If you build it, will they come?

Many of you have probably come across the piece by Andy Grove titled “How to Make an American Job Before It's Too Late” that was published in Bloomberg. In the article, the former president of Intel argues that losing low-end commodity jobs from the US is a long-term problem. He uses batteries as an example.

In the battery space, all manufacturing of lithium-ion batteries happens in China, Korea, and Japan. Since the mid 90’s when it was becoming clear that lithium-ion was going to be a dominant force in the rechargeable battery market, several US companies have tried to enter the market by setting up plants in the US. None made it big. Some went under; others went back to their core business; still others survived (and continue to do so) on small government projects.

An article written by Ralph Brodd examines this issue in detail. The article is a bit dated, but is interesting reading. Ralph concludes that there are many complicated factors that come into play. Some of these involve the difficulty in penetrating OEM markets (that were all in Japan) for US companies and the fact that lower profit margins were sustainable in East Asia. Interesting he also notes that labor costs are not as significant in this “outsourcing” trend as some claim. I suppose if you automate you can depend on robots not to ask for a minimal wage irrespective of the geography!

Long story short, by the turn of the century, the battery community had accepted the fact that there was no real Li-ion manufacturing in the US. However, most of the community also believed that innovation in batteries happens in the US, and manufacturing (read “low end jobs”) was dominated by Asia.

There are very good reasons to believe that. The materials that power your laptop and cell phone batteries were discovered in the US. Some of the materials that may end up powering your plug-in hybrids and your electric cars were discovered in the US. Ergo... the US leads in the “high value” innovation; Asia does all the “low end” manufacturing.

Andy Grove had come to LBNL last Fall and during a discussion on battery research, he asked what the rest of the world was doing. I answered (echoing the popular belief) to the effect that Asia (read China, but also Korea and Japan) leads manufacturing and the US leads innovation. He cautioned that this was exactly what the semiconductor folks thought, but in time, they started to realize that Asia was starting to do more than just low-end stuff. And he cautioned that the realization might come too late.

What he was talking about was already happening in batteries; it’s just that I was not paying attention. Japan was always a powerhouse in battery R&D (with the Korean’s not far behind), but the last few years are showing that the Chinese are doing just fine, thank you. The number of papers coming from China is increasing and there is a lot more research activity than even a decade ago.

In effect, it is possible to outsource not just “low-end” jobs, but even “high value” R&D. Certainly the last decade has shown that industries ranging from software to pharma are outsourcing their research to China and India.

One could argue that quantity does not imply quality, and impact of papers from the US tends to high compared to most of the world, especially the developing world. But I would argue that as each year goes by, you can expect to see the quality and the impact improve. With money comes equipment, personnel to hire, ability to travel to conferences, and the ability to collaborate with the best and the brightest the world over. And despite the recession, China has continued to grow. If you are looking for money, China is the place to be.

If the manufacturing is in Asia, the talent is in Asia, and the funding is in Asia one can logically assume that future breakthroughs will happen in Asia.

The question then becomes: How does the US get back on the driver seat?

The US DOE decided that one way to do that was to bootstrap the development of a battery industry in the US by providing stimulus money to build factories. A few different companies got funded as part of this effort. These companies will be ramping up manufacturing of vehicle batteries in the coming years and slowly but steadily, the US will ramp up battery manufacturing for next-gen cars. Over the last week, the government issued a report on the impact of all this funding and their expectation of battery performance and cost over the next 5 years. The report, predictably, paints a rather optimistic future.

However, there a couple of problems to worry about. For one, the batteries that are being made have to be sold (Sounds obvious, but I think its worth reminding ourselves of this). For this to happen, there has to be a market for plug-in and electric cars. And as we pointed out these cars will be expensive because of the battery cost. Mass manufacturing will decrease the cost, but for mass manufacturing you need someone to buy these batteries and so you have a chicken and egg problem. And even the decreased cost will still make these cars expensive.

Moreover, most (if not all) of these companies are essentially using the money to build a building, and buying equipment from China, Japan, and Korea to make batteries pretty much exactly as they have been made in Asia except that they are doing it on US soil. Even the chemistry for the anode, cathode, and electrolyte that are being used for are not really unique.

Its not clear is there will be any unique intellectual property that will come out of this. Maybe in time, IP will come, but in the short term there will be little that is different from the batteries made in Asia. These will be expensive batteries with no clear technology advantage over the Asian rivals, but made in the US of A.

But the funding will create jobs, reduce battery costs, allow us to start the process of innovation and IP generation, and provide a pathway for the wonderful research in the Universities and National Labs to reach the marketplace. In the long run, all this can only help.

But in the short run, it is not clear which markets these companies will sell their batteries to and how they will stay in business long enough for all these benefits to occur. I believe that a vibrant PHEV or EV marketplace is key, but it’s not clear how one should enable this. None of the solutions are easy (e.g., a gas tax). But does appear that without incentives, it will hard to jumpstart an electric economy. We may be forced to make these hard choices.

This would be the “If you build it, they will come” route.

Instead of going this route, one could try to do something radically different; generate IP; use this IP to manufacture in the US, and leapfrog Asia. Leapfrogging in batteries is not easy (I suppose by its very definition leapfrogging is not easy!) and as I have noted, Moore’s law is like Murphy’s law for battery folks (we cringe at the mention of both). But one can imagine a new material or a new way of assembling a battery coming along that makes the existing methods obsolete and makes the US the leader in manufacturing as well as research.

There are a few governmental programs that are aiming to do just that. And certainly the whole of Sand Hill Road (which would be the street in Menlo Park that houses many of the Venture Capital firms in the SF Bay Area) is looking to see if they can find the next big startup with the winning idea. Only time will tell if the numerous startups and projects that are attempting to do something radical will end up being truly disruptive. And as I mentioned in my post on David vs. Goliath (or Tesla vs. Toyota), succeeding in the battery space can be hard.

In the meantime, all of you can do your part to keep the battery economy moving. Pay the $40K or $100K (depending on your affordability) and buy a Chevy Volt or a Tesla Roadster. This may mean selling your home, but, as the last few years has taught us, home ownership is overrated anyway.

Venkat