Recently, I visited the China International Battery Fair in Shenzhen. This is perhaps the largest battery show in the world, with over 980 exhibitors covering three-quarter of a million square feet. The three-day exhibition was followed by a three-day conference on battery technology and innovation drawing battery scientists from all over the world.

Almost everybody in the battery industry in China attends this show. There were lead acid batteries, NiCad batteries and all kinds of lithium-ion batteries. There were manufacturers of battery electrodes, separators and battery cases. Battery assembly equipment manufacturers were also present.

Most people think of China as a low-tech cheap labor market, but Chinese companies are now making the robots to produce batteries. Back in 2008, Chinese battery assembly equipment manufacturers were struggling to produce cylindrical cells. Today they have mastered the production of cut and stacked cells (which is where the future of lithium-ion technology is heading).

China's central government is investing huge resources into the battery industry to make China the world leader of battery technology.

One hundred years ago the engine was the key to manufacturing an automobile; for electric vehicles the battery is the key: that is where the power comes from. Batteries are the most expensive component in an electric vehicle, sometimes exceeding more than half the bill of materials cost. Tesla's Gigafactory will change the entire automobile industry and give Tesla an incredible competitive advantage, putting Tesla years ahead of all other automobile manufacturers. Tesla will turn its electric vehicle manufacturing volume into a battery cost advantage and make it very difficult for other automobile manufacturers to compete.

The Chinese government also understands the importance of batteries to the electric vehicle industry. The central government is investing huge resources into the battery industry to make China the world leader of battery technology. Close to 900 of the exhibitors at the CIBF were Chinese manufacturers.

China International Battery Fair 2014

The amazing thing about the CBIF is the breadth of the companies exhibiting at the show. Literally everything you need to manufacture batteries was there. The key to cutting battery costs is reducing capital investment and lowering component cost. Low-cost Chinese battery assembly equipment lowers the required capital investment. Chinese component manufacturers further lower costs.

So what happens to lithium-ion battery manufacturing in the US? Well, the US has a much larger market today with the Tesla Model S and the Chevrolet Volt. Volume drives down prices and robotics improve quality and level the playing field with respect to labor costs.

China has fostered an ideal environment to nurture start-up battery companies.

But China is undoubtedly the place to be for the small battery manufacturer. Battery manufacturing today is as much an art form as a science. The start-up company that invents a new recipe to increase power density and reduce cost could become a billion dollar company. With the abundance of battery component and material suppliers, China has fostered an ideal environment to nurture start-up battery companies.

China offers another competitive advantage. On an assembly line not all batteries will meet the manufacturer's specification. Low yields in a manufacturing process can be very costly. Battery manufacturers in China have a strong market to sell batteries which don't measure up to spec: electric bicycles. This market greatly reduces manufacturing risk and can be the difference between profitability and bankruptcy.

China Electric Bikes

Tesla has an advantage that other automobile manufacturers lack because they can justify investment in the Gigafactory to meet their present orders. They can build batteries in huge numbers that will attract component and material suppliers from all over the world. Tesla plans to manufacture a battery which has very high yields so it doesn't need a large market to sell batteries which are out of spec. And they are their own customer so they cut out the middleman while they cut their costs to the bone.

For the rest of the world, low cost batteries will come from China.

Charlie Paglee is the CEO of Brannan Auto, an American automotive component engineering and manufacturing company focused on China, specifically on the electric vehicle industry. Mr. Paglee has more than two decades of business experience in China and speaks fluent Chinese Mandarin. Mr. Paglee is an electrical engineer who started working with electric vehicles in 1991. Mr. Paglee was the Vice President of China for Fisker Automotive and prior to that, he was Employee Number 5 at Aptera Motors.

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