How to Make Money Manufacturing Batteries (And Why It’s So Hard)

Part 1: The Battery Manufacturing Boom

Granted, “boom” may not be the most elegant choice of words given the many headline-grabbing battery safety incidents of the last several years, but the sector is poised for tremendous growth. These days news from the battery ecosystem speaks to severe supply constraints and of the dozens of companies seeking to fill the coming supply gap by building gigafactories and cranking out lithium-ion cells by the billions. “Semiconductors are a small appetizer to what we are about to feel on battery cells over the next two decades,” stated RJ Scaringe, CEO of Rivian. Indeed Benchmark Mineral Intelligence projects global battery manufacturing capacity to grow sixfold by 2030, to a staggering 6 terawatt-hours per year (that’s 6,000 GWh, from a baseline of under 1,000 GWh in 2021). Even with anticipated cost declines, this level of production will amount to a market size for battery cells into the many hundreds of billions of dollars. It’s an enormous opportunity!

We founded Voltaiq with the mission to accelerate the transition to a battery-powered world, so this megatrend toward dramatically expanding global battery supply excites us tremendously. We’re also left with a sense of trepidation, as we hear each new announcement along the lines of “it’ll take us a year to build the factory, and a year to ramp to full production”. For existing Tier 1 battery suppliers, new entrants such as Auto OEMs seeking to vertically integrate battery supply, or ambitious startups with promising technology and loads of financial backing, we expect many of these would-be battery manufacturers are in for a rough ride. In this post, we’ll lay out some of the challenges ahead, ideas on how to avoid some common pitfalls, and how to find the shortest path to full production.

It’s hard for everyone, even the “Big Six”

On paper it may seem possible to achieve the timeline of “two years from breaking ground to full production” for a new battery factory. However, the recent experience of two of the largest players in the industry, Panasonic and LG Energy solution, would suggest a sobering dose of reality may be in store for those with such aggressive timelines in mind. (The other “Big Six” Tier 1 battery suppliers are CATL, Samsung SDI, SK Innovation, and BYD.) Looking at the launch timeline for the Panasonic gigafactory outside Reno, Nevada, we note the following milestones:

• July 2014: Gigafactory announced
• January 2015: Construction begins
• January 2017: Production begins
• 2017–2021: Production quality issues and financial losses
• Q1 2021: First (announced) profitability

This is the company whose battery cells enabled Tesla’s meteoric rise. They should be the best in the world at battery factories, and probably are. Yet, it took them four years from turning on the production lines to achieving profitable operation. The LG Energy Solution battery factory in Poland reveals a similar narrative, with production shortages forcing their major auto OEM customers to delay deliveries and shut down production lines (with the VW Group, Jaguar Land Rover and FCA suffering delays, to name a few) as that battery plant ramped up.

The following chart illustrates the challenge from a financial perspective:

Typical path to payback for a battery factory

From the day you break ground, it takes enormous cash outlays just to get to the point where you can turn the production lines on (more on why below). Once you actually start production, it can again take multiple years (as illustrated by Panasonic and LG) to reach the point where you are making enough cells (throughput) with high enough quality (“yield” percentage, i.e. the portion of cells that are good enough to sell to someone else), that the factory is neutral from a cash flow perspective. On the chart, this is marked as the “self-funding point”. If you can maintain sufficient throughput and yield, you’ll eventually get to the point where the initial large investment has been repaid (“breakeven point”). Continue along that path, and you’ll (finally!) start to see a positive net return on this initial investment.

The key takeaway is that you want to get to the self-funding point as quickly as possible so cash starts coming in and your massive investment starts paying off. With our firm belief that batteries will power the way to a sustainable future, we’re sincerely rooting for everyone.

Part 2: Challenges When Building a Gigafactory

Why is it so hard to make money manufacturing batteries?

Getting to profitability in battery manufacturing is a multi-stage challenge, from actually building the factory, to ramping production up to a profitable level of throughput and yield, to maintaining quality and profitability over the long run. (For some background reading on this topic, see our previous post “So you want to build a battery factory”.)

Building the factory

The fun begins the day you start building your battery factory. Here are some of the biggest challenges you’re likely to encounter:

• Sourcing equipment: With 90% of anticipated battery manufacturing capacity yet to be built, it’s no surprise that the production equipment to fill all those factories will be in short supply. Unlike other more mature high-tech manufacturing sectors like semiconductors or pharmaceuticals, production equipment for advanced lithium-ion battery manufacturing continues to evolve rapidly. New production techniques driven by innovative cell designs or processing steps mean that your equipment may not exist and will need to be custom-built. The supply base for this equipment is highly varied as well, comprising a mix of multinational industrial companies and mom and pop outfits. Like many other industries, the global Covid-related supply disruptions have impacted this sector as well. The bottom line is it will likely take over a year just to equip your factory.
• Sourcing materials: In addition to production equipment, of course you also need the materials to make the batteries themselves. If you’re planning to start production any time in the next couple of years, you should already have your materials supply locked in by now. With global production increasing sixfold over the next several years, you should assume that materials supply is going to tighten accordingly. Add in complications around geographic concentration around sourcing and processing of key materials, geopolitical instability, and ethical sourcing concerns, securing a steady supply of high-quality materials for your factory is an enormous challenge in and of itself.
• Sourcing talent: Let’s assume you’ve locked in supply lines for your production equipment and materials. Who is going to run your plant? A future with six times the global battery production will require roughly six times the number of people working in battery manufacturing today. It is safe to say that those people don’t exist yet, or more precisely they haven’t been trained and lack the experience needed to spin up a battery factory and keep it running. Indeed, at a recent battery manufacturing panel at The 2022 International Battery Seminar, the consensus across the panel of experts was that finding people would end up being the biggest challenge in getting a new gigafactory up and running. The key takeaways here are that 1) you will need to look more broadly for talent — food manufacturing and pharmaceuticals have been mentioned as potential sources, and 2) you need to equip your people with force-multiplier tools that will make them maximally productive and effective.

Ramping up the factory

When we talk about “ramping up” a battery factory, we’re referring to the process of starting up production lines, fine-tuning your production process using limited production runs in pursuit of your yield target, and then increasing production until you reach the point where your factory is profitable on a per-unit-manufactured basis (the “self-funding point”). The following chart provides an illustration.

Typical yield trajectory for a new battery factory

This chart illustrates the link between ramping up manufacturing capability and the investment payback timeline shown in the earlier chart. Winning in battery manufacturing is all about getting the combination of throughput (number of units you make) and yield (percentage of production that passes quality control and can be sold to customers) to a profitable state as quickly as possible. Even once your factory is fully built and equipped, this process can still take years as illustrated by the Panasonic and LG cases mentioned above. Here are some of the key challenges you’ll face:

• Battery manufacturing is complicated: At a high level, battery manufacturing comprises three main stages — electrode fabrication, cell assembly, and end-of-line. However each of these stages comprises dozens of individual steps, and hundreds (if not more) of equipment settings: speeds, temperatures, pressures, and so on. Achieving profitable production throughput and yield requires precise orchestration of all of these parameters into a recipe that will produce a commercially viable battery. It’s just plain hard to get all of it right and can literally take years of iteration when bringing up a new factory. This challenge is compounded when building a factory to support the latest and greatest cell technologies — which by definition have not yet been mass produced.
• Cycle times are slow: When running at full speed, it only takes a handful of hours for a production line to transform a batch of raw materials into a fully assembled battery. However, it actually takes days or weeks longer to determine if that battery is any good. This delay comes down to two final steps in the manufacturing and quality control process, formation and aging, commonly known as “end-of-line”. Formation cycling (a.k.a. “formation”) is the slow, careful charging and discharging of a finished battery cell over a handful of cycles to form and lock in the vital internal structures and interfaces that ensure the cell’s performance and longevity. Each and every battery cell goes through formation cycling, and the process typically takes a few days. Formation is also the first time the battery produces any sort of electrochemical data, and as such is really the first opportunity to tell for sure if the cell is any good. Thus, when ramping up a new factory, formation necessarily implies that the minimum feedback cycle time for any tweaks to your production recipe is at least three or four days, realistically more like a week. But it gets worse. After formation, a cell goes through “aging” in which newly produced cells are stored in a warehouse for anywhere from a week to a month, after which each cell’s voltage is measured and compared to its voltage when it finished formation. If a cell’s voltage declines too much during this aging period, there is some undesirable self-discharge taking place (an internal short or similar) and that cell is rejected by quality control. A longer aging period indicates more rigor in the quality control function of a battery manufacturer, however the tradeoff is further extending the feedback cycle needed to determine if a given production recipe will produce the desired results.
• Systems are immature: Manufacturing lithium ion batteries at the scale currently being planned really is unprecedented, and as such a lot of best practices are still being figured out in real time. One implication of this immaturity is that the computer systems that link together all the equipment in a factory and record process parameters and similar continue to be in a developing state. Many of these Enterprise Resource Planning (ERP), Manufacturing Execution Systems (MES), and Product Lifecycle Management (PLM) software packages are custom-built, or adapted from other industries, and may or may not be capturing the most useful and relevant information from the production line. Even less mature are the tools that are used to analyze all of the data coming from the production line, formation, and aging to determine what makes a good cell and ultimately increase production and optimize yield. It can take weeks or longer just to analyze all of the data from a production run, connect the dots across multiple disparate systems, and determine what to try next. When combined with the delays inherent to formation and aging, production iteration cycles can stretch to several weeks.

In light of these challenges, most notably iteration cycles denominated in months and not days or weeks, it is actually not that hard to understand why it can take multiple years to ramp up a new factory to full production. These challenges also put in perspective the ambitious timelines being proposed by new entrants who plan to fully ramp up in a year or less. We hope they’re right, but in all likelihood it will take substantially longer.

Running in steady state

If you get to the point where your primary concern is running a battery factory at steady state in full production capacity, then congratulations are in order! You have overcome a multitude of major obstacles that continue to trip up some of the most experienced companies in the field. You’ll still be faced with the ongoing challenges of continuing to source an adequate supply of high-quality materials, and retain enough experienced staff and institutional knowledge to keep things running smoothly in an extremely tight market for battery expertise. But if you’ve come this far, you probably have a good handle on those things as well.

Production issues will inevitably arise, however. And when they do, those same issues around immature and inadequate data and analytics systems can severely hamper root-cause analysis and lengthen response times. Both of these can be disastrous to your cash position when running a high-volume, commodity manufacturing business, particularly if you have to stop production or recall batteries. Having access to the best modern tools for gathering and analyzing all of this data, from mixing slurries through to formation and aging, is ultimately vital to dispatching production issues quickly and resuming profitable operation.

Part 3: How To Properly Monetize Battery Manufacturing

In presenting these many and daunting challenges to starting up a new battery factory, we by no means wish to discourage anyone. With global demand for battery cells skyrocketing, there is a massive and lucrative opportunity for companies that get it right — and many will. In this section we’ll lay out some keys to success for getting to full production scale quickly, and staying there profitably.

The key is speed!

As mentioned earlier, the primary lever to reaching profitability in battery manufacturing is getting to the self-funding point, and then to breakeven on the overall investment, as quickly as possible. But let’s break down what this means in practice.

In simple economic terms, breakeven means the total revenue on all the batteries you sell matches or exceeds the variable costs associated with making the cells (mostly materials inputs), plus the overhead of running the factory (people, utility service, building maintenance, etc.).

And how do you maximize profit? By making as many cells as possible with sufficient quality to sell them to someone else. Let’s again revisit the concepts of throughput and yield, the key drivers to battery manufacturing profitability.

• Throughput: The total number of battery cells you can produce in a given time period
• Yield: The percentage of manufactured cells that pass quality control and can be sold

These two are often intimately linked. As you refine your process to improve yield (and can thus make an increasing number of good cells relative to what you lose as scrap), you can ramp up throughput a bit while further refining the process to ensure yield is maintained. This process repeats iteratively on the path to full production.

Revenue (and thus profit) is ultimately a function of throughput multiplied by yield percentage. The challenge boils down to maximizing both throughput and yield simultaneously. If you run your production line at maximum speed, but have to scrap too many cells that fail quality control, your plant will not be profitable. Conversely, if you have great yield but have to slow down your production line to achieve it, you’ll again fall short. If you get both right, your cash flows will turn positive and stay there. Let’s have another look at one of our earlier charts to get a feel for how doing so directly impacts profitability.

Improved yield trajectory for a new battery factory, powered by EBI

On this chart, the path highlighted in green illustrates the potential benefits of accelerating production ramp, namely:

• Faster time to market, time to self-funding. The sooner you get yield up, the sooner you can actually start selling batteries. The faster you ramp throughput, the more revenue you’ll make.
• Greater profitability in the long run. Again, a higher yield means more saleable batteries, and thus more profit for a given production throughput. Happily, increasing yield also tends to increase throughput due to less overall downtime and time spent troubleshooting.
• Faster and larger return on investment. The area between the two curves represents the massive lost time, lost revenue, and increased expense that result from taking the default path (grey) as opposed to the optimized one (green).

And likewise, let’s take one more look at the more financially oriented chart to observe these impacts in terms of payback on investment.

Improved payback trajectory for a new battery factory, powered by EBI

Here you can see how ramping up throughput and yield faster gets you to self-funding and breakeven sooner, meaning you can raise less money for each factory, and enjoy greater profitability over the long run.

The key to speed? Enterprise Battery Intelligence!

You’ll see on these last two charts that the more optimal green path is labeled the “EBI-enabled path”. EBI here stands for Enterprise Battery Intelligence, an emerging category of data infrastructure and analytics software specifically targeted to helping battery-powered businesses achieve profitability and success in the marketplace.

In a battery manufacturing setting, an EBI system provides an analytics layer that automatically aggregates data from across the production line — materials batches, equipment setpoints, formation cycling, and end-of-line quality control information — applying battery-specific analytics to make key correlations and actionable insights instantly available across your organization. This capability brings a range of benefits to a battery manufacturer.

• Accelerated production ramp by shortening the feedback loops between production runs. An EBI system can detect problems early in formation, and alert you to issues in real time. Correlations to materials and process information can quickly identify which parts of your recipe need fine tuning. You no longer have to wait days for formation to complete, or days longer to prepare all of the data for analysis — The key information is immediately at your fingertips, so you can iterate quickly and get to profitability faster.
• Improved yield. EBI analytics can use formation cycling data to derive much deeper insight into battery quality than the current industry-standard practice. To use a medical analogy, most formation cycling analysis amounts to measuring a battery’s height and weight (really its voltage and capacity). By contrast, EBI is like a cardiologist examining the battery’s charge-discharge “heartbeat” like a detailed EKG, identifying more nuanced clues as to how a battery will perform over the long term. Over time, these insights can be used to further optimize your production process to drive even higher yields than the base case would permit.
• Faster response to production issues. Production issues will inevitably arise. EBI can alert you quickly to end-of-line quality problems, and facilitate rapid root-cause analysis through its materials and process tracking functionality to get you back up to full throughput and yield faster. EBI can also help you avoid recalls by detecting issues before faulty batteries find their way into customer hands. In the unfortunate event that you do need to recall product, EBI can help you limit the scope of any recall by isolating the problem to the affected batches or production lines.

An EBI system will integrate with and run alongside your existing tooling (MES, formation data capture, etc.) so that you can be up and running quickly, iterating toward success. Ultimately, this level of data agility and depth of analysis is a table-stakes requirement for any company that manufactures batteries today, or plans to in the near future. As the company that pioneered EBI, Voltaiq is proud to work with a number of companies at various stages along this battery manufacturing journey. We’d love to learn about your challenges and see if we can help. Give us a call!