There is yet another milestone event regarding ongoing supply chain impacts concerning the alternative energy industry.

Readers may recall our recent Supply Chain Matters commentary regarding consolidations occurring in solar panel manufacturing.  Intense competition, overcapacity and certain economic advantages have caused China based producers to continue to benefit from global consolidation and more compelling economics that favor supply chain capabilities within China. We previously noted the events leading up to the bankruptcy of Evergreen Solar, and since that commentary, we can now add the bankruptcy intent of Fremont California based Solyndra, at the cost of 1100 jobs. Each of these companies cited their inability to compete with Chinese producers in an environment of global overcapacity and eroding market prices.

Evidence of similar trends, albeit early stage, are now starting to occur in battery production but with a different twist.  Xconomy reported this week that Boston Power, a developer of advanced lithium-ion battery technology announced a new round of strategic funding.

The company announced that it raised an additional $125 million of funding, but with a new twist to its business model.  That revision caused the company’s existing CEO, CFO and vice president of marketing to resign at the time of the announcement. Beijing based GSR Ventures is leading the current round of funding, and the deal is reported to include other funding from the Chinese government.

The company’s new strategic plan calls for a product direction weighted toward the powering of electric vehicles while production operations and most of product marketing are to be shifted to China, where Boston Power is currently building a new factory.  However, Xconomy reports that research and development, product design and sales will initially remain in the U.S. while hundreds of jobs will be added in China. Boston Power’s original founder and now international chairmen, Christina Lampe-Onnerud will also remain in the U.S. while GSR managing partner Sonny Wu will now chair the company’s board of directors. One of Boston Power’s current strategic customers is Hewlett Packard which utilizes its battery technology in its portable electronics.

In essence, this is an example of a westernized  venture capitalist model with a China thrust.  With R&D and design resources remaining in the U.S. while high volume production and global distribution sourced within China, the Boston Power has the opportunity to leverage lower labor costs, lots of governmental incentives and U.S. developed product technology.

Replication is the best form of flattery.  However, this development is yet another warning sign for existing North America and Europe based producers who continue to compete with Chinese producers for market share and long-term supply contracts. All of this is important since many auto industry observers, including ourselves, anticipate a glut of excess electric battery production capacity over the next 3-4 years.  Such situations always tend to favor the lowest cost, most efficient supplier with the strongest OEM supplier ties.

Once again, as U.S. and European politicians make hay of out-of-control spending without the context of a strategic economic growth plan, China continues to show signs of building out the high volume production and distribution expertise to sustain a long-term presence in important strategic growth markets.  We now must add a venture-capitalist model that favors China’s strategic interests.

Bob Ferrari

A rather short news item caught my eye this week.  The Captain Hybrid blog featured on designnews.com takes issue with financial media reports indicating that there may be constraints in the supply of lithium powered batteries to displace gasoline-powered vehicles.  Rather, the posting notes quantitative research indicating that there may well be an oversupply of lithium ion battery production capacity.  It cites research studies from Pike Research and Lux Research which separately conclude that forecasted sales of all electric powered vehicles result in a predicted oversupply in currently invested lithium battery plant capacity.  As an example, Lux Research predicts there will be 18.2 gWh of lithium-ion battery supply available by 2015, but vehicle sales are only forecasted to consume about 11.0 gWh. Lux’s argument is that governments offering billions of dollars in subsidies to build new plants does not equate to the ability of private industry at naturally balancing supply and demand factors.

While I can partially support such a conclusion, I might offer another stream of commentary.  In the big-picture, governments and their associated industry players are in a global race as to which alternative energy supply chain ultimately prevails as the most innovative and cost competitive.  Is there some disconnect to forecasted demand for end-products? Absolutely.  Is this a economic business, or a political process?  I believe it is both.

The supply chain supporting alternative energy needs is a battleground for dominance in the coming decade. The reality, regardless of political leaning, is that governments are taking stakes in this key battle.  There is over capacity in many other industries today, because of these same strategic stakes, and private industry is just as much at fault.  Need an example, consider the current overcapacity situation in steel production that is occurring in China today.  Last year it was DRAM and flash memory to support consumer electronics growth industries. All remain key battleground areas for supply chain competitiveness.

Let’s move beyond the numbers and concentrate on supply chain strategic implications.  Natural forces of the market, coupled with political influence of lobbyists and governments are all in play.  Time will tell the ultimate story of the surviving lithium battery supply chain. Major automotive OEM’s are already placing their bets, both business and political in scope, on which battery suppliers they will partner with. In the meantime, current lithium-ion battery producers are in a marathon with a rather large prize- dominance of a future strategic industry.

Bob Ferrari