The principal barrier to the development of electric drive in the United States is not technology, it is finance. American scientists and auto companies invented the modern electric vehicle. But in the race to deploy electric vehicles and manufacture the lithium-ion batteries that power them, the United States lags behind.
According to Bloomberg New Energy Finance, global sales of electric vehicles should reach 11 million by 2025 and then surge to 30 million in 2030, as they become cheaper to make than internal combustion engine cars. China will lead the transition, with electric vehicle sales accounting for almost 50% of the global market from now to 2020 and 39% by 2030. By 2030, Bloomberg expects Europe to account for 26% of the electric vehicle market with the United States accounting for about 20%.
The outlook for battery manufacturing and the development of battery manufacturing technology is even more bleak. According to Avicenne Energy, in 2017 the United States accounted for only 2% of worldwide manufacturing capacity for lithium-ion batteries. China accounted for 53%, with Japan and Korea accounting for 20% and 17%, respectively. It is unclear that these percentages are going to change significantly between now and 2030.
Where lithium-ion batteries are made and who owns the technology used to make them matters. The lithium-ion technology that powers electric vehicles is a fundamental technology of the 21st Century. He who controls lithium-ion technology will ultimately control not just who makes the cars, but who makes the consumer electronics, medical devices, robotics, IoT controls, aircraft, electronics equipment, high energy weapons and other 21st Century devices that will run on electric energy unattached to the grid.
So why has lithium-ion manufacturing and manufacturing technology become so concentrated in Asia? The answer is simple. In the words of the famous bank robber, Willie Sutton, that’s where the money is.
Although Japan and Korea have long supported the development of lithium-ion manufacturing capacity as a matter of national policy, China has in recent years become the biggest investor in lithium-ion and electric vehicle technology. Forbes reports that in 2017 alone, China’s central and local governments spent $7.7 billion on electric vehicle subsidies. This figure does not account for the additional direct and indirect subsidies and other forms of support that the Chinese central and local governments give to lithium-ion battery and electric vehicle manufacturers and to electric vehicle owners.
Under the current vehicle subsidy program, subsidy payments in China will rise to approximately $20 billion in 2020 and $70 billion in 2025. In order to put this number into perspective, the annual budget of the Chinese government was RMB 20.3 trillion ($3.1 trillion) in 2017, and the government ran a fiscal deficit of RMB 3.1 trillion ($460 billion), says Forbes.
That the United States is lagging behind in the race to dominate lithium-ion battery manufacturing and manufacturing technology should be no surprise. The United States is simply being massively outspent. The only real surprise is that the United States is still in the race at all, probably due to its initial development of lithium-ion technology. But as the imbalance of cumulative investment weighs more heavily each year in favor of Asia, even the remaining competitiveness of U.S. industry is likely to wane and eventually to dissipate entirely.
The fundamental problem is that the traditional tools of capital formation used in many Asian countries, particularly in China, are simply better suited to supporting the long-term capital needs of lithium-ion battery and electric vehicle development than are the traditional tools of capital formation used in the United States.
China is in large part a command economy. Where the Chinese government sees compelling economic, environmental and security reasons to support certain technologies, it can, through a number of command mechanisms, direct massive amounts of capital to support those technologies. That is exactly what is happening in China with electric vehicles and lithium-ion battery manufacturing.
The United States does capital formation differently. Investments in early stage technologies typically access capital through venture capital. The venture capital market in the United States is an amazingly effective and efficient way to raise money for new technologies. But it comes with a significant catch: In order for a venture investment to work, the venture investor generally needs to see a return on its investment within a five-year time period in order to produce a rate of return that justifies the investment.
That catch is of little consequence where the investment is in information technology or some other technology that requires little capital and can produce a return on investment within five years. But where an investment involves something like battery or electric vehicle-related technology, which involves large capital expenditures and potentially many years until a meaningful market develops, venture capital is ill-suited to the task.
Last September I attended the U.S. Department of Energy’s InnovationXLab Energy Storage Summit at the SLAC National Accelerator Laboratory in Palo Alto. The well-intended purpose of the meeting was to highlight the energy storage-related technologies being developed by several national laboratories and to pair those technologies with venture capital investors.
The InnovationXLab program was fascinating in its description of the battery technologies being developed by the national laboratories. But it became painfully clear in listening to the talks of the invited venture capitalists that they had not the slightest interest in making any investments. They were fully and painfully aware of the inapplicability of the financial tool they represented to the problem that the U.S. Department of Energy wanted them to solve. The meeting had the feel of the remaining passengers on the Titanic scrambling to locate the departed life boats.
But what if the problem is that rather than looking for lifeboats, the passengers should be looking for a different flotation device? Is it possible that there is another type of financial tool familiar to U.S. investors that is better suited to making capital intensive, long term investments of the types necessary to support lithium-ion battery technology and rival the Chinese? That other tool could be one long used to finance the construction of infrastructure.
The United States has financed the construction of infrastructure, such as toll roads, bridges and airports, for well over 100 years. Rarely do such investments involve venture capital investment and the promise of an equity return. More commonly infrastructure is financed by forward selling user fees, such as tolls and landing fees, to investors who will pay the capital cost of the desired new infrastructure in exchange for the right to collect the user fees for some period of time after the project is put into service.
There is an obvious application for this type of finance to vehicle electrification. The U.S. government could, through Congressional action, impose a 2% user fee on all electric vehicles sold between 2025 and 2040. A 2% user fee would be unlikely to depress demand for the vehicles themselves. But the fee would generate a substantial stream of government-guaranteed revenue that the U.S. government could sell and that many investors would be happy to buy.
The proceeds of the sale would be used by the government to invest in things that would generate more electric vehicle sales, such as consumer incentives, charging infrastructure and advanced battery research. The investors would have the right to approve such government investments, as the investors will want to ensure that the proceeds are used in ways that will maximize the user fees eventually collected.
The size of the revenue stream generated by a 2% fee is necessarily speculative. But Forbes expects that about 6 million electric vehicles will be sold in the United States in 2030. Assuming an average sales price of $30,000 per vehicle, a 2% user fee should generate proceeds of $600 per vehicle or $3.6 billion in 2030 alone.
While the forward sale of a modest user fee of 2% on the future sales of electric vehicles will not put the United States at quite the same level of investment as China, it would inject much needed capital into lithium-ion battery and electric vehicle technology in the United States at a time when that capital is sorely lacking. That might not be a lifeboat. But it could at least be a raft.