Detroit Free Press
April 15, 2012

Lackluster electric car sales imperil Michigan's battery firms.

Sometime this summer, one of the world's most advanced lithium-ion battery manufacturing plants will officially open in Midland.

The $320-million, 400,000-square-foot Dow Kokam facility will join four other battery-cell plants in Michigan, which has become a hub for U.S. electric vehicle battery production. Dow Kokam has already hired 95 operators, engineers and others who are undergoing training.

"We're a start-up company in a start-up industry," said David Pankratz, Dow Kokam's vice president of operations.

But any celebration could be short-lived, experts say. Lackluster sales of electric vehicles, such as the Chevrolet Volt and Nissan Leaf, and the bankruptcies of several fledgling niche automakers in this emerging sector are raising questions about whether demand will be high enough to sustain all five plants. Last fall, A123 Systems, which owns two of the factories, laid off 125 Michigan workers because of reduced orders from a key customer. It has called back 50 of these employees so far but is grappling with concerns about the company's finances in the wake of a costly battery recall campaign.

A looming shakeout in the industry, which would likely include plant closures and layoffs, is also likely to touch off a fierce debate over whether federal and state government officials made a major error by using more than $1 billion in grants and tax credits to spur massive investments that are not yet needed.

"It was a mistake to build so many factories," said Menahem Anderman, one of the world's top battery experts and president of Advanced Automotive Batteries, a California-based consulting company.

He supports the electrification of vehicles but said these plant investments should not have been made without improvements in the competitiveness of battery technology.

But there's no turning back now. With production lines at the Michigan plants already up and running or about to launch, state officials remain hopeful these companies will be among the survivors.

"We are really at the beginning of this market," said Eric Shreffler, managing director of the cluster development team at the Michigan Economic Development Corp. "There are going to be some ups and downs."

Can lithium-ion battery makers stay charged?
With slow sales and several bankruptcies plaguing the electric vehicle industry, it would appear that 2012 may not be the best year to open a new lithium-ion battery manufacturing plant in Michigan. But don't tell that to the folks at Dow Kokam.

The battery maker is betting that its superior technology and manufacturing processes combined with the financial backing of its three parent companies will give it a major advantage.

An uptick in March sales for the Chevrolet Volt and Nissan Leaf electric vehicles is encouraging for the industry, but it's just one month.

"It's certainly a very competitive market right now," said David Pankratz, Dow Kokam's vice president of operations. "I remain very optimistic and positive about our future."

The company is owned by Dow Chemical, TK Advanced Battery and Groupe Industriel Marcel Dassault. It is licensing the battery technology from South Korea's Kokam. The Midland factory should be fully operational in the latter half of this summer, serving customers such as ZeroTruck, Motive Power Systems and Quantum Fuel Systems Technologies.

In addition to electric and hybrid vehicles, Dow Kokam hopes its new batteries can be used in energy storage, industrial and defense applications. If the Midland plant wins more business, it could eventually employ as many as 320 people.

Dow Kokam is vying to be one of the winners to emerge from what could be a turbulent period for battery makers in the years ahead. With too much battery production equipment being installed worldwide, many industry experts predict that consolidation is inevitable, with some suppliers likely to go out of business while others will be forced to merge with stronger players.

The outcome of this looming shakeout will likely determine whether Michigan's efforts to become the advanced battery capital of the world prove successful. State officials have been pursuing this market since 2006, enticing battery suppliers with more than $400 million in tax credits. The U.S. Department of Energy also chipped in, awarding $860 million in grants.

"There is no other place in North America with as much electric vehicle-related investment and production than Michigan," said Thomas Wendt, principal at Roland Berger Strategy Consultants and author of a 2011 study about the automotive battery industry.

He expects that battery production capacity will be twice as big as the market demand in 2015. But those that can weather the industry's rough patch may see some kind of breakthrough in sales of electric vehicles by 2020.

Other experts are less optimistic about this sector's prospects, warning that technological breakthroughs needed to dramatically reduce the costs of these batteries may take much longer than several years. They anticipate that only those battery makers with deep pockets will survive. Three of Michigan's five battery plants are backed by large corporations.

"It's not a short-term horizon," said Brett Smith, co-director of the Center for Automotive Research's manufacturing, engineering and technology group. "The electric vehicle market is going to be much slower to develop than many had hoped."

Last year, electric vehicles accounted for just one-tenth of 1% of all vehicle sales in the U.S.

To make it through what Smith calls the "valley of death," battery suppliers will need to find alternative, non-transportation uses for their products, something that some of these companies are already working on.

So far, turmoil in the electric vehicle industry has affected two of the state's battery suppliers. Not long after hiring its 1,000th worker in Michigan, A123 Systems laid off 125 employees at its plants in Livonia and Romulus last November because of reduced orders from a key customer, Fisker Automotive.

So far, 50 of these workers have been called back. But the company is in the midst of a costly effort to replace defective batteries made at its Livonia plant, and some analysts have raised concerns about the firm's financial situation.

A123 declined requests for an interview for this report.

In Holland, Johnson Controls' battery plant has been affected by the recent bankruptcy of Azure Dynamics, which stopped production of an electric version of the Ford Transit Connect van. JCI supplied batteries for the vehicle. So far, there have been no layoffs or furloughs at the Holland plant, which employs just over 100 workers.

Despite these challenges, additional battery production capacity is being added this year. In addition to Dow Kokam's plant, LG Chem, which makes batteries for the Chevrolet Volt and Ford Focus Electric, is launching operations at its new factory in Holland.

Michigan may also get a sixth battery plant if Swiss-German company fortu PowerCell makes good on its plans to establish a production facility in Muskegon Township. The company has delayed the project, and its top Michigan executive could not be reached for comment.

For now, state officials aren't promising any additional financial incentives for battery makers. "There's not going to be a specific battery program like there was before," said Eric Shreffler, managing director of the cluster development team at the Michigan Economic Development Corp.

But he and other state economic development leaders plan to work closely with these companies to help them compete for any new federal grants and other opportunities. "We're in that kind of initial rocky period," Shreffler said of the market demand for these batteries. "Ultimately electrification is here to stay within all of the plans of the automakers."

Written By Katherine Yung