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Following the LiB Money Trail to Safety & Innovation

This article is contributed by Stan Sakai

Thesis: We posit that the mere thought of Lithium-Ion battery (LiB) related automotive recalls and the potential liabilities therein lead to a “Safety First” approach by US automakers and battery-makers. This position comes after following the money trail of the Hyundai Kona and Chevy Bolt LiB-related recalls of 2021 and their economic impact on battery production. We lastly project forward the deep implications of “Safety First” on the nature of automotive battery innovation, including its end goals, pace, and ultimately what will sell.


Our technology industry has been driven by the rise of new platforms — PC to internet to mobile to cloud. And many of us have pinned our livelihoods on the constant rise of these platforms with the rise of innovation, fed by entrepreneurship and venture capital. And so it is with a natural reflex that we see electric vehicles as yet another platform, which will drive our energy transition and concomitantly lead to wealth creation. And as we dig deeper, leaving aside autonomy over the long-term, batteries are viewed rightly as the driver for this platform's growth.

The Battery Report 2021 has noted the increased cadence of investment across new materials and chemistries, including cathodes, anodes, and various forms of solid-state. Several high-profile investments by major automakers in 2021–22 such as VW, GM, Ford, Hyundai, and others in solid-state and semi-solid state battery companies added fuel to the investment interest. Most recently in Q1–22, three major automotive companies combined to back the development of Factorial Energy, a Boston-based solid-state battery company; SK Chemical, the leading material supplier to the battery maker, SK Innovation, invested $80M in Silicon Anode company, Nexeon (UK); and in March the venture arm of BMW led a $65M B Round for Our Next Energy (ONE), the battery start-up that retrofitted a TESLA Model S with their battery, drove over 750 miles in Michigan winter weather while showing a doubling in range…..Impressive specs! Brilliant marketing!…..but not enough.

We all have seen numerous US start-ups pitching higher energy and power densities, substantially improved cycle life, and lower $/kWh. In short, innovation is targeting lighter, longer, faster, and cheaper. And we have been widely trained to think that lower cost/performance leads to higher demand, and that estimated cell costs need to decline by half to $50/kWh or so to get below “ICE” parity sometime in the late 2020s. We further surmise that as we reach this inflection point, demand will take off with EVs accounting for 30–40 percent of car sales in the US by 2030. And in 2021, we saw a plethora of lithium-ion battery projects in the US that will effectively increase automotive LiB production capacity by 12x by 2025 (see Chart 4 below) in anticipation of this demand; and this is before taking into account TESLA’s 2030 Terawatt production plans. Adding spice to the drama is the “take back the supply chain” movement in the US, encouraging the entire chain to shift from Asia back to US soil.

In light of this “greenfield” like growth situation, is the demand aperture for dramatic innovation from venture-backed automotive battery companies growing or getting smaller? I would argue innovation, based on the above traditional metrics, will be getting smaller in the automotive battery space; rather innovation is headed even more toward Safety First. To get an understanding of this thesis of putting Safety front and center in the battery innovation pipeline, we should follow the money trail, from the

economic nature of lithium-ion mishaps to their potential impact on battery production returns and the shape of the battery ramp up in the US.

2021 Lithium-ion Mishaps and their Economic Consequence:

I would argue that among the most significant events in the lithium-ion battery world in 2021 were the fires and recall. In February, 82K Hyundai Kona’s were recalled, followed by a 142K recall by GM of the Chevy Bolt in the Fall of 2021, resulting in, respectively, $900M and $1.8BN in write-offs as shown in the Chart 4 below. Yet the recall stemmed from just 31 fires, or one in every 7K+ Bolts and Konas on the road. The batteries in these two cars were both made by LG, the second-largest battery maker in the world and among the most experienced, having produced Li-Ion batteries since 1999.

The relatively low incidence of fires in the recalled cars substantiates the fact that EVs are less prone than ICEs to catching fire. A recent study conducted by AutoInsuranceEZ, using data from the NTSB (National Transportation Safety Board, showed that electric cars in the US caught fire at a rate of 25 vehicles per 100,000 sales versus 1,530 for ICE vehicles and 3,475 for hybrids. Put another way, if the Chevy Bolt had the same incidence of fires as ICE’s there may have been 6x the number of Bolt fires. In part, these numbers are a bit deceiving as the current life of an ICE vs. the EV is probably three or so times longer, but even after adjusting for this fact, the EV’s low level of fire incidence is striking.

However, these lithium-ion fires are more akin to napalm bombs going off, rather than fires, due to the runaway nature of Li-ion chemistry flammability. As the Austin TX Fire Division Chief noted after one TESLA fire, “normally (in) a car fire, it takes 500 to 1,000 gallons of water; but TESLAs may take up to 30,000 to 40,000 gallons, maybe even more to extinguish the battery pack…” Can you imagine what could happen on a crowded EV public bus? And what happens if we fully convert to EVs–can the public tolerate thousands of bombs going off each year? (~17Mn cars were sold in the US in 2019; at a ratio of 25 LiB fires to 100,000 sales, the number comes to 4,250 LiB fires — of course, we will be better than these numbers)Due to the explosive nature of these fires, the media tends to crowd in on these events, leading to public concerns and heightened OEM and customer sensitivity. The fires make great visuals.

Yet I would posit that the potential loss of life aside, the recall liability factor of EV fires weighs heaviest on the industry and shapes behavior. Recalls are definitely not new to the auto industry–as may be seen in Chart 2 below, 53Mn vehicles were recalled in 2016, leading to $22BN of losses. What is different with EVs is the potential magnitude of these liabilities, especially when you consider the cost on a per-vehicle basis. Whereas before, such auto recalls may have been replacing a brake pad, an airbag, or a switch, a recall of defective lithium-ion batteries involves replacing the battery pack, more akin to replacing an engine in an ICE.

Chart 2: Recall & Liabilities, Past, Present, and Future for the Automotive Industry

What is different about battery recalls, versus the traditional automotive recall, is the amount liable per unit. e-Silverado assumes 520K in sales in the late 2020s, the same ~level as 2021, with 30% EV penetration and 30%+ decline in battery pack prices to $100 per kWh, plus dealer charges.

Furthermore, as we are early in the EV life cycle, neither the Bolt nor the Kona was scaled products. Once EV penetration rises across mainstream car lines, the potential magnitude of the loss can spiral. And OEM efforts to add higher voltage platforms and ultra-fast 350–400kW charging networks could very well increase fire incidence. In the above Chart 2, we simulate what it could look like for the e-Silverado, a popular GM pick-up truck that is going electric, to be recalled due to batteries. Bigger battery packs plus a much higher volume lead to $15BN in potential warranty liabilities, or more than 7x the Bolt case. And who has to bear the cost of these warranties? Not the auto OEM, rather it is the battery maker.

Battery Production Economics:

When we consider the large giga-factories that are being built, we think of enormous facilities (e.g. 2.8M sq ft for a 65 GWh battery plant), that deploy highly automated, complex machinery in streamlined processes at heavy capital cost ($2–4B). Frankly, though, it really is not that profitable of a business, generally achieving returns on capital that are “acceptable” or “solid”, but certainly not impressive.

Chart 3: LG Energy Solutions Financials, 2021

Consider the case of LG Energy Solutions, which was recently spun out of its parent company, LG Chemical in order to raise $10B of capital through an IPO in January of this year. Though not a lot of detail is provided by LG on financial root causes, we can surmise the following:

  • A Gross Margin in the range of 28% for the 13 months ending Dec 31, 2021. I suspect that in times of over-capacity, which will surely come at some point, this margin could go into the mid-high teens.
  • Operating Income margins in the range of 11%. Note the relatively high level of operating expenses–higher than I would have expected for this type of commodity business.
  • A Pre-tax Return on Capital from operations of 10% — perhaps a bit low for a commodity parts manufacturing business. Undoubtedly returns are compressed due to the highly competitive nature of the China market, where LG likely derived most of its 2021 sales.
  • Finally, the impact of the cumulative addition to reserves, presumably, is related to the Chevy Bolt settlement.

One thing though is very clear: If you combine the Hyundai Kona ($900M) and Chevy Bolt ($2.9B) recall expenses, they blow out three years of operating profits for the Company. In essence, battery operations generally do not have the financial shock absorbers, i.e., margins, to cushion against automotive recalls of even a product with lower-tier volumes, such as the Bolt.

Chart 4: Announced US Battery Gigafactories (not including TESLA)

As may be seen in the above Chart 4, a plethora of giga-factories has been announced in 2021–22. Virtually all of them have been led by Korean battery makers and JVs are the dominant form. While the JVs are often viewed by US-based strategists as a vertical integration move by the auto-makers into LiB production — a “take-on TESLA” challenge — perhaps the other side of the table is that Korean makers’ massive entry here could only take place with risk-alignment that is afforded by a JV. For automakers, this will add a new dimension to their financial risk management. We can expect that rather than looking at spider charts (Chart 5) on measurable performance-based innovation progress below, both auto and battery makers will be oriented more toward staying in their safety zone, taking smaller sips of innovation after widespread testing. Safety First, and pushing out the spider web second.

Chart 5: Battery Spider Chart Showing Performance across 5 Key Benchmarks

Implications for Battery Innovation:

I believe the flight to safety by battery and automakers will have the following impact on innovation:

  1. Battery chemistries that may have the slightest hint of a safety issue will be put on the slow track. This would include Lithium metal and high silicon content anodes. Expect that higher density anodes, which now contain an estimated 5–7% or so of silicon, will edge up in their silicon content over years –i.e., a gradual evolution. Fast tracks will go toward safer battery chemistries including the development of solid-state and in the nearer term, the wider adoption of LFP cathodes.
  2. Innovation Safety at the periphery of the battery cells, including battery management systems, pack design, and especially better diagnostic and testing tools are needed, though how much would come from the venture and how much from incumbents is uncertain.
  3. For battery materials start-ups, it may mean starting first with ultra-safe materials–and improving the spider graph dimensions from that point.

Driving down the Performance/Cost curve is always more interesting to hear about than the Safety/Cost Curve. This may be due to the fact that it is always more engaging to see things happen, rather than see things not happen. Such is the case with risk management in general. In this case, though, the fault line for innovation in automotive batteries lies first in Safety.


Thanks to Katherine He and the BatteryBits Editorial Board for reviewing portions of the draft of this article and providing helpful feedback.

About the author:

Stan Sakai is CEO of EMS Capital Management, a firm that serves as the co-manager of the TUS Green Innovation Fund, and also a Partner in the Clean Energy Venture Group. He has served as lead investor or advisor in the formation of two semiconductor foundries, the founding or restructuring of four joint ventures in TMT industries across Asia, as well as several start-ups in the clean energy space while residing in Boston, Palo Alto, Singapore, Tokyo, Seoul, and Beijing. He can be reached at

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Bibliography and Reference Links:

Battery Report 2021: (Feb 2021),vehicles%20and%203%2C475%20for%20hybrids.,than%20%24100%20worth%20of%20lithium.



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