Reality and green cars

Material costs threaten affordable green cars

Talk with any executive involved with hybrid- or pure-electric vehicles, and the conversation inevitably comes back to cost. The hope is that economies of scale will save the day, bringing down component costs and making green vehicles affordable and profitable for all.

Except that prices might not fall.

Several recent studies indicate that the cost of batteries may not decline as much as hoped over the next decade. What's more, some researchers think the cost of rare-earth elements--essential to key components in an electric drivetrain--actually may increase.

Rare-earth elements and lithium for batteries are at the heart of the new technology. Far more than any consumer product, hybrid vehicles such as the Toyota Prius are the world's biggest users of rare-earth elements. And for electric vehicles--burdened by high battery costs--price reductions are essential to selling to mainstream buyers.

Yet a report from Roskill Consulting says demand for rare-earth elements will exceed supply within four years. That would make the elements known as lanthanides--crucial for the magnets installed in motor-generators--very pricey.

"It would suggest prices will gyrate upward, adding cost to any automaker building hybrids," said Robert Bryce, author of the book Power Hungry. "And that's assuming automakers can be assured of a reliable supply."

For example, the per-kilogram price of neodymium -- a crucial element sourced from China and used in high-end magnets -- has doubled in the past year, according to metal-pages.com.

"The mandated higher fuel economy standards mean the auto industry will have to embrace hybrids to meet standards," Bryce said. "The increased volume of hybrid production will increase the demand for rare-earth elements. We are trading one type of foreign dependence--on foreign oil--for another."

'Go big, go volume'

Although Toyota Motor Corp. has been the leader in hybrid vehicles, Renault-Nissan is placing the biggest bet on pure-electric vehicles.

Renault-Nissan CEO Carlos Ghosn is betting 4 billion euros ($4.92 billion) to create eight electric-vehicle models and 500,000 units of global capacity within the next few years. He may be the firmest believer that economies of scale will make EVs affordable and profitable.

"Go big, go volume, that's the big driver," said Simon Sproule, communications director for the Renault-Nissan alliance. "We're not going to claim profit from Day One, but we're not in the EV business to lose money."

But Sproule admitted that EVs entail a changed mind-set from traditional internal combustion vehicles: "We are ensuring we have stability of suppliers. It's a different set of raw materials at play."

The two leading alternative-fuel vehicle companies, Fisker Automotive and Tesla Motors, must base their entire business case on the idea that a plug-in hybrid or electric sedan can be made profitably.

Their strength is that they don't have the overhead of large automakers. The downside is that they cannot spread costs among many platforms and divisions. Both also are planning to fill out their product lineups with higher-volume--and lower-priced--vehicles than their high-end initial offerings.

Tesla CEO Elon Musk, whose company may be most reliant on lithium ion batteries, hopes that scale will reduce purchasing costs.

"It definitely affects the cost of battery cells. To really get the cell cost much lower than where it is today--and we think we have a very good cell cost for our volumes--you really want the battery pack requirements of the car business to far exceed that of the laptop business," Musk said in a recent interview.

Similarly, Fisker Automotive CEO Henrik Fisker said: "We all want the price to go down -- not just of batteries; it's the inverters and cabling. Right now those parts are not manufactured in the millions, like every other component in cars.

"In the next three, four, five years, all those component costs will go down."

Price decline?

Future supply and demand for both rare-earth elements and lithium spur intense debate.

"Batteries are commodities, as are all of the raw materials that are used to make the batteries, motors and other components required," said John Petersen, a lawyer specializing in alternative-energy clients for Fefer Petersen & Cie in Barbereche, Switzerland.

In a report written for the Seeking Alpha Web site, Petersen noted that backers of hybrids and electric vehicles ignore "fundamental natural resource development issues like location, economics, environmental impacts and the difference between known mineral resources and developed mineral reserves."

Said Petersen: "Battery costs are commodity materials that are not going to decline in price as demand increases. We've all gotten used to the IT business, where price falls and performance soars with each new generation. That cannot happen in the battery business because we are dealing with chemistry instead of physics."

In a January report, Boston Consulting Group said that in the future, "actual battery costs will likely be higher than what carmakers predict."

While automakers such as General Motors Co. are heartened by Boston Consulting Group's prediction of a 60 to 65 percent drop in battery prices by 2020, that won't be as advantageous as automakers need, the report said.

"The adoption of fully electric vehicles in 2020 may be limited to specific applications, such as commercial fleets, commuter cars and cars that are confined to a prescribed range of use," the report states.

Still, GM isn't panicking.

"We see no issues with the supply or reserves of lithium," said Micky Bly, GM executive director of electrical systems and hybrid vehicles. "Even with something like 100 million Volts [or similar hybrids], each using 16 kilowatt-hours of energy capacity, there is no issue with supply."

Bly thinks the Boston Consulting Group report was "conservative."

Oil for lanthanides?

While lithium is still selling for less than $1 per pound, a deeper concern is access to the rare-earth elements used in many hybrid powertrain components. Those elements are sourced mostly from China.

Bryce worries that the West is trading reliance on Middle Eastern oil for Chinese rare-earth elements. Not a good deal, he said.

So far, only Toyota has signed corporate deals to secure rights to search for these elements, specifically in Argentina, Vietnam and Canada.

Bill Reinert, Toyota's national manager of advanced technology vehicles, worries that predictions of rapid price deflation may be overstated.

GM's Bly said access to lanthanides is not a zero-sum issue.

"There are other materials available, but you might lose a couple percent of efficiency," Bly said. "It's not as though if you don't get this, you get nothing. A couple points of efficiency are measurable, but it will not hamper the ability of electric machines or motors to propagate very rapidly."