Category Archives: Technology

Testing Tony Seba’s EV Predictions 13 (What Makes Us Buy a Car?)

“What makes us buy a car?” Well something obviously does since global sales of cars and light vehicles reached around 100 million a year in 2017. Moreover, if we can answer that first question then we are in a better position to answer this question: “What makes us choose an electric vehicle rather than an internal combustion engine (ICE) vehicle?”.

These questions come from the demand side. Up to now, all my posts have basically been dealing with the supply side. That is asking questions such as “Who will sell EVs?, “Who is  investing in EV production?”, “Will there be enough lithium?”. My answers to those types of question leads me to believe that the supply side can keep us on Tony Seba’s EV penetration S-Curve through to at least the mid-2020s. But will anyone buy these EVs even if the auto makers build them?

Hoping to shed some light on that question, I have been toiling over reports by companies and organisations that forecast how many vehicles will be sold in the future and what percentage of those vehicles will be EVs. In September 2017, David Roberts at Vox wrote a nice piece pulling all those forecasts together:

VoxEVForecasts

A reminder: I have taken Tony Seba’s death of ICE vehicles by 2030 forecast to mean 95% market penetration (130 million EV sales). From the middle chart above we can see what everybody else thinks:

  • Exxon Mobil:   10% by 2040
  • British Petroleum:   10% by 2023
  • Norway’s Statoil:   40% by 2040
  • Goldman Sachs:  9% by 2040
  • OPEC:   12% by 2040
  • Total SA:   22% by 2030
  • Bloomberg New Energy Finance (BNEF):  55% by 2030

So they don’t agree with Tony. But my interest with them is less in the forecasts themselves (a topic for a future post), but rather how they were arrived at. Keep in mind that what I did in the chart below is not make a forecast but rather fit a few data points into a logistic function to produce an S curve:

Seba Central Scenario

To repeat, this is a data fitting exercise. I’ve just taken Tony Seba’s point forecast of 95% penetration by 2030, the current penetration and sales of EVs, and added an S curve that looks reasonably sensible. But it is not a true forecast.

There are a couple of ways to forecast: 1) you can create a model which is purely empirical and takes an historical time series and then projects it forward, or 2) you can build a microeconomic model in which your forecast variable is a function of variety of other variables. Hoping to learn what methods and methodologies these esteemed organisations and companies have been using to arrive at their EV penetration rates, I trawled through the back pages of their reports looking for references and helpful appendices, but there were none to be found (at least as far as I could find; I am still working my way through these reports).

I get the distinct impression that the forecasts drop down like manna from heaven. It’s basically a game of pick a number that looks roughly right based on your organisation’s attitude toward EVs and then construct a vague argument surrounding that forecast number. You could argue, perhaps, that it is impossible to do anything more rigorous given the profusion of variables that come into the purchase decision, stretching from GDP growth rates and the oil price at the macro level to eco fashion and periodic EV safety scares at the micro level. But I still think we can do better than that, by adopting a somewhat different approach.

From the existing academic literature based around ICE purchase decisions, we know that consumers have a fixed budget and are presented with a basket of goods that they can spend the budget on (or save). You can consider that basket of goods as consisting of cars and non-car goods. A consumer will buy a car rather than the alternative of non-car goods if the car gives him or her a higher degree of utility (happiness or pleasure). The sources of utility derived from a car can be thought of as threefold:

  • Mobility
  • Aesthetic
  • Status signalling

So cars aren’t just a means of transport: they are also like large pieces of jewellery which give one pleasure through personal contemplation of them and through displaying them to other people.

Finally, the budget constraint is temporal: it stretches from the present to the future. So the purchase decision is not just bounded by the current available budget but also budgets through time. Accordingly, the purchase decision takes into account future costs captured by

  • Fuel
  • Maintenance
  • Depreciation and replacement

This is all pretty much common sense even if I have used economic terms, which may be unfamiliar for some. But I hope we can pull out some insights that will impact on EV adoption rates. The next bit is important: I don’t have to build a complicated multivariable model and input millions of data points into a computer to derive some insights. From basic theory, I know how the model will act in certain conditions. Let’s look at one such set of conditions.

First, we start with a budget constraint existing now in an ICE dominated world. Consumers have allotted to spend an amount of money now and in the future on a means of mobility whether EVs exist or not. This is where it gets interesting and why I feel the adoption forecasts by the likes of Exxon Mobile and the International Energy Agency make no sense whatsoever.

If any individual consumer is faced with an EV that is a) cheaper than an ICE, b) has lower ongoing costs than the ICE, c) has better mobility characteristics than the ICE, d) is prettier than the ICE and e) signals status better than the ICE, then that consumer will always choose the EV. That is because the consumer will get a higher level of utility from the EV purchase. (Alternatively, the consumer will spend less money buying an EV yet get the same amount of utility as buying the ICE, so then having extra money to spend on non-car goods.)

In fact, I can even relax these conditions a bit. Let all the factors be equal except one where the EV is better. That market will also flip 100% EV too. Don’t believe a market can do that? Look what happened with film and digital cameras.

I admit to some brakes on the transition: the consumer has to be aware of how the variables have changed in EV’s favour. That requires active information searches or exposure to information through advertising and marketing. The psychology and marketing literature covers that aspect of decision-making well.

ConsumerDecisonMakingProcess

Moreover, a more important reason why markets don’t flip overnight (ignoring the supply side) is because they go through an intermediate phase where some of the factors differentiating between products are positive and some negative. And given that consumers derive different utilities from each factor, the market will move in phases from one state to another as each individual faces a different decision-making process.

For example, purchasers of the first Tesla model S were deriving most of their utility through signalling that they a) were an early adopter of new technology and so were hip, b) had superior eco credentials and c) had immense wealth since they could afford the car. The rest of the population didn’t have the budget to buy the car and/or was less interested in the status signalling or, maybe, just didn’t like the look of the car. So the market didn’t tip the first day the Model S went on sale.

This brings me to why I think consensus forecasts for EV penetration are barking mad. As of 2018, EVs have already exceeded ICE vehicles with respect to a number of the variables. They pose less of a future budget constraint because they a) are cheaper to run, b) have lower maintenance costs and c) have a longer potential road life as they have fewer parts to wear out.

So we are left with the upfront price of an EV versus an ICE (which is the current budget constraint), the mobility functions, aesthetic and status signalling.

For EVs, nearly all of these factors relate to the size and cost of the battery pack. If the battery pack price can come down enough, the drive mechanism of an EV will be cheaper than an ICE, which means the overall vehicle will be cheaper. Note that engine power delivered by a battery is already better for an EV than an ICE. If the energy density of batteries improves enough, then the mobility characteristics such as range of the EV will be able to at least match the ICE. If the battery pack shrinks enough, this will improve mobility characteristics such a storage and opens up a range of new form factor possibilities that impact aesthetics.

There is one aspect of the aesthetic that I think an EV can’t match; that is, the joy brought to some people through owning a piece of precision engineering. A high end ICE is a marvel of engineering and an ICE engine has an aesthetic all of its own. The residual ICE market for me will be cars as luxury watches. Rolex, Tag Heuer, IWC, Breitling and Breguet of Switzerland still sell mechanical time pieces, but their market share is tiny. That to me is the fate of the ICE due to the cold, hard logic of the EV surpassing the ICE on  every other variable that goes into a consumer decision-making process.

So the battery holds the key. That will be the subject of a future post.

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

 

 

 

Testing Tony Seba’s EV Predictions 12 (Follow the Money Part Two)

In my last post, I suggested that we “follow the money” and see how much money is pouring into lithium mining projects. That post concentrated on the Big Three incumbent lithium miners whose operations are centred around extracting lithium brine from the salt flats and lakes of Chile and Argentina.

In this post, I want to look at the new entrants to the lithium mining market. Through doing so, I believe you can get a sense of the fever pitch activity in this space. And the lithium production ramp-up will need to stay at a fever pitch for the next decade for Tony Seba‘s predictions to come true. To repeat, he states that electric vehicles (EVs) will make internal combustion engine (ICE) vehicles near extinct by the year 2030 (and, in so doing, this will trigger an extraordinary social and geopolitical transformation).

But before so doing, I want to again provide context. A web article headline saying that company X aims to produce Y amount of lithium has no meaning if we can’t translate that into EVs on the road. Hence, let us repeat this chart from my last post by one of the Big Three incumbent lithium miners FMC:

FMCDemandEstimates

I’m going to pluck out three very useful numbers from this presentation. First, total demand for lithium carbonate equivalent (see my post here for how that differs from lithium metal) was 215,000 tonnes in 2017. Second, FMC and most observers believe that the average EV sold in 2025 will have a battery size of 50 kilowatt hours (kWh). Third, around 1 kilogram (kg) of lithium is required per 1 kWh of battery cell. Since there are 1,000 kgs in a tonne, 215,000 tonnes of LCE translates into 21.5 million kgs of LCE. If each EV uses 50 kgs of LCE, then by dividing our 21.5 million kgs by 50 gives us 4.3 million EVs.

Now we have some context: if we allocated all our current lithium production capacity to EVs, we could produce 4.3 million of them. But to stay on Tony Seba‘s S curve we need to produce 22 million EVs in 2023 in order to have a chance of hitting 130 million EVs in 2030. So we need to find a lot more lithium.

TotalEVSales

Tougher still, the majority of existing production is being accounted for by uses that don’t relate to batteries:

 

LithiumDemand

And of the battery usage, the vast majority of lithium goes into consumer electronics rather than EVs (from a paper by Sun et al).

Lithium-IonBatteryConsumption

That chart is based on 2016 numbers, so in terms of lithium-ion batteries alone, we likely were around one third lithium for EVs, one third for phones and one third for portable computers in 2017. Accordingly, since lithium-ion batteries make up 45% of overall lithium demand, and EVs make up one third of lithium-ion battery demand, then EVs account for around 15% of overall lithium demand at the current time.

Given LCE production of 215,000 tonnes in 2017, this suggests 32,250 tonnes ended up in EVs. Dividing that by 50kg per car would get us on 645,000 EVs compared with actual sales of around 1.3 million. However, the EV market is still dominated by plug-in hybrid vehicles (PHEVs) and city EVs, both with very small batteries. The best selling 2017 EV in China, for example, was the BAIC EC80 with a 22kWh battery pack. So the numbers look about right.

To put 22 million new EVs on the road in 2023 with 50 kWh of battery per vehicle, however, would require 1,100,000 tonnes of LCE going into EVs as compared with 32,250 tonnes today.  Is that possible?

In my last post, I stated that the Big Three incumbent lithium producers (SQM, Albemarle and FMC) were intending to increase LCE production from 125,000 tonnes to 485,000 tonnes over a timescale toward 2023. That’s an increase of 360,000 tonnes of LCE. Add on existing LCE production earmarked for EVs (32,500) and that gives us a total of 392,500 tonnes of LCE. But our need is north of 1,000,000. Can we get there?

Hard Rock Drives Lithium Growth 

The mining of hard rock spodumene ore is where the real action is taking place in terms of capacity expansion, with Australian miners at the front of the pack. Nonetheless, tucked in behind the Aussies and a couple of years behind are a plethora of projects being advanced across the globe.

Generally, the investment community has been behind the curve in terms of forecasting lithium production hikes, but each new report pushes projections higher. The Canadian broker Canaccord Genuity in a report released in April 2018 sees a ramp up to over 900,000 tonnes of LCE in 2023. And given we are seeing funding announcements every day for new mines, I think it will be relatively easy to push that number above the 1 million tonnes mark. From the chart below you can see that the big gains are coming from hard rock, not brine operations.

Modelled Mine Production

The increase in hard rock supply is coming from both the expansion of existing mines and the introduction of new ones:

ExistingNewHardRock

In the chart below, the production jumps for hard rock are broken down by mine. Importantly, of the mines listed, Greenbushes, Mt Marion, Mt Cattlin, Bald Hill and the two Pigangoora mines are all located in Australia and now in production. Further, Mt Holland and Wodgina, also in Australia, are fully funded and in the development stage. Let’s look at them more closely.

HardRockMineProduction

Talison Lithium (Greenbushes Mine, Australia):  Talisan Lithium has been the role model for other Australian hard rock lithium projects due to the success of its Greenbrushes mine. The company is a joint venture between Tianqi Lithium of China and the US firm Albemarle. The current capacity of the mine is 80,000 tonnes of LCE, making it the largest single source of lithium in the world, but the firm has announced plans to double its capacity to 160,000 tonnes.

Neometals/Mineral Resources/Ganfeng Lithium (Mount Marion Mine, Australia):  Mount Marion is a joint venture between the three partners: Neometals (13.8%), Mineral Resources (43.1%) and Ganfeng Lithium (43.1%). Stage 1 of the mine plan was complied in 2017, with the ability to produced 25,000 tonnes of LCE a year. After further ramp-ups, the joint venture is targeting production of 450,000 tonnes of 6% spodumene, which translates into 145,000 tonnes of LCE.

Galaxy Resources (Mount Cattlin, Australia): The Mount Cattlin hard rock lithium mine ramped up smoothly in 2017 to reach a run-rate of 19,500 tonnes of LCE by year end. In May 2018, the Korean steel company POSCO, which is also a leader in battery materials, paid Galaxy $280 million for rights to the Salar de Hombre Muerto brine concessions in Argentina. Galaxy will, in turn, use the capital to fast track another new brine project Sal de Vida in Argentina and a hard rock project James Bay in Quebec.

Pilbara Minerals (Pilgangoora): Pilbara’s mine will commence producing concentrate from June 2018. In Stage 1, the company is targeting 43,000 tonnes of LCE, rising to 100,000 tonnes after Stage 2 is completed. It has already signed off-take agreements with General Lithium, Ganfeng, Great Wall Motors and POSCO of Korea,

Altura Mining (Pilgangoora): Altura is just commencing operations and aims in Stage 1 to reach production of 30,000 tonnes of LCE. Stage 2 will double the LCE output. Off-take partners are Optimum Nano and Lion Energy.

Tawana/Alliance Mineral Assets (Bald Hill): The mine went into commercial production in April 2018 and is targeting around 20,000 tonnes of LCE with a stage 2 and 3 ramp-up also planned.

Mineral Resources (Wodgina Mine, Australia): The Wodgina project is the world’s largest hard rock lithium deposit. Mineral Resources (MRC) aims to produce 750,000 tonnes of spodumene 6% once the mine reaches full production in future, which is 240,000 LCE, or equivalent to the world’s current production. MRC is looking to sell off a 49% minority stake in Wodgina. It will be fascinating to see who will step up to buy this stake, one of the largest, highest quality lithium assets in the world up for auction..

Kidman Resources/SQM (Mount Holland Australia): The Earl Grey Project at Mount Holland is a 50:50 joint venture between Kidman Resources and one of the Big Three lithium miners SQM, with a resource of 7 million tonnes of LCE and an eventual annual production of 40,000 tonnes of LCE and is planned to come on stream in 2021.The JV is planning to be an integrated operation, with the principal end project being lithium hydroxide. Tesla has already entered into an off-take agreement to take a large part of the plant’s output.

Outside of Australia, the pace of development had been slower, but then in the first few months of 2018 activity suddenly accelerated, with important announcements surrounding two large Canadian mining projects.

North American Lithium (Abititi, Quebec, Canada): In March 2018, the Chinese battery manufacturing CATL took a 90% controlling stake in North American Lithium. CATL‘s battery factory expansion plans will make it into the largest battery manufacturer in the world and it wants to nail down guaranteed lithium supply. The first stage of the Abitibi project will see production of 23,000 tonnes of lithium. Prior to the CATL takeover, the company was hoping to raise $425 million with a tentative production of 25,000 tonnes of LCE scheduled for 2020. Given the delays prior to CATL’s move, that date for commercial production would appear to be a stretch goal, but the financing now appears in the bag.

Nemaska Lithium (Whabouchi, Quebec, Canada):  The Whabouchi project, like the one at Abititi, appeared to be stuck at the financing stage for the last few years, but then everything changed with three quick-step developments. First, the company announced a US$350 million bond offering in April 2018 that was fully subscribed. Almost simultaneously, the Japanese tech giant Softbank bought a 10% stake in Nemaska for C$100 million.  Then in May 2018, Nemaska came back to the market with a C$360 million stock offering, which again was placed easily. These moves, together with a $150 million streaming agreement with Orion (under which it sells a future stream of its lithium production for an upfront lump sum payment), mean Nemaska secured a C$1.1 billion financing package in the space of a few months. The company is now looking to reach commercial production in the second half of 2020, with an initial aim of producing 32,000 tonnes of LCE a year. It has already secured agreements to sell the lithium it produces to a large new battery manufacturer starting up in Europe: Northvolt.

If you think hard rock activity is restricted to Australia and Canada, here is a list of other projects that are progressing, albeit a little behind the Aussies and the Canadians:

  • Rio Tinto (Jadar, Serbia)
  • Birimian (Goulamina, Mali)
  • AMG (Mibra, Brazil)
  • Bacanora (Sonora, Mexico)
  • Prospect (Arcadia, Zimbabwe)
  • Piedmont (North Carolina, USA)
  • Lepidico (Alvarroes, Portugal)
  • Novo Litio (Lucidakota, Portugal)

There are a lot more projects out there, but that’s enough for now on lithium projects.

Finally, some thoughts on the scale of the ramp-up in lithium mine production. Projects either recently put in place, starting up now, or planned are raising total global lithium production capacity five fold from a little over 200,000 tonnes of LCE in 2017 to likely over one million tonnes in the early 2020s.

That kind of production hike costs an awful lot of money, but the money has been secured. In other words, a lot of smart people believe the market will be able to absorb over one million tonnes of LCE within five years. If they are wrong, the price of lithium will collapse and these projects will founder and those same people will lose an awful lot of money.

Bottom line: to not lose money those financiers are betting the market can absorb a five-fold hike in lithium production. And the only way that will happen is if EV production and sales rise almost 20-fold from their current levels. And a 20-fold rise in EV sales will keep us broadly in line with Tony Seba‘s S curve through to the early 2020s. So a lot of big money believes in Tony‘s vision (even though most players don’t realize they do).

Of course, to get to Tony Seba‘s ultimate forecast of 130 million EV sales in 2030 would require lithium production to not only jump five-fold between now and say 2022, but also then jump six fold again through to 2030. Five times six equals 30. That is a lot of lithium! But a thirty-fold jump in lithium demand also means an awful lot of money to be made. In sum, Tony Seba‘s vision rests on a mountain of lithium. To grasp whether that mountain will grow big enough, just listen to Deep Throat‘s advice:

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

Testing Tony Seba’s EV Predictions 10 (Not Enough Lithium?)

We’ve spent a good few posts looking at the down-stream situation with respect to potential EV manufacture by the major auto makers. Now let’s climb all the way back upstream to the beginning of the supply chain in order to look at the battery metal miners.

I will start right off by saying that in a lot of my blog posts over the years I have been sympathetic to those who worry about resource constraints. Techno optimists and Dr Pangloss libertarians point to the explosion in material wealth over the last 200 odds years with not a serious, prolonged resource constraint in sight. Yes, we have had temporary issues with oil around the Arab oil embargo in 1973 and the fall of the Shah of Iran in 1979, but they have been short lived.

Part of my argument against such unconstrained optimism is that just because we have a 200-year data set with no resource constraints, that doesn’t mean you should be overconfident projecting that situation into the future. A centenarian can boast of an empirical record of having lived for 36,500 days. If we forecast that record forward, does that give him or her a better future life expectancy than a 10-year old?

If I were to volunteer to bat for ‘Team Resource Constraint’ against “Team Techno Optimists’, however, it would not be on the availability of lithium.

The first person to get major media attention over the potential for a lithium deficit was William Tahil when he posted a paper online in 2006 called “The Trouble with Lithium“, with a follow-up in early 2007 here. In the Executive Summary, he argued the following:

“Analysis of Lithium’s geological resource base shows that there is insufficient Lithium available in the Earth’s crust to sustain Electric Vehicle manufacture in the volumes required (my note: he means to replace internal combustion engine vehicles), based solely on LiIon batteries. Depletion rates would exceed current oil depletion rates and switch dependency from one diminishing resource to another. Concentration of supply would create new geopolitical tensions, not reduce them.”

Tahil’s analysis started where any such work would start today: by looking at the reserves and resources for lithium as reported by the authoritative US-government agency the  United States Geological Survey (USGS). Every year, the USGS publishes a report titled “Mineral Commodity Summaries”, which looks at the reserve and resource availability of 84 minerals and metals (from abrasives, aluminium and antimony to zeolites, zinc and zirconium) across more than 180 countries. The latest edition dated January 2018 is available here. You can also find the 2006 edition on the internet, which reports lithium reserves, reserve base and resources as of 2005. So this is the table Tahil would have had in front of him when he wrote his report:

USGSLithiumReserveBase2005.jpeg

According to USGS, 4.1 million tonnes of lithium reserves were available worldwide in 2005, 11 million tonnes of reserve base and 13 million tonnes of resources. The terms ‘reserve’, ‘reserve base’ and ‘resource’ are very important to understand. The term ‘resource’ is the widest and is defined by USGS this way:

“A concentration of naturally occurring solid, liquid, or gaseous material in or on the Earth’s crust in such form and amount that economic extraction of a commodity from the concentration is currently or potentially feasible.”

Note the wording “potentially feasible”. The reason why it is “potentially feasible” rather than “currently feasible” could be for three main reasons:

  1. The technology is currently not available to extract the metal or mineral but feasible technology is in existance.
  2. It is too expensive to extract the metal or mineral.
  3. The metal or mineral price is too low to allow a profit to be made extracting the metal or mineral.

Nonetheless, the word “potential” requires a judgement call. It does not include minerals or metals that could be extracted with a technology that is from the realm of science fiction. Similarly, the future price may be taken to be higher than the current price, but not significantly higher. Thus, no metal from mining on the moon makes it into the USGS’s resource or reserve base, even though it is feasible that at some distant day in the future we could put a mine up there. The definition of “reserve” is a lot narrower:

“That part of the reserve base which could be economically extracted or produced at the time of determination. The term reserves need not signify that extraction facilities are in place and operative.”

So here we are talking about metal or minerals that we know about and could be extracted profitably now; that is, at the current metal or mineral price, with the current mine and milling cost structure, and with current technology. Resources are a very slightly wider definition of the reserve base.

To get a sense of how these definitions mesh together, the USGS puts out this helpful table:

USGS Reserve Base.jpeg

The table is particularly interesting in that it shows us what doesn’t make it into the resource base. First, the bottom row labelled “other occurrences”. This includes “unconventional” reserves, which relates to reserves that can’t be extracted with any current technology that we aware of, although new technology could emerge (think of fracking of natural gas and oil). It also includes “low grade” resources. Many metals and minerals are found in minute quantities over vast areas but are impossible to extract economically.

Second, we have “undiscovered” resources in the right-hand column. Despite major advances in satellite, gravimetric, magnetic and seismic mapping, the majority of exploration is still old school. That means looking at the nature of surface geological formations and river sediments, or employing geochemistry techniques and soil sampling. From there, you move on to targeted exploration drilling. All this requires boots on the ground and costs money. So when the price of a metal goes up, more boots hit the ground and you get a migration of resources from “undiscovered” to “identified”.

Now let’s go back to Tahil’s report. His firm, Meridian International Resources (MIR), came up with lithium reserves of 6.8 million tonnes and a reserve base of 15 million tonnes, somewhat larger than those of the USGS. This is because they identified reserves that USGS had not included.

tamilLithiumReserves

Note also the wording “contained metal”. Since lithium can exist in nature in different metal compounds and ores, both the USGS and Tahil keep count of lithium reserves via contained lithium metal so as to compare apples with apples, not apples with pears.

Using ‘contained metal’ as the unit of account, however, is just one approach. Another, is to use the unit ‘lithium carbonate equivalent’, or LCE for short. Lithium carbonate is used in a range of applications, particularly the manufacture of lithium-ion batteries. In general, pure lithium is of little use by itself since it is so inflammable as you can see here:

 

One tonne of the widely traded lithium carbonate only contains 0.188 tonnes of lithium metal. Likewise, if you had one tonne of lithium metal, you could theotetically produce 5.323 tonnes of lithium carbonate. To make things more complicated, there are other useful compounds of lithium on the market, such as lithium hydroxide, that contain more or less lithium metal. Moreover, the most common form of hard rock lithium, spodumene, contains a different amount still. A useful conversion table for the most common forms of lithium is given below:

LithiumVolumeConversion

Experts in lithium are at ease switching between these different forms, and Tahil changes from talking about contained lithium metal when referencing reserves to talking about lithium carbonate when assessing the needed supply for battery production. Journalists? Not so good at doing this. Consequently, you frequently see a journalistic treatment of lithium availability becoming hopelessly confused, since the writer in question has got into a complete muddle with respect to his or her unit of lithium account. This detour into lithium convertibility is important otherwise we wouldn’t be able to follow the rest of Tahil’s argument, which goes like this.

Tahil starts with a  lithium reserve base figure of 15 million tonnes. However, he goes on to state that only part of that can be used in the production of lithium-ion batteries.

Only Lithium from the Brine Lakes and Salt Pans will ever be usable to manufacture batteries: the Spodumene deposits can play no part in this….

….Looking back at the table, we can optimistically estimate the Global Lithium Salt Reserve Base as 2MT for Argentina, 3MT for Chile, 5MT for Bolivia and 1MT for China – 11MT contained Lithium in total or about 58MT of potential Li2CO3. The US salt deposits are in decline. The relatively small hard rock mineral deposits can be discounted when considering their availability for batteries.

Note he gets to 58 million tonnes of lithium carbonate by multiplying his contained metal reserve base target of 11 billion tonnes by 5.323. Next, he reduces that number further by postulating that only a certain amount of lithium can be extracted in the recovery process. This reduces his total lithium carbonate reserve base further from 58 million tonnes to 33 million tonnes.

Finally, Tahil tries to estimate the total lithium carbonate requirement should we electrify the world’s entire fleet of cars:

The World Automobile Parc currently stands at about 900M vehicles. If they all used a 5kWh LiIon battery, they would contain 6.3M tonnes of Lithium Carbonate – and the fleet is growing all the time. 6.3M tonnes is in the region of at least 18% of economically viable Li2CO3 Reserves, including Bolivia. With a more realistic projection of at least an average 10kWh battery per vehicle, 36% of the world’s recoverable Lithium Carbonate Reserves would be consumed. 10KWh is still a small battery – even if 20kWh was achieved with the same Lithium utilisation, Lithium consumption will be at unsustainable levels.

So this is the core of his thesis. We have 35 million tonnes of economically viable lithium carbonate and 6.3 million tonnes is required to equip 900 million cars with 5 kilowatt hour (kWh) batteries; that is 18% of total reserve base of lithium. And with a 10 kWh battery that goes up to 36% and with a 20 kWh it goes up to 72%. And that is excluding all the other uses of lithium and the fact that the world’s population keeps growth, economies keep expanding and people keep buying more cars. So we run out of lithium.

Note that the kWh is the basic measure of energy storage for an EV. The energy stored in an internal combustion engine (ICE) vehicle is the number of gallons/litres of gasoline/petrol held in its tank.

Before we start poking Tahil’s thesis with a pointy stick, let’s just tease a very useful metric out of it. If we need 6.3 million tonnes of lithium carbonate to equip 900 million vehicles each with a 5 kWh battery, that means that we need 1.4 kg of lithium carbonate per kilowatt hour of battery cells.

Now let’s take his methodology and apply it to the present day situation. We currently have a fleet of 950 million cars and 350 million commercial vehicles (OICA here), the latter requiring even bigger batteries. To make range anxiety a thing of the past, many auto experts believe each passenger car will need a 75 kWh battery. And let’s give our trucks and vans a 200 kWh battery on average each. That adds up to roughly 141 billion kWh’s worth of batteries. Multiply that by 1.4 kg of lithium carbonate per kWh and it’s about 200 billion kgs of lithium carbonate or 200 million tonnes. “Houston we have a problem: Tahil says we only have 35 million tonnes of lithium carbonate!”

In his report, Tahil was not a shrill for the oil industry: he was still arguing for a big battery push away from fossil fuels, but just thought the auto industry was backing the wrong horse, and he proposed other chemical configurations as being much more sustainable. Nonetheless, his article had sufficient hooks to appeal to editorial desks across the world: ‘Bolivia as the New Saudi Arabia’ or ‘World Jumps Out of the Energy Frying Pan into the Fire’; the headlines wrote themselves.

The media’s love of Tahil’s take on lithium has one worrying aspect: Tahil had already demonstrated a certain lack of analytical objectively by writing a nut-job piece of analysis suggesting that the Twin Towers destroyed in the  911 terrorist attack in New York came down due to two controlled nuclear explosions. In short, Tahil is a bit of a loony conspiracy theorist.

Once Tahil’s views on lithium gained mainstream distribution, it was not long before Newton’s third law kicked into play: “For every action there is an equal and opposite reaction”. So as Tahil become the media ‘go to’ man on peak lithium, a retired geologist named Keith Evans came out of retirement to be tapped by the media as the ‘go to’ man for the counter argument; basically, Evans said Talil was talking a load of old rubbish. In a simple piece of symmetry Evans wrote a riposte to Tahil titled “An Abundance of Lithium“.

As background, Evans was a specialist in lithium and had worked on a US government National Research Council report back in 1976 whose remit was much wider than the USGS. Their aim was to see how much lithium would be available worldwide in an era of rapidly expanding demand due to not only battery storage demand but also for fusion energy. A key point in his report, and one I would agree with, is that a rising price begets supply.

Nonetheless, most of the report takes issue with Tahil from the perspective of a static analysis. In other words, Evans believed that Tahil had got his numbers wrong just by incorrectly knocking out a whole bunch of potential lithium carbonate sources from hard rock spodumene, pegmatites and certain brine deposits. After he had crunched his numbers, Evans came up with these figures for reserves and resources:

EvansLithiumReservesResources

So now we have nearly 30 million tonnes of contained lithium metal compared with Tahil’s figure of 11 million. That translates into about 160 million tonnes of lithium carbonate, not enough to supply my back-of-the-envelope 200 million tonnes necessary to electrify the world’s car fleet (let alone the storage energy needs). In other words, while Evans analysis was far more optimistic than that of Tahil’s, it basically leads us to the same conclusion: not enough lithium.

But wait a minute, I trained as an economist and I don’t like such static approaches to analysis. Let’s go back to the USGS reserve and resources chart and remember that the right-hand column refers to “undiscovered resources”.

USGS Reserve Base

And how does the market decide to turn “undiscovered resources” into “identified” ones when you have a limited existing supply but a very large potential demand? Through price.

LithiumCarbonatePrices

Has the price signal had any effect? You bet!  Let’s jump to the latest Mineral Commodity Summaries report published by USGS in January 2018. On page 99, we get this table for lithium:

Lithium 2018

Reserves are now at 16 million tonnes and resources at 53 million tonnes. Back in 2005, those numbers were 4.1 million tonnes and 13 million tonnes, respectively. So in 10 years we have found a shed load of lithium. Moreover, 53 million tonnes of lithium translates into 282 million tonnes of lithium carbonate, the kind of quantity we need to support an EV transition.

Now at this stage I need to introduce some caveats:

  • Moving from contained metal in ore or brine to lithium carbonate results in losses
  • Not all resources will easily migrate to reserves.
  • Many of the resources are in geopolitically unstable areas of the world.
  • Battery grade lithium carbonate and lithium hydroxide require exceptional purity. Many sources of lithium contain contaminants or impurities that are difficult to remove.
  • Putting in mine infrastructure costs a lot of time and money. Ditto scaling up ore and brine processing capability.

Nonetheless, while I am not some kind of libertarian free market Ayn Rand acolyte, I think markets do a pretty good job of discovering scarce but needed resources through the mechanism of price (even if they don’t do a good job of dealing with externalities like climate change).

As an example, in Appendix C of the USGS Mineral Commodities Summary 2018 the case of copper is highlighted:

“Reserves data are dynamic. They may be reduced as ore is mined and (or) the feasibility of extraction diminishes, or more commonly, they may continue to increase as additional deposits (known or recently discovered) are developed, or currently exploited deposits are more thoroughly explored and (or) new technology or economic variables improve their economic feasibility. Reserves may be considered a working inventory of mining companies’ supplies of an economically extractable mineral commodity. As such, the magnitude of that inventory is necessarily limited by many considerations, including cost of drilling, taxes, price of the mineral commodity being mined, and the demand for it. Reserves will be developed to the point of business needs and geologic limitations of economic ore grade and tonnage.

For example, in 1970, identified and undiscovered world copper resources were estimated to contain 1.6 billion metric tons of copper, with reserves of about 280 million tons of copper. Since then, almost 520 million tons of copper have been produced worldwide, but world copper reserves in 2017 were estimated to be 790 million tons of copper, more than double those of 1970, despite the depletion by mining of more than the original estimated reserves.

Future supplies of minerals will come from reserves and other identified resources, currently undiscovered resources in deposits that will be discovered in the future, and material that will be recycled from current in-use stocks of minerals or from minerals in waste disposal sites. Undiscovered deposits of minerals constitute an important consideration in assessing future supplies.”

So we started with X amount of copper in 1970, since then we have consumed 2X amount of copper and now we are left with 3X amount of copper. That is the magic of the market dragging ‘undiscovered resources’ into the ‘identified’ category.

Now for this post, we did some wild back of the envelope forecasting of demand requirements for lithium based on Tahil’s assumption of 1.4kg of lithium carbonate being needed for 1 kWh of battery energy storage. Tahil’s numbers, however, look a bit dodgy and I think we could do better, so in my next post we will go full battery nerd and look at lithium content of different types of battery chemistry. In the process, we will start to build up a picture of how different battery chemistry leads to different performance and cost outcomes for different auto makers. Trust me, to make a call on whether Tony Seba will get 95% EV penetration and 130 million EV sales in 2030 you really need to know this stuff.

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

 

Testing Tony Seba’s EV Predictions 9 (And Then There Was Tesla)

Not bad! I’ve reached number nine in my series of posts on Electric Vehicles (EVs) and haven’t done a post yet concentrating on Tesla. There are two main reasons for this. First, so much has been written about Tesla, and so many opinions are publicly available on the web about Tesla, that I am not sure I can add much.

Second, this is a series of blog posts looking at the question of whether EV penetration can realistically get to 95% in 2030, which roughly equates to around 130 million vehicles. Even if Tesla becomes the most successful auto company ever–or even if it becomes the most successful auto company ever multiplied by a factor of two–it alone cannot get even close to that target of 130 million EV sales. Let us say that in 2030 Tesla has the combined market share that Volkswagen and Toyota have today (the top two in terms of global autos sales market share). That combined VW-Toyota percentage share of the market now would equate to Tesla selling about 30 million cars in 2030. Pretty bloody good (if it ever happens), but it will not get us even close to 130 million EVs. For that to happen we need the collective heft of the rest of the global auto players.

Nonetheless, in our S-curve analysis we started by looking out 5 years, since battery plant and auto lines need to be financed and designed now in order for cars to roll off out in sufficient quantity in 2023. So let’s recycle this chart again:

EVSalesto2023

 

In my post on China’s New Energy Vehicle (NEV) strategy, I surmised that it would be relatively easy for China to hit its target of having 5 million NEVs (made up almost entirely of EVs rather than fuel-cell vehicles) on the road by 2020. That would see Chinese consumers buying around two million EV vehicles that year. My next question is whether Tesla, as the current world’s largest seller of EVs, could supply a large chunk of the other 3.6 million EVs needed in 2020 to stay on Tony Seba’s S curve. My answer to that is “possibly”. Here’s how.

First, Tesla will have enough batteries. From the press release accompanying their January 2017 investor event relating to their factory in Nevada:

“Gigafactory 1 (GF1): GF1 is the world’s leading battery production facility, maintaining high efficiency and output while achieving the lowest capital investment per gigawatt hour (GWh) and the lowest production cost per kilowatt hour (kWh).

The factory will produce cells, battery packs, energy storage products and vehicle components. Phase 2 construction, currently underway, will support annualized cell production capacity of 35 GWh and battery pack production of 50 GWh. The cell capacity represents more than the 2013 total global production of lithium-ion battery cells of all other manufacturers combined and supports the production of about 500,000 cars.”

So in January 2017, battery plant capacity was already being put in place to fit out 500,000 EVs. By 2020, that number will be a lot higher.

Tesla delivered 101,312 Model S and Model X  vehicles in 2017, and Elon Musk has stated his intention to produce 10,000 of the mid-market Model 3 a week by the end of 2018. The press has been rife with stories over how Tesla has been missing its production targets in 2018 for the Model 3, but in April Elon Musk tweeted that production was now exceeding 2,000 per week, which is on top of another 2,000 Model S and Model X vehicles. He then went on to say that they should be producing 5,000 a week of the Model 3 by end June with a stretch goal of 6,000. If we take the 5,000 number add 2,000 Model S plus Model X’s and multiply by 50 we get 350,000 EV sales annualised.

So far, this entire series of blog posts have been dedicated to the supply side; in short, the question of whether the auto manufacturers have put, or will put, enough plant in place to physically build the necessary number of EVs for us to move up Tony Seba’s S curve of EV market penetration versus internal combustion engine (ICE) vehicles. I have said nothing about whether consumers will want to buy a ton of EV cars. In Tesla’s case, however, the demand side is already in the bag for a couple of years since the company has 450,000 reservation deposits for the Model 3 as reported in Tesla’s Q1 2018 results update letter released on 2 May 2018. This really is a case of “build it and they will come”. Moreover, for those who don’t believe that EVs can go mass market look at this chart contained in the same release by Tesla:

MidSizeSedanMarketShare.

Given Tesla will be on an annualised run rate of 350,000 cars by end of June, it looks entirely feasible that this figure will improve to 500,000 by year-end. Then, with the gigafactory in Nevada being scaled up again and more new models to be released over the next two years, it looks likely that Tesla alone could do a third of the 3.6 million vehicle sales needed outside of China to stay on Tony Seba’s S curve through to 2020.

The situation beyond 2020 will be the subject of a separate post, but I want to finish this post by introducing a video by Jack Rickard, an electric car expert, explaining why he thinks Tesla will continue to go from strength to strength. Rickard looks like a Hollywood caricature of an elderly battery nerd, and I will come back to one of his videos where he deconstructs a Tesla battery in a future post.

What I like about Rickard, however, is that he obviously never picked up the book “How to Give a Ted Talk” or, for that matter, any self-help book on presentation style or image branding at an airport book stand. From looking at some of his videos, I have drawn up a Jack Rickard guide to giving a presentation:

  1. Never go to the gym in an attempt to stay in shape: life is too short for such a colossal waste of time.
  2. Dress like you don’t give a shit, because you don’t give a shit.
  3. On the day of your presentation, don’t change your grooming routine since you don’t have one.
  4. When deciding on the length of your presentation, first think of the likely average attention span of your audience. Second, quadruple that number and add a bit more.
  5. Go off at random tangents at great length.
  6. Don’t talk to the camera. Look down a lot and mumble.
  7. Write down your presentation on multiple pieces of paper, then laboriously talk to each page.
  8. Fancy infographics and the like are for morons.
  9. You know your IQ is a lot higher than the vast majority of your audience: communicate that fact to them. Don’t patronise them by letting them think they are cleverer than they really are.
  10. Realise that you can get away with one through nine only because you really, really know your subject.

So here is Jack Rickard spending one hour 50 minutes explaining why Tesla is revolutionising the auto industry, why its competitors are unable to respond and why Tesla’s stock is a screaming “buy”. Enjoy:

 

 

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

Testing Tony Seba’s EV Predictions 8 (The Invisible Chinese Auto Maker Disruptors)

When following the EV story in the Western press, you would be forgiven for thinking that it is solely a story about Tesla. Having such a flamboyant and charismatic head in Elon Musk obviously helps the narrative.  Another reason for the neglect of the Chinese EV market is that it is just bloody difficult to discern what is going on there.

The ownership structure of Chinese automakers is complicated, with public-private partnerships, joint ventures with foreign makers, and cross- and subsidiary-holdings galore. Moreover, new entrants into the EV market are announced almost every day, fresh alliances are formed, units are spun out or merged and foreign parters are brought in or dropped.

The fragmented and somewhat chaotic nature of the Chinese auto-manufacturing marketplace was viewed as a disadvantage in the Harvard-Kennedy study I referred to in a previous post. Yet out of this chaos has grown increasing Chinese market share: 10 of the top 25 best-selling EV models globally in Q1 of 2018 were Chinese brands (Chart from EVvolumes.com).

GlobalEVDeliveries

The situation contrasts markedly with what is going on in the overall Chinese market where ICE vehicles still dominate. There, Volkswagen sits supreme at the top, with only 1 Chinese maker in the top five. I’ve marked in red those Chinese producers who have EV models featuring in the table above (note Zhi Dou is a subsidiary of Geely).

Chinese1-25

 

Chinese25-50

Moreover, there appears to be a distinct difference in strategy between foreign and Chinese makers with respect to EVs. The few foreign firms that have invested heavily in EVs (Tesla excepted) have just promoted one or two EV models to champion in this space: think GM’s Chevrolet Volt and Bolt, Nissan’s Leaf, BMW’s i3 and Mitsubishi’s Outlander (although as I posted on here, over the last six months that has changed radically).

Many Chinese makers, by contrast, have been setting up or spinning out dedicated EV subsidies whose aim is to launch a range of models and who are less worried about cannibalising successful and profitable existing ICE lines. The Chinese makers also have the advantage of access to risk capital through multiple public-private channels under China’s unique form of Wild West capitalism. So the Chinese majors a) have large equity stakes from state-owned enterprises, b) are able to borrow from state-owned banks, and c) are also accessing global capital markets through listing on stock exchanges in China and Hong Kong.

 

AutoMakerMarketCap

Let’s dig a little deeper into those Chinese names who have had initial success in the Chinese EV marketplace, and some of the larger auto makers who are yet to show up in the EV rankings. We should note, however, that at this early stage of the S curve, rankings are very fluid and names can suddenly appear at the top of the sales charts from out of nowhere, or, for that matter, drop off.

Geely

In the US, most observers would nominate Elon Musk of Tesla, Jeff Bezos of Amazon, Mark Zuckerberg of Facebook and Larry Page and Sergey Brin of Google as visionary leaders. Jack Ma of Alibaba has also made it into the Western consciousness but not so Li Shufu of Geely. A hybrid oligarch entrepreneur, Li has personally bought a 9% stake in Daimler and a 6% stake in Volvo Trucks. That comes after Geely (Li is chairman) bought Volvo cars outright in 2010. More recently, Geely took a controlling stake in supercar maker Lotus in January 2018.

With the announcement that Volvo will only sell EVs or hybrids from 2019, Geely has a dedicated EV brand at the top of the market and also one at the bottom of the market with Zhi Dou. It is also rapidly electrifying its mid-market offerings that it sells in its own name, with a major announcement of a new plug-in version of its flagship Bao Rui Sedan at the Beijing Motor Show in April 2018. The company’s intention is clear: it wants to extend the Volvo EV commitment across all its offerings at breakneck speed as spelled out by its CEO and President An Conghui:

“China will ultimately become the global centre of a new energy revolution that will reinvent the car as we know it, hence making its automotive industry stronger and more resilient. As a leading Chinese automotive brand, we’ve realised that competition in this new era will come in the form of a technology war and that we must lead through technological innovation to become the vanguard of this new age.”

Changan Motors

While none of Changan Motors models are present in the top 25 table above, the company already is marketing a range of EVs in the SUV, mid-market sedan and compact car segments of the market.

The company also launched its “Shangri-La Plan” in September 2017, which includes a $15 billion investment in EVs, and 33 EV models to be added to its existing line-up of 4 EV models,by 2025; at that time, all its models will be offered as EVs. An interesting part of the plan was the announcement of strategic partnerships with the German parts maker Bosch, the dominant Chinese search engine Baidu, the ride-hailing company Didi Chuxing and the lithium-ion battery producer CALT (the largest lithium-ion battery maker in the world).

Again, I am not sure how many observers of the EV market realise the type of technology and capital Changan is accessing through these alliances. Didi is the largest ride-sharing company in the world, far outpacing Uber and Lift. It has a market capitalisation of $50 billion, larger than Tesla. Baidu is the largest search engine the world after Google and one of the leading companies in artificial intelligence (AI). Its market cap at $75 billion is larger then any car maker in the world except for Toyota and Volkswagen.

Not surprisingly, Changan Motors wants to lever these relationships with Didi and Baidu so as to become a leader in autonomous driving technology.

SAIC (Shanghai Automotive Industry Corporation ) Motor

As is typical in the Chinese auto industry, the state-owned (and thus deep-pocketed) SAIC pops up in my top 50 sales ranking of the Chinese auto market in a number of different places. In seventh place is its Baojun marque, which is a joint venture between SAIC and General Motors at the budget end of the market competing against Geely and Chery. It does have EV aspirations and a dedicated EV plant was established in 2017.

For more high-end vehicles, however, we need to turn to SAIC Roewe, SAIC’s luxury marque. In my last post, I quoted Ken Brinsden of Australian lithium-mining company Pilbara Minerals. Ken said this at a presentation to the Melbourne Mining Club:

“For those of you who have a picture in your mind that the Chinese cannot build a quality outcome, I’m telling you they are already there.”

If you don’t believe him then check out SAIC Roewe’s EV SUV the eRX5 and their i6 saloon,  which feature in the Chinese sales table above at ranks 16 and 18. Even more impressive is that SAIC have teamed up with Jack Ma of Alibaba to incorporate every aspect of digital technology into future car production (quote from here):

“In July 2016, Alibaba Group and SAIC (Shanghai Automotive Industry Corporation), one of the largest auto manufacturers in China, teamed up to launch the Roewe RX5, a brand new SUV that incorporated Alibaba’s ALIOS operating system and that was dubbed “The world’s first mass-produced internet car.” Just one year later, in July 2017, the Roewe RX5 was already the 6th best-selling SUV in its category in China.

And, most importantly, when asked about their buying decision 75% of customers said they purchased the RX5 because of its connectivity. In other words, what they valued most of all was not the car’s design or its comfort, its engine performance, or its safety standards, but the fact that it gave them the connected mobility that would integrate them seamlessly with the rest of Alibaba’s ecosystem, where smartphones, shopping sites, payment systems, video services, IOT-enabled home appliances, wearable devices, and – yes – cars, are all linked together as part of one comprehensive digital immersion experience.”

Dongfeng Motor Corporation 

Another state-owned enterprise like SAIC, Dongfeng has been somewhat of a laggard in the EV space. Currently, it main avenue to incorporating more EVs into its line-up is through its joint venture with Nissan, the Dongfeng-Renault Automotive Company (DRAC). Yet don’t count Dongfeng out due to its access to huge amounts of capital.

FAW Group

The FAW Group is another state-owned enterprise; along with Changan Motors, SAIC and Dongfeng, FAW is part of  what are called the ‘Big Four’ in Chinese automotive circles. In FAW’s case, its joint venture with Volkswagen Group has made it one of the largest players in the Chinese automotive market.

In December 2017, recognising that the Chinese automotive market was entering a new era centred around EVs, FAW entered an agreement with two other of the Big 4 state-supported enterprise Changan and Dongfeng to pool resources. The agreement had the following goals:

  • Establishment  of a national innovation centre for intelligent connected vehicles.
  • Creation of an advanced technology innovation centre that will develop in the fields of new energy, internet connectivity and lightweight materials.
  • Joint investment and development of core technologies and shared platforms.

I would expect a number of well-financed new EV initiatives to come out of this alliance.

Great Wall Motor Company 

In number eight in the overall (ICE plus EV) sales chart is Haval, which is a marque of Great Wall Motor Company specialising in SUVs. In my last post, I mentioned that Great Wall has also set up an EV specialist operation under the Wey marque.

A hiring spree for top European auto talent resulted in  Jens Streingrabber, who was responsible for SUV development at Audi, coming to the group as CEO for the Wey brand. He was later joined by the chief designer from BMW. Great Wall’s aspirations are evidenced by initiatives to incorporate Level 5 autonomous driving capability and contactless charging in future Wey models.

Beijing Automotive Holdings (BAIC)

BAIC is 60% owned by the Chinese government and 12% by Daimler of Germany. In January, 2018, Beijing Electric Vehicle Company (BJEV) was spun out of BAIC as a pure play EV company and currently boasts the top-selling EV in China, the BJEV EC180/200.

In March 2018, BAIC opened a brand new dedicated EV factory in Changzhou, Jiangsu province, which at full production will be capable of making 300,000 vehicles per year. BAIC has promised to end the sale of all fossil fuel cars by 2025.

The parent company BAIC, together with other state-entities, own a majority share of BAIC Motors, which is an auto company listed in Hong Kong (the listed piece of BAIC whose market cap I have included in the chart above; but don’t confuse it with the valuation of the wider group). The principal business of BAIC Motors are joint venture operations with Daimler (Beijing Benz brand) and Hyundai (Beijing Hyundai brand), as well as its own-brand vehicles (Beijing Brand).

BYD (Build Your Dreams)

Considered the closest Chinese equivalent to Tesla, BYD is a pure EV player, built out of a battery business rather than an ICE business. Its model the Song ranked fourth by sales in China in the first quarter of 2018. Warren Buffet and Charlie Munger’s investment  in BYD way back in 2009, so the company has had some publicity overseas. Listen to Charlie Munger talk about BYD’s CEO Wang Chuanfu:

BYD remains just as much an electronics company as an automotive company as can be see from its latest annual report:

BYDRevenueBreakdown

Wang Chuanfu, visionary CEO, started the company as a specialist in lithium-ion batteries for cell phones and has expanded from there. A major difference between BYD and Tesla, however, is that BYD’s core competence has been in lithium-iron phosphate battery chemistry. Such battery cells are very stable but lack the specific energy (energy stored per unit of volume) of batteries (like Tesla’s) that make use of cobalt compounds. This is an important topic, but I will return to it as a post in its own right down the road.

The company also has a strategic alliance with Daimler, and in September 2017 Daimler announced a large expansion of both battery production and EV sales in China working with BYD.

JAC (Anhui Jianghuai Automobile) Motors

Another state-owned company though with a stock market listing. JAC also has an alliance with Volkswagen (along with FAW and SAIC) and in 2017 they announced a joint project to build 100,000 pure EVs per year. The JV will see $12 billion invested over the next 7 years through to 2025, with the aim of producing 40 EV models locally.

To date, its EV offerings in China, such as the iEV6e have been at the compact end of the spectrum like those of Geely and Chery.

Chery Motors 

Chery is an independent non-state company like Geely.  It is the only Chinese company that, to date, has had some success marketing its products abroad, with over one million units exported.

Simultaneous with the Frankfurt motor show, Chery announced its intention to start selling all-electric models in Europe in 2017. While the Chery eQ EV is a SMART-type city compact car, the new offerings being promoted and unveiled at recent motor shows are are at higher sticker price tags including the compact SUV Exeed TX. They incorporate high-end electronic systems similar to Tesla, such as a 10-inch touch screen.

Jiangling Motors (JMC)

In the past, JMC was mostly associated with a joint venture with Isuzu of Japan, selling compact cars. More recently, however, it has been expanding its EV offerings in larger model sizes. In addition, Ford has been negotiating with JMC to set up an EV operation in China aimed at producing commercial vehicles. This is in addition to Ford’s EV joint venture with another Chinese auto maker Anhui Zotye.

I could go on with this blog post since I have yet to cover the EV aspirations of a whole host of other Chinese EV makers, both incumbents and brand new entrants. The above, however, gives you a sense of the fever pitch activity going on in the Chinese market. Out of this rather complex mess of car-maker acronyms and complicated holding structures, I will, nonetheless, pull out some key points:

  • The Chinese market hosts a vibrant ecosystem of disruptors who wish to leapfrog western dominance of auto markets through jumping directly into high spec advanced EVs. These include BYD, Changan Motors, SAIC Roewe, BJEVs and Wey.
  • Like the US, China has access to leading edge digital technologies like AI through its huge tech firms such as Baidu and Alibaba. These deep-pocketed tech firms are forming alliances across the board with auto makers and in the process changing cars into consumer electronics items as much as a means of transport.
  • You shouldn’t count out the large laggards like FAW and Dongfeng. They have what a company like Chrysler doesn’t: massive state support. The support consists of a) vast pools of capital composed of both state-originated equity and loans and b) the means to transfer in technology through the state’s control of overseas makers access to the Chinese market (in effect limiting access to joint ventures only).
  • Lastly, take a looks at this video (which has a rather annoying computer-generated interpreting system from Chinese into English, but bear with it) You will get to see BYD’s 4 wheel drive EV the SEED, with a 600km range on one charge and an acceleration of zero to 100 km in 3.9 seconds. Tesla: eat your heart out.

 

 

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

Testing Tony Seba’s EV Predictions 7 (Is China Force Feeding Its Citizens EVs?)

Let’s have a recap of where we need to be on Tony Seba’s S curve in 5 years’ time. For starters, out comes this chart again:

EVSalesto2023

From my last post, we saw that China’s State Council is targeting 2 million EV sales by 2020, and through the use of a series of central-, provincial- and city-government level carrots and sticks should get there with ease.

On Tony’s S curve, we need to register 5.6 million global EV sales to keep on track for 130 million sales by 2030; that is the logic of an S curve. This is where we stood in 2017:

GlobalNewEnergyVehicleSales2017SCMP

So if China is doing 2 million EVs in 2020, we need to find 3.6 million EV sales from the rest of the world. Given we are estimated to hit 800,000 EV sales outside China in 2018, a jump to 3.6 million in 2020 is a more than three fold increase.

But we should remember that we are at the very foothills of the S curve. If we go out a bit further to 2023, we need to see global EV sales of 22.2 million units to keep Tony’s dream alive. Now while the Chinese state has gone full Tony, we have limited evidence that it’s citizens are all completely on board with the programme.

Currently, there is a high degree of force feeding of EVs going on via state-owned enterprise procurement, the EV subsidy system and city level non-EV car registration caps. Moreover, next year the “New Energy Vehicle (NEV)” 10% incentive scheme will, in effect, force all auto makers down the EV route.

Indeed, China, as an authoritarian state, could just ban internal combustion engine (ICE) vehicle sales just as many other countries have promised to do. The following table from Wikipedia shows the expressed intentions of a swathe of states and cities to ban ICE vehicles.

ListofCountriesBanningFossilFuels

Such actions, however, will not in and of themselves get us to an EV sales penetration rate of 95% by 2030, since there are a host of countries, most obviously the United States, whose political systems are not very good at pushing their citizens to do things they don’t want to do.

Nonetheless, if the Chinese consumer chooses voluntarily to buy an EV over an ICE car– rather than be forced to buy and EV over an ICE car–then this will be a far better catalyst for the wholesale global adoption of EVs. So the question then is whether Chinese auto makers can make cars that Chinese consumers want without subsidies, NEV credits, city ICE bans or whatever.

For me, the wake-up call that Chinese manufacturers were actually far further along the road toward making attractive and desirable EVs came to me, strangely, while watching a presentation by the CEO of the lithium mining company Pilbara Minerals (ticker PLS listed on the Australian Stock Exchange). in April 2018, Pilbara Minerals CEO Ken Brinsden got a coveted spot to present at the prestigious (in resource circles) Melbourne Mining Club.

The beginning of the video consists of Ken being very smug about the fact that Aussie miners can now rebrand themselves as eco warriors rather than rapists of the planet. From 11:45 into the presentation, however, Ken switches to talking about China. Given that he has been negotiating and partnering with the Chinese battery material makers for some years now, he has a unique insight into what is going on there.

The presentation slides are available here:

http://www.melbourneminingclub.com/events/luncheons/ken-brinsden-md-chief-executive-officer-pilbara-minerals/

His general overview of how fast China is moving in EVs is something I am familiar with, but 21 minutes into the presentation I got rather a shock when Ken started to talk about a particular car: the luxury SUV called the Wey made by Great Wall Motors. Now I had vaguely heard of Great Wall, but I was completely unaware that a domestic Chinese manufacturer was capable of making a prestigious EV SUV that in time will compete directly with Tesla’s Model X. In Ken’s words:

“For those of you who have a picture in your mind that the Chinese cannot build a quality outcome, I’m telling you they are already there. And as a result, they are in a very short period of time going to become the dominant global car supplier because they have got the technology right, they’ve locked up the lithium-ion supply chain, and especially the raw materials, and they are also producing the quality product.”

I would echo Ken’s remarks about looking down on the ability of any developing Asian nation to go up the value chain. I am old enough to remember as a child Japanese cars being termed “Jap crap”, just as the UK car industry was going into terminal decline. Then in the 1980s and 1990s while working in Japan I took countless meetings with senior Japanese executives who had a similar attitude towards Korean products. Panasonic telling me that Samsung products were crap, Toyota same with Hyundai, and then Nippon Steel with POSCO. Then in the 2000s, I had a ringside seat as China’s Baoshan Iron and Steel made its meteoric rise both in terms of tonnes of steel produced and the quality of the products.

The brand CEO for the Wey is Jens Streingrabber, who was responsible for SUV development at Audi, and the chief designer of the Wey hales from BMW. So build quality is something Great Wall understands. True, the first low-end Great Wall cars that have arrived upon European shores have got poor reviews (for example see here), but I would not take that as indicative of where they will remain on the quality ladder. Great Wall’s aspirations are evidenced by initiatives to incorporate Level 5 autonomous driving capability and contactless charging in future Wey models. You can see a pure high-end Wey X EV at the April 2018 Beijing motor show here.

True, the Wey X on display at Beijing was a concept car, but full production versions of EV versions of Wey SUVs and Great Wall’s new pure EV brand ORA are on their way. And these are just part of a wave of EV disruption that is set to come out of China. I’ll spend one more post looking at the Chinese EV auto maker ecosystem across all the major makers,  and the potential for Chinese EV makers to act as the mega disruptors, then it will be time to talk about Tesla.

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

 

Testing Tony Seba’s EV Predictions 6 (China Plays Leapfrog)

In 2012, China’s State Council (China’s central government policy-making body) issued a plan with the snappy title “Energy-saving and new energy vehicles industry development planning (2012- 2020)”. It reiterated the target of having 5 million new energy vehicles (NEVs, which includes fuel cells and EVs) on China’s roads by 2020, but backed the mission statement up with a swathe of incentives. The table below is taken from a report by the International Council on Clean Transportation (ICCT).

 

ChinaEVSubsidies

 

So let’s annotate the above table a bit. BEV stands for battery electric vehicles, PHEV for plus-in hybrid electric vehicles. BD refers to the minimum battery-energy density measured in watt/hours per kilogram and ER relates to the minimum electric range of a vehicle in kilometres. At the current exchange rate of roughly 6.4 Chinese yuan to a US dollar, a subsidy of CNY10,000 is approximately US$1,500. So if a maker sells an EV with a minimum range of between 100k and 150k, the Chinese government will give that maker a subsidy of $3,900. Note that unlike many other such subsidy schemes worldwide, the subsidy goes to the manufacturer not the end purchaser.

Another point to note is that since the subsidy scheme was introduced, the minimum BD and ER criteria have been gradually raised, so forcing auto makers to constantly upgrade their EV product if they want to remain beneficiaries of the subsidies.

Two years after the original plan was unveiled, the Harvard Kennedy School of Government came out with a very damning report on China’s EV strategy. If you have ever sat down in a bar or pub next to a petrol head who believes that the height of sexual satisfaction is watching an old episode of Top Gear with Jeremy Clarkson you would get the gist:

  • Cars too expensive as battery costs too high
  • Range anxiety will kill demand
  • Can’t drive cross country as no charging infrastructure
  • If EVs succeed, utilities will need to burn more dirty coal to generate electricity so worsening air quality and CO2 emissions

The report also pointed out two China specific issues:

  • China car industry far too fragmented to support EV push
  • Trade and direct investment barriers to foreign entrants prevents major global auto makers (with better technology) supporting the plan

The Harvard report basically poured a bucket of cold sick over the “Energy-saving and new energy vehicles industry development planning (2012- 2020)” initiative:

“In mid-2013, China had only about 40,000 EVs on the road, more than 80% of which were public fleet vehicles (e.g. taxis and buses). China EV incentives face the same challenges as the rest of the world: high battery costs, long charging times, and no obvious business model for charging infrastructure. But domestic barriers loom even larger. The country has a weak domestic auto sector, counterproductive trade barrier, a balkanized subsidy and infrastructure program, and uncertainty over standards and technology.”

The author was also happy to take a pop at the New York Times journalist Thomas Friedman along the way (since Friedman has got the Tony Seba religion):

“The idea that electric vehicles for private and public use could allow China to leapfrog the internal combustion engine (ICE) and build a clean, high-tech transpiration system was a compelling vision. In 2010, New York Times columnist Thomas Friedman wrote: “It will be a moon shot for them, a hobby for us, and you’ll import your new electric car from China just like you’re now importing your oil from Saudi Arabia.” Despite Friedman’s forecast, China remains a long way from meeting its ambitious goals.”

Time to repeat a chart from yesterday’s post:
GlobalNewEnergyVehicleSales2017SCMP

So China has gone from 44,000 EVs on the road in mid 2013 to an estimate of around 2.5 million at the end of 2018. To reach 5 million EV sales at the end of 2020 would require sales growth of less than 50% in 2019 and 2020. It really doesn’t look that difficult. Against the backdrop of these numbers, the Harvard-Kennedy study conclusion looks, well, embarrassing:

“In addition to the unexpectedly difficult infrastructure challenge, it seems the Chinese government was over-optimistic about the technological capacity of China’s domestic automakers. It overestimated the amount of technology transfer that foreign firms had imparted on their domestic JV partners. An absence of data in the Chinese policy making process helps explain why basic driver in the Chinese vehicle market, as well as more tangible issues such as battery costs, were poorly understood.”

Well they must have done something right to have already become the most vibrant and dominant EV market in the world.

On top of this, the Chinese state has recently added a very nasty stick to its tasty subsidy carrot in the form of a zero-emission vehicle credit system for auto manufacturers. The details of this scheme can be found here. It’s certainly complicated, but basically the idea is that every auto maker in China must sell a certain percentage of its vehicles that meet a range of EV standards. Auto makers get credits for those vehicles they sell that meet the necessary EV standards. But if they don’t get enough “New Energy Vehicle” (NEV) credits they can then buy them in from other companies who are more fully committed to the EV programme (and as such have surplus credits).

Imagine a race where all the contestants are forced to run with weights. Subsidies allow the EV contestants to run with lighter weights. Conversely, an NEV credit system means that that non EV internal combustion engine contestants have additional weights attached to their legs.

Moreover, the scheme is quite clever in that it forces Chinese ICE reliant makers to, in effect, subsidise and support aggressive EV makers.

Such positive and negative incentives have consequences; and the Chinese auto makers have responded accordingly. That is the topic of my next post.

 For those of you coming to this series of posts midway, here is a link to the beginning of the series.