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Battery 101: The Cathode

Battery 101: The Cathode

We’ve written about the imminent electrification of everything and the crucial role of the battery before. New segments are being disrupted by electrification, from homes to recreational vehicles to construction equipment. Essentially, anything powered by gas today will be electric in the future.

Electric vehicles (EVs) have been the focal point of investor thinking on electrification given that we’re seeing more and more of them on the roads. While the EV segment has an impressive forecasted growth of a 35% annual run rate, we believe that the growth in battery minerals and components will—within the next ten years—exceed EV growth.

This report on the cathode is the first of our five “Battery 101” reports.

What is a cathode?

The cathode is one component of a battery cell and is one of two key elements that make a battery work, along with the anode. The word “cathode” was derived in 1983 from the Greek word, káthodos, which means “descent” or “way down,” referring to the flow of energy through a battery. The development of cathodes for lithium-ion batteries began in the early 1980s, so the underlying architecture has been around for about 40 years.

Here’s how it works: During a battery’s charge, lithium ions (electrons) flow between the cathode and anode repeatedly which creates an output of energy (mechanical). The cathode plays an important role in the four workings of a battery cell, which include:

  1. Ions flow from the cathode to the anode internally.
  2. As ions flow, the anode builds up an excess of electrons.
  3. Through an external circuit (conductive path), ions flow from the anode to the cathode which balances out the charge and gives power to the vehicle.
  4. When this transfer of ions eventually stops, it signifies the end of the battery life.

Cathodes are expensive

The battery in an EV is expensive, accounting for between 15-20% of overall vehicle cost. For example, in a $55K Model Y, the battery represents about $10-$12K. The material contents of the cathode make up about 50% of the battery cell cost. In other words, the Cathode Active Material (CAM) makes up 8-10% of the cost of an EV. CAM is so expensive due to the high costs of mining and refining materials, along with the global supply chain needed today to transport the CAM to battery cell manufacturers.

What companies make cathodes?

Cathodes are “made” by battery cell manufacturers including CATL (China), Panasonic (Japan), and LG (South Korea). We estimate that 90% of the cost of a cathode lies in the cost of the CAM. The primary material in the CAM is lithium, alongside a secondary metal which could be cobalt, nickel, or manganese. If you’re curious, copper is a key battery material that is used in the anode. The key CAM suppliers include L&F (South Korea), Kansai (Japan), POSCO (South Korea), EcoPro BM (South Korea), Mitsubishi Chemical Holdings (Japan), Umicore (Belgium), BASF (Germany), and soon-to-be Redwood Materials (US).

Proud to Be an American Cathode Producer

With continued geopolitical tension and supply chain constraints, the focus of the US government on localizing supply of rare materials for EV batteries has become increasingly apparent. The Inflation Reduction Act offers financial incentives and tax breaks for companies who comply with guidelines set for new materials, including sourcing from within the US or from countries with whom the US has a Free Trade Agreement. These new sourcing guidelines come when China is the leading force in global electrification through its Made in China (MIC) 2025 initiative.

In the coming years, we expect an increased emphasis on localized battery component manufacturing. At last count, 22 companies made announcements committing to investment and expansion of US-based battery production. More recently, from February to August 2022, the following OEMs and manufacturers announced additional plans to scale US facilities, including:

  • CATL: The Chinese-based, world’s largest battery manufacturer has paused announcements on its plan to expand battery production to the US (potentially in South Carolina and Kentucky). We expect CATL to make its plans for US manufacturing official within the next two months.
  • Toyota: Committed to an investment of up to $3.8B with a portion allocated to EV battery production. Production capacity will be increased to 40 GWh.
  • Honda and LG Energy: Announced a joint venture to invest $4.4B toward a US-based battery production facility, with lithium-ion battery production to start by 2025. Annual production capacity will match 40 gigawatt hours.
  • GM and LG‘s Ultium Cells LLC: The Department of Energy’s Loan Programs Office announced a $2.5B investment into the company battery cell manufacturing facilities located in Ohio, Tennessee and Michigan.
  • Ford: Announced a new battery capacity plan to localize 40 GWh annually and direct source raw materials from the US, Australia and Indonesia.
  • Hyundai: Committed an investment of $5.5B for its first dedicated EV plant and battery manufacturing facility in Georgia, with production set to begin in 2025. Annual capacity will reach up to 300K units.
Themes
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Early iPhone 14 Demand Signs are Encouraging

Early iPhone 14 Demand Signs are Encouraging

While connecting lead times to demand is more of an art than a science, we’ve found that an expansion or compression of delivery times over the years have been a leading indicator of demand. Three days into the iPhone 14 cycle, we looked at average lead times in eight countries for the base iPhone 14, Pro, and Pro Max models and found an average lead time of 3.1 weeks. This is a longer average than we observed in 2021 and 2020 (measured as 2.0 weeks) as well as the cycles of 2018 and 2019 (measured as 2.5 weeks).

Digging into the lead times

The 3.1-week average is the highest since the 5.5-week average in Fall 2017 preceding iPhone revenue growth of +18% in FY18. The following year, we observed iPhone lead times compress to 2.5 weeks which kicked off a year where iPhone revenue declined by -14%. This suggests that the change in lead time is more important than actual weeks of lead time. It’s worth noting that some of that decline in FY19 was attributed to timing of initial iPhone shipments. Adjusting for this timing dynamic, we believe that iPhone revenue would have been down slightly in FY19 compared to the +18% growth in FY18.

The chart below outlines the average iPhone lead time for iPhone 14, Pro and Pro Max models three days after launch:

Methodology

We checked iPhone 14, Pro, and Pro Max lead times in 8 countries on Monday, September 19. Extrapolating lead times to sales is more of an art than a science given that we don’t know how many phones Apple is able to produce. That said, longer lead times have historically been an indicator of healthy demand and shorter lead times an indicator of softer demand.

Takeaways

  • For September: We caution that we are only a few days into the cycle. Lead times suggest the iPhone segment for the September quarter is on track to report a slight upside to the Street.
  • For FY23: If the trend continues, we expect an inline to slight upside to the Street’s +2.5% iPhone growth estimate for FY23.
  • Reasons for strength: We believe the reason for the strength in sales is less about the new features on the iPhone 14 and more about a base of nearly 1.1B iPhones (Source: Loup) that need to be upgraded every 3-4 years.

Watch/Watch Ultra

We also observed that Watch lead times were slightly longer than last year. Series 8 is running just under 3 weeks, in line with our Series 7 lead time observations last year.  We saw slightly longer Ultra lead times at just over 4 weeks which results in an uptick in the overall Watch lead times. Translating that lead time dynamic into sales should factor the macro headwinds on the Wearables business. Specifically, this Summer, demand for Watch softened as evidenced by the decline in sales by around -15% in the June quarter (Source: Loup). With the addition of Ultra, we expect Wearables growth to improve from the recent June quarter to flat in the December quarter.

Apple
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EV Sweet Spot Is Shifting from OEMs to Batteries

EV Sweet Spot Is Shifting from OEMs to Batteries

The trend line is undeniable. Today, EVs account for about 5% of global car sales. In 2021, an estimated 16.5m EVs were on the road worldwide (according to IEA), compared to about 1.4B vehicles total. Within the next 20 years, all vehicles will be electric. To say that the electrification of transportation is just starting is an understatement. To date, the investment approach of Wall Street has largely been focused on the OEMs. If you’ve invested the last few years on getting smart about OEMs, you’re in a good place. That foundation will be helpful for the next EV learning curve: batteries.

We believe that over the next two years the investor focus will shift away from the OEM to US battery production. Battery sourcing will move away from Asia and domestic policies like IRA will continue to ramp, both fueled by an underlining 35+% annual growth in EV deliveries.

Companies and investors are beginning to get behind the opportunity. Recently, the White House highlighted that since Biden took office, “companies have announced investments of more than $36B in electric vehicle manufacturing and $48B in batteries right in the United States.” We believe that spending over the next three years will exceed those estimates, with the actual investments leaning closer to $40B and $55B, respectively. Either way, there is a shift in dollars going from OEMs to batteries.

OEMs and manufacturers are lining up

At last count, 22 companies have made announcements over the past year regrading an increase in battery production within the US. More recently, from February to August 2022, the following OEMs and manufacturers have announced additional plans to scale US facilities, including:

  • CATL: The Chinese-based, world’s largest battery manufacturer has paused its announcements on a plan to expand battery production to the US (potentially South Carolina and Kentucky). We expect CATL to make its plans for US manufacturing official within the next two months.
  • Toyota: Committed to an investment of up to $3.8B with a portion allocated to EV battery production. Production capacity will be increased to 40 GWh.
  • Honda and LG Energy: Announced a joint venture to invest $4.4B toward a US-based battery production facility, with lithium-ion battery production to start by 2025. Annual production capacity will match 40 gigawatt hours.
  • GM and LG‘s Ultium Cells LLC: The Department of Energy’s Loan Programs Office announced a $2.5B investment into the company battery cell manufacturing facilities located in Ohio, Tennessee and Michigan.
  • Ford: Announced a new battery capacity plan to localize 40 GWh annually and direct source raw materials from the US, Australia and Indonesia.
  • Hyundai: Committed an investment of $5.5B for its first dedicated EV plant and battery manufacturing facility in Georgia, with production set to begin in 2025. Annual capacity will reach up to 300K units.

Built for the US and Europe from the ground up

By 2030, the Biden administration is aiming for 50% of all new passenger vehicle sales to be electric. That’s worth saying again. In 8 years time, half of all new cars sold within the US will be EVs from about 5% today. The mass adoption of EVs will, of course, drive demand for raw and recycled materials (Ni/Co, Cu, Li) along with components and cells. Today, more than 95% of EV battery critical parts come from Asia, with around 70% from China. That dynamic will change given that global trade will fade and be replaced by onshoring, hoarding of technology/raw materials by national governments and the opportunity to lower battery costs by moving production to the US.

As the landscape of EV battery manufacturing shifts away from Asia to the US over the next decade, some traditional companies will benefit and new companies will emerge targeting parts of the battery value chain. We believe that the new companies, built from the ground up and targeting US and Western Europe production, will be the biggest beneficiaries. It’s a similar dynamic to the EV first auto companies having a competitive advantage.  The short list of potential winners today include Ascend Elements and Redwood Materials.

I’ll be writing more about those companies in the months ahead.

Themes
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