2023-11-06 09:00:00 ET
Summary
- Ford is the only automaker planning to invest directly in manufacturing lithium-iron-phosphate batteries in North America, giving it an advantage in the American EV market.
- LFP batteries offer a cost advantage over high-nickel cathodes, making EVs more affordable without sacrificing profit margins.
- Ford's commitment to domestic LFP production positions it well to capture federal EV subsidies and deploy LFP vehicles at scale, giving it a massive advantage in producing low-cost EVs.
As the EV market in America heats up, the leading automakers have started to engage in a bit of a price war, sacrificing margins to do so. However, producing vehicles with an alternative battery chemistry may allow companies to cut prices without cutting margins. While Ford Motor Company (F), Tesla, Inc. (TSLA), and General Motors Company ( GM ) have all announced plans to introduce LFP vehicles to the US market, Ford remains the only automaker to have announced its plans to invest directly in manufacturing the chemistry in North America. This article will look at why I believe this places Ford in a stronger position than its peers to succeed in the American EV market.
What is LFP
Batteries are composed of three primary components: the cathode, anode, and electrolyte. In the modern lithium battery, both the anode and electrolyte have become rather commoditized, not contributing much in the way of performance or cost variance. This has left the cathode as the primary variable to alter the profile of a battery.
High-nickel cathodes, such as nickel-manganese-cobalt ("NMC") or nickel-cobalt-aluminum ("NCA"), provide high energy density. However, this energy density comes at a premium.
Where cost is more important than overall range, lithium-iron-phosphate (lithium-ferro-phosphate; "LFP") becomes the better choice. LFP cells come at a 30% discount compared to NMC, on a per kWh basis, making up for the ~25% reduction in energy density.
Historically, LFP has been almost exclusively deployed in the Chinese market in EVs with incredibly low range. However, as recent developments have helped improve the energy density of LFP cells, and EVs become increasingly price-sensitive, LFP has started to make its way into Western EV markets.
As prices for cobalt and nickel continue to surge, LFP's cost advantage has continued to grow. Furthermore, products such as BYD Company Limited's (BYDDF) Blade battery pack have taken advantage of LFP's superior stability to improve energy density at the battery pack level.
While LFP cells remain significantly less energy-dense than high-nickel chemistries, the greater internal stability of an LFP battery allows for battery packs to be constructed with less internal support. This allows for a tighter, and lighter, packaging of LFP cells within a battery pack, helping to reduce the realized energy density delta between LFP and high-nickel batteries.
BYD's Blade battery, introduced at the start of 2020, was truly the first LFP battery pack architecture to take advantage of the chemistry's superior internal stability. Prior to its introduction, LFP batteries were constructed in the same architecture as high-nickel batteries.
Inflation Reduction Act Battery Investments
Now that LFP has been developed to a point where it can deliver a suitable range for mass-market EVs, the major US automakers have all announced plans to introduce the chemistry to the North American market. Doing so will allow them to introduce far more affordable EVs, undercutting rivals without reducing profit margins.
GM's Chevy Bolt is currently the cheapest EV in the United States, with an MSRP of $26,500 . The vehicle's 259-mile range is powered by an NMC battery pack, which likely costs around $9,750 . Switching this over to LFP would reduce the battery cost to ~$6,825.
But in order to really take advantage of this low-cost battery chemistry, automakers need to capture the federal EV subsidies. Following the Inflation Reduction Act ("IRA"), the qualifications to receive an EV subsidy have shifted to prioritize supply chain localization.
In order to even be eligible for consideration, final EV assembly must be in North America (50 states plus the District of Columbia, Puerto Rico, Mexico and Canada) and the vehicle's MSRP must be below $55,000, or $80,000 for vans, pickup trucks, and SUVs. If those conditions are met, the vehicle is then audited for additional criteria.
The $7,500 tax credit is split in half, with different criteria needed to receive both, or either, halves. One half dictates that at least 40% of critical materials in the battery need to be sourced from the United States, or countries that it has a free trade agreement with. This 40% threshold will rise to 50% in 2024; 60% in 2025; 70% in 2026; and 80% in 2027 and beyond.
To be eligible for the other half, at least half of the vehicle's battery components need to be manufactured in North America. This also has a growth clause, moving up to 60% in 2024 and 2025, eventually reaching 100% in 2029 (+10% per year).
Automakers are taking this pretty seriously, as they are currently responsible for nearly three-quarters of America's gigafactory pipeline, far greater than the 29% global average. By leading the transition to domestically-produced EV batteries, automakers are vying to best position themselves to capture the latter half of the EV tax credits.
Earlier this year, an EV price war was widely reported on as automakers were vying to capture market share from one another. Adding LFP production under the blue oval brand, eligible for federal subsidies, gives Ford another weapon in their arsenal to fight with that its competitors simply don't have in my opinion.
North American LFP Outlook
Unfortunately, for LFP batteries, it isn't enough to just focus on final cell assembly. Iron phosphate, a critical material for the assembly of LFP batteries, is exclusively produced in China, as are LFP cathodes. By 2026, automakers will be hard-pressed to qualify for the battery components portion of the tax credits without domestic LFP production.
As of February, Benchmark Mineral Intelligence ("BMI"), estimated that the announced US gigafactory pipeline implied LFP battery manufacturing capacity of 8 GWh by 2025 and 49 GWh by 2030. While automakers are investing heavily in battery capacity, this does not include LFP.
Investments in domestic LFP production have likely been sidelined as producers seek a remedy for the supply chain concern. After all, there's not much point investing in a battery facility if it won't even put the EV subsidies in reach.
However, of the 49 GWh of LFP capacity to come online by 2030, Ford was responsible for 35 GWh. In my previous article , I covered Nano One Materials Corp. (NNOMF), a little-known cathode developer out of Canada which seeks to completely localize the LFP supply chain in North America via a few key process innovations (removing the need to manufacture iron phosphate as a separate precursor). It also currently owns the only LFP cathode facility in North America.
Nano One is currently partnered with an undisclosed global automaker based in the US, in which the automaker is evaluating Nano One's LFP production process. The two companies are also working together to complete a joint vision for commercial production, which will include the sourcing of battery metals.
In that article, I called out that Ford announced its plans to build a 35 GWh LFP battery facility in the US on February 13, which was just eight days before Nano One announced that its US-based automotive partner would be evaluating its LFP cathode material (in addition to NMC). While Nano One's partner could be any of the major US automakers, it does seem to align most closely with Ford's current strategy.
Regardless of how it plans to source cathode material, Ford is currently the only automaker committed to manufacturing LFP batteries domestically. This places it in the best position to produce EVs at a discount to its peers.
Earlier this year, General Motors discussed plans to slow its initial EV deployment on the heels of a slower-than-expected ramp of its Ohio battery facility. This only bolsters Ford's early advantage, as it continues to invest aggressively in electrification.
Recent Challenges
However, the company's plan to license CATL's LFP technology may become a roadblock in Ford's efforts to capture federal subsidies. Because CATL is a Chinese company, GM has been lobbying behind the scenes to disqualify Ford's LFP plant from vehicle subsidy packages. This, in conjunction with the ongoing UAW strikes, has caused Ford to halt development of its LFP production site.
Ford's argument is that licensing technology from CATL will allow it to remove China from the supply chain, while still benefiting from the significant technological lead that the country has in the LFP space. However, GM and Republicans in the House of Representatives argue that this simply invites China to lead America's EV transition and that it doesn't accomplish the vague goal of eliminating "foreign entities of concern."
Biden is expected to clarify this clause in the coming months, determining how strict America's anti-China policy will be. This will likely determine the future of Ford's LFP investment, which may be scaled back significantly if it is determined that licensing agreements do not sufficiently eliminate China's involvement.
It's worth noting that Ford was granted a $1.7 billion subsidy package to create the facility from the State of Michigan. This will be scaled back if Ford's plans change, though it does provide some basis of government support for the project.
Investor Takeaway
I continue to feel strongly that the North American LFP opportunity is a significant, and overlooked, aspect of the ongoing EV race with a substantial advantage granted to the early adopters. As the only automaker with plans to manufacture LFP batteries at scale, Ford appears to be the best-equipped automaker to deploy LFP vehicles at scale, with IRA subsidy eligibility.
While this future is now in question, I believe that Ford will still be the first automaker to deploy LFP capacity regardless of the upcoming clarification. Ford could shift its licensing agreement to collaborate with other battery makers, such as those from South Korea (i.e., SK Innovation or LG Energy Solution , the latter of which plans to produce LFP cells in America as well), or simply pursue alternative arrangements.
As Ford continues to ramp its EV efforts, this lead in powertrain development will contribute to a lead in the American EV market. Investments now are critical in creating a successful execution down the line, given the long lead times for facilities of this nature.
Overall, I feel that investors are not aware, or interested, enough in the significance that supply chains hold in the future of the American automotive industry. An intelligent strategy could be completely negated by a lack of early investments in securing supply chains, but I do not believe Ford will be one to fall victim to this.
For further details see:
Ford: An Early Lead In LFP Could Mean Winning Electrification In America