, 2017
     

    This is part one of a two-part series by Ms. Zhang that explores the economics of electric vehicle (EV) batteries, which are rapidly developing, arguably at a quicker pace than stationary battery storage. Zhang follows last year's two-part blog series on the necessity of battery storage as a crucial element of widespread solar electricity adoption (read Alternative Energy: A Transformative Storage Boom? Part 1 and Part 2).

    Overview: A New Paradigm

    While it is virtually impossible to define the exact inflection point at which EV technology and cost will make sense and usher in a new paradigm, history shows with prior technology adoption rates that an "s-curve" is the likely pattern. It took TVs and smartphones 5 to 10 years to go from 5% to 50% adoption in the U.S. – although rates vary country-by-country depending on infrastructure and pace of growth. The pace of EV cost cuts, research and development (R&D) support in new tech development, and broad global support for EV augur well for electrification in the coming decades. We believe that we are not far from what is likely to be a sustainably profitable industry.

    Here we present the key takeaways from our 4Q 2016 trip to Asia, which included meetings and facility tours with some of the leaders in the battery vertical. Our travels took us to Shenzhen and Shanghai, China, and Seoul, South Korea to meet the incumbents in the battery and electric vehicle space. We met management from battery manufacturers Samsung SDI and GS Yuasa, electric vehicle developers BYD, Hyundai, and NextEV, solar project and equipment manufacturer Canadian Solar, toured the battery and car manufacturing facilities of BYD and the auto assembly line of Hyundai.1

    Tesla Model S Unleashed a Surge in EV Interest

    Interest in EV batteries has surged since the introduction of Tesla's second vehicle in 2012, the Model S luxury sedan, which was the world's best-selling electric car for two years in a row, 2015 and 2016.2 The growing interest in EV has compelled us to better understand the pace of technological development and cost structures of the major component providers and competitors in the East, where peer competition is intense and government support resilient. Our long-term view on the EV industry is very positive. We believe that technology is evolving rapidly and see the global competitive landscape as highly conducive to developing efficient, low cost, yet powerful batteries. In the near term, however, electric battery manufacturing and development is largely unprofitable and relies on government subsidies ― a dependency that is volatile and unsustainable.

    Evolving the Technology and Process to Reduce Costs

    For the EV battery industry to become a compelling investment, we believe that permanent steps in cost reduction are paramount and necessary. The companies we met with in 4Q 2016 were unanimously in agreement in expanding capacity multifold from current levels by 2020, scaling manufacturing, and subsequently reducing the cost/kWh (cost per kilowatt hour) in tandem with technological improvements. In 2011, the cost of a battery pack was $550/kWh, and since then it has more than halved. However, despite the race to achieve lower prices while improving energy density (defined as the amount of energy stored per unit volume), different manufacturers can have highly variant cost structures depending on their manufacturing process. For example, BMW's battery pack costs between ~$200-$300/kWh while Tesla's Model S pack is ~$190/kWh, largely due to Tesla's in-house packaging.

    We are in the early stages of technological development, and if you take a closer look at manufacturing costs, materials that comprise the battery cell (cathode, anode, electrolyte, separator, and container) represent just 25% of total battery cell costs. As the technology improves, we would expect a sizable reduction in the 25% "abnormal" category of costs, which are comprised of discarded batteries and impaired assets spread over the cost per cell.

    Chart A: EV Battery Cell Cost Breakdown 2015

    Chart A: EV Battery Cell Cost Breakdown 2015

    *Loss from discarded batteries, asset impairment, etc.
    Source: BofA Merrill Lynch Global Research estimates.

    Not All Batteries Are Created Equal: Cylindrical, Prismatic, and Polymer

    Not all batteries are created equal, and there are three major types of cells: cylindrical, prismatic, and polymer. Each is designed very differently both in shape and chemistry, despite similar functions as lithium-ion batteries. Tesla,3 in particular, uses the cylindrical cell with NCA (Nickel-Cobalt-Aluminum oxide) chemistry. Despite its competitive cost basis on the overall cell level, we believe it will be outpaced in cost reductions by the Chinese polymer cell with LFP (Lithium-Iron-Phosphate) chemistry, and the Korean original equipment manufacturers' (OEMs) prismatic chemistries, which use NMC (Nickel-Manganese-Cobalt oxide) chemistry.

    Chart B: A Comparison of Lithium-Ion Battery Form Factors

    Chart B: A Comparison of Lithium-Ion Battery Form Factors

    Source: Johnson Matthey Battery Systems, Bernstein Analysis. For illustrative purposes only.

    You may wonder why certain OEMs choose different chemistries and form factors. Which one will "win" in the end? Simply put, a successful battery demands three key requirements: 1. A life cycle specification of at least 3,500 cycles (~10 years of use with daily charge and discharge); 2. Be cost-effective, measured by both cost of ownership and upfront capital cost; and 3. Safety (e.g., not the Galaxy 7 debacle). Tesla is currently partnering with Panasonic to manufacture the NCA battery, but they are currently the only players in the market to do so. Tesla's current cost competitiveness resides in the massive economies of scale achieved at the Tesla Gigafactory, a Nevada-based manufacturing facility with production levels its European and Asian peers have not met. However, it remains to be seen if Tesla can maintain its cost advantage, since both NMC and LFP cells satisfy requirements 1. and 3., while 2. is still working its way down on the cost curve, as shown below in Chart C. One recent innovative development with this configuration has been the evolution of the ratio of NMC from 1:1:1 to 6:2:2 and 8:1:1, which greatly improves energy density and cost. This process is difficult, however, as nickel is also highly reactive and working with it is difficult.

    Chart C: EV Battery Pack Prices Are Coming Down
    2012-2035e

    Chart C: EV Battery Pack Prices Are Coming Down

    Source: Bernstein estimates and analysis.

    At this current point in time, auto OEMs are placing bets on their technology of choice and working with their respective battery manufacturers in further developing a cell that would surpass its competitors in safety and power at the lowest cost.

    Part 2 in this EV series will look at how regulatory policy is on the side of electric vehicles, and how we believe that the adoption of electrification will be an inevitability.

    The Evolution of Electric Vehicle Batteries: Part 2