U.S. battery startups face strong headwinds

It was only a few years ago when investors in the United States proclaimed that a burgeoning battery industry would, riding the success of the electric car, challenge Asia's technology giants for supremacy.

That hasn't quite happened.

Since the economic downturn in 2008, electric vehicle adoption hasn't quite taken off as quickly as investors had hoped. Scale became an issue as Asian manufacturing companies flexed their muscle. And profit margins -- if there were any at all to begin with, since manufacturing batteries is expensive -- slimmed.

Yuliya Chernova writes in the Wall Street Journal that startup companies once championed as America's leading lights in a manufacturing resurgence are now stumbling, cutting costs and scaling back production just to keep afloat.

The "valley of death" so feared by startups has seemingly and suddenly been extended -- perhaps indefinitely.

Chernova reports:

Just a couple of years ago, the U.S. battery industry seemed to be off to a promising start. The Obama administration, with the 2009 Recovery Act, awarded $2.4 billion in grants to support companies making battery cells—which are assembled into packs for use in autos—and the materials used in battery production. The goal: to lower the cost of batteries and spur adoption of electric vehicles.

At the same time, venture capitalists were pouring funds into advanced-battery start-ups—contributing $1.55 billion since 2003, according to Dow Jones VentureSource.

But the battery market has proved challenging for the newcomers. Because the field is so young, battery makers are dependent on only a handful of potential customers. Manufacturing is expensive and needs large-scale production to bring down unit costs, while current demand is uneven.

Among the victims? New York-based Ener1, which saw management turnover and was delisted from Nasdaq; Johnson Controls, a major player who had to scale back automotive battery production; and Massachusetts-based A123 Systems, which lost out to Asian rivals in its bids for major contracts, such as for General Motors.

Enthusiasm, it seems, trumped reason. The reality is that Japanese and Korean conglomerates such as Samsung and LG have been building batteries for consumer electronics for decades; that kind of scale means those companies can deliver much lower prices than any well-funded startup ever could -- and have a lot of weight to throw around when bidding for new business.

There is one potential upside: the challenges in the automotive market have forced battery startups to take a hard look at the growth of energy storage for the electricity grid for opportunities. Still, renewable energy adoption has been meager at best, itself a sector facing its own challenges in a down economy.\

Illustration: A123 Systems

This post was originally published on Smartplanet.com