Sweden’s Northvolt Quest to Build the World’s Greenest EV Batteries - George Serafeim Flashcards
Have you ever heard of a company that before it has sold a single unit of the product, they have secured 55 billion of revenues? And it has been able to attract an enormous amount of people to go not to San Diego to work, but to work in the Arctic Circle.
There’s a real question: are theIr batteries going to be cost competitive? Already, your Asian manufacturers and competitors have incredible scale that gives them incredible cost competitiveness. Can you get there? And if you can, can you get there fast enough? Because that market is expanding so fast, you need to deliver batteries yesterday.
I have been writing a series of cases on what you would call those climate solutions companies, basically companies either entrepreneurial firms, or established companies that are transitioning their businesses to provide products and services that are going to experience a tremendous amount of growth in the future because we’ll need them in order to reduce carbon emissions in the economy.
20/12/23
18/02/24
And one of them is batteries, and batteries are needed because you need to store electricity somewhere, much like we now have internal combustion engine vehicles, gas tanks to store the gas, you need to store it somewhere. So batteries are going to be needed for that. And of course, batteries are going to be needed whenever you need to store electricity somewhere.
I think about companies that are able to deliver that scaling process. And we have an enormous amount of interest among students, among participants here in being entrepreneurs and creating those companies. So I see Northvolt as a very, very interesting company that illustrates many of the tensions and dilemmas that an entrepreneur has about key questions.
How do I raise financing for this? Is it equity? Is it debt? How do I actually assemble a team? What are the credentials of the founding team that gives us enough credibility to get the customer agreements, to get the capital? Where do I locate? How do I make a choice about location? Why up there in Sweden? What are the competitive advantages when it comes to that? So a series of what I say critical decisions that an entrepreneur and a founding team needs to make, and they’re all being illustrated in the Northvolt case.
Can you just explain a little bit about net-zero and the main drivers of climate change? At a very, very simple level, Brian, what net-zero means is around mid-century, we need to basically reduce dramatically the carbon emissions that we’re emitting every year. But because we cannot really reach zero emissions, meaning that we won’t emit anything as the economy, they’re so-called very costly carbon emissions that would be very costly for us to reduce. So as a result, that’s where the concept of net comes. And net means you need negative emission technologies, either nature-based ones, such as for example, reforestation, or you need technological ones, such as carbon capture and storage, basically sucking carbon out of the air and storing it on Earth, that allows you to create negative-emission technology.
You can say, “Okay. We’re at 100% right now. We’ll reduce by 80%.” The rest 20% is just too costly, so we need to develop this negative-emission technology for the rest of the 20%. And that’s where the term net-zero comes from. And scientists basically are saying that more or less, we need to get there around mid-century in order to keep from increasing the temperature well below two degrees Celsius.
When you consider the scale of change, think about it, like cars, we have more than 1 billion of them on the road. Changing them is actually not a trivial exercise. Most people actually keep it for about 10 to 12 years. So even if you would say, “Look, I have the best car to offer for you,” it actually takes time for people to change some of those things. And then when you think about everything that we’re doing from heating and cooling and buildings and everything else, it’s just a very large-scale transformation that we need to experience across the economy.
Road transportation is a significant cause of pollution, air pollution carbon emissions as well. So to the extent that you could decarbonize them, meaning that you could actually use electric vehicles and preferably that electricity coming from low-carbon energy sources, then you could make a dent.
You defined this in the case as a problem of the commons. What does that mean?
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The problem of the commons is this idea that because we don’t have well-defined property rights, meaning that you cannot stop me from overusing the park, being there all the time and consuming it, we tend to have over-consumption of these common goods and public goods. And you can think about the problem of climate change in a similar spirit in the sense that because the atmosphere is really not owned by someone, we’re overusing it because we are over-polluting it by putting too much carbon out there.
And assuming that it’s a problem of the commons, then the solution should also be the commons. Right? Everybody owns a piece of the solution.
Are there examples you can think of where we have collectively solved a problem of the commons?
A well-known example of that is for example, the ozone layer. We all got very scared because we were thinning the ozone layer. And that was causing actually really serious health consequences for a lot of people instead of … Including skin cancer and so forth. So as a result, the world came together to create something that is called the Montreal Protocol, and as part of that, phasing out substances that were responsible for causing the thinning of the ozone. And in general, as the world, as we’re looking back 30, 40 years later, we have been enormously successful in terms of reducing those types of emissions that were causing that effect.
I remember in particular, aerosol cans were a big problem. Exactly. Refrigerants, those types of things.
Carl-Erik basically has these companies that rely on supply chains from Asian manufacturers. And as basically their important border obstacles to materials, moving through, he’s asking himself, “Why can’t we have a value chain here in Europe that we can actually secure, and as a result, diversify our supply chain.” And he’s looking at that, and he finds on LinkedIn, Peter Carlsson, who used to be at Tesla, and he was heading there several supply chain and manufacturing and battery related work. He calls him up in the middle of the night, and there they go.
We’re assuming that EVs are really cutting down on emissions. How much do they actually cut down? The answer is it depends. So let me say what it depends on. So the first thing is that basically in order to create the battery, you need actually a lot of energy. So where the battery gets manufactured makes a big difference, and this is why they’re located up in the Arctic Circle because they have access to a lot of hydropower that is very green energy, very low carbon energy. And by the way, it’s also very cheap. So when you make the battery with low-carbon energy, that actually reduces the carbon footprint from the supply chain perspective and the manufacturing perspective of creating an EV.
And then of course, the other big part is where you drive the car. So if you drive the car in a country, in a location, where in general most of the electricity, when you charge your car, is also coming from solar and wind and lower carbon sources, then actually, the reduction in the carbon emission relative to driving an internal combustion engine vehicle can be very, very dramatic. So on a total lifetime let’s say of ownership of let’s say 10 years, you could actually reduce emissions up to 80%. But if I produce it primarily, the battery, using coal? And then I drive and the electricity grid is primarily using coal, which tends to be the most high carbon intensive fuel, then you could imagine where you could get into a situation where actually, you haven’t reduced at all. Or even a situation where you have increased carbon emissions. So it really depends where you manufacture the battery and where you drive the car.
Europe, if we think about the EU in particular, have been much, much more aggressive and committed to sustainability measures than the United States, or Asia, or many other parts of the world. So it kind of makes perfect sense for them to do this here. What are some of the steps that the EU in particular, has taken to reduce CO2 emissions?
Over the decades, the carbon intensity (meaning carbon emissions per unit of electricity produced for the grid) has declined significantly, being a manifestation of the fact that indeed, many European countries have been able to decarbonize their grids pretty significantly. That is important because then when you drive the car, that is a lower carbon car, as we discussed before. And the centerpiece of the European strategy for reducing carbon emissions has been the European Union carbon market, where they have imposed a price on carbon, and they have allowed it for trading where if you need it to actually emit a unit of carbon, you will need to purchase that allowance from somebody else. And that has been a big driver I would say of the strategy of Europe toward de-carbonization.
I also think that is important to acknowledge that pretty much all regions have a de-carbonization strategy. China has one. And actually, this is one of the reasons why the strongest I would say battery manufacturers, much like CATL, are located in China, because they are creating all these incredibly powerful, efficient, and competitive climate solutions companies. And of course, now in the US, we have the Inflation Reduction Act, which is a big push of the US towards creating those climate solutions, industries, and value chains and be able to become competitive in the future.
We see these targets that all of these governments put out there, and Europe has very aggressive ones. And I wonder: Are they too aggressive? We put the stake in the ground and we say this is where we’re going to be by 2030, or 2040, or 2050. What happens if you don’t make that? Is it demoralizing?
you need to set ambitious targets to motivate people. Right? But not so ambitious that actually, it’s impossible to get, and then the target becomes irrelevant.
When you look at some of the targets for de-carbonization that Europe has set, now actually, they are not that different from example from the US one, because both the US and Europe have basically net-zero goals by close to mid-century. And depending on the European country, it might be a little bit earlier than that. And then when you actually observe, for example, China, it’s a little bit later than that, reflecting on the less state of GDP per capita. And in countries like India, a little bit later, closer to 2070. So I think from that perspective, we need to view it from the perspective of how ambitious you wanted to be: What is the urgency behind that goal?
Let’s go back to Northvolt then with all of this in mind. What were the founders hoping to achieve in starting the organization? And what was the strategy that they chose to move forward?
I think it’s a really interesting strategy because what they are doing is they’re creating this virtue cycle between customer offtake agreements, so getting the commitment from customers to basically enter into those offtake agreements from the products, and then raising financing on the back of those offtake agreements. And that financing is really critical because this is not a business that is creating an app to sell you something. This is hard capital expenditure, a lot of manufacturing, a lot of equipment, a lot of people. You need billions and billions to build what Northvolt is doing.
And in order to get both the customers on board and the investors on board, you also need to get governments on board. And this actually a critical component because the founders are looking where Europe is going from a government strategy perspective. And they are saying, “We can actually help you deliver that.”
Then the question also becomes: What are the strategic choices that the firm is making? And some of them are extremely, extremely important. What we discuss about before, location is extremely important. Why? Because it allows you to get cheap access to energy, and at the same time, differentiation. So somebody doesn’t say, “Okay, it’s a commodity product. This is just a battery.” No, actually, it’s a greener battery. And when your customers also have their own de-carbonization targets, you’re actually enabling them to reach those.
So I think certain of those elements are really critical in terms of creating an outcome for a startup that is a very interesting outcome.
And these founders had some credibility. They had some street cred. I mean, they both held important positions in important firms, and they knew a lot about what they were trying to do here. And I think that is the other critical piece here. So you are getting two of the founders that are coming from Tesla with incredible credentials in the marketplace.
But these people know what they’re doing, and then with them, two other incredible entrepreneurs financiers, that actually have a lot of credibility in building companies and raising a lot of capital in doing so. And then the location is also a competitive advantage because you’re in this Swedish environment, where actually it’s a high trust, cooperative market economy, where you can actually get industrial groups and other partners to become part of an ecosystem to support the creation of this entrepreneurial activity. And as we discussed before, also with the help of the European Investment Bank that is providing a loan to the enterprise, and that is extremely important. So you’re building that ecosystem. But what is the glue around that ecosystem is the credibility of the founding team.
I was fascinated at the fact that they were able to line up so many customers. It was this sort of cart-horse thing that they had to deal with. You need the investors, but you need the customers to get the investors. But you need the investors to make the customers feel like something’s going to happen. How did that play out?
They’re making lithium ion batteries that is a proven technology. It works. And as a result, it’s removing that aspect of risk from this endeavor. So then as a customer, what is your risk at that point? Well, your risk is: Can they scale up? And can they deliver those batteries?
Is it less expensive for these OEMs to buy their battery from a battery that’s made more locally than to have them made in Asia and shipped over?
I think my initial reaction is probably it’s cheaper to buy them in China and ship them over. But I think there are a couple of ifs here. The first one is the cost of the actual energy. If you can actually get the cost of energy to be really, really low, you might be able to actually deliver cost competitiveness. The second one is the rate at which you are scaling production. You should be able to achieve massive economies of scale if you are getting to the level of what is called gigafactory, which is what Northvolt is building as well. And of course, then you also have the cost of transportation. And when you take all of those things into account, I think you can get close to that cost that you might be incurring from Asia. I think in my view it’s pretty hard to get below that given the effectiveness that those companies have been able to achieve.
Vertical integration was a critical part of their strategy. What are the raw materials that go into making a lithium ion battery? And are those materials accessible in a cost effective way?
That is a huge bottleneck. When you look at actually the availability of a lot of those materials, they exist in very, very specific areas of the world and everybody’s trying to get them.
So securing them is incredibly important. And one of the things that Northvolt has done has done backward vertical integration in order to be able to de-risk cost inflation in the value chain. And the other thing that they’re doing is they’re implementing what we call circular economy principles, in plain English, meaning reuse, recycle, of elements that are going into the batteries to be able to decouple future growth of battery production from the rare materials that you actually need because if you can take back some of those batteries, then you can disassemble, you can take back the rare materials, you can reuse them.
And that actually is enabling you again to do a couple of things. The first one is to protect yourself against cost inflation. And the second one is not have to mine again all these rare minerals, again, decreasing the carbon emissions that are embodied in the batteries, and as a result, be able to produce and deliver a lower carbon battery.
So if they build this gigafactory, how many batteries will they be able to make when they’re at scale? Gigafactories probably can deliver about 600,000 of EVs or so. Again, it depends on the size a little bit. You can make them a little bit bigger. You can make them a little bit smaller. But let’s say for the sake of that argument, about 600,000 EVs per year.
The number of EVs is accelerating very fast, but the stock is small. It’s a few million already. I think by now, just Tesla has I think sold something like four 4 million in their lifetime. So you can scale that up and not everything that is being sold, and it’s probably in the low two digit millions of electric vehicles out of a stock of hundreds of millions.
Do you think a Northvolt model would work in the United States? I think it depends on a couple of things. The first one is clarity of government direction. There needs to be stability in policy as you’re moving forward. In general, businesses thrive on stability of government action. To that extent, I think that could facilitate that. The other element is I would say the access to cheap low carbon energy. And then of course, the ecosystem that you create around you. So you need an ecosystem of parts, manufacturers, and customers, and everybody to align around that. So I think it needs a little bit of a coordination, and that is exhibited with differential ability across different states and across the history.
And you also need an electric car charging infrastructure in the country that will make buyers like me, who are sitting on the sidelines waiting to make that move, feel comfortable about it. We’re so comfortable with our gas powered vehicles that that’s a big step for a lot of people.
At the end of the class, I wrap up and I say, “When you have this Venn diagram where three circles intersect, magic happens.” And that is the right people, in the right location, at the right time. Right? And I think the Northvolt case illustrates some of that. So I leave many of my students with that thought. And I ask them to think about: What are the capabilities and credibility that they bring that is unique and differentiates them? Are they in the right location of the business that they’re trying to build? And is the time right? Is it too early or too late? Because both of them can be destructive.
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