Lessons For Europe & North America From Northvolt Collapse

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The European Union lost a few things in the past week. The least of them was a couple of billion euros of loans and grants. A big one was a new supply of fresh and shiny Europe-made batteries. The biggest was a belief that anything China could do, they could do better because Europe.

What was the cause? Northvolt entering bankruptcy after blowing €15 billion. As a contextual point, an equivalent gigafactory costs €1.5 billion in China and would reasonably cost €3 billion to replicate outside of China.

This week’s episode of Redefining Energy by my collaborators Gerard Reid and Laurent Segalen was focused on the failure of the EU’s battery startup darling Northvolt. Gerard especially has senior contacts in the firm and Laurent’s investment insights are key, so I wanted to share some of them and elaborate.

Richard Rumelt’s Good Strategy Bad Strategy is the most useful book on strategy this century. The kernel of good strategy per Rumelt is diagnosis, policy and actions. The diagnosis is an accurate read on what is going on, not one influenced by hopes and dreams. The second is a simplifying policy to take advantage of what is going on without too much exposure to risks. The third is a set of mutually reinforcing actions aligned with the policy.

Northvolt got the diagnosis wrong. They thought that there was going to be a big shortage of batteries around now because no one could possibly scale to meet demand. Instead, China scaled up to five times Northvolt’s prediction. Getting China wrong is a major western failure right now, and until they get China right, they will continue to fail.

Partly because they predicted a massive shortage, the batteries they managed to produce were too expensive for the market. They predicted battery prices would remain high — a common and fundamental failure in a lot of the west — and so didn’t work tirelessly to bring their unit production costs down.

Lesson #1: Don’t underestimate China.

Let’s talk about Northvolt’s primary manufacturing location in Skellefteå, Sweden. It’s a town of 75,000 in northern Sweden, about 300 kilometers south of the Arctic Circle. It gets under four hours of sunlight in December. It gets just under 22 hours of sunlight in June. On a hot day in the summer it gets up to 21° Celsius. It’s over a nine hour drive from the fleshpots of Stockholm, the closest Swedish city, and one not known for its fleshpots.

Northvolt’s gigafactory in Skellefteå was designed to cover an area of 500,000 square meters during its initial phase. The facility aimed to produce up to 60 gigawatt-hours of battery capacity annually, sufficient to supply batteries for about one million electric vehicles each year. It was going to employ up to 3,000 people, almost 10% of the total population of Skellefteå.

Almost nobody in Skellefteå has any clue about precision manufacturing of electronics, electrochemistry and the like. The two local firms that are somewhat in the space, Optronics and Dipolar AB, have about 100 people between them per LinkedIn. That is to say, no scaled manufacturing at all, never mind high end electrochemistry facilities and skills. What it does have is mining and smelting operations, as well as hydroelectric.

The latter is why Northvolt opted to build their gigafactory there, presumably. Lots and lots of low-carbon electricity generated locally and hence cheaply.

One of the big questions of energy and industrialization strategy of the next couple of decades is where the industries of the future will be located. Will they be where they are today, will they be where there is lots of cheap, low-carbon electricity, or will they be somewhere else?

The Northvolt case study provides a convincing argument that cheap energy isn’t enough, at least in cases where high skills, high quality requirements and high volumes intersect, as they do in battery manufacturing.

The research and development team, an integral component of a first of a kind gigafactory, was located on the outskirts of Stockholm. Why? Well, the thousand or so people in R&D didn’t want to decamp to 300 kilometers from the Arctic Circle, and many undoubtedly were wondering how they ended up with only the attractions of Stockholm to entertain them.

This isn’t rocket science. For a few decades, Richard Florida and team have been studying the creative class, a socioeconomic group comprising individuals whose work involves creativity, knowledge, and innovation, including professionals in fields such as technology, arts, science, and education, and what attracts them. A small city of 75,000 with four hours of sunlight in December that’s close to the Arctic Circle never entered the list of things that highly in demand technologists were interested in.

What’s easier to move, electrons or the creative class? I’d personally vote for electrons over the creative class and indeed people of all kinds. How many people in a city of 75,000 which has mining, smelting and hydroelectric dams are qualified to do even 10% of the jobs in a high-tech battery gigafactory? Given the cleanroom requirements of electrochemical manufacturing and assembly, anyone doing even the most basic work on the plant floor would require extensive retraining and monitoring. Where are you going to get the trainers and quality control people from?

Moving electric arc steel plants to where the cheap electricity is might make sense, but even then you have to ship all of the scrap there too. There aren’t any electric arc furnace steel plants in Skellefteå either, and the human resources requirements are both much less stringent and much more aligned with the local smelting industry.

There’s about a gigawatt of capacity of hydro dams in Skellefteå. The electricity generated by Skellefteå’s hydroelectric power plants is integrated into a comprehensive power transmission and distribution network managed by Skellefteå Kraft. This network spans approximately 10,897 kilometers and serves multiple regions, including Skellefteå, Norsjö, Malå, Robertsfors, and parts of Vindeln, Arvidsjaur, Piteå, and Lycksele.

Northvolt wanted 300 MW of that. Maybe, just maybe, it was easier to move all those electrons south on transmission than to try to move the international creative class to just south of the Arctic Circle.

This, of course, applies to all strategies that are interested in moving higher tech manufacturing closer to cheaper electricity. Unless the factory is highly automated or otherwise has a high labor productivity ratio — a very low number of people required for a very high unit output — it probably makes more sense to move the electricity to places where the skilled people exist than vice versa. The cost of energy goes up, but it’s actually possible to create value, unlike Northvolt.

This isn’t like the oil sands in northern Alberta or oil rigs offshore in the North Sea. The ability to extract and move electricity with very minimal human resources once the generation and transmission is set up and stabilized is part of the technology set. Harvesting electrons from wind, water, and solar require a lot fewer people than extracting increasingly difficult hydrocarbons from increasingly technically complicated conditions.

By contrast, China has clustered industries that have overlaps and mutual skill sets. Need the most talented battery electrochemist in China? She’s probably across the street, not 20° latitude south. Need the right materials scientist to figure out why your electrodes process is throwing out crap? He’s probably in the same city, not a 10 hour drive away. Need the best coating expert? She can probably walk over, not get on Expedia and try to figure out how many connecting flights she needs to get to 300 km south of the Arctic Circle.

Lesson #2: Move the electricity to the talent, not the talent to the electricity. Also, don’t underestimate China.

A third key point raised by Laurent and Gerard was focus. Good Strategy Bad Strategy is strong on focus, via that simplifying policy mentioned above.

The simplifying part is something Northvolt failed miserably on. They were making both prismatic and cylindrical cells. They were making both grid storage units and commercial and industrial storage units. They were into battery recycling. They were upstream in lithium refining. They were doing fundamental research and development. They were doing joint ventures with Volvo and Volkswagen. None of that is focusing on doing a couple of things very well and efficiently. As a result, they did nothing well or efficiently.

A good simplifying policy would have been to say: “LFP cell format batteries are going to be huge. We’re just going to do that as efficiently and cheaply as possible.”

Not long ago, CATL’s CEO said, “They have a wrong design … they have a wrong process … and they have the wrong equipment. How can they scale up?” Because they didn’t have any focus, they weren’t able to spot things obvious to a very deeply experienced battery industry leader.

By contrast, Chinese firms typically do one thing extraordinarily well and depend on other best of breed firms to do other things extraordinarily well. The ecosystem of firms in China is amazing.

Lesson #3: Focus on doing one thing very well. Also, don’t underestimate China.

Northvolt had other problems which Laurent and Gerard discussed, including work culture, lack of accountability, and lack of transparent upward flow of accurate information. All of those contributed. But when you don’t get reality right, can’t get the right people to work at the plant, and have no ability to focus, it’s a good question about whether the other factors were the cause or the effect.

Northvolt failed on the fundamentals of strategy. The €15 billion write-off that’s impacting western cleantech investing right now is in big part due to that. The investors who put the large majority of money into the venture are not drinking Cristal right now or ordering new matching Cybertrucks.

What the USA and Europe need to take away from this is that competing with China requires a lot more than subsidies and unlocking capital. In many industries, it takes talented and experienced resources that are clustered among multiple like companies. It takes figuring out what the European or American firm can do that China isn’t already doing vastly better and cheaper. It takes the discipline to focus on doing a small number of things extraordinarily well in a global ecosystem. It requires telling potential customers that you aren’t going to try to serve their requests because it’s not aligned with doing a small number of things incredibly well. In a lot of cases, probably most, it requires moving the electrons to the industry, not the industry to the electrons.

There are very few firms or countries that appear to realize this.