Over-Stimulus, EV Indifference a Lethal Mix for Battery Companies

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Volt recharging photoThe Obama Administration has over-stimulated the electric vehicle battery market, as companies inspired by the flow of federal stimulus support don’t have enough customers for their products.

The government promise of a coming electric car (and truck) revolution, thanks to moves such as President George W. Bush’s signature to approve a $7,500-per-electric-vehicle tax credit and Congress’s passage of the Recovery Act, instigated a buildup of capacity and inventory for batteries. Now putrid EV sales – including the newly introduced Ford Focus electric – have put their battery makers in peril, according to the Detroit Free Press.

“A looming shakeout in the industry, which would likely include plant closures and layoffs, is also likely to touch off a fierce debate over whether federal and state government officials made a major error by using more than $1 billion in grants and tax credits to spur massive investments that are not yet needed,” the newspaper reported last week.

The latest underwhelming car is the Ford Focus Electric (battery cost: $12,000-$15,000), which was launched this year to markets in California, New York and New Jersey. The Detroit News reported that fleet customers purchased a dozen or so in December and January, but none were sold during the last two months. Ford opened availability for customers to order the Focus EV on November 2, with the now-familiar linguistic flourish.

“Today is an historic day, as Ford opens up the order banks for the company’s first full production, all-electric passenger vehicle – the Focus Electric,” said Chad D’Arcy, Focus Electric Marketing Manager, Ford Motor Company. “The all-new Focus Electric is an important part of Ford’s overall strategy, bringing still another option to customers who want a car that is fun-to-drive, easy to own and fully electric.”

The hype would seem to match that for the Chevy Volt, the beneficiary of General Motorsmultimillion-dollar ad campaign, which has failed to boost lackluster sales. And being “fully electric” (“easy to own” – with 3-plus hour charging times and extremely short driving range – is easily challengeable) hasn’t helped the Nissan Leaf, whose recent sales have lagged the Volt’s. This despite an estimated $250,000-per-Volt subsidy and a $1.4 billion Department of Energy loan guarantee (more “stimulus”) for Nissan to build the Leaf in Tennessee.

Then along comes Ford – who famously boasted in a car commercial (since pulled) that it didn’t accept a bailout from the U.S. government – to accept a $5.9 billion taxpayer-backed loan guarantee to “raise the fuel efficiency of more than a dozen popular vehicles.” According to DOE’s Loan Programs Office, this move suddenly transformed 33,000 of Ford’s existing workers “to green manufacturing jobs.” Makes the Volt subsidies sound like a bargain, doesn’t it? But despite its introductory remarks in November, Ford doesn’t sound like it’s really in to selling its EV to a lot of people.

“The marketing of the Focus Electric is to people who buy electric vehicles, not to you and me,” said Jim Farley, Ford head of global marketing, to USA Today. “We’re focused on the people who buy them.”

Meanwhile luxury EV makers Fisker Automotive and Tesla are niche, and are not doing very well with their limited markets either.

So whether automakers can’t, won’t or don’t sell EVs, the battery companies compete for few customers. NLPC has documented extensively the troubles of A123 Systems, which started two factories in Michigan thanks to $249.1 million from DOE and $135 million from the state. LG Chem, maker of batteries for the Volt and the Focus EV, built its own plant in Holland, Mich. with $151 million in stimulus from DOE (plus $100 million, cash, from Wolverine State taxpayers). Ener1 received a $118 million grant from DOE to build batteries in Indiana – many intended for a repeatedly failed EV company, Think Global, that it had about a 1/3 stake in – which has gone bankrupt. And now Dow Kokam, a partnership between Dow Chemical and a Korean company, will soon officially open a Midland, Mich. facility with $161 million in help from U.S. taxpayers.

“It was a mistake to build so many factories,” said Menahem Anderman, an EV supporter who the Detroit Free Press says is one of the world’s top battery experts and president of Advanced Automotive Batteries, a California-based consulting company.

The newspaper, based on interviews with “other experts,” says only “battery makers with deep pockets will survive.” According to Jack McHugh of the Mackinac Center for Public Policy, a free-market think tank, only final assembly of the battery packs for A123 and LG Chem (and I would bet Dow Kokam, too) may be done at the Michigan facilities, while the majority of the work will be done at the companies’ factories in South Korea and China.

“Without subsidies and regulatory mandates,” McHugh wrote, “the electric and hybrid car market would blow away tomorrow. That reality is not likely to change in the foreseeable future…. Moreover, to the extent that regulations and subsidies do prop up electric car production, the real battery-making jobs will probably be overseas.”

In July 2010 the White House announced that LG Chem was the “ninth of nine” new plants to begin construction as part of its $2.4 billion “investment” from taxpayers in advanced batteries and EVs. “Once fully operational,” the administration’s press release said, “the (LG) factory will produce battery cells to support 53,000 Chevy Volts a year.”

Last year GM sold 7,671 Volts, and this year – unless governments and General Electric kick their purchases up substantially – will unload no more than 27,000. GM has already stopped Volt production for five weeks because of lack of demand, and will do so again this summer. That’s a lot of battery cells that will collect dust, a problem that A123 has had to deal with.

Big Government may not care whether the little battery companies go out of business, squashing the hopes of their hires that turn out to be temporary. In fact, it’s expected, as DOE has set aside $3 billion to cover losses from the stimulus program. But those multinational corporations like LG and Dow will hang in there, right? 

Wrong – deep pockets don’t go out of business. Instead they shut down unprofitable operations. And just like with the little crony companies that played with Big Government, the big corporations will drop EV battery operations the instant they realize it’s a lost cause.

Then it will be “goodbye” to green jobsthanks to another lost government “investment,” and both battery companies and taxpayers will feel quite overcharged.

Paul Chesser is an associate fellow for the National Legal and Policy Center.