IV. Structural Factors Affecting Production Decisions

Our interviews revealed strongly contrasting business environments in the United States compared with Asian countries with burgeoning activity in rechargeable batteries. The different market structures and other characteristics underlying these varied environments favor manufacturing of recharge-able batteries in these Asian countries, typified by Japan , which manufactures 80% of Li-ion batteries today.

Table 2 summarizes some differences in the business environments in the United States and Japan that emerged during interview discussions. In general, Japanese firms have enjoyed more supportive government policies and financial conditions. Although Japan has lately been suffering its own economic malaise, it is a misperception that the advantages that Japan enjoyed though the 1980s have disappeared. And other East Asian companies seem to be following Japan 's example.

This section explores the different structural factors in the contrasting national business environments in greater detail in order to seek answers to why U.S. firms failed to success-fully engage in Li-ion battery manufacturing despite their dominance in primary batteries.

Table 2. Characteristics of Business Environment in the U.S. and Japan

Manufacturing and Marketing Infrastructure

The United States has a fully developed infrastructure for manufacturing. The value added by manufacturing has been a true source of strength behind the U.S. economy. A major component of this strength is the ready availability of highly qualified industrial designers and manufacturers of automat-ed production equipment. In general, the production by U.S. equipment designers and manufacturers is less expensive than their Japanese counterparts, and their equipment is equally good or better.

The U.S. battery companies have been successful in primary battery markets. Three of the world's five largest producers of primary cells are based in the United States . Most of their business is dedicated to supplying batteries to power simple portable electric devices. All have production facilities throughout the world with global marketing and distribution networks that deliver products directly to consumers through retail outlets. Success in the primary market has been dependent on establishing highly automated production facilities, as well as economies of scale, and marketing the unit cells directly to consumers using branding, advertising, and strong control of the distribution network. These are not key issues in the rechargeable market.

Success in the rechargeable market requires knowledge of the electrical requirements for emerging products that use batteries as well as the ability to generate rapid product improvements to meet the demand and then to assemble the unit cells into battery packs for use in the device. Most U.S. producers have lacked this marketing and design/production infrastructure.

Large Japanese vertically integrated, consumer electronics companies have this infrastructure in place. These companies are major players in both primary and rechargeable battery industries. European companies have manufacturing capabilities for primary and some rechargeable batteries, but are not globally oriented on the scale of U.S. or Japanese battery industries.

Duracell originally envisioned forcing the Li-ion cell into their business model for alkaline cells. They proposed and implemented a series of standard size packs for the industry to choose from, based on a minimum of different standard sizes, or stock keeping units (SKU), and sold through their regular distribution channels for notebook computers. The approach failed because the notebook and cellular telephone designers each had a unique layout, and considered it a critical product differentiator. Furthermore, computer manufacturers have a strong incentive to sell their own packs at the time of initial purchase because the packs are very profitable for them.

The past half century has seen a significant hollowing of traditional U.S. industry. In the global economy, engineering, design, and distribution can be located in the United States while manufacturing is conducted in Southeast Asia . However, once the production process is out of a company's immediate control, it often loses control of the intellectual property on which the manufacturing and product technology is based. New technology is now being developed in the countries to which the production had been shifted.

Duracell, Energizer, and Rayovac have acquired manufacturing facilities or formed joint ventures in China for alkaline cells. Eventually, using their strong worldwide distribution networks for primary batteries, they could well take advantage of the lower production costs in China and shift produc-tion of primary batteries there. These distribution networks are entirely different from those needed for the rechargeable battery business, which is one of the reasons Eveready and Duracell exited the rechargeable battery business. They all buy rechargeable Ni-MH cells from China and Japan for resale using their distribution networks.

Supply Chain Structures

Japanese companies are geographically closer to other Asian markets for selling their products, sourcing production, and working with other makers of portable devices. The Japanese battery supplier is most often part of a vertically integrated Japanese electronics company. Proximity to the device designer gives them a significant advantage in developing new products for the market. In the United States , major battery producers are "on the outside looking in," with limited access to or understanding of the needs of portable electronic device manufacturers. Device manufacturers such as Motorola and HP do not share new product concepts and developments with U.S. battery manufacturers.

It is even more difficult for U.S. manufacturers to identify new battery requirements for devices that are being developed in Japan , the heartland of portable device developments. The Japanese market is not readily accessible to non-Japanese companies, making it very difficult for U.S. battery manufacturers to act as suppliers of the batteries for new products developed in Japan . As a result, the U.S. battery manufacturers were unable to take advantage of the introduction of the Li-ion battery to the portable device market in 1991.

We examined some of the structural differences underlying these different market relationships in the United States and Japan in greater detail.

The relationship of battery suppliers/manufacturers to the OEM manufacturers of portable electronic devices follows two patterns. In the vertically-integrated Japanese electron-ic companies, device designers and battery groups are equal partners in developing leading edge new products. The intensity of market competition in Japan has resulted in the recognition by both groups that having batteries of the highest capacity is critical to device sales. Designers of battery components have advanced notice of the needs of the device designers. They thus have time to develop a battery with special characteristics or offer an improved version of their present battery for incorporation into the device.

This coordination between device designer and battery manufacturer does not exist in the United States . Since new device designs constitute very sensitive business information, the device designer will not share detailed information on the battery needs with outside battery suppliers until the device is almost ready for production. Once new device designs are complete, OEMs specify battery requirements. They then use their specification to purchase from suppliers worldwide, based on price.

The relationship of U.S. battery manufacturers to device designers, including U.S. cellular phone, notebook computer, and other wireless manufacturers, is distant. The device designer imposes new product requirements. The device manufacturers develop relatively detailed battery performance specifications and buy against their specifications on price. They also want at least two suppliers of each component to have an assured supply to meet their needs. The battery manufacturers have relatively little advance warning when a new cell size is required for a new device. U.S. and European device manufacturers would buy a battery product from U.S. suppliers, if it were available and the cost and performance were competitive.

All interviewees from U.S. battery manufacturers felt strongly that device designers place the battery last in their designs. The cavity provided for the battery is often an afterthought and undersized for the expected performance. It often does not fit particular battery sizes and shapes that are currently being manufactured.

The device manufacturers qualify battery suppliers and will conduct regular quality audits of the supplier's plants to ensure compliance with specifications. This contrasts markedly with the situation in Japan , where battery and device designers in the same or sister company work in parallel to arrive at new sizes or shapes much more efficiently.

The Japanese materials suppliers often have agreements with their customers down the supply chain to include some R&D activity to improve their products. In Japan , materials suppliers truly cooperate with battery manufacturers, whereas battery manufacturers in the United States typically have no continuing relationship with their materials suppliers. U.S. manufacturers often insist on having two suppliers for critical materials for their manufacturing operations.

A global market exists for battery materials. The same material can be purchased from several companies at the same price in the United States , China , or Japan . All of the major material producers for Li-ion batteries, however, are located in Japan . Although several U.S. companies are capable of producing all the components and materials, no viable market exists in the United States because there is little manufacturing here. Two U.S. materials producers have established a presence in Japan to supply the Japanese Li-ion battery manufacturing. Because of cultural barriers, these suppliers spent five or more years establishing a presence in Japan before the Japanese battery manufacturers would consider them as reliable suppliers.

As a result, U.S. battery manufacturers have no loyalty to U.S. suppliers for materials produced locally and will buy materials globally from the lowest-cost producers. One materials supplier emphasized that large U.S. battery manufacturers universally disallow the materials supplier sufficient profit to invest in process improvements, or, more importantly, to develop new materials for a next generation product. As a result, materials producers are reluctant to invest in additional R&D to develop a new technology. They will pursue engineering improvements only to meet performance requirements. These differences in supply-chain relationships in the United States and Japan place U.S. OEMs at a considerable disadvantage in addressing markets using rechargeable batteries.

R&D Planning Horizon and Return on Investment

U.S. companies often have a very short-term outlook that results from the common practice of linking management compensation to the company's stock share price. There is a strong corporate drive to have immediate profits match for-ward stock analyst projections, and bonus systems often rein-force this tendency. The stock market responds directly to the profitability of the company on a quarterly basis. When a performance bonus is included in the management compensation package, fluctuations in stock price can directly impact remuneration for executives. Managers in the United States receive bonuses that often are equal to or larger than their base salaries. Since R&D expenses negatively impact the net earnings for each quarter, managers may tend to sacrifice R&D in order to maximize their immediate income and company earnings, and may be reluctant to invest in new facilities that have a longer-term payback than one or two years. The financial impact of the introduction of new products is not felt in company profits until three to five years in the future, which is often beyond the horizon of personal benefit for the U.S.manager.

In contrast, Japanese managers generally take a long-term outlook, and their goal is to gain market share. They aim to ensure that the company will be in good condition when they hand it off to the next generation of managers; thus, their outlook is five years or more. This gives them the opportunity to invest significantly in future R&D for product improvements. Japanese companies report earnings on a yearly rather than a quarterly basis. This means that a company has two years to recover from a down period, and that the managers are not pressed for immediate profits. When a market matures, the companies with the largest market share profit, second-class players survive, and third-place players disappear. The availability of bank loans at low interest rates in Japan reduces the pressure on managers to focus on profits and stock price.

The large, well-funded battery manufacturers in the United States have discontinued in-house funding of forward-looking research and development. They now tend to fund only R&D that is related to performance improvements in their current products. If needed, they believe that new technology can be acquired from other companies, particularly from venture-backed companies, which generally lack the ability to generate sufficient capital funding for production capability. The battery manufacturer often has a powerful engineering group with expertise in the design and operation of automated production. Most venture operations lack this critical expertise. New technology the battery company acquires must have the potential to produce immediate impact on the bottom line, with a recovery of investment in two years or less, and ideally the new technology can be adapted to present production equipment.

In existing companies, new technology that departs from the current product line must present a truly significant business opportunity to justify funding of new facilities. An interviewee with a materials company said that the company would invest in new equipment for producing a new product only if one of its customers would commit to a purchase order for a given amount of the new material (basically guaranteeing a portion of the initial investment). Generally, a similar process is involved if a device manufacturer wants a specialized cell for its device. The battery manufacturer will want a guarantee from the customer to purchase a minimum amount of the specially-designed product.

Project and Employment Security

Since Japanese battery manufacturers are invariably part of large, vertically integrated electronics corporations, their device designers and battery developers readily share new product information. Early in the product development cycle, the battery group has inside information on the new requirements, sizes, and performance specifications. Conversely, the device designer is aware of attainable capabilities for battery performance. Each has time to respond to the evolving needs of the other. Where executive bonuses are not strictly tied to the price of stock, management compensation is not threatened by the vagaries of the stock market. This results in greater security for R&D programs. Japanese companies rarely suffer staff reductions, and the managers are relatively free to engage in long-term planning.

Replacement Market

The distribution channels that Duracell and Eveready have established for battery sales, which are based on selling individual cell units to the consumer, are not applicable to Li-ion batteries. Because of safety and performance considerations, Li-ion manufacturers (except those in China ) do not sell individual cells. Japanese cell manufacturers sell only battery packs with safety devices included. A battery pack can consist of a single cell, or multiple cells connected in series or in parallel, to give the required voltage and capacity. Individual cells from major Japanese manufacturers are available only to out-side pack assemblers on approval of their electronic control circuitry in the pack. Individual cells are available from Chinese manufacturers, but are often of inferior quality. They often lack the usual safety features in cell design and electronic controls and thus constitute some danger to the public. This is not true for responsible manufacturers who try to match the world standard of performance.

The replacement market for Li-ion cells is minimal. Of the purchasers of a new piece of equipment such as a cell phone or a notebook computer, about 30 percent will buy a second battery pack from the OEM. After that, replacement sales account for less than 2 percent of total battery sales. People typically buy a new, higher performance notebook computer about the time that their old battery would need replacement. Lower cost, knock-off replacement packs are available from many Internet suppliers, such as IGO, at about 50 percent of the cost of the original pack. The knockoff packs may not have the same safety circuitry as the original packs, and could be dangerous in actual operation. Nonetheless, many people buy these knockoff replacements.

Logistics

Materials and components for the manufacture of Li-ion batteries are readily available any place in the world for essentially the same price. In addition, Li-ion cells have a high value and are lightweight and small. The cost of shipping cells to pack manufacturers, wherever they are located, and then to the device assembler for incorporation into the final product, is not a determining factor in locating a manufacturing facility. In the global economy, the location of manufacturing operations is determined by considerations other than logistics.

Most Li-ion battery pack assembly, however, is located in Southeast Asia , because of the low cost of labor for manual operations. It is advantageous for the battery manufacturer to be close to the pack manufacturer when introducing new technology, or when a safety incident occurs. In these situa-tions, the pack manufacturer needs a quick response from the battery manufacturer to identify and remedy the cause of the incident.

Venture Capital

Venture capitalists, consistent with the payoff requirements of OEM's, have likewise not found the time frame for development of rechargeable batteries acceptable. Success in commercializing battery technology at companies funded by venture capital has been spotty at best. The inability to generate sufficient income from product sales in an acceptable time frame has led to some failures. Venture-funded Valence Technology raised substantial funding through stock offerings and had a clear path to commercialize its technology, but sales have been disappointing. Venture-funded Bolder Technologies and PolyStor fell short of full commercialization of their technologies because of insufficient funding for production facilities. The companies were not able to trans-late good technology into practice within a time frame accept-able to venture capitalists.

One exception is PowerStor, a spin-off from PolyStor, which developed ultracapacitor technology under an ATP award, and then managed to have the manufacture of its products accomplished by hand in Malaysia. This choice required min-imal capital and quickly resulted in product sales. The company eventually was acquired by California-based Cooper Electronics, a maker of audio equipment.

Many venture groups tend to follow the behavior reported in these examples. They will fund technology development to the point of proving its validity and defining the market. They are reluctant to fund costly manufacturing facilities or cover lengthy scale-up/"prove-in" procedures. The companies must raise funds for manufacturing equipment by stock offerings, license or sell themselves to an existing company, or go overseas to manufacture with a minimum expenditure.

Company Loyalty

Often U.S. employees have little feeling of company loyalty, and the company feels little, or no, responsibility for the future welfare of its employees. This contrasts with the traditional paternalistic company in Japan , which has engendered strong company loyalty with its system of lifetime employment. Although this lifetime employment system has never been universal in Japan , and has eroded in recent years, it is still prevalent for those who graduated from the best universities and who are now employed by the most prestigious battery companies.

Labor Costs

Although labor costs do not appear to play a significant factor for a highly automated Li-ion battery factory, they do play a significant role in the decision about where to place battery pack assembly. Where U.S. firms employ offshore activity for assembly, it helps build technical capabilities of Asian engineers and scientists, resulting in stronger capabilities by Asian firms, and increased offshore activity by U.S. firms in the longer term.

Several interviewees who were involved in developing Li-ion technology pointed out that the costs for skilled labor in a well-automated Li-ion factory (producing three million or more cells per month) are essentially the same in the United States and Japan . Production in this type of factory involves a minimum of hand operations, and skilled operators are required to ensure proper operation of the equipment. In such an automated factory, the material costs are 75 percent to 80 percent of total manufacturing costs (or higher). The volume of materials required to operate a plant of this capacity motivates producers to obtain the lowest price for a given material.

Labor costs are significant for battery pack assembly, as a considerable number of hand operations are involved in assembly operations. Small volume production items are especially sensitive to labor costs. As the president of U.S. operations for a Japanese battery company noted, most battery companies have moved pack assembly operations from Mexico to exploit the lower labor costs in China and Southeast Asia . Low volume niche markets can be serviced in the United States , provided that the higher costs for unskilled labor can be recovered.

This movement (product lifecycle) of manufacturing operations offshore has an additional effect. As local engineers and managers become skilled in working with the technology, they develop the capability to undertake process improvements themselves. This scenario has occurred in several semi-conductor fabrication operations that moved to Taiwan 15 years ago. The local group now generates all the process improvements, independent of the U.S. parent company. This same outcome can be expected for battery operations that move to the East Asian countries. Although the basic technology still resides in the United States , with the relocation of manufacturing to Southeast Asia , the local operators and managers will learn the technology and eventually acquire the skills to improve it without aid from their U.S. counterparts.

A significant increase in the publication of battery-related technical papers from China and Korea has occurred over the past five years. Today, these contributions are of high quality and demonstrate a grasp of the fundamentals that previously were found only in papers by researchers from Europe and the United States . Many of these scientists were trained at U.S. universities and then returned to academic and industrial positions in their home countries.

This increase in technical capability is due to the strong government support in China and Korea , both for developing battery production facilities and for university research. China recently announced a program related to the 2008 Olympics involving production of electric vehicles powered by fuel cells and batteries. Production facilities for these vehicles will be located primarily in China and Korea . These countries offer large financial incentives in order to acquire technology expertise and establish domestic manufacturing facilities that provide jobs. Key technologies include power sources for portable electronic devices. The incentives usually involve a government loan or grant to a local company for the production facility, with an American or Japanese company providing the technology through a joint venture. As a result, the technology becomes resident in the host country. Historically, the company providing the technology is eventually forced out of the venture. There are incentives for the U.S. and Japanese companies, however, to try and obtain market share in China by having a presence there.

Capital Costs of New Facilities

Manufacturing facilities for Li-ion batteries are expensive. The rule of thumb developed for the cost of automated Li-ion facilities is that a volume manufacturing facility of three mil-lion cells per month has an annualized cost of $3 to $4 per cell. A plant making three million cells per month will thus cost between $108 and $144 million. This number includes the cost of the land, but not the costs for the research, development, and engineering (RD&E) that produced the technology and equipment designs for the plant. Plant costs are about the same worldwide.

The high cost partly results from requirements for high precision and environmental controls. In the United States , the permit process for new operations is slow and expensive. Contributing factors include the amount of paperwork companies must file to comply with EPA rules and regulations, as well as potential local political opposition to the location of new manufacturing facilities.

New facilities to produce the active materials for carbon anodes or oxide cathodes are less expensive to build than are those for cell manufacturing. Building new facilities for volume production of these materials will cost about $10 per pound for a facility designed to produce 1,000 tons of product per year. The cost of building new facilities is about the same for both carbon anode materials and cobalt oxide cathode materials. The cost of modifying and expanding an existing facility is slightly less, but still lies in the range of $1 per pound annualized. Materials companies traditionally operate on lower rates of return than do the battery companies. Material suppliers invariably prefer to modify existing facilities to pro-duce a new product rather than build a new facility. Materials companies will not undertake the building of a new production facility without having agreements in place from customers guaranteeing to buy a specific amount of material.

In their return on investment calculations, U.S. managers must load their overhead from corporate staff as well as recovery of the investment in a 3 to 5 year frame. At the time the Energizer group made its decision to cancel its Gainesville Li-ion plant, the calculations showed that the returns from the new plant would be much lower than for alkaline cells. Further, based on the required calculations, Energizer could buy the cells cheaper than they could make them.

R&D Costs

Ten to fifteen years ago, the large battery companies pursued significant R&D efforts. Today, these same companies engage in little or no basic research and have practically eliminated forward-thinking product R&D. Internal funding of R&D is most often directed toward improvements in present products, and research work now consists entirely of applied development, with little emphasis on basic research. If needed, these companies expect to buy new research concepts and technology developed elsewhere.

Advanced analytical instrumentation is essential to advance a research program. Instrumentation costs include both hard-ware and skilled labor. The cost of equipment for Li-ion R&D is significant. The initial acquisition of ESCA-Auger analysis equipment costs $750,000 or more, and a good mass spectrometer gas chromatograph costs from $250,000 to $300,000. In three or four years, personnel costs for dedicated operators can equal or exceed the cost of the equipment. Only a few well-funded battery R&D operations, such as those at Telcordia, Duracell, and Eveready, can afford advanced analytical equipment and the personnel to run it.

Use of university facilities is a possible solution. Most R&D labs are near university facilities that have a collection of advanced analytical equipment, such as ESCA-Auger, mass spectroscopy-gas chromatography, transmission electron microscopes, and surface Raman spectroscopy. Private companies can pay to use these facilities. Most universities require scheduling use of facilities by outside companies, however, and researchers must travel to the university to carry out the analysis.

In general, companies find using university facilities to be inconvenient, time-consuming, and expensive. Researchers are under time pressure to obtain results. They do not find it efficient to wait a week and travel for 30 to 60 minutes to spend a short time on the machine and obtain a single result. They would more likely use such equipment if it were down the hall or across the street.

Interest Rates

Even though interest rates are at historical lows in the United States , the cost of securing money for business investment continues to be lower in Japan . The low interest rates in Japan are driven, in part, by the higher savings rates. People in Japan have been saving an average of over 20 percent of their gross income annually. In contrast, the personal savings rate in the United States dropped from about 8 percent in 1990 to become slightly negative in 2000. The Japanese tend to save more money than Americans for their retirement. This high personal savings generates large amounts of capital available for loans and investment in Japanese banks, resulting in low interest rates for commercial loans.

Low interest rates in Japan often encourage Japanese companies to rely more on bank loans to fund R&D and new production facilities. This is in direct contrast to the financial resources available to U.S. companies from lending institutions to build new facilities and the actual costs they would incur.

Intellectual Property

Intellectual property (IP) consists of patents and know-how that a company possesses. The importance of IP in the battery environment depends on the company's role in the market-place. A venture fund company must have a unique IP position in order to generate funding for the venture. It is important to build a group of patents around the core technology to protect the area of interest from outside predators. Investors believe that patent protection of the technology is the key to success. Uniqueness in a venture operation is an essential element.

A strong IP position can protect a market. Energy Conversion Devices Corp. (ECD) has been very successful in keeping Ni-MH batteries under control of its patents. No one can import Ni-MH into the United States without taking a license from ECD. This generates considerable income for the company. Another example is the patent for lithium cobalt oxide (LiCoO2) for use in batteries. Harwell, in England , controlled the use of LiCoO2 in Li-ion batteries until the patent expired in 2002. All Li-ion manufacturers have taken a license on this patent, generating significant income for Harwell. Composition-of-matter patents can be very important as they are easily defensible. They have played a key role in R&D related to Li-ion systems, and in other battery systems as well.

Intellectual property is less important for existing battery manufacturers. Although they view IP as providing the freedom to operate, they see manufacturing process technology and know-how as the real keys to low cost production and survival in the market. To meet requirements for new products, they believe that they can acquire or generate IP as need-ed. In the past, R&D efforts have developed considerable IP for new products.

Energizer's plans for Li-ion production included both its own and acquired IP, and the acquisitions were accomplished prior to their building their Gainesville plant. They licensed a core Goodenough patent from Sony and intended to purchase materials from companies that had an IP position on the particular form of carbon/graphite they intended to use. The license on the carbons came with the purchase of the materials. They had developed their own IP positions in several areas such as sealing and venting that would make their cell construction safer and better than the competition.

Litigation Exposure

Another difference between the United States and Japan is the difference in legal exposure companies experience in regard to various product safety incidents. The most common incident involves a cell in a battery pack entering thermal run-away and venting with fire. This usually causes significant damage to the notebook computer or other device. According to the VP of sales of a materials company, this legal exposure presents a considerable risk for makers of Li-ion batteries specifically, and those introducing new materials and technology in general. In the United States , such incidents are cause for class action lawsuits against the offending company. Japanese companies in their home market deal quickly with the individuals involved in the incident. They do not rely on their legal system to provide reparation. The Japanese approach of proactively providing reparations and demonstrating human concern reduces their legal exposure in their home market. In contrast, for a U.S. company to demonstrate concern for the victim of an incident would be an admission of guilt, potentially exposing itself to additional legal repercussions.

About five safety incidents involving notebook computers occurred in 2002. Cell production was in the range of 770 million units, of which roughly 40 percent (350 million) were for installation in notebook computers. This translates into 5 incidents in 308 million, or slightly more than 1 in 61 million cells. Cell manufacturers are working hard to improve the odds. The manufacturers of cellular phones and notebook computers accept the current rate of incidents as a cost of doing business. Although safety is still a concern for the cobalt cathode cells, recalls resulting from safety related incidents have not increased in spite of a significantly higher cell capacity and increases in production.

Government Policies

Government policy can encourage or discourage plant locations. The relationship between government and industry in the United States differs from that in other countries. In the United States , the government more frequently takes an adversarial position against industry on environmental issues. Government and industry are more likely to turn to the courts to resolve problems. This is in sharp contrast to the cooperation between government and industry in Japan and else-where where the two groups work together to solve problems as quickly and expeditiously as possible.

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 research and development. This contrasts with the U.S. pattern of business-government relations, where such cooperation is deemed anti-competitive under some conditions.

In Japan , the government funds strategic research initiatives with the participation of industry, universities, and government to develop new materials and Li-ion battery constructions for new applications. These initiatives often involve scientists and engineers from several companies and universities, along with government laboratories. The people in these programs meet regularly to discuss progress and plan the next activity. They freely exchange information and results.

In South Korea and China , among other countries, the government will loan companies the funds to establish automated manufacturing facilities to produce Li-ion and Li-ion polymer batteries. These loans are often made at low interest rates, and may be forgiven if a certain level of production is reached. Countries such as Northern Ireland and Singapore offer incentives to establish essential strategic research, development, and manufacturing for advanced batteries on their shores. For instance, Valence Technology received up to $40 million in matching funds from the United Kingdom to establish a manufacturing plant in Northern Ireland . The agreement included conditions and goals relating to the number of employees, the amount of production, and the like. These arrangements are powerful enticements for U.S. companies to move production abroad.

Compared with Asian countries, the United States makes little funding available to assist companies in addressing longer-term research. The Advanced Technology Program is an exception to the pattern, with its mandate to initiate change by offsetting some of the costs of technically risky, longer-term research with potentially broad national benefit. However, its resources are small.

With the exception of its relatively small funding through the ATP and Small Business Innovative Research (SBIR) pro-grams, the U.S. government essentially does not fund research with a commercial purpose, and U.S. companies seldom fund university research because the university would generally require ownership of all resulting intellectual property (IP), regardless of the source of funding. ATP's focus is on cost-sharing industry-led projects with strong commercial potential. ATP has funded $2.3 billion in advanced technology development, with industry cost sharing an additional $2.3 billion in their ATP projects. The ATP also fosters collaborative R&D among suppliers and manufacturers and with universities. More than four out of five projects involve col-laboration among multiple organizations. About three out of five projects have university participation. Over one out of four projects is an industry-led joint venture.

The Department of Defense and the Department of Energy support most of the U.S. university research on new battery materials. Most of this research is for military applications, however, complicating the transfer of the technology developed in these programs to industry. Only a few small manufacturers are dedicated to such niche military markets. The

U.S. Auto Battery Consortium (USABC) and its survivors do not fund pure research, per se. In spite of investments in excess of $200 million, none of these programs has produced a new commercial battery. Although support exists for battery-related R&D at the national laboratories, these laboratories have little direct connection to battery and materials companies that would commercialize the results.

Many new products developed by Japanese companies are derived from university research supported by company funding. The Japanese government funds strategic R&D programs involving people from universities as well as from companies. The information is shared with all those involved in a particular program. Because of antitrust considerations, it is difficult and unusual for U.S. companies to engage in information-sharing outside of government-sponsored R&D consortia projects, such as those funded by ATP.

Human Resources

Essentially all interviewees agreed that qualified people are the key element to technology development and transfer to production. The number of qualified research people in the battery industry is limited. A large number of highly qualified materials scientists graduate from universities but are not specifically trained for industrial research in battery technology. Often these students have been trained in basic research, but not in applied research, and often they lack the skills or philosophy required for applied research. Battery companies expect to spend an additional two to three years training new hires before they can work effectively in an industrial environment.

Industrial recruiters look for individuals with experience in electrochemical materials research-those who are self-starting, creative, and, as demonstrated in thesis work, have a capacity for unorthodox thinking. Characteristics for new hires include that they must be willing to work on a team for a common result, not be adversarial, and not feel threatened. They must be capable of expressing themselves and their opinions clearly in give-and-take discussions.

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

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