Earlier this week I delivered a talk at the EMCMR-3 conference in Marrakech about what a country such as Morocco could do in order to become a regional center for advanced battery manufacturing. My thesis was that Morocco has a relationship to the EU auto market that is in many ways similar to the relationship of Mexico to the U.S. auto market. A recent NREL study suggests that a country such as Mexico, and by analogy, Morocco, may be well-positioned to be the low cost manufacturer of lithium-ion cells in its adjacent major auto market.
The NREL study, which was presented at The Battery Show this past fall by CEMAC, compared the relative cost of battery cell manufacturing by different manufacturers in different regions. The study compared the costs of a U.S. start-up, a Korean-owned U.S. manufacturer, a Japanese manufacturer, a Korean manufacturer, a highly automated Chinese manufacturer, a labor intensive Chinese manufacturer, and a Japanese-owned manufacturer located in Mexico. When NREL compared the relative costs in those markets of labor, facilities, equipment, energy, maintenance, capital and shipping costs to the U.S. market, it found that a manufacturing firm located in Mexico should theoretically be able to manufacture battery cells and ship them to customers in the U.S. at the lowest potential cost, edging out manufacturers located in China and Korea.
Mexico’s edge over China and Korea was attributable only in small part to its lower cost of shipping to the United States. The real differentiator was the lower cost of capital (i.e., expected return on equity investment, interest rates, corporate tax rates, and expected leverage ratios) in Mexico relative to other manufacturing locations. There, I suggested, lay the lesson for Morocco, should it decide to compete for a share of the European advanced automotive battery market.
But there was a second, arguably more important, lesson to be gleaned from the NREL study, and one with relevance not just to Morocco but to any company that wants to enter the advanced battery manufacturing business. According to the NREL study the utilization rate of a factory producing advanced lithium-ion batteries will have an even greater impact on ultimate manufacturing cost than any of the other costs that may vary by region. The cost of a battery made at a plant manufacturing at a 30% capacity may, for example, be a full 50% higher than that made at a plant working at 80-90% of capacity.
The critical importance of utilization rate was indirectly highlighted earlier this week by Elon Musk’s announcement that Tesla has already sold out of stationary storage products for next year before the first ones have even been shipped to customers. This was not a pointless idle brag. As Tesla’s Gigafactory nears completion, Mr. Musk is keenly aware that the success or failure of his project in Nevada, and the market’s confidence in Tesla Motors, will depend in large part on whether Tesla’s battery products will have sufficient market demand to support a utilization rate at the Gigafactory in excess of 80%. If Elon can pull that off, the Gigafactory could be a successful project and a productive investment. If not, the Gigafactory and Tesla will face great challenges. So if you want to speculate about the future of Tesla Motors, keep an eye on the key metric of utilization rate at its Gigafactory.