The Pointless EV Battery Wars & Why We Will Have Them Anyway
A great example of the pitfalls inherent in the (re)turn to protectionism is the impressive and also impressively foolish drive to build electric vehicle batteries in the West.
The political drive to re-shore electric battery manufacturing is launching a frenzy of new projects and competition to announce massive new factories to service the new electric car industry. These "battery wars" are rapidly becoming both politically controversial and big, big business.
We aren't just encouraging their manufacture, we are paying out the nose to do so. A race to subsidize their construction domestically has become the hot new thing and it is likely entirely unnecessary.
It isn't hard to see why this trend has gained such traction. It is politically popular across the board and what region or politicians don't want jobs? It also has something for everyone ideologically speaking.
It satisfies the right's desire to "build stuff" and the left's desire to protect certain industries from rapacious foreign competition. Better yet, it has the cachet of helping the environment and combat climate change, at least in theory, which thrills a large portion of the elites in thrall to the idea that driving a large and luxurious EV as opposed to a large and luxurious gas guzzler, is a game changing move in the battle with climate change.
Alongside all of these things it is also misguided and demonstrates many of the problems inherent with this "strategic" approach to economic growth.
Let us find out why:
The reason:
As we said above, the march to electrifying cars is taking off! The Biden Administration's Inflation Reduction Act provided massive subsidies in the form of tax write offs to purchase electric vehicles that are made in the USA.
They have also either relaxed or ignored many of their restrictions they themselves imposed around whether the vehicles had to be made with union labor and how many of their components are constructed of domestic materials.
The problem and the reason for the increasing controversy is that suddenly car brands the world over have discovered to their shock that to sell electric vehicles in the American market they will need not just to manufacture them there but also build their batteries.
This was unexpected and is very, very unwelcome.
But it has also led to a string of seemingly very positive developments. The headlines have been endless. Here are just a few of the latest.
Ford just announced that it is investing $3.5 billion in a Michigan battery plant.
BMW is doing much the same with Envision AESC in South Carolina.
And these are just the announcements from the last 3 months....
Add it all up and since the beginning of 2021, more than 18 new US lithium-ion battery gigafactories or expansions have been announced in a region becoming known as the "Battery Belt."
Combined, these facilities represent a potential investment of at least $45 billion, according to the Federal Reserve Bank of Dallas. All but one gigafactory will produce more than 10 GWh of capacity, and the largest will exceed 40 GWh.
On the surface, this seems great! Jobs! investment! high tech! green! What is not to like?!
Well, here is the reality of building electric batteries, anywhere:
They are a very dirty, low margin and high capital business.
It is likely very true that we do not want all of battery technology going to China but that doesn't mean that we want to - or need to - subsidize the entire industry.
There is a lot of blue sky between:
Let us permit our strategic geopolitical rival to dominate this industry
And:
We need to throw wave after wave of precious capital at subsidizing a known problem to an extraordinary degree because it fits with our current political worldview.
We are doing the latter and are so busy patting ourselves on the back and crowing about the companies announcing endless new large investments that we are not stopping to ask whether:
This is a good use of capital.
We needed to go this far in encouraging domestic battery production.
The companies building these battery "gigafactories" are doing so because they are not stupid and will gladly accept the handout.
Whether they will work out over the long term.
Whether we actually want to be in the battery business, at all?
There are actually quite a few endeavors that are far riskier and far less likely to receive private support than batteries that are both green and would be a better use of scarce public monies.
Carbon capture, energy storage, battery recycling to name a few.....
The problem isn't just the economics though. The real issue is that we are approaching electric vehicle batteries as if they are in a class of technology similar to semiconductors.
The latter are truly valuable pieces of technology. They require huge investment, sure, but are also incredibly high margin and are the definition of a hugely strategic good one that is capable of conferring tremendous advantages to those who hold an edge in manufacturing the very best and most advanced versions.
This is not the case with electric vehicles at present and it will only become less the case in the years to come. It is highly probable that batteries will become commoditized in the years ahead. They already are to a certain degree.
In fact, the real value for electric vehicles is supposed to be in software, not batteries. Batteries are a long extant industry with a linear - not exponential - improvement rate over time. The single biggest reason not to massively subsidize them is because they are simply not risky or important enough. Governments can and should subsidize risky bets that the private sector is reluctant to take.
That isn't some big, out-of-consensus statement. That has been commonplace in the electric car industry for well over a decade if not longer.
So, what are we doing then?!
We are throwing billions and billions of subsidies and tax breaks to build factories that the market would likely build anyway with some small tweaks to tariffs, taxation and above all, time.
We are wasting money for photos of politicians and CEOs with picks and shovels talking about bringing manufacturing back to America. That's right, we are blowing billions on photo ops.
We will regret this extremely at some point though because the lead time for building a "gigafactory" is so long it is likely that the politicians will be long gone. They might not even be alive by the time we realize that we have wasted money on expensive follies.
More constructively, one of two things will be true in the years to come:
Either we will realize the error of our ways and let batteries be commoditized by whatever - likely Asian - company understands how best to produce a battery
Or we will get very used to paying more for inferior batteries compared to the likes of the Chinese auto manufacturers.
The only positive will be that because, sooner rather than later, we will almost certainly forbid the import of those cars that we won't realize what we are missing unless we go to Seoul or Tokyo or maybe Sydney.
Our money is on the former however, because the money will run out eventually, perhaps far, far faster than we realize. That means that many of these new factories and many of these different battery industries springing up around the country and Western world will rapidly head back to being, well, not factories. It just makes little sense to have dozens competing battery makers all in the same region. Over capacity will lead to factory closures, sooner rather than later.
In fact, this is already happening. Always keen to be first to a bad idea, the United Kingdom's heavily subsidized and loudly trumpeted British Volt has declared bankruptcy before their "giga" factory even got off the ground.
And that is the final point to think about the next time you read some grandiose headline about another gigafactory. These projects are being created by the political winds about what is "strategic," if those winds shift or even if they slow, then those factories may suddenly become very expensive white elements littering certain parts of the South and Midwest.
When that happens - and it will - the EV batteries will likely come from factories nearby (Mexico?) but from whatever firm masters the dirty, low margin and steady improvements the best. We will have one battery giant eventually, it just likely won't be Chinese. The gigafactory money will be gone by then though. That won't come back.
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