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Lithium For EVs: Tesla’s Outsourcing Vs. Toyota’s Vertical Integration

Nowadays there are two ways we can go about producing lithium batteries for EVs. We can either outsource them or produce them in-house. Of course there are levels or degrees of outsourcing as well as levels or degrees of vertical integration.

Mass production and the state and trends of technological development may exert influence on the levels or degrees of outsourcing or vertical integration.

Mass production has forced Tesla to build its lithium-ion battery gigafactory because this will imply, among other things, economies of scale, whereby doubling the inputs they will more than double the output. Reducing the cost of the battery would in turn give Tesla the kind of competitiveness it requires to dominate the market of affordable EVs for the average consumer while paving the way for electrification of the automotive industry and/or EV mass production in the world.

So far so good, right? Not so fast. To many, by joint venturing with Panasonic and bringing it to the gigaplant in Nevada, Tesla may have made important steps towards vertical integration regarding battery manufacturing. This, however, is not completely clear. Why? Because chances are Panasonic will only assemble (not manufacture) Li-ion battery cells in Nevada while continue outsourcing the different components of the battery cell either from Japan or from China in the years ahead. So in a way Tesla may have brought its only lithium battery source (Panasonic) closer to its EV manufacturing facility in Fremont, California, but this doesn’t necessarily mean that it has actually integrated its two lines of production. By so doing, Tesla would have rather – in fact- completely dispensed with the lithium issue, letting Panasonic (alone) deal with that.

This explains why Tesla, after having been incapable of buying out Simbol in 2014 to secure lithium production in the U.S., signed two off-take agreements with Bacanora Minerals and Pure Energy Minerals. But why did Tesla choose two unexperienced start-ups (instead of Albemarle, SQM or Tianqi) for these deals? Some analysts have argued that it was because they weren’t willing to cede to the lithium giants pricing conditions. My perspective here is that by the time Tesla took this decision (end of August 2015) – approximately one year after it sent its letter of intent to Simbol – it had already sorted out its Plan B with Panasonic, to essentially by-pass the “lithium thing”.

What happened to Bacanora Minerals and Pure Energy Minerals? Well, they failed bringing lithium production online timely, that is when the gigafactory started operating in Nevada. But, based on the arguments above, we can presume that this outcome was completely foreseeable. The question remains as to whether these two juniors will ever make it to industrial production and, even more importantly, whether Tesla will ever purchase any lithium from them. In closing this argument, just let me refer at this point to an interesting piece of information from China: Tianqi, the world’s largest supplier of lithium hydroxide, the lithium compound required to produce the kind of cathode materials (NCA) used by Panasonic to produce its battery cells, in response to the question as to whether the company sells its products to Tesla or battery suppliers for Tesla, has just said that it “does not directly sell its products to lithium battery producers or car producers but to producers of lithium battery cathode material in the main; and some of its customers have been included into Tesla supply chain.” Now who are those producers of lithium battery cathode material for Panasonic in Tesla’s supply chain? According to Roskill, “Panasonic currently sources cathode materials from Sumitomo Metal Mining (SMM) in Japan, which has been expanding capacity to meet Panasonic’s requirements.” Hence just as Tesla let Panasonic be in charge of production of Li-ion battery cells, Panasonic in turn transferred to Sumitomo the responsibility of producing the cathode materials it requires, which at the end, implies getting also the lithium necessary for them.

This appears in sharp contrast with the approach being followed by Toyota – and beware here that the Japanese giant is not the most enthusiastic advocate of EVs in the world.

As I have argued elsewhere, Toyota has recently rephrased its lithium discourse after disastrous sales results of its fuel cell EV, Mirai. Although I don’t think its recent emphasis on lithium is really a radical transformation of its business strategy, I do believe that Toyota doesn’t want to find itself unprepared for the forthcoming lithium wave. That’s why it’s betting on building a lithium hydroxide plant in Japan as part of its partnership (through its trading subsidiary Toyota Tsusho) with Orocobre in Argentina. Unlike its current off-take agreement, Orocobre has indicated that this time it will be a fully financed off-take agreement. It is then clear that Toyota is aiming at developing their own lithium battery production in Japan, separated from its long-time companion Panasonic. It should also be crystalline why this might be the case.

In sum, whereas Tesla has chosen to outsource its lithium battery production, Toyota seems to be interested in an in-house endeavor. The only problem with the new Toyota strategy is scale. They are talking about producing 10,000 MT lithium hydroxide a year. It is clear that this quantity of lithium will not help them compete with Tesla which confirms their lack of interest in contributing to a lithium revolution whatsoever. What seems somewhat paradoxical is that Tesla, which is aiming to disrupt the automotive industry, has opted for a rather risky lithium strategy, whereas Toyota, which only wants to be part of the new techno-economic paradigm, has indeed decided to follow a precautionary approach. Chances are these two business strategies will fail, albeit for different reasons.

This takes us directly to the second influential factor of outsourcing and vertical integration, namely technological development.

By adopting a “weak” lithium approach, Tesla may not only be putting at risk its entire supply of EV batteries in the event of a severe lithium shortage, but also the possibility of advancing a major technological breakthrough in one the most important tiers of EV production: Battery manufacturing. This has to do with what I can call scientific and technological lithium trends insofar as one of the most important applications of lithium nowadays, namely lithium batteries for EVs.

As is well known, ever since Panasonic popularized 18650 Li-ion battery cells with Nickel-Cobalt-Aluminum (NCA) chemistry, not only the demand for lithium hydroxide but also its price has increased substantially. That’s why every lithium producer (either major or junior) is now either shifting its lithium production from lithium carbonate to lithium hydroxide or planning from the start to produce lithium hydroxide only. Even though the chemistry has not changed in the new and more advanced 2170 Li-ion batteries recently developed by Panasonic for production at the gigafactory in Nevada, the rest of the battery makers are moving towards a Nickel-Cobalt-Manganese (NCM) chemistry. In both cases, lithium hydroxide remains the lithium compound of choice. Now under the current technology, production of lithium hydroxide is much easier and less costly from lithium mineralized resources than lithium brine resources because in the first case the compound can be produced directly whereas in the second it requires to be derived from lithium carbonate. Disruptive methods of production of lithium from brine resources such as those developed by Simbol and Posco are aiming at producing lithium hydroxide directly as well. Time will tell whether these new techniques end up being successful.

For the time being though, neither Tesla nor Toyota seems to be interested in this kind of technological development. For one thing, Tesla will simply rely on Panasonic to take care of the whole problem. For another, Toyota will rather purchase from Orocobre in Argentina the lithium carbonate necessary to produce (out of it) 10,000 MT of lithium hydroxide in Japan. Other things being equal, this strategy will work just fine for both players so long as they either keep demanding or producing Li-ion batteries. It could though run into some difficulties if, for instance, lithium battery technology moves in another direction. This could happen if technology goes beyond Li-ion batteries to other energy storage solutions such as All-Solid-State Lithium Batteries, Lithium –Sulfur Batteries and Lithium-Air and/or Lithium-Oxygen Batteries, which will most likely utilize lithium metal in the anode.

In sum, today, more than ever, the search for lithium batteries of higher energy density particularly for electric vehicles calls for not only continuous Research Development but also vertical integration between lithium production and lithium battery production through specialized materials technology. And here, again, Toyota appears to be much better prepared than Tesla to face this challenge. But does Toyota’s business strategy have any room for improvement? You bet!

Article source: http://seekingalpha.com/article/4056248-lithium-evs-teslas-outsourcing-vs-toyotas-vertical-integration

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