An economic chill will soon arrive in the world market that provides the batteries that power electric cars.

For U.S. manufacturers of these batteries, the most valuable and competitive part of the electric car, the question is whether they will survive this winter or perish in it.

Over the past three years, new production lines for lithium-ion batteries have sprung up in China, Korea, Japan and the United States. Some have been built solely with private capital, by companies that sense a healthy global market for energy security and carbon dioxide reduction. Other plants were built with a large share of government financing, as officials have identified electric cars as a major economic race.

The result: In the short term, the worldwide capacity for making batteries far outruns the demand for electric cars. Market analysts expect a multi-year cull, starting as early as 2012, of the factories that can't make the grade.

One of the looming questions hanging over the auto industry, the world's largest consumer market, is: Where will the survivors be?

"The question remains about whether we'll have enough demand in the market to support the number of potential manufacturers of batteries in the U.S. market," said Xavier Mosquet, senior partner at the Boston Consulting Group and head of its global automotive practice.

As a rule of thumb, Mosquet said, one battery plant can be sustained by supplying 1 percent of new vehicles sales in the United States. If electric vehicles made up 3 percent, for instance, that would support three to four plants.

A replay of Solyndra?
Currently, he said, there are roughly 10 battery suppliers in the United States, so if battery demand proves smaller than 10 percent of sales, some factories will cease production.

Today, electric vehicles are nowhere near 10 percent of the market. Indeed, hybrid cars, which have been commercial for 10 years and use much smaller batteries, make up 2 to 3 percent of annual sales.

The market conditions have uncomfortable resemblances to those that undid Solyndra Inc., the solar panel manufacturer that filed for bankruptcy in September after accepting a major Department of Energy loan. Outgunned by Chinese scale and undercut by a drop in silicon prices, Solyndra's product suddenly found it difficult to compete on the world market.

Similarly, U.S. battery manufacturers are competing with enormous Asian factories that are ruthlessly cutting battery costs.

There are important differences from Solyndra, too. In solar, the preferred technology is converging toward the one that China specializes in. In batteries, however, the technology race remains wide open, and U.S. firms are thought to hold some of the most innovative ones.

Nevertheless, as battery capacity contracts worldwide, a U.S. closure could prove inconvenient for the Obama administration, whose clean-tech strategy has come under sustained Republican attack.

Worldwide vulnerability
U.S. factories aren't the only vulnerable ones; other countries also have more battery production than they have customers. Globally, according to Bloomberg New Energy Finance, automakers have committed to making 839,000 plug-in cars by 2013. Yet battery makers already have enough capacity to supply twice that number of cars.

Moreover, engineers are finding new ways to slice battery costs. Together, the trends mean battery prices are poised to plummet -- and that to survive, American manufacturers will have to keep up with Asian conglomerates.

BNEF said the large Asian firms will be able to cope by reducing production, lowering prices, and waiting out the crash. In some cases, they can also rely on strong bonds with Asian auto companies, which started developing electric-drive vehicles before their U.S. counterparts.

The picture is dicier for U.S. lithium-ion manufacturers, whose ranks have grown since President Obama awarded $2.4 billion in grants in August 2009 (ClimateWire, Aug. 6, 2009).

Much of that funding helped build massive battery manufacturing plants. But the economics of these plants is a double-edged sword. On one edge, size is necessary to enjoy economies of scale and thereby compete with Asia on costs.

On the other edge, that size advantage only works if the factory is making lots of batteries and selling them. With that practice, a factory can make its assembly line and supply chains leaner and its batteries cheaper, said Glen Walker, a clean-tech analyst for BNEF.

"If you pause, and you're not making batteries, and your competitors are making batteries, then they're driving their costs down and you're not," he said.

With the U.S. market for electric cars just waking up, battery manufacturers are battling for the biggest contracts they can find, whether in trucks, the grid or the defense industry.

"It's going to be a period of haves and have-nots," Walker said. "The companies which have secured these production-scale contracts are pretty much going to to be OK; for those that don't have production-scale contracts, they're really scratching to get what's up for grabs."

Some American players
Last month, General Motors Co. announced it would source the batteries for its Chevrolet Spark, a mini-car that will sell in the United States, Europe and Asia in 2013, from A123 Systems Inc.

A123, based in Watertown, Mass., is thought to have one of the most competitive lithium-ion batteries in the world. In 2009, it received $249 million in grants from the Obama administration for a plant.

Nevertheless, GM had passed it over before: Earlier in 2009, GM had chosen to supply the Chevy Volt's initial run through LG Chem Ltd., a division of a Korean firm. LG Chem had also received a battery grant in 2009 (ClimateWire, Feb. 2).

Another U.S. battery manufacturer, Ener1 Inc., has faced serious struggles this year.

It received a $118 million grant in August 2009 to scale up lithium-ion production at its Indianapolis plant. But while its competitors secured production contracts, Ener1 was unable to land major vehicle deals beyond the THINK City, a small urban EV sold in Europe.

THINK Global AS, which makes the car, filed for bankruptcy in June. Ener1 must seek sustenance from other auto or grid contracts, or risk collapsing as investors flee.

Walker, of BNEF, expects the U.S. situation to get clearer in mid-2012. By then, he said, more EV models will be available, such as a plug-in version of the Toyota Prius and the all-electric Ford Focus.

The U.S. battery makers' fate will depend on the consumer response and the automakers' willingness to ramp up production of these vehicles, he said. Alternatively, the companies could survive on international business. All the U.S. battery firms do business abroad, whether in EVs or the grid.

The companies that survive the global battery crunch can look forward to serving a larger market -- and less competition for customers. Oliver Hazimeh, a principal at PwC's PRTM Management Consulting, said today's oversupply of batteries will be an undersupply tomorrow.

"While there is a short-term over-capacity, the currently installed global capacity of about 35-50 GWh is still well short of the 180-200 GWh capacity forecast to be needed in 2020," he said in an email.

Reprinted from Climatewire with permission from Environment & Energy Publishing, LLC., 202-628-6500