This morning, A123 announced that we have signed a a non-binding memorandum of understanding (MOU) with Wanxiang Group Corporation that establishes the framework for a strategic agreement through which Wanxiang would invest up to $450 million in A123. While we are still negotiating definitive documents and there are a number of conditions and approvals that must be met to execute the various components of the proposed financing agreement, this is exciting news for A123 . We believe a substantial capital investment from Wanxiang would not only provide financial stability to A123 as we continue to grow, but it would also align us with a large, successful global brand in the automotive and cleantech industries.
But who is Wanxiang Group?
For one, Wanxiang is China's largest automotive components manufacturer and one of China's largest non-government-owned companies. Wanxiang has more than $13 billion in revenue and more than 45,000 employees globally (including more than 3,000 in the U.S.). Wanxiang has a strong track record of partnering with and investing in U.S. companies, including in the automotive and cleantech space. Check out this video about Wanxiang's global strategy and its U.S. footprint, and you'll see why we think an investment agreement with Wanxiang makes financial and strategic business sense for A123:
Although electric vehicle sales fluctuate month-to-month as the industry ramps up, strategy consultancy Roland Berger is forecasting that the global automotive lithium ion battery market will grow to more than $9 billion by 2015.
In a recent update to a market study initially published in September 2011, Roland Berger does acknowledge electric vehicle volume reductions in Europe and America, but points to new and confirmed EV programs, especially in Asia, that support its $9 billion market estimation.
The study also predicts that the indstry will experience overcapacity, leading to increased market consolidation (certainly not a new concept and a similar expectation of a number of industry prognosticators). As a result, Roland Berger thinks five companies will control the majority of global market share in the 2015 time frame: AESC, LG Chem, Panasonic/Sanyo, A123 Systems and SB LiMotive.
Interestingly, the revised forecasts expects these companies to control about 70 percent of the market share (down from about 80 percent in the initial study). Roland Berger cites the emergence of battery manufacturing in China as the reason for the discrepancy, predicting that Chinese battery makers will have about an eight percent global market share by 2015, largely due to the State Council’s reaffirmed commitment to making China a world leader in electric mobility.
But given the lingering questions about global demand for passenger electric vehicles, how can one determine which of the numerous studies and forecasts of the automotive lithium ion battery market are most accurate/credible?
When analyzing which suppliers are likely to emerge as the industry leaders, it is important that studies dig deeper than simply publicly announced supply contracts. Over the next few years, the number of electric vehicle models (including full EVs, hybrids, plug-in hybrids and the emerging micro-hybrid category) being built globally is expected to increase, but not all programs have been announced. For instance, our analysis shows that in the 2010 model year, 27 automakers globally sold 50 different electrified models. Those figures should grow to about 36 automakers and more than 110 different models this year, and into 2013 and beyond, we expect these numbers to continue increasing.
Taking this into consideration, we believe the Roland Berger study uses one of the
best approaches to reach its conclusions. The methodology takes into account all of the vehicle models projected to use lithium ion batteries in 2015 based on sales estimates from a globally respected automotive forecaster. The likely battery supplier for each program was then derived from existing contracts, manufacturing capabilities, overall company financial strength and proprietary data obtained from both battery suppliers and automakers. The result is a projection that we believe more accurately reflects what the market will look like in 2015 and beyond as the global electric vehicle industry evolves and the lithium ion battery market
takes shape.
The Global Wind Energy Council recently released its annual market statistics and the results are impressive—last year, more than 41,000MW (41GW) of wind power were deployed globally, bringing the total worldwide installed capacity to more than 238GW at the end of 2011.
Not surprisingly, China led all countries, deploying 18GW in 2011 to bring its total install base up to a world-leading 63GW. China is unlikely to relinquish the top stop any time soon, as the government has show commitment to continue increasing wind power generation in China, and the National Energy Bureau expects China to have about 90GW of capacity installed by 2015.
While these goals are ambitious, China’s power grid infrastructure is facing challenges integrating renewable generation capacity at this scale—according to the China Power Union, about 72 percent of the country's total wind power capacity is connected to the grid.
One of the reasons for the gap between installed versus connected wind generation is the absence of adequate ramp management technology. The variability of wind power causes fluctuations in the amount of energy flowing onto the grid, which can be controlled though ramp management. However, without this functionality, these fluctuations can decrease the stability of the grid, and grid operators in China are not allowing large amounts of wind resources to connect and put reliability at risk.
Another major challenge is the limited effective options for adding low voltage ride through (LVRT) capabilities when needed, which would enable wind turbines needing this support to continue operating when a significant drop in voltage occurs. However, because most turbines in China built to date are not equipped with inherent LVRT functionality, entire wind farms are at risk of simply disconnecting from the power grid when exposed to deep voltage excursions and they can be slow to reconnect when voltage recovers.
These issues must be resolved to achieve the government’s lofty wind energy goal, which has created a significant opportunity for advanced energy storage technology China.
Energy storage systems can deliver ramp management capabilities by regulating the flow of renewable power coming onto the grid. Large-scale lithium ion battery systems, for example, can store power and deliver it into the grid, tapping excess reserves when the wind dies down and recharging when it picks back up. This controls the rate at which wind power is distributed to the power grid, and U.S. utilities like Southern California Edison are moving forward with large projects to demonstrate the viability of battery energy storage as a ramp management solution, and in a limited number of markets this is a requirement today for interconnection of large wind projects.
Similarly, appropriate power electronics when deployed with energy storage technologies can also provide the LVRT capabilities necessary to support wind turbines achieving compliance with LVRT criteria, and do not disconnect from the grid when voltage drops temporarily. These dips typically last for only a second or two, so the most robust battery systems are equipped with “smart inverters” that react instantaneously to changes in grid voltage, delivering power to compensate for the change until the voltage increases again. This is designed to keep wind turbines operational and avoid the significant reductions in power generation that can occur without proper LVRT capabilities in place—China’s State Electricity Regulatory Commission (SERC) has identified several incidents when wind farms disconnected from the grid, prompting SERC to note that the absence of LVRT capability is likely to cause further disconnections in the future if the grid continues to experience power dips.
The challenges of wind power in China have not gone unnoticed by the government. Regulators have capped the allowed new wind capacity at 15-20GW per year so upgrades to the grid can be made to accommodate additional renewable energy integration. Further, the country’s National Energy Administration (NEA) approved a series of technical standards designed to better regulate the development wind power resources. These standards call for wind power suppliers to add LVRT capabilities and other functionality to enable the greater interconnection of wind farms to China’s grid.
As these new standards are debated companies like Dongfang Electric Corporation (DEC), the third largest manufacturer of wind turbines in China and the country’s largest exporter of power equipment, are already looking into energy storage. With China’s potential of reaching 230GW of installed wind power capacity by 2020, DEC and other companies deploying advanced battery energy storage are one step closer to finding a solution to China’s wind dilemma.
China is the largest automotive market in the world, surpassing the U.S. in 2009 to claim the top spot. With concerns about growing use of petroleum and the potential disruption to its economy if supplies became limited, the Chinese government recognizes the value of electric drive vehicles—called “new energy vehicles” in China—in achieving greater energy independence.
As such, China’s 12th Five-Year Plan for new energy vehicles has goals to boost production, rapidly increase EV adoption in model cities and have 1 million EVs on the road by 2015. In line with these goals, the Chinese government has established a system of policies designed to accelerate the development and adoption of new energy vehicles. National and local incentives, for instance, can reduce the cost of an electric vehicle by the equivalent of roughly $10,000.
With the new energy vehicle segment expected to be one of the fastest-growing in the Chinese auto industry, this creates an opportunity for companies that make the advanced battery systems that power these vehicles.
However, in order to be eligible for the incentives, the vehicle must meet local content requirements. The battery, power electronics and/or electric motor must be assembled and owned in China. The calculation of local content is determined by the where the components are made, established by the Chinese government to provide domestic suppliers with a built-in advantage over non-Chinese battery makers.
For example, a battery pack that undergoes final assembly in China but uses cells or modules from another country would have a relatively low level of local content. In addition, when a company’s products are imported to China, they are at a cost-disadvantage from the start, which is especially inauspicious in an already cost-sensitive market like vehicle electrification.
Therefore, for a U.S. battery manufacturer interested in pursuing the Chinese automotive market, the best (and perhaps only) way to gain access is through relationships with strong, local partners.
Shipping and other logistics costs are much lower when materials, cells and battery packs are locally-produced, particularly for large or heavy components, which are usually made close to final assembly. In the advanced lithium ion battery industry in particular, many of the materials and other components that are used in cell manufacturing are produced in Japan and Korea, so manufacturing in Asia shortens the supply chain and further decrease time-to-market.
In southeastern Michigan, the home of the U.S. auto industry, suppliers and vendors are located in close proximity to the OEMs, facilitating cooperation and lowering costs. The same is true in China and other countries that are developing their own ecosystem of automotive suppliers to support their domestic OEMs.
For example, Shanghai, the largest and most prosperous city in China, has become a center of the Chinese auto industry. Shanghai Automotive has joint ventures with GM and Volkswagen, which stand as two of the largest producers of vehicles in China. When combined with vehicles under its own Roewe brand, SAIC Motor’s total production of 4 million vehicles makes it the largest automaker in China. These vehicles include a variety of EVs—the Roewe 750 hybrid electric vehicle, the Roewe 550 plug-in hybrid, and the Roewe E50 electric vehicle,. SAIC also produces commercial vehicles through Shanghai Sunwin Bus Corporation, a Sino-Swedish joint venture established between SAIC Motor, VIC (Volvo Investment China) and VBC (Volvo Bus Corp.).
The fast-growing new energy vehicle market in China creates an enticing, potentially very significant opportunity for U.S. advanced battery suppliers….but only if they develop creative business strategies, including developing strong relationships with leading companies in the Chinese auto industry. The ability of non-Chinese battery makers to capitalize on the new energy vehicle boom is likely to be a key metric in determine the global market share leader board, while those that do not have a sound strategy for entering the Chinese market will likely lose considerable ground.