RedBlue Newsletter: 05Jul22

Date
July 5, 2022

A concise yet comprehensive picture into all things mobility

Podcast: The Automotive Analyst Series

Episode 4: Arndt Ellinghorst, Former Head of Global Automotive Research at Evercore ISI

Each episode opens the floor to an equity analyst covering the space. We go beyond the latest earnings to dive into the narratives & frameworks to understand where & why the industry is moving.

You can listen on Spotify & Apple as well

In episode 4, we speak with Arndt Ellinghorst, whose career across equity research had him recognized as Europe’s top auto analyst. Arndt has long been an expert source on VW, Daimler and BMW. When he switched industries last year, the Financial Times published what could almost be called a eulogy, where Joe Miller described Arndt’s departure from research as leaving deadline-bound journalists bereft.

Arndt talks about the research industry, how US, European and Japanese markets differ, the role shareholder activism has played in transforming companies, and his views of the biggest risks & opportunities for European carmakers. A little something special, too - Arndt’s a bit of a race car driver and we talk about his vintage Porsches at Le Mans.

Commentary

You can listen to a short discussion between RedBlue Partners Olaf & Prescott about the themes in this newsletter here:

You can listen on Spotify & Apple as well

RedBlue in the news

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Olaf was quoted in this Bloomberg piece by River Davis that gives fascinating background into the emerging alliance between Sony and Honda.

🏘️ Mobility NIMBYism

New York’s mayor recently waved a checkered flag to begin the destruction by massive bulldozer of scores of confiscated motorbikes and ATVs. It was a strange spectacle, somewhat akin to setting up a pyre to incinerate witches (link). Certainly vehicles of all kinds are being confiscated by governments, but why this strange spectacle for these ones?

“We’re here at Erie Basin Auto Pound to send a very strong and very clear message to anyone who illegally operates an ATV, dirt bike, or other such vehicle on the streets of New York City. We will seize that bike and we will destroy it.” Some noted that many of these vehicles were not illegal vehicle types as the mayor claimed and that they certainly didn’t all need to be destroyed (link).

Why don’t we have public spectacles bulldozing bad cars?

An unexpected parallel: In Canada, scooters are mostly illegal. The states of Alberta, Quebec and Ontario have total bans and only three Northshore communities in Vancouver permit them in limited pilots. In these communities, the Vancouver Sun notes that “police are reporting a rise in complaints” (link).

This same news source suggests that they are “dangerous” citing a Barcelona hospital (apparently none could be found onshore) that describes them as “the new epidemic” [a fraught characterization]. “I don’t mind them being on the sidewalk, but they go so fast,” adds one senior interviewee. “It’s dangerous for them and it’s dangerous for us.”

Yet our perceptions of danger are distorted. We wish our loved ones a “safe flight” even though it’s the drive to the airport where the danger lies. In reality, cars are the most important factor making urban space dangerous, including for micromobility users. This is not only because of the weight and speed of cars, but also because they take up so much urban space that pedestrians and micromobility users are left squabbling over only a small sliver of remaining thoroughfare.

What is telling about both stories is that they are jarringly one-sided: the parties causing offense aren’t given a voice. Many of scooter drivers in Canada are delivery couriers but only elderly residents and regulators are given a voice. Similarly, though it’s hard to tell where all the NY motorbikes come from and the stories behind them, many are likely to have been confiscated from delivery couriers or those simply unable to afford cars. Meanwhile, those offended by these vehicles likely own large, dangerous and polluting vehicles.

Cities are complicated because they create value by bringing people into closer proximity. But that closeness creates the need to manage tradeoffs between different stakeholders. Winning in these confrontations requires the ability to leverage political power and that usually lies with those who have power, influence and have the least to gain from change.

🔋 China’s lead in batteries just grew for one unexpected reason

While US research pioneered many of the key innovations in lithium ion technology, it was the Japanese in the ‘90s and the Koreans in the ‘00s that ran away with the market. As batteries became embedded in everything, so too did battery companies. The biggest public share offering this year was LGES, the battery division of Korea’s LG which owns roughly 22% of the global battery supply for cars (link). It was really the Chinese who took the prize in the last 2 decades, though. CATL has become one of China’s most valuable companies and supplied over 30% of global EV batteries last year (link). Incidentally, the second biggest public share offering this year after LGES was CATL, which raised nearly $7B last month (link).

European & American companies are playing catchup. Their saving grace was that they were focused on a newer, more advanced chemistry than the Chinese were scaling up. In the last two years, though, the “less sophisticated,” Chinese-mastered chemistry has proven itself a sufficient - if not better - battery for many global EV platforms. With this development, battery supply independence in the West has gone from bad to worse.

🧪 Entry level chemistries background

Two kinds of EV batteries today: Nickel & iron are the basis for the two major types of automotive lithium ion batteries. When people write LFP they mean iron, when they write NMC or NCA they mean nickel.

LFP “China’s play” (lithium iron phosphate): This is an older technology developed in the US in the ‘90s and commercialized to great success by the Japanese & Chinese for electronics & automotive. While the Japanese have largely moved on to the newer nickel chemistries, the Chinese have doubled down on iron over time. LFP is more stable, less prone to fires and broadly speaking can be abused & cycled through more aggressively with less degradation. But its energy density is fairly low at 180 to 210kWh/kg.

NMC “the next gen” (lithium nickel manganese cobalt - Tesla’s NCA variant uses aluminum): An American successor to the LFP invented in the ‘00s, the NMC was most effectively commercialized by battery makers in Korea & Japan which sell them back to American & European carmakers who believed this was the future. Nickel cell chemistries allow far higher energy density, approaching today 250kWh/kg with some line of sight up to 300kWh/kg. They are pricier than LFP per kWh and are far more finicky, requiring careful management to avoid fires or rapid degradation. They also require problematic metals - “conflict minerals” and the like - that iron batteries avoid entirely.

While iron chemistries’ improvement is reaching asymptotic limits, nickel cell advancement has been fast and “high-nickel” variants are finally stamping down on metals of concern like cobalt.

📚 How the bets were placed

Nickel batteries were a natural choice for western carmakers in the last 15 years. Nickel’s energy density enabled 200+ mile range, which is why starting with the GM Volt in 2009, every major passenger EV has launched with a nickel battery in Europe & the US.

Largely, the US & Europe are dependent on Asian manufacturers for their NMCs, though the mix of suppliers is more western-aligned “friendlies” Korea & Japan than the Chinese. The ‘09 GM Volt was powered by an NMC made by Korea’s LG, which built that battery factory in the US partly funded by Obama-era stimulus money. As nickel took over western carmakers’ agendas, so too did it become the focus for automotive lithium ion cell makers in Korea & Japan.

Meanwhile, China’s domestic market was served just fine with cheaper iron batteries, and was big enough for its major battery makers to focus mostly on building LFP technology & factories. That’s only accelerated as NMC’s cost decline has slowed, and Chinese leader BYD announced last year that it was committing entirely to LFP going forward (link).

💥 China’s upset

While non-Chinese carmakers focused almost entirely on NMC, the Chinese have nonetheless grown to account for over 40% of global EV batteries in 2021 (link) - largely by supplying nickel batteries to international customers.

In the last two years, nickel’s hold on Western car markets has come into serious question. In early 2020, estimates placed iron at between 1 and 5% of the global EV battery markets. Today, that seems to have passed 20% (link). Announcements from Renault (link), Tesla (link), Ford (link), VW (link) and many others underpin this significant shift. Given that the Chinese make essentially all LFP batteries, LFP adoption may dramatically accelerate their rise.

🤔 What changed?

A confluence of changes upset the playing field, boosting LFPs to close-enough performance to NMC, while keeping costs more attractive.

Thinking beyond the cell: The chemistry of cells isn’t alone what determines the performance of a pack, which is comprised of hundreds or thousands of these cells packaged together. Battery companies have become better at using LFP cells’ high stability to create pack designs that help close energy density gap in real-world use. Basically, LFP cells can be assembled together in packs that would catch fire if they were filled with NMC cells. With less special “packaging” needed to keep the battery safe, the effective density of an LFP battery can become closer - if not quite the same - as an NMC battery. Case in point: Tesla’s LFP Model 3 in China is advertised as getting 250 miles of range, versus a 260 mile range in the NCM model (only 4% better!). Within six months, Tesla went from zero LFP to nearly half its cars equipped with the iron batteries (link) as it has moved to selling them even in the US.

Customer needs: Part of the change comes from OEMs realizing that lower prices matter much more than slight dents in mileage for EV buyers in the lower or middle parts of the market.

Bright spots for US/Europe: Surging lithium prices impact iron batteries more than nickel ones, which can narrow the cost advantages of LFP batteries recent lithium price trends continue. Furthermore, nickel batteries are the basis for much of the cutting edge innovation - so if breakthroughs push them into 300 kWh per kilogram and above without much price jump, there could well be an NMC comeback.

Your thoughts?

We’d love feedback on our newsletter! Let us know here.

Events & Conferences

NameDateEvent url
🍺
Automotive News Europe Congress ‘22
July 13, 2022 → July 14, 2022
🚲
Eurobike Convention ‘22
July 13, 2022 → July 17, 2022
👖
EAA AirVenture Oshkosh ‘22
July 25, 2022 → July 31, 2022
🇨🇳
International Conference on Smart Transportation and Future Mobility ‘22 (CSTFM 2022)
September 2, 2022 → September 4, 2022
☀️
Code Conference ‘22
September 6, 2022 → September 8, 2022
🏙️
The Armory Show ‘22
September 8, 2022 → September 11, 2022
🛴
Micromobility America ‘22
September 15, 2022 → September 16, 2022

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RedBlue Newsletter: 24Jul22