Research in Action: Investing behind the battery boom

Carolyn Bigda: From Janus Henderson Investors, this is Research in Action, a podcast series that gives investors a behind-the-scenes look at the research and analysis used to shape our understanding of markets and inform investment decisions.

For decades, battery technology has centered around the all-mighty lithium-ion battery, which today powers everything from mobile phones to electric vehicles. But the electrification of the economy has kick-started a global race to make batteries more powerful, lighter, cheaper, and safer. Major dollars are at stake, says Jacob Thayer, an Associate Analyst who tracks the industry, which is expected to hit new milestones in 2023. But will those advances translate into returns for investors?

Jacob Thayer: I think it is important that investors drill down into what is the science actually showing, and, really, the nitty-gritty of how do you get from something that works in a lab to mass produced and in your EV.

Bigda: I’m Carolyn Bigda.

Matt Peron: I’m Matt Peron, Director of Research.

Bigda: That’s today on Research in Action.

Jacob, welcome to the podcast.

Thayer: Thank you for having me.

Bigda: Let’s start the conversation with a pretty basic question, which is, why have batteries become this flashpoint in the push to electrify the economy?

Thayer: Batteries are key because it’s how we store the electricity that will power our EVs, power our phones, and then even store the excess power we can generate from wind and solar and make sure we can use it when demand on the grid is higher. At night, for example, if the sun’s not out, you can’t use solar, but the battery can store the power from the solar panels during the day and use it to power the home at night.

Peron: I think it’s fair to say it’s the limiting factor in so much that we do, right? It’s not only, as Jacob points out, that it’s the hub of our energy storage and what powers our day-to-day lives, I should say. But it’s also the limiting factor in the sense that the battery energy density is really what gates us from doing more with these devices.

Bigda: And that limiting factor is there because, for many years, it’s been lithium-ion batteries that have been the workhorse of batteries. They’re rechargeable, they’re portable; but as Matt was alluding to, they have limitations in terms of their ability to store energy and power energy. Could you talk a little bit more about that, Jacob?

Thayer: Yes, I think it’s important to realize just how profound lithium-ion batteries have changed and had an impact on society. I think it was the 2019 Nobel Prize went to the technology foundations of lithium-ion batteries. If you look around today, you see our phones, our laptops, all our screens, EVs, grid storage – it’s truly had a transformational effect. The amount of progress we’ve made in improving energy density, bringing down costs over the past two decades have enabled so many facets of modern life.

But there still are some limitations. Where if you look at EVs, you have range concerns because we can’t fit enough batteries or it’s too cost-prohibitive to have the battery load we need on a car to get it to an equivalent range of some of our newer internal combustion vehicles. Then there’s always concerns about how fast you can charge. And when we’re thinking about broadening applications beyond just cell phones and cars and to potentially planes or drones one day, then we’re getting into concerns about weight, as well. And I’m sure we’ve all seen it or read about the headlines on fire risk. So, there’s still some drawbacks around lithium-ion battery technology.

Bigda: We couldn’t live modern-day life without lithium-ion batteries and yet, in order to move forward, we need even more from our batteries, is what it sounds like.

Peron: They’re really holding us back. As much as they’ve enabled, they’re holding us back. I have to ask, because all our clients ask me, I think it’s on the mind of everyone listening: Jacob, what’s the prognosis? What’s the outlook? Is there going to be a big step function in energy density coming our way in the next foreseeable future?

Thayer: Yes. We’ve been improving energy density really since we’ve started making batteries, and that trend has room to continue. If we look at existing lithium-ion technology, we really get a new, call it, generation of battery technology every one to three years that drives a 20% increase in energy density; and if all the input costs are the same, usually a corresponding reduction in price. We have a couple of promising technologies that could offer a step change in either costs (think sodium-ion batteries), a better blend of cost and performance (think high-manganese batteries), or even just on the performance side (in solid-state, as well) in development today.

Bigda: All those terms – sodium-ion, solid-state – basically, are they changing the fundamentals of the battery technology itself, or are they just improving on the exiting lithium-ion battery, how it operates today?

Thayer: It’s a mix. If we look at a high-manganese battery – right now, we see two, call it, dominant forms of lithium-ion: that would be high-nickel batteries, which have higher energy density but also are higher cost, and then iron-based LFP [lithium iron phosphate]¹ batteries  that are lower cost and lower performance. And so, high-manganese is really splitting the difference between high-nickel and LFP in terms of cost and performance. So, that’s more of another step on top of existing technology.

Where solid-state batteries are taking the liquid electrolyte out of a battery; this is much more of a step change. We’re changing the anode from graphite to lithium, and this will dramatically improve energy density and the safety profile by reducing fire risk. And then sodium-ion’s arguably the biggest potential change of them all, where we’re not using lithium, we’re using sodium instead.

Bigda: Just going back to Matt’s question, which is, are we any closer to one of them making this breakthrough and becoming more commonly used in the market?

Thayer: We have various timelines on all of these. If we look at the sodium-ion batteries, we’re in the very earliest stages of commercialization today from the leading Chinese competitor, who is in the forefront of this technology. Over the next, call it, two to three years we’ll probably see more and more instances of use cases starting to roll out on a mass production level.

High-manganese batteries, the development timelines from the leading companies here have commercialization in the middle of this decade, 2025-2026. While solid-state has had a lot of headlines on increasing performance from both start-ups and established battery players working on this space. We’re probably looking at commercialization more around the 2030 time period if the development stays on track.

Peron: I can say, as a research team, this is a keen area of research and focus for us. Because the development of this technology and the evolution of this technology is super important to understanding the investment landscape in a number of sectors.

Bigda: Not just batteries themselves, but many other parts of the economy.

Peron: They’re enablers of electric vehicles, of utility-scale storage, and lots of other applications.

Bigda: That’s an interesting point that you just made there, which is utility-scale storage, because part of the electrification of the economy isn’t just powering the devices themselves, but also being able to access power from the grid, basically. Could you talk, Jacob, a little bit about how are batteries evolving in that area?

Thayer: We’re seeing increased focus on trying to apply both batteries as backup storage for grids and then also to take the excess power from wind and solar farms and store it until we can apply it and use it later in the day. This is still an earlier phase of development. We’re seeing new technologies developed focusing on the energy storage space, where when we think about battery technology as a whole, you have a couple of trade-offs coming on. Cycle life, which is how many times you can charge and discharge a battery. And then energy density, which is how much energy a battery can store per unit of mass or per unit of volume.

If we think about energy storage as a problem versus EV batteries as a problem, EV batteries need a little bit more of a premium on energy density because there’s only so much space on a car or a truck to hold the battery. Versus when we talk about energy storage, land usually isn’t the constraining factor, it’s how reliable is a battery. How many times can you charge and discharge it? And so, we’re seeing more technologies developed where the LFP batteries that we talked about earlier, the iron-based that have a little bit lower energy density but they have higher cycle life, are now starting to be applied more on the energy storage side. And then you get the benefit of the cost savings there, as well.

Bigda: It sounds like the industry is exploring different chemistries for different applications.

Thayer: Yes, and I think that will increasingly happen as we go forward, where we maybe don’t see the same dominance we saw three or four years ago, where the majority of the industry’s batteries were high-nickel, but we start to see different slices of iron-based chemistries where that’s best; high-nickel chemistries where energy density is at a premium; solid-state batteries 10 years from now when performance and safety are even more critical. Instead of having one solution for 10 problems, we can have five or six solutions that are each more tailored to what we’re trying to solve for.

Bigda: How do supply constraints play into this? Because you talked about a lot of different raw materials that are going into these new types of batteries that are being developed. They’re all dependent on these minerals to work, so how have supply restrictions or just the ability to get these raw materials out of the ground influenced this development?

Thayer: Raw materials are obviously a big area of concern and there are several different paths we’re pursuing. On the battery-cell level, one, the rise of iron-based chemistries or the LFP chemistries we’ve talked about a couple of times, really reduce or actually eliminate the need for nickel and cobalt, which helps solve a couple of supply constraints in that area. While our higher nickel chemistries, which use the nickel and the cobalt, we’ve been decreasing the amount of cobalt that goes into these batteries. Both because cobalt’s the most expensive but also because of concerns on environmental and working conditions and the cobalt supply chain. That really leaves nickel as one of the constraints, and we’re developing technologies where we’re able to convert lower-grade nickel to higher-grade nickel to be used in batteries, which should help eliminate concerns here.

Then on lithium, this is a bit of a trickier question because lithium’s one of the more abundant minerals or resources on the planet, but it takes time to develop mines. As we go down and develop lower-concentration lithium grades, that means it’s more expensive to extract; you have to be more concerned about the environmental impact, as well. We continue to develop more efficient ways to both extract lithium and then also how we use it in a battery, where we’re working to increase the energy density at a battery back level. A battery pack is just all the battery cells put together, and if we can make the battery packs more efficient, we can increase the energy density of each battery pack without needing more resources to do so.

Bigda: In your view, would you say that the supply challenges that we face, are they actually holding back innovation or are they in a way helping to accelerate it?

Thayer: They’re really working to accelerate it. Where our cell-to-pack technology is helping to drive more energy density per unit of raw material. We’re seeing innovation around the iron-based chemistries and then the high-manganese based chemistries, which both help reduce raw material concerns. Then we’re also seeing whole new chemistry or battery types in sodium-ion, where we don’t need lithium, which is another abundant resource and one that will probably continue to develop and deploy in battery technology.

Bigda: I guess another way to ask that question is, does it stretch out the timeline, though, to when we get to a state where batteries are helping facilitate the electrification of the economy?

Thayer: Yes, I think it’s going to be an ongoing balance of how fast can we bring new resources to supply new battery facilities. How fast can those be deployed to the grid, to a car. How fast can utilities build out the transmission and distribution needed to connect a charging station. I think it’s going to be ramping three or four major segments simultaneously. If one lags the other, that has a potential hiccup for adoption, but we’ve seen a tremendous amount of capital flow into the space, both private investments, as well as here in the U.S. with the IRA to really try and jumpstart and make sure we don’t have any parts of the supply chain lag and we can get to a more electrified economy with as few hiccups as possible.

Bigda: You said the IRA, which is the Inflation Reduction Act, which was passed in 2022 in the U.S. How does public funding influence the direction of this industry right now?

Thayer: It’s really a mixing of public and private incentives here, where using the EV example, we’re seeing extremely strong consumer demand on EVs. Just because of both lower maintenance cost but also, they’re very fun to drive; they’re great driving experiences. Then we’re also seeing the government incentives play a huge role on where we end up making and manufacturing. We’re following the IRA subsidy announcements. We’ve seen Albemarle, which is a lithium miner and converter, announce a large-scale conversion facility in the U.S. We’ve seen various steps of the battery supply chain, such as cathodes manufacturing facilities, being built in the U.S. We’ve seen an acceleration of cell manufacturing in the U.S., as well. It can really shift where we end up building the components that we need to make a battery.

Bigda: That’s a little bit of a change, though, recently. Because for a while, it was perhaps other countries that were leading the way in terms of subsidizing this development, such as China, correct?

Thayer: Yes, where if we look even at the start of 2022, the vast majority of the supply chain touched China in some way or another. They were home to most of the lithium conversion facilities; they have the largest cell makers. And we’re starting to see that shift and become more a global supply chain and less reliant on one country, following the IRA and the broadening of demand.

Peron: Just to bring it back to our research process, just as we follow the evolution of the chemistries and the geometries of the battery, the same thing on the supply chain: We’re watching that closely, as Jacob mentioned, because that’s also a gating factor. If the supply chain can’t supply the batteries, then all the roadmaps that a lot of downstream industries [have] will be affected. It’s a key point of research for us.

Bigda: Even if the technology is there, if the supply chain isn’t functioning, that would…

Peron: That’s going to slow everything down.

Perhaps it’s worth shifting a minute to the competitive dynamics of the industry. You alluded to this, Carolyn. I think it’s important to bring out the fact that the competitive dynamics are changing. That’s also an area of research because, ultimately, we want to make productive investments here. Jacob, maybe you can talk to how the landscape is shifting between legacy providers and emerging providers?

Thayer: What we’ve seen historically is the top six cell manufacturers have been consolidating market share. They went from, call it, 55% in 2016, to over 80% in 2022. This has really been driven by the ability to make safer, more affordable, more reliable batteries. These leading companies have been homes to innovation, and we’ve seen, call it, two shifts, in this dynamic. Where there are several private companies or now-public but smaller, more pre-revenue, [and] earlier in their development path working on developing the step-change technologies. I think of these as solid-state, lithium-metal anode or silicon anode batteries.

And then we’re also seeing what has been a rush of capital during lower interest-rate periods; some government-driven capital in other parts of the world that have provided funding to some tier 2 and tier 3 manufacturers that may not have historically been as reliable or as competitive on cost.

And it’ll be interesting to watch how it plays out going forward. But when we’re thinking about the innovation path for, call it, iterative changes on existing lithium-ion technology, I think we’re really looking at these top six players continuing to have market share, just based on their manufacturing prowess, lower cost profile, better safety profiles, longer-term track record. But as we look out to, call it, 2030, or if we put on our 2040 glasses, there’s a lot of innovation happening both within these top six, as well as the broader supply chain. And the competitive landscape is a lot more uncertain, where new companies with great science have a chance to commercialize if they’re able to continue on their development track and really alter how we think about battery technology and the competitive landscape.

Peron: On a lighter note, I think we’ve seen many, many press releases over the decades of, new battery technology is going to revolutionize batteries, and we see those quite a bit. I guess I’m just curious, Jacob, if it’s going to be different this time.

Thayer: In some cases. I think as we pick through these press releases – it feels like we get one every couple of weeks of how we have the new next best thing on batteries. I was actually looking at one the other day, where they talk to having a fantastic battery, but if you dig in, it’s still a very long way from commercialization. I think what’s really different this time is, one, we’re getting more detailed disclosures on what is the testing parameters, what they’re actually achieving, how they’re achieving it. But we’re also starting to see capital committed behind these ideas, where it’s not just a lab paper of the next, great big thing; it’s a profit-oriented company investing in production lines. And so, it does feel that, yes, there is something real here, but I’m sure in the mix of what’s real we’re still going to get optimistic press releases coming out.

Peron: At a minimum, I think it’s fair to say that going from the lab to actual production full-scale and then use is a long, long road.

Thayer: Yes. These are incredible scientific advancements, and it might end up actually being harder to take what is incredibly hard science and make it mass produced at a commercially competitive price.

Bigda: As we make progress, what do valuations look like? Can investors actually participate in this revolution without losing their shirts?

Thayer: Yes, I think there are ways for investors to make money here, but I think it’s important that investors are able to sort through the hype of, call it, these very optimistic battery announcements and drill down into what is the science actually showing. And then, what is the manufacturing ability and, really, the nitty-gritty of how do you get from something that works in a lab to mass produced and in your EV.

Bigda: Just looking at some of the companies in this space that have recently IPO’d, their stocks would pop shortly after going public and then some of them have lost as much as 90% since then, especially during the market reset. It sounds like being a little bit circumspect is a good idea here, perhaps.

Peron: That’s not unique to battery providers; all new technologies usually go through that cycle, especially when it comes to the more, sort of, green technologies. Solar technology a few decades ago had the same cycle, and there’s this rationalization and then the real winners emerge over time. I think that’s likely what we’ll see here.

Thayer: Yes, I think that’s exactly right. Where we have a lot of innovation going on and if a company came public with a great idea, some track record of innovation, but then they had scientific setbacks or that technology became less promising. Or you also have your existing cell makers that have a more stable revenue base, they have earnings, and they had a little bit more support when interest rates started to rise in the market reset.

Peron: I think we also benefit from Jacob’s work on the EV, the electric vehicle manufacturers, because they’re doing a lot of battery innovation. Not necessarily in the chemistry always, but just in the way they’re able to package it together in innovative ways to get more range, for example, out of an electric vehicle. There are investible ideas here that capture this innovation, but not always in a pure play.

Thayer: The whole battery supply chain, the innovations and technology can build upon each other, where we can take a new battery cell and then a company with a very strong battery management system will be able to get more range out of the same cell or the same battery pack as a company that doesn’t have that same in-house battery management system technology. So as Matt’s saying, there’s a lot of ways battery improvement can manifest itself, and it’s not always in just a cell maker. It can be at an OEM who is able to have a lower cost vehicle because they’re better at managing the cell technology.

Bigda: It sounds like it’s a pretty big ecosystem and that you have a lot of work ahead of you in keeping track of it, Jacob. So, we thank you for taking time today to sit down with us and share your insights.

Thayer: Thank you for having me on.

Bigda: Next month, we’ll be joined by Portfolio Manager Ash Alankar who will talk to us about the signals he’s seeing in the options market and what that means for identifying and managing downside risk, and how to apply that to an investment portfolio. We hope you’ll join.

Until then, I’m Carolyn Bigda.

Peron: And I’m Matt Peron.

Bigda: You’ve been listening to Research in Action.

¹ A lithium iron phosphate battery is a type of lithium-iron battery using lithium iron phosphate as the cathode material and a graphitic carbon electrode with a metallic backing as the anode.