Executive Summary

The United States has continued to lead in developing new technologies and is the major source for new concepts in battery, fuel cell, and other budding technologies supporting the nation's energy and portable communications future. Asian and European companies, however, are developing the manufacturing expertise to commercialize many of these technologies.

In the area of advanced rechargeable batteries, and other areas as well, the Advanced Technology Program (ATP) has funded projects that were technically successful, but where the out-look for U.S. companies' becoming major commercial players in high-volume applications is not promising now. U.S. companies have opted out of many markets. ATP seeks to better understand the factors affecting commercialization of technology as a means of:

• providing guidance for the proposal evaluation and selection process,
• aiding in monitoring the business opportunities progress of technologies currently under development, and
• contributing to the development of U.S. science and technology policy.

This study uses the case of lithium-ion (Li-ion) batteries to seek a better understanding of industry factors that affect the introduction of new rechargeable batteries and similar types of technologies into the marketplace.

Background

Li-ion batteries power the devices of the digital revolution— including telephones, music players, digital cameras, and notebook computers. Today's typical mobile phone owes its size and weight reductions largely to the advent of the Li-ion rechargeable battery.

Over the past 10 years, the market for Li-ion systems has grown from their commercial introduction with minimal production in 1992 to over $3 billion in 2003. This technology sparked the expansion of cellular telephones and notebook computer applications. Production of Li-ion cells originally centered in Japan, but new manufacturers with significant production capability have now appeared in China and Korea .

U.S. researchers were once on the leading edge of key technical developments enabling the Li-ion battery systems in use today. The National Electronics Manufacturing Initiative (NEMI) roadmap studies recognized advanced rechargeable batteries as a critical component in the growth of portable electronic devices. The U.S. battery industry was aware of the importance of this emerging technology, but did not try to compete with stronger players overseas. In spite of the rapid growth of this important market segment, the United States has no large volume producers of this technology. There are several reasons for this.

Why are there no volume Li-ion manufacturers in the United States?

• The U.S. battery companies “opted out” of volume manufacturing of Li-ion batteries, primarily because of a low return on investment compared with their existing business. Duracell and Energizer both started, but later abandoned, programs for production of rechargeable Li-ion in the United batteries. They decided not to compete with companies based in East Asia, which can tolerate lower profit margins due to structural advantages in their home countries. A secondary consideration was the time and expense required to establish a sales organization in Japan to access product design opportunities.
• The cost of labor is not as significant as is commonly believed. Production of Li-ion batteries consists of both unit-cell production (which can be automated to a high degree) and battery pack assembly (which is most cost effective as a manual process). Automated unit cell production offsets the advantage of locating production in East Asia . However, establishing an automated production facility requires a minimum investment of about $120 million.
• Sales and marketing of rechargeable batteries differ significantly from the marketing of primary batteries, where
• U.S. firms have a strong marketing and distribution net-work. In rechargeable batteries, customers are large, high technology-based electronics companies. Developing a product requires close contact with portable electronic device designers who choose the battery to power the device. Most producers of portable electronic devices are located in Japan in companies that are both producers and user/customers of rechargeable batteries.
• American companies are better able to compete in small-scale, high-quality, high-profit-margin niche rechargeable battery markets, such as those with medical, military, or space applications, rather than in large-scale production.
• American manufacturers will continue to be competitive in the market for primary batteries. Their strengths lie in their distribution networks and in marketing coupled with low-cost, highly-automated production.
• No simple explanation accounts for the lack of a large-scale producer of Li-ion batteries in the United States . The subsequent discussion, however, provides reasons for the dominance of companies from East Asia in this arena.

Factors Affecting U.S. Production Decision

Several East Asian countries, including China, South Korea, Taiwan, and Malaysia, as well as Japan, have internal structural advantages for domestic companies over what U.S. companies experience at home; these encourage commercialization of new technology. Some European countries have also developed such advantages, but Japan is the archetypical example. These structural advantages include:

• Lower Cost of Capital —More significant than lower labor costs, many countries have a better investment climate than has the United States . The cost of capital is lower in Japan because of its greater availability (owing to high savings rates). Because unit cell battery production is highly automated, labor costs are a relatively minor component of cell production costs.
• Reliance on Loans rather than Stock Sales for Operating Capital —American companies tend to focus on short-term profits and stock prices, while Asian companies seek market share. American managers are held accountable and valued based on company profitability and stock price. Asian managers are more likely to defer near-term profits in favor of investing for long-term success as reflected in market share. Japanese companies rely more on bank loans to fund R&D and new production facilities.
• Government Coordination of R&D —The Japanese government works with industry to identify new technologies that are ripe for near-term economic exploitation. Government then encourages companies that will eventually be competing with each other to share information and cooperate during the early stages of development. This contrasts with the U.S. pattern of business-government relations, which can sometimes be adversarial.

American companies sometimes move production to East Asia to take advantage of government incentives or lower labor costs. This inevitably results in an eventual transfer of technology to the host countries—product as well as production technology. Batteries are only one example. Two others considered in this study were fuel cells and electronic chips and components. Fuel cells have a short window of opportunity to begin manufacture in the United States . Manufacture of electronic components, such as displays, will likely follow the course of IC chips and Li-ion batteries to Asia .

These factors should be kept in mind when ATP evaluates the likelihood that new battery and related technologies will be commercialized in the United States . These are the factors that have demonstrated the most leverage in U.S.-firm decision-making. Although Japan has lately been suffering economic malaise, it is a misperception that the advantages that Japan enjoyed though the 1980s no longer apply.

Conclusion

The United States still leads in developing new technologies and is the major source for new concepts in battery, fuel cell, and display technologies. The United States is an incubator for new technologies relating to the electronics industry, while the Asian and European companies develop the manufacturing expertise. There could be a tendency in the future for technological development to follow manufacturing in moving to East Asia as a natural consequence of Asian companies' development of manufacturing expertise.

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Date created: July 21, 2005
Last updated: August 4, 2005

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