Deep Dive Into Battery Software - part 3
Battery software market outlook
With Intercalation Station’s contributor Gaël and Breathe Battery Technologies CEO Ian Campbell.
A big question that’s always in our minds at Intercalation is how different segments of the battery markets will evolve in the coming years. Battery software is no exception, and I was glad to have some insight from Ian on this topic.
Centralization of the market to few players
In a recent piece, Steve Levine from The Electric writes
In the 1920s, more than 700 U.S. manufacturers vied in a brutal competition to sell a new product-electric washing machines […]. But just five U.S. washing machine manufacturers survive. It’s the same with refrigerators and waffle irons. In the 1920s, around 60 U.S. companies made the former and 85 the latter; the two devices are now made by just three U.S. manufacturers each. Similar reasons underlie all these industry bloodbaths: A large number of contenders and intense competition made it hard for any single company to reach economies of scale. Strong companies swallowed up weaker or smaller ones; some went bankrupt; others moved abroad.
The idea of market consolidation has been around for a while in the battery sector. Already in 2010-2012, the consultancy firm Roland Berger was reporting that:
Overproduction and falling prices of lithium-ion batteries, have led to significant consolidation in the global market. Smaller parties are repressed, and the market will be largely dominated by five major players. Especially the small players […] will have a hard time in 2015. The competition will increase in the coming years as almost 70% of the market in 2015 will be dominated by the five major players: AESC, LG Chem, Panasonic / Sanyo, A123 and SB LiMotive.
And just this year McKinsey was affirming that:
We believe the market will likely consolidate to about ten to 15 global cell-manufacturing players. This consolidation will be mostly driven by the importance of scale to reduce production costs and to compete on performance.
So while the predictions of market consolidation have been there for a while, we went from “5 major players” in 2015 to “10 to 15” in 2023. To be fair, the dynamic of established players buying emerging ones is a logical trend, and Ian does outline the first-mover advantage very well:
I think the possibility of there being a convergence [within 5 years] on a small number of leaders dominating particular areas… I think this is the most likely outcome. And I think that we will see over the next years a lot of companies, both startups and OEMs, try to enter areas and fall by the wayside as they discover that the opportunity in those areas is great, but the investment required is also great. At a certain point, it just makes economic sense in terms of time-to-market that everybody across the industry uses [the dominating] player because they have locked-in a substantial advantage.
With Breathe being well-positioned to benefit from this advantage in the markets where they are present today. But I feel like the picture of small actors linearly becoming a few big ones is a bit oversimplified, and deserves deeper thoughts especially for the battery market. In 2002, the Harvard Business Review published this graph on the industry consolidation life cycle:
The path across the four stages is, in reality, pretty bumpy and no industry is immune to disruptions. For example, while in 2002 it did seem that automotive OEMs and Aerospace suppliers were very stable markets well in the focus phase, both were significantly disrupted by companies like Tesla and SpaceX. Also from the HBR article, while the pharma industry is a textbook example of a stage 2 industry:
Pfizer, in its recent acquisition of Pharmacia and Warner-Lambert, is a textbook example of a stage 2 company successfully positioning itself for the later rounds of consolidation that will yield the industry’s giants.
I am not sure the industry went as smoothly into “the later rounds of consolidation” as the authors imagined in 2002. I really like this YouTube video that shows the ranking of pharma companies by revenue from 2000 to 2023, to give some perspective. We can see some companies like Sinopharm slowly rising to the top, and the impacts of events like Covid where Pfizer goes from 8th to 2nd, while Moderna appears in the ranking and goes straight to 17th in the span of two years. We could also mention the huge market caps of Eli Lilly and Novo Nordisk (thanks to novel weight-loss drugs) which may shuffle the ranking further in the future.
Also to go back at one of the example from Steve LeVine, while by 1923 56 companies were indeed involved in the domestic refrigeration business, including Kelvinator and Frigidaire, the former was already holding 80 percent of the market for electric refrigerators and the latter was owned by General Electrics. It’s not like these 56 companies were created equal.
Here’s my hot take on the topic of consolidation:
I think the timelines are underestimated by many people, and that for a few years we will continue seeing new startups appear and grow fast, especially in software. These are my reasons to believe this:
More policies are coming towards the battery sector. Subsidies, cost of capital and interest rates are the primary factor in driving down manufacturing costs, and it seems to be going in the right direction globally.
Falling prices translate to new opportunities. More manufacturing means cheaper cells, so more markets that were dominated by other techs will open to batteries.
Batteries have many applications. Compared to a waffle iron, you can do a lot of things with a battery. This means there are a few large markets and many niche markets where batteries are suitable, with different opportunities and different needs. And this number is growing.
There is no one-size-fits-all chemistry. Today NMC and LFP share the spotlight but tomorrow we might see Na-ion and Li-metal become a real thing, and that will again come with new opportunities.
These four points, in combination, mean that there will be a growing need for battery software as more companies will look to optimize the design and performance of different chemistries in an increasing number of markets. Here is what Ian has to say on the topic of emerging chemistries:
From a company perspective, what we are seeing is more niche applications being the most likely candidate applications for some of these new chemistries. With Breathe, we are very intentionally building a company that positions itself and its product portfolio complementary to the cell manufacturers to make sure that we are positioned to then amplify the performance, the safety, the benefit of whichever of these chemistries [LFP, lithium metal, Na-ion] and minimize then the errors that come. I think as long as new chemistries are being developed, and I don't expect that to stop anytime anytime soon, there will always be a need for more and more intelligent control strategies to maximize safety and longevity, and minimize charging time.
I do think there will be room for disruptive startups in niche markets, since these tend to have a lower barrier to entry. Ian did underline the first-mover advantage however, and how Breathe is positioning itself to be as chemistry-agnostic as possible. What I am also wondering is how much pure software solutions fare against both software and hardware.
Software and hardware
In a recent episode of Redefining Energy entitled “Top trends in Climate tech”, Dr. Caroline Funk, partner at Blue Bear Capital (a silicon Valley VC firm that invested in Accure), affirms that:
At the Venture scale, we believe that software and data are going to provide the biggest returns.
The advantage of software-only approaches being outlined by Ian:
[our customers] can extract more from their batteries with our software add-on that doesn't require any hardware changes on their system, which for sure they love. […] Historically [software-only] has been a very good strategy for us.
I think this makes sense in a market where cell manufacturing companies and car OEMs have very thin margins (head to the excellent piece by Andrew Wang “Gigaprofits: batteries not included” on the topic if you haven't read it already). The priority in such a market is to optimize the bottom line fast and minimise the time to market.
In a more mature market however, the differentiator can be a few percent points of performance that usually come at a higher cost. Improving rejection rates on production lines from 20% to 15% is typically easier than from 10% to 5%. Also, at this point the market actors are usually more tech-savvy and have already collected most of the low-hanging fruits, so they might become more interested in “exotic” solutions that cost more.
For example: Let’s say a company in the EV industry targets a certain performance X. Company A offers a pure software solution that can be integrated with existing equipment, while company B offers a hardware + software solution that costs more than company A’s solution but improves performance X by an additional 10%. In a less mature market, company A is probably the go-to solution, because they improve time-to-market (less integration trouble) and require less investment. In a more mature setting, market actors may evaluate that the hardware is worth it, and therefore may switch from company A to company B.
So here is my hot take concerning software vs. hardware:
I think we’ll see more and more companies proposing both hardware and software solutions, which could happen through mergers of companies that today specialize in either, through larger companies (like the car OEMs themselves) entering the battery software space and adding their hardware expertise, or through new companies (spinning-out from academia for example) offering cutting-edge hardware + software packages.
And I do think Ian is attentive to market evolution with respect to that:
Since day one [our objective] has been to create the most amount of end-user value most quickly and most cost-effectively. […] The industry evolves pretty fast. We see new hardware as well as new pack architectures come on online and create opportunities outside of the software space.
The UK market
With this year’s news from BritishVolt and AMTE in Scotland, it seems that battery manufacturing in the UK is going through complicated times.
On the counter side of that, we also see investment from Tata and from Envision AESC UK in battery manufacturing capacity. I think there is a massive opportunity for the UK to focus the battery industry here on more than just sustaining the automotive industry and preventing the domestic automotive industries decline, but rather focus the investments to create a battery industry that is serving a global market outside of purely automotive, and recognizing that there's massive volume already existing today in consumer electronics and soon in the stationary market. Overall, I'm very bullish on the UK battery industry and the battery value chain.
I think there are good reasons to be bullish on the UK battery value chain. Some manufacturing projects may have had some troubles so far, but there is a lot going in on in software (many startups on my market overview were British) and more added-value hardware. There is also a type of software startups that I have completely left out of this article because they don’t really model what’s going on inside a battery: route-to-market providers like Habitat Energy or market analysis providers like Modo Energy. The UK is very much ahead of the pack when it comes to integrating batteries to its grid through market mechanisms and regulations, so that’s another layer of startups doing great in the UK battery value chain.
Conclusion
To conclude on this article, I’d say that battery software is a field that’s ripe with innovation and opportunities.
We know some of our (younger?) readers may be wondering which of academia or industry might be more interesting with respect to a career in battery software-related topics. As Ian elegantly put it:
I don't think that for me the question I would ask myself is, is it academia or industry? Academia is an absolutely wonderful place for exploring some of these [cutting-edge, low readiness level] technology opportunities but there are great opportunities to do that in industry as well, more in contact with the customer. One of my pieces of advice for anyone who's operating in academia would be to try and find applications. I think that personally helped me to be time-efficient with what I was researching when I was building battery models.
Indeed, it’s possible to lose oneself in the details of what’s happening in a battery, but at the end of the day what users care about is how you can improve their battery key performance indicators. And, wherever you’re reading this from, there won’t be a shortage of opportunities to do that in the near future!
🌞 Thanks for reading!
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