U.S. Backs Electric-Car Batteries. Will Drivers Follow?

If federally funded factories don’t get enough demand, even more government spending could result.

Last year’s stimulus package committed the government to spending billions for factories designed to produce advanced batteries for electric cars. One goal is to rejuvenate cities in Michigan that have been devastated by the collapse of the auto industry. Unfortunately, it’s not yet clear if electric cars will sell fast enough to justify all this battery production. Generating the demand for these vehicles could be a long-term project-which could mean even more government investment over the next few years.

Battery Line Up: The first equipment arrives for a manufacturing line at a new Johnson Controls automotive battery factory in Holland, MI.

Construction began last week on the last of nine battery factories supported by grants under the Recovery Act, which was part of the stimulus package. The factories are part of a $2.4 billion program to help fund 30 factories for electric vehicles and their components in the United States. (The manufacturers must match these federal funds with other money, such as state incentives and private investment.) The U.S. Department of Energy released an analysis this week that claims this program, and others in the Recovery Act that support electric vehicles, will lower the cost of batteries by 70 percent, support the production of 500,000 electric vehicles a year, and create tens of thousands of jobs.

But some experts, including people at companies supported by the grants, worry that the new manufacturing capacity will exceed the demand for electric vehicles and plug-in hybrids, which have larger batteries than conventional hybrids and can be recharged by plugging them in. Later this year, Chevrolet will start selling its plug-in hybrid, the Volt, and Nissan will offer the electric Leaf, to be followed by other automakers in the next two years.

How many people will buy these cars? Menahem Anderman, founder of Total Battery Consulting, which analyzes the market, expects low demand for the vehicles–fewer than 100,000 per year in the U.S. by the time the new factories are all in full swing by 2014. That’s far less than the DOE figure of 500,000. He cites several factors for his low prediction, including the limited range of the Leaf, which Nissan says will be able to go 100 miles between recharging. Also, electric cars and plug-in hybrids are expected to cost $10,000 to $20,000 more than a comparably sized conventional hybrid such as the Prius.

If demand is low, many of these new factories may need to shut down–or rely on the government to keep running. The federal government has already approved tax credits of $7,500 to encourage consumers to buy the vehicles. The government will likely go a step further and expand the market directly by buying large numbers of electric cars for its own use.

While he thinks Anderman’s estimates are too pessimistic, Michael Andrew, director of government affairs at Johnson Controls, which received the largest of the battery-factory grants–$299 million–agrees that the government will likely play a key role in stimulating the demand. Johnson Controls, which is based in Milwaukee and has a contract to produce batteries for an electric delivery van and plug-in hybrids for Ford, is “working closely” with the agency that handles the government’s purchases of a million cars a year, Andrew says.

“One of the challenges for the industry right now is not overbuilding capacity,” he acknowledges. A wave of purchases from early adopters will help, but to sustain demand, he says, Johnson Controls is working to educate the public about electric vehicles and hybrids.

Andy Chu, vice president of marketing at another grant recipient, A123 Systems, based in Watertown, MA, says his company already has enough orders to justify the capacity of its new factory in Livonia, MI. But he says the calculation would have to be rethought if demand for electric and plug-in hybrid vehicles is lower than his customers expect.

If there is overcapacity, companies such as A123 and Johnson Controls would face tougher competition from suppliers in Asia, where there are several established makers of lithium-ion batteries, and where manufacturing equipment often costs less, Anderman says. U.S. manufacturers will need to ship equipment and materials from Asia, which drives up their costs compared to Asian manufacturers. Indeed, Chu says that without the federal grants and support from the state of Michigan, “We would likely have built a factory in Asia, not in Michigan.”

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