Unpacking China’s cheap battery costs

Chinese battery companies are manufacturing the cheapest cells in the world right now, and it’s not just because of cheap labor and state subsidies. They’ve streamlined the process in a way that has industry experts wondering how international competitors can ever catch up.

In this episode, Shayle talks to James Frith, principal at the battery investment firm Volta Energy Technologies. He argues that there are multiple factors behind Chinese manufacturers’ efficiency and speed, like the know-how to operate plants with high yields, easy access to suppliers, and ability to squeeze margins to near zero. Shayle and James cover topics like:

• The confluence of overcapacity, softening demand, and low commodity prices that could result in a “bloodbath” of market consolidation in China
• Why the low cell prices on the spot market hit stationary storage harder than EVs
• Cost drivers of cell manufacturing, like labor, power, and environmental regulations
• What Western companies can learn from China’s cheap prices
• Why James is bullish on partnerships between Chinese and Western companies 

Recommended resources

• Latitude Media: How Northvolt’s bet on lithium metal batteries fell apart
• Latitude Media: A summer of ups and downs in the battery sector
• Latitude Media: DOE designates $3 billion for the advanced battery supply chain

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Transcript

Shayle Kann: I'm Shayle Kann, and this is Catalyst.

James Frith: It's a bloodbath out there. The Chinese market in particular, it's a bloodbath.

Shayle Kann: 2024, it was the best of times for battery buyers, was the worst of times for battery manufacturers. I'm Shayle Kann. I invest in revolutionary climate technologies at Energy Impact Partners. Welcome. All right. So we've talk to anyone in the battery world over the last few months and I guarantee you at some point in the conversation you're going to end up marveling together at just how cheap lithium-ion battery cells and packs coming from China have become. BloombergNEF put out a stat that I've heard cited like many times since then, a couple months ago that LFP battery cells in China on the spot market were selling for $53 a kilowatt-hour. Just truly bananas cheap relative to what you would've expected even just a couple of years ago.

So you combine that with recent announcements from companies like Northvolt in Europe struggling mightily and some delays or cancellations of new battery manufacturing capacity that was announced for the United States. And the obvious question becomes can the West ever really compete or is it game over? That of course is a function of many things, not least of which are end markets, geopolitics, trade policy and so on. But at a fundamental level, one question I've always had is how much cheaper is it really to produce battery cells or packs in China and why?

The answers are actually sometimes a little bit less obvious than you might think and they are vitally important to the future of batteries in the battery market. So to discuss, I brought on James Frith. James used to lead energy storage research at BloombergNEF, but now he's on my side of the fence as a principal at Volta Energy Technologies, which is an investment firm focusing on the battery supply chain all the way up and down. Here's James. James, welcome.

James Frith: Hey, Shayle. Thanks for having me.

Shayle Kann: Let's talk about what the hell is going on in battery manufacturing world these days, or I guess the battery market in general. Can you just give me... Let's start at the highest possible level. How would you characterize what is happening today in that space?

James Frith: I think there's a couple of ways I could do it. I mean, the rawest way, and this is what I've heard from a number of companies in China in particular, it's a bloodbath out there. The Chinese market in particular, it's a bloodbath. On the other side of things, if you are an environmentalist, you want to see the world electrified faster, we're in a fantastic position, right? We've got LFP prices from China down at 50 bucks per kilowatt-hour, which is-

Shayle Kann: That's at the cell level, right?

James Frith: That's the cell level, yeah, exactly. That's the cell level. At the back level, the rule of thumb is 30% on top of that. So you're still well below a hundred dollars per kilowatt-hour. And that's just to put it into context. Back when I was at BloombergNEF, I used to run the battery price surveys. I think probably 2020 or 2021 when we were doing that, would forecast out the numbers and we're expecting that by 2030, 2035 or so you could get down to 50, 60 bucks per kilowatt-hour at the cell level. We're there five years early.

Now, there's a lot of nuance going into that of why we're there and part of that is the kind of bloodbath in China, but it's just crazy to think that we've got there so quickly and these are prices that I got a lot of flack for even suggesting that we could get there in 2030, 2035 and yet here we are today. So great for the battery industry, if you like, or the... Sorry, I should say the electric vehicle industry for consumers. Not so good if you're a battery manufacturer.

Shayle Kann: I want to talk about why that's happening. But first I guess one question I always have when I see these numbers quoted is who is actually getting those prices? Those are presumably spot prices. Is there a large spot market for LFP cells for example in China and so it's a decent chunk of them? Is that flowing through to actual battery prices at significant volume here or is it a thinly traded spot market where most of the market exists under long-term contracts that are at higher prices anyway?

James Frith: Yes, it's a great question and it is pretty thin spot market, if you like. If you think about the bulk of battery demand is coming from the electric vehicle industry and those contracts are really long-term contracts. Where you have more exposure to these, the spot market if you like, or shorter term purchasing is in the stationary storage market in particular. And again, crazy numbers coming out of China in terms of stationary energy storage, costs, not just at the cell level but at the system level. At a system level for turnkey system, you're looking at something like $135 per kilowatt-hour. So again, crazy low considering that 18 months ago the average price of a cell was about $135 per kilowatt-hour.

Now, you can get an entire storage system in China. But again, even those spot markets in China getting to 35, sorry, the $50 per kilowatt-hour, it's low in China. Some people can access that. That's not a price that's necessarily going to be reflected if you're a stationary storage developer in Europe or the US. You're going to be paying higher than that and you're not going to be as exposed to those spot markets. Also, worth considering, what's the quality of the cell that you're getting? We hear more about tier two, tier three manufacturers or B grade cells that are being sold at lower prices.

Having said that, there's also reports out there of CATL having some of their pricing structure down at that point. But again, not for long-term bulk orders going into let's say the EV industry.

Shayle Kann: So it's a low watermark, right? It's like this is the lowest pricing that's available anywhere in the world, but everything else kind of flows from that. So it does tell you something. You also mentioned the other thing that I think folks outside the industry probably don't sufficiently appreciate, which is that when prices crash like that, it's the stationary storage sector. It's like grid energy storage that actually sees the benefit from that, from a cost perspective fastest. And that's one interesting dynamic, whereas EV is what you think of which is still EVs are still the majority of demand for lithium ion batteries, longer term contracts, new models, etc. It takes longer. Let's talk about why.

So is it just a matter of overcapacity? Before in this podcast, everybody has talked about kind of slowdown in growth for EVs, basically everywhere outside of China. I mean, China doesn't seem to be slowing down at all, but is it that? Is it there was an overbuild of new capacity and then demand soften just enough that now the market is flooded or is it more nuanced than that?

James Frith: That certainly a big part of it, but it's a little more nuanced than that. And again, for context, if you go back to even 2020 for the last couple of years, in fact, there's always been a slight overbuild in manufacturing capacity and demand takes a little while to catch up. And that does depress prices and that's certainly part of the story now. But I think you've also got a confluence of factors. So you've got this oversupply and manufacturing capacity, you've got a softening in the electric vehicle market as well, which I think, as you say, the signaling of that to the rest of the market is that demand isn't there and therefore if you want to maintain market share or gain market share, you've got to reduce your prices.

But you've also got other factors like low commodity prices. So we've got lithium not at an all time low, but very depressed below $20,000 per metric ton. And you've also got another kind of factor, which is perhaps kind of less clear exactly how it plays into these low price prices, but we can get into it in a minute. And that's that a lot of the companies in China and the supply chain, cell manufacturers and material providers had stockpiled material over the last couple of years, particularly when raw material prices were very high. And so they then have that material sitting on their books and they want to shift and then resupply with low-cost materials because who knows how long we're going to be in this low-cost environment for.

You can look at some forecasts that say lithium prices are going to be depressed until 2028. On the other hand, you have some price reporting agencies that are telling us that we'll be in the of undersupply situation for lithium in the next couple of years and you'll see prices shoot back up. Whatever the truth is, today, you've got low raw material prices. So if you have the ability to restock your capacity at this point, it makes sense to...

Shayle Kann: This is often true. It seems like companies are behaving exactly the opposite of how they should. If you were stockpiling lithium when lithium was 50,000, that was a bad idea. And if you're trying to get rid of all your lithium now when lithium is 20,000, that's also probably a bad idea. And yet that's what everyone does in these markets.

James Frith: Yeah, exactly right. I mean, it's been a crazy market, the lithium market the last couple of years going up to over $60,000 per metric tonne a few years ago and expectations that price was going to or those high prices were going to hold for a number of years or potentially even go higher. So you exactly saw all this kind of stockpiling at relatively high prices. And then we've had this sudden crash and it's kind of thrown the industry and I think material suppliers, cell manufacturers aren't sure what strategy they should take at this point.

Shayle Kann: Okay. So two high level questions then. One is this pricing that we're seeing in the market right now, is this sustainable? Is this the new normal, right? Battery prices have been on a long-term downward trajectory and everyone has expected that to be true and expects that to continue to be true to some extent. So is this just where we are today and then now we're going to keep marching down and price from here? Or is it this short term phenomenon driven by everything that we just talked about where, "Okay, people are going to run out of stockpiles. Lithium prices are going to recover this oversupply. There's going to be a shakeout in the market. Probably we've seen this before. Bunch of tier two and tier three manufacturers in China in particular are going to disappear."

And actually what we should be expecting is battery prices to increase at some point in the near future. Who knows if that's in six months or six years before they continue their inexorable decline from there. Obviously, you don't have a crystal ball, but just help me think through the dynamics of what could cause one of either of those scenarios to be true.

James Frith: Yes, and I would love to say that this is new normal and that we're going to have these prices going forward and decreasing from here, but I think unfortunately we're probably going to see prices increasing moderately in the next year or so, I would say. Let's say two years out, we'll probably see higher prices than we're at today. But I don't think like in 2022 when we saw average lithium-ion battery prices rise for the first time, I think we are not going to see the average price rise particularly. But I think what we'll probably see is those kind of lowest prices that we're hearing reported in the market that we just discussed that are perhaps not representative of long-term contract pricing.

We'll probably see those prices increasing, but in general, the average price of batteries is going to continue to come down. But I think getting the big drop in prices that we've just seen because of those confluence of factors that we discussed, I don't think we're going to see that again necessarily. And I think the reduction in prices is going to be driven by fundamentals. So improvements to manufacturing efficiency, falling CapEx, increased automation playing into manufacturing efficiency, changes to cell design and pack design as well, I think that's something that people often underappreciate in the impact that that's had on falling prices prior to this point, let's say.

And again, changes to cell chemistry tend to make a difference and have over the last decade been a big factor in reducing prices. And I think that will continue in the next, well, for the rest of this decade at least, there'll be some new cathode chemistries introduced. The LMFP is one that there's a lot of interest in at the moment. There are some technical challenges that still need to be overcome, but there you have a raw material price that is similar to LFP but with a higher capacity.

So when you put that into a cell on a per kilowatt-hour basis, you're reducing the cost. And you've also got changes coming on the anode side of things as well. So again, people are probably aware that the biggest changes, the chemistry that we've seen in the lithium ion battery industry have come from changes to the cathode material going from NMC111 through to NMC11 reducing the kind content of expensive cobalt and substituting it with nickel. And we haven't really had any changes on the anode side. It's been graphite.

Maybe you're playing with your synthetic to natural graphite ratio to balance cost and performance. But over the next few years we're going to see the increasing adoption of silicon materials. And again, some silicon materials, not all, but some silicon materials will give you a cost advantage over graphite. So on a per kilowatt-hour basis, you'll have a cheaper anode material in there, which again will have benefits for the cell and for the pack as well.

Shayle Kann: This is a tangent, but why is it that we've seen so much innovation, so much change on the cathode side and so little on the anode side, historically? Is it just a technically more difficult challenge to replace graphite in the anode or is it that graphite is like we're starting from a better benchmark? Graphite is just better as a starting anode material than NMC was for the cathode side. Why is it?

James Frith: It's a little bit of both. So I think that there are certainly... There have been challenges in introducing new kind of anode chemistries. In particular silicon is, as I say, the kind of thing that everyone is interested in. The issue with silicon is that you get the very high capacity, but the cycle life takes a hit. So in order to increase the cycle life to the point where you can actually use it commercially, there's had to be a lot of innovation and engineering challenges to overcome, particularly related to swelling.

So we've got companies now know... Volta is invested in OneD Battery Sciences over in Palo Alto. They've overcome the issues around cycle life using nanowires. You've got Group14 and Sila up in Moses Lake, both of whom encapsulate the silicon to try and reduce cracking and issues related to cycle life. So there's been a lot of innovation there that's got us to this point. But on the cost perspective, graphite is a really cheap material and it's hard to beat that.

And that's why when I talk about silicon potentially reducing the kind of cost further, it depends on the silicon solution you're using. You've got to have a silicon material that is inherently lower cost than graphite and some people might adopt higher cost silicon materials for particular performance reasons. But actually for the mass market, if you want to adopt silicon and you want to reduce costs, you've got to have a silicon material that has that kind of cost advantage built in.

Shayle Kann: Okay, so back to the main point. It's funny you mentioned, I asked whether this was sort of the new normal or ephemeral and you said I'd love it to be the new normal. This is always true in these markets, right? On one hand, oh my god, battery prices are so cheap. Look at what that's going to unlock in terms of EV adoption, in terms of grid storage, et cetera. So from a market adoption perspective, incredible. On the other hand, I think of it as being unfortunate timing because we were right in the midst of what seemed like and maybe seems like this is the topic for us to discuss a manufacturing revolution in battery world.

I mean, everything from raw materials up through batteries themselves in the West. In Europe, we had players like Northvolt that were starting to scale in the US. We had the IRA pass, which has all sorts of carrots for domestic manufacturing in the battery supply chain, all these project announcements, everything. But it's like the timing couldn't be worse in some ways because everything was nearing or had just reached FID. Everything is supposed to be getting constructed. And then here we go. Now we're going to be able to domestically supply our own batteries and battery materials and then prices crash through the floor.

So I guess two questions there that I want to delve into. One is what do we think that means for this raft of potential battery manufacturing in the West? And second is I guess I want to talk at a more fundamental level about what drives the difference in cost and to some extent price between battery manufacturing in China and in the West. It's to some degree intuitive to people, but I actually think what you might assume are the big cost drivers are probably not the obvious ones.

So let's start with the cost differences and then we can round back to what does this mean for the future of Western battery manufacturing? Just highest level, talk to me about if I'm building a gigafactory for LFP or standard run-of-the-mill battery manufacturing facility, and I'm doing it either in Europe or the US on one hand, or if I'm doing in China, on the other hand. What drives the difference I'm going to see in my cost in either case?

James Frith: This is an interesting topic and I think as you say, some of the factors are what you would expect, but perhaps the scale of the impact of those factors is less than you would expect it to be. So I split it into CapEx and CapEx. I'm going to start with OpEx just because, and we'll get to CapEx in a minute, in my opinion, it has a bigger impact. The CapEx numbers can vary quite significantly, but when you think about it on the number of millions or billions of cells that you're producing each year, you're amortizing that CapEx. It's not as significant, but we'll come back to that in a minute. So if you're looking at the differences, the key drivers of difference on the OpEx side between any country in the world, China and the US or wherever, you're really thinking about cost of labor, cost of power, other utilities.

So water in particular, there's a lot of water used in some processes. Environmental costs. So what have you got to do to meet local environmental regulations? And that obviously impacts on CapEx as well. But those are really the things that I'd be thinking about, labor, power, utilities, environmental costs. And there is a difference. It's clear that labor costs are going to be cheaper in China than they are in the US. Interestingly, actually power, depending on what state you're in and what part of China you're in, power is not that different.

And so it doesn't differentiate things as much. And even on the labor side of things, if you go back five years, 10 years, even, battery manufacturing was far more labor-intensive. But what we've seen over the last 10 years or so is the processes are becoming increasingly automated. So the cost of labor doesn't have a bigger differentiating factor on the cost of producing in China as it does in the US. The other kind of areas, so utilities that I mentioned and an environmental impact, there is a little bit more of an impact there, particularly on the environmental side of things.

Some of the regulations in China are more lax than you'd find in the US. But again, actually having said that, if you're a large scale manufacturer like CATL producing cells in China that you're selling to the rest of the world, quite often you are meeting the environmental kind of targets set by your customers. So although you might not have to do it for local regulations, you still got some of those kind of costs in there.

But again, if we take those factors on the OPEC side and we look at that as a percentage of the total cell manufacturing, and again using the example of LFP, the operational costs account for somewhere around 20% of the total cost of a cell. You've then got roughly 10%, which is related to the CapEx. So equipment and plant CapEx, and then the rest of what you're looking at 70% or so is the material costs, whether that's anode, cathode, electrolyte, etc. So changing those kind of OPEC's numbers that we talked about, it has an impact, but not so significantly.

And I plugged some numbers earlier into the model from BloombergNEF and looking the difference between the US and China. So for a LFP cell produced in China, 35 gigawatt hour facility, you're looking at around $68 per kilowatt-hour. So this isn't kind of optimized for these super low prices that we are seeing today, but assumes a LFP material costs of about five bucks per kilowatt-hour.

You compare that to manufacturing in the US. And so again, the only things that we're really changing here are those OpEx numbers and CapEx again, which will come onto in a moment, but the cost of manufacturing in the US is about $75 per kilowatt-hour. So it's only 8% higher if we're changing those common variables that you would be thinking about if you're moving from China to the US. So it's not a huge difference really. And again, labor is a big part of that in the US.

On the US side, it's close to 17% of the total cost of the cell. In China it's about 11%. So there is a difference there. But again, when you come back to it and you think that the manufacturing process is becoming increasingly automated, actually the impact that labor cost has is going to decrease over time. So there's not a huge difference. Now, if we come to CapEx, there's a big difference there. If we look at the high level numbers, and again, I just grab two examples from the media.

So CATL recently built a plant in Guangdong, which was a 35 gigawatt hour plant, and that was roughly 1.7 billion in CapEx. So on a per gigawatt hour basis, it's about 68 million per gigawatt hour.

Shayle Kann: That's in US dollars.

James Frith: That's in US dollars, yeah, exactly. In contrast, the Ford plant that it's building, using CATL's technology for manufacturing LFPs, so a licensing agreement rather than a joint venture. The original capacity that we were looking at there was 35 gigawatt hours as well, and that was at 3.5 billion US dollars. So that works out at a hundred billion per gigawatt hour. So you're looking at a 30% difference in a per gigawatt hour cost there. So it is quite significant.

But again, when you then think about those plants are going to be operating for 10, 15 years and well, let's say 15 years for the plant equipment is probably got a seven-year lifetime. When you start to think about the amortization of that depreciation over the lifetime of the factory and over all of those billions of cells that are going to be produced, it's relatively small. You're looking at a percent difference in the impact on a per kilowatt-hour basis at the cell level. So these factors, they make a difference, but nothing that is, let's say insurmountable.

Shayle Kann: Okay. So both CapEx and OpEx drive a delta, but it's not huge and it wouldn't explain the difference in prices that we see coming out of China versus the West. So if it's not CapEx, it's not OpEx, what is it?

James Frith: Yeah. And so this is the interesting thing. I think the point that you made, it's not necessarily the obvious things that you're thinking about. A lot of it's down to operations. So yield is a big factor here. If you can't get a high yield, then you're wasting a lot of material. You're using all that energy, you're using all that labor, and you're not getting a product at the end of it that you can sell. And this is where China has a huge advantage over the rest of the world. China has been manufacturing batteries since the early 2000s.

They've grown at the fastest rate of any other kind of region in the world, and they have a workforce who has been working in those facilities going on for more than 15, 20 years at this point. So they have a lot of skilled work, skilled laborers who understand battery manufacturing and understand how to use the equipment and how to get those kind of yields up quickly. Whereas if you look at a couple of examples from the West, the most obvious one at the moment is going to be Northvolt. Northvolt started manufacturing cells on its plant around the end of 2022, I believe. So coming up to two years now.

And if the media reports are to be believed, they're still having a huge issue with yields. They can't get their yields up and that's pushing the price of their sales up dramatically. I believe it was BMW who cited costs and yield as one of the reasons that it was canceling one of its initial contracts with Northvolt. So getting that yield up is a key part of it. Having a skilled workforce is essential there. The other part of it, and this is something that I think that the workforce side of things, the West, they will build those skills up over time.

There's a lot of programs going on to rescale and upscale the workforce. So we'll get there. But the other advantage that China has is close access to equipment manufacturers. So if there are any issues, if they need to troubleshoot something, if they have any kind of issues with the equipment breaking down or whatever, they can quickly get onto those equipment manufacturers and they can get the engineers in, the technicians in to troubleshoot it and to get that equipment up and operating again.

Outside of China, there's only a limited number of companies, or outside of Asia I should say, there's a limited number of companies that have that capability. And certainly in the US and in Europe where a lot of companies are actually using Chinese equipment, you can't get those engineers there that quickly. You've got to get them on the plane, fly them over. It's going to take time and that's going to cost you because you're not going to be able to operate your facility as expected. So I think that yield, an uptime, there are two big factors in it.

Shayle Kann: Yeah. There's an extent to which the yield one, you can spin that as a positive for the West potentially in the sense that, "Okay, if the reason China can produce so much cheaper cells is because labor costs are so low, environmental permit, regulations are so lax, etc." It's difficult to imagine how the West ever solves that problem. On the other hand, if it's basically that China's really good at it, they got their yields up because they have experience and they're very good, that's at least a challenge you can imagine to be surmountable for the West.

Now, not easy, obviously. I don't mean to minimize it, but it's at least something that feels like it's in the control of Western battery manufacturers. Maybe a little bit less so the access to equipment manufacturers and so on. But at least the yield one you can sort of picture like, "Okay, somebody could do it better here." Maybe novel technology that allows for higher yield. Maybe not, maybe just better operational performance, but if that drives a big component of the cost delta, obviously it's difficult.

Volta is struggling with it as are others, but it seems possible. The other thing we should at least address, right, and the thing that has been always thrown out I think often without much detail behind it, is this general assumption that well, China subsidized the hell out of battery manufacturing, China Inc.

And I think that is true to an extent, and you should tell me a little bit about what form those subsidies have taken. Of course now we in the West are also at least attempting to subsidize the hell out of this stuff, certainly in the US through the IRA and I think in Europe through a bunch of mechanisms as well. So there's an attempt to replicate that, but it's in a different form. So in your view, what have those subsidies looked like in China and how big a difference have they made in the cost structure?

James Frith: Subsidies definitely have had a big impact. And it's interesting, in China, it's always difficult to understand the full extent of what the subsidies look like, but certainly the most straightforward one is going to be low land costs. So you'll often have provinces that will provide land to manufacturers for free to get them to build a plant there and to secure that industry.

You've then got the direct, indirect subsidies if you like. There was a long program of EV subsidies in China where EVs that were using Chinese produced cells would get a higher subsidy and the cell manufacturer would get a portion of that as well. So not dissimilar to what we're seeing with the IRA now, in fact. And that was a big part of setting up the Chinese industry and getting Chinese automakers to use Chinese produce cells. So that has played a factor.

Those subsidies were phased out I believe earlier this year or earlier in 2023. I can't remember off the top of my head, but we've seen those subsidies phased out. Now, I think more what I'm hearing about is it's the kind of land subsidies. That's a big subsidy that Chinese cell makers are getting. Today, I'm sure there are tied into that as well, tax breaks as well, again, similar to what we see in other parts of the world. So it's not that China has a secret subsidy regime that is perhaps better than anyone else in the world, it's that I think that they did it first and particularly again in the 2010 period to 2020, that did make a big difference.

But I think what a lot of people fail to realize when they're thinking about that is that the bulk of China's manufacturing capacity has been or will be commissioned in the four-year period from 2020 to the end of 2024. If we go back to 2020, commissioned capacity in China was about 550-gigawatt hours. By the end of this year, if all the projects that are under construction are completed, you'll be looking at about 4.5 terawatt hours of capacity.

So really 90% of the capacity is being built in this four-year period. At the same time as we're building capacity in Europe and the US. So the subsidies from the last decade, they've helped to build up these big companies that we know, BYD, CATL, Eve Energy, et cetera, but they're not fundamental in the way that people think they are to the low cost structure that we're seeing in China today.

Shayle Kann: The other thing that I think plays a role... I know this was true in solar over the years, as China was ramping up, PV manufacturing and Western companies were trying to compete. The market is cyclical and you'd have periods of oversupply and prices would crash as we are seeing now, in battery world. And one of the things that would happen in that crash is that you would see a shakeout in China. A bunch of companies would disappear and fail. But the bigger ones at least could withstand zero to negative margins for a while.

And so on the other side of that, there would still be a few really, really large Chinese PV manufacturers who just had the capacity and the capital and the support to withstand a temporary crash in prices and removal of margin effectively. But Western manufacturers really struggled with that and just didn't have the capacity to weather the storm. I wonder whether that's what's going to happen here too. Maybe all those plants that you mentioned in construction to get to four and a half terawatt hours, they probably won't all get built, right? Not in today's environment. We probably will see a shakeout in China, but is CATL going anywhere? Probably not, right?

James Frith: Yeah, I think you're spot on there. That's exactly the kind of environment that we're in at the moment. And again, there are reports coming out of China of just that happening of manufacturers selling with low to zero to negative margin in order to maintain market share, in order to keep their plants operational rather than just mothballing them. So it's interesting that we are in that situation. I think we will see a shakeout of probably tier three players more than the tier two players. I think, CATL, as you say, and BYD, they're not going anywhere.

I think the tier two guys, the Eve Energies, the Goshens, the Lifan, etc, they're going to stay around. It's some of the smaller players that, as you say, they don't have those longer term contracts. They've perhaps been relying on more of these spot market contracts that we discussed earlier to shift cells, and they're the ones that are going to suffer the most. They're either going to have to... Well, in fact, I have heard of reports of some companies basically selling at the cost of the raw materials, so not even including manufacturing costs in there.

So I think it is back to what I mentioned earlier. It's a bloodbath in China at the moment. We are going to see that consolidation of the industry, but the big players, they'll survive. And actually maybe it's even perhaps a blessing in disguise for the West because we don't have these big homegrown factories that are operating today and having to compete with those low margins. They're still in construction. And so that could be the silver lining, if you like, for those companies at the moment is that they're not directly competing today. They're thinking of that cost in the next two or three years.

Shayle Kann: All right, so to wrap it up, let's come back around to this key question I mentioned earlier, which is what is the prognosis for Western battery manufacturing? Is there a way for these battery manufacturers in the West who are just starting to scale up right now or starting to construct their projects right now? Are they going to be able to weather this storm? And I guess relatedly, because you were at BloombergNEF, now you're on the technology investment side with me, is novel technology the way out of that trap? In other words, there are lots of what I would call standard like LFP cell manufacturing facilities planned or NMC for that matter for the West.

Then you're competing just head to head against the same thing. Can you win by playing a different game and doing something entirely novel? Is that actually something that could work? That was always the premise in solar, for example. And really first solar proved it to be true and everyone else proved it to be wrong. So curious if you think batteries are the same or different?

James Frith: I mean, I feel like there's only one answer I can give here. I've been a technologist working on battery technology since 2010 or so, and I've always been a big believer that the technology will drive the industry forward and help to reduce costs. So I think the answer is yes, you can use technology to save the industry and differentiate what the West is doing compared to China. I think you're right that if you're just competing on LFP and it's a race at the bottom, then that's when you're going to struggle. And there's already been... Well, I think you can already see that actually some Chinese players think that it would be cheaper to import LFP cells from China, pay any taxes or whatever, and then have them deployed in the US rather than manufacturing them locally.

Now, I haven't done that analysis myself, so I can't say exactly what the nuances there are, but the fact that some Chinese companies think that it's still cheap to manufacture in China and export to the rest of the world, that speaks volumes on that side of things. But I think what we see is that there has been a lot of technology development going on in the West. While China has been building up capacity, the West has been advancing on the technology side, and a lot of Chinese companies don't have the IP for those new technologies outside of China. So this creates an interesting dynamic that we are seeing where Chinese companies want to get out of China because it's a bloodbath. It's difficult to do business and make money there at the moment. They want to sell to the West, but the technologies that are about to be adopted, and going back to silicon as an example here, right? Imminently going to be adopted in electric vehicles.

A lot of Chinese companies don't have the freedom to operate and sell that material outside of China. And you've got a load of startups in Europe and the US who have the IP, they have the freedom to operate, they have the technology, but actually what they don't have is the cash to build facilities to scale up to actually get their product out there.

So I think there's a unique opportunity at the moment where you could see Chinese players coming with cash, working with these startups, helping the startup to scale and building facilities in Europe and the US to bring these new technologies online. The startups or European technology, US technology gets adopted. We see that kind of return on investment, and at the same time, we have the skills from the Chinese players being utilized. We have that knowledge on how to get those high yields. We have the connections to the equipment manufacturers. We have access to those supply chains, which we haven't talked about much, but actually the supply chain development in China is a big part of why they've got low cost as well.

And so partnerships with the Chinese cell manufacturers, Western technology developers, I think is a big wave that would be almost a win-win situation for everyone and would see us on-shoring battery manufacturing in the US and Europe with a differentiated technology that's not just a race to the bottom on the kind of LFP side of things, but is trying to improve performance. So that's my outlook. Hopefully, it's not too naive, and this is something that we see happening in the next couple of years, but certainly we're seeing the beginnings of that stirring in the industry and even the of Ford-CATL licensing deal is almost an example of that, although it's in reverse. Ford is putting the cash in to build the plant and we're taking CATL's technology.

But just seeing that we are building those relationships gives me confidence that a lot of the early stage companies in Europe and the US will be able to get there. What it doesn't necessarily perhaps solve is for the homegrown cell makers that we have in Europe and the US. The Northvolts who are struggling on just the manufacturing side today. And I think that again, is why taking advantage of the Chinese know-how really brings home for me at the moment as something that we should be exploring if not taking advantage of.

Shayle Kann: James, this was a lot of fun. Thanks for the time.

James Frith: My pleasure. Thanks, Shayle.

Shayle Kann: James Frith is a principle at Volta Energy Technologies. This show is a production of Latitude Media. You can head over to latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. Prelude backs visionaries, accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more at preludeventures.com.

This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquand. Theme song by Sean Marquand. I'm Shayle Kann and this is Catalyst.