Fully charged: Look for undervalued winners in battery sector boom

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1 Fully charged: Look for undervalued winners in battery sector boom Steady growth in EVs to drive li-ion battery market growth We estimate the lithium-ion (li-ion) battery market will more than double from its 2009 level to 1.8 tn by 2014, driven by demand for use in automobiles. Our best-case scenario calls for the market to grow to 4.3 tn by We believe electric vehicles (EV) will be the main driver of car liion demand near term. We see EV demand growing more strongly than some market observers expect thanks to increased subsidies and falling battery costs. EV battery capacity requirements are very high, and this should give strong impetus to li-ion battery demand. For hybrid vehicles, meanwhile, we expect a more gradual shift from NiMH batteries to li-ion. Customers the key near term, focus on Nissan suppliers We expect major earnings disparities to arise between battery and materials makers amid rapid growth in demand from the auto industry. This is because battery and materials decisions are largely complete for first-generation models that will reach the market by 2012 and we would not expect abrupt changes in supply relationships thereafter. We therefore see the customer profile as crucial to evaluating battery and parts makers. Japanese automakers vary in their stance on eco-cars, and we think benefits will accrue first to suppliers to the EV camp. We highlight battery and materials makers for Nissan, which is putting the most effort into EVs. Furukawa up to Buy, reiterate Buy on Ube, initiate GS Yuasa as Sell We have upgraded Furukawa Electric (5801.T, 12-month target price 480) to Buy from Neutral on three factors. (1) We think Furukawa remains the top supplier of copper foil for car batteries and expect it to benefit from growth in copper foil volume per Wh. (2) We are positive on medium-term growth potential in electrical applications (super-high voltage cable). (3) We expect a cyclical earnings recovery and additional restructuring measures. We reiterate our Buy rating on Ube Industries (4208.T, 12-month target price 280) on two factors. (1) Ube remains a major supplier of electrolytes and (2) we expect its automotive market share to increase significantly on a shift to dry-process production technology in battery separators and expect growth in usage volume per Wh. GS SUSTAIN: Alternative Energy POTENTIAL FY3/15 SALES GROWTH FOR BATTERY STOCKS Code Company FY3/09 % of total FY3/09 % of total Sales growth from FY3/09 to FY3/15 sales op 6701 NEC 0.1% Loss 64.0X 6674 GS Yuasa 1% Loss 29.0X 6501 Hitachi 0.3% Loss 3.5X 6752 Panasonic 1% - 2.0X 6764 Sanyo Electric 15% >30% 1.4X Source: Company data, Goldman Sachs Research estimates. POTENTIAL FY3/15 SALES GROWTH FOR MATERIAL STOCKS Code Company Product FY3/09 % of total Sales growth from FY3/09 to FY3/15 op 5563 Nippon Denko Cathode 0%-10% 15.6X 4047 Kanto Denka Kogyo Electrolyte salt 10%-20% 2.8X 4208 Ube Industries 4023 Kureha Separator Electrolyte Binder Anode 10%-20% 0%-10% 2.7X 2.3X 4109 Stella Chemifa Electrolyte salt >30% 2.1X 5801 Furukawa Electric Copper foil 20%-30% 2.1X 4217 Hitachi Chemical Anode 10%-20% 2.0X 5012 Tonen General Separator 0%-10% 1.9X 4100 Toda Kogyo Cathode Loss 1.6X 3407 Asahi Kasei Separator 10%-20% 1.5X Source: Company data, Goldman Sachs Research estimates. COVERAGE VIEWS Japan: Technology: Hardware Elec. components: Neutral Japan: Metals & Mining: Wire & Cable: Neutral Japan: Integrated Electricals: Neutral Japan: Chemicals: Neutral RELATED RESEARCH Furukawa Electric (5801.T): Upgrading to Buy on electrical/hev/ev growth potential, Ube Industries (4208.T): Reiterate Buy: Recovery on track, best chance of achieving guidance, GS Yuasa (6674.T): Initiating at Sell: We expect strong growth expectations to subside, We have initiated coverage on GS Yuasa (6674.T, 12-month target price 700) with a Sell rating. We think the company will likely continue to dominate in car li-ion batteries, but the stock looks very overvalued. Takashi Watanabe The Goldman Sachs Group, Inc. does and seeks to do business with +81(3) Goldman Sachs Japan Co., Ltd. companies covered in its research reports. As a result, investors should Hisaaki Yokoo be aware that the firm may have a conflict of interest that could affect +81(3) Goldman Sachs Japan Co., Ltd. the objectivity of this report. Investors should consider this report as Ikuo Matsuhashi only a single factor in making their investment decision. Customers in +81(3) Goldman Sachs Japan Co., Ltd. the US can receive independent, third-party research on companies Daiki Takayama covered in this report, at no cost to them, where such research is +81(3) Goldman Sachs Japan Co., Ltd. available. Customers can access this independent research at or call For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to Analysts employed by non-us affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research Goldman Sachs Global Investment Research 1

2 Table of contents EVs to drive initial growth phase in car li-ion batteries; focus on earnings disparities 3 Valuation: We forecast share price premiums for next year or two 5 Li-ion battery market poised to grow 2.2X by Solid demand growth prospects for EVs on govt. subsidies and battery cost declines 11 Shift in HEVs to li-ion batteries lagging; NiMH batteries should still see use 17 Automakers stance on eco-cars 18 Outlook for consumer electronics (CE) li-ion batteries 22 Buyers key to profit growth prospects of battery/materials suppliers; watch Nissan-affiliated suppliers 23 Car li-ion battery makers 28 Breakdown of technological trends by battery material: We highlight Ube Industries and Furukawa Electric 33 Company comments 40 Appendix 46 Disclosures 48 The prices in the body of this report are based on the market close of June 25, 2009 unless otherwise indicated. Goldman Sachs Global Investment Research 2

3 EVs to drive initial growth phase in car li-ion batteries; focus on earnings disparities Li-ion battery market entering rapid growth phase; near-term driver is EV We project the lithium-ion (li-ion) battery market will grow to 1.8 tn by 2014, 2.2X the 2009 level, on growth in automobile-related demand and to 4.3 tn by 2020 in our best-case scenario. We forecast a full-scale pickup in growth car li-ion battery demand from 2009, which we view as year one for li-ion battery-equipped vehicles. We expect growth in electric power storage applications over the medium term and accelerated li-ion battery market growth. We see electric vehicles (EV) as the near-term driver of market expansion. We think EV demand will rise more than expected on government subsidies and lower battery costs, and forecast sales of 300,000 EVs by We think this will have a major impact on li-ion battery demand because EVs use high-capacity batteries. Meanwhile, we forecast a gradual shift in hybrid vehicles to li-ion batteries from nickel metal hydride (NiMH). Over the near term at least, we think EVs will be the main driver of car li-ion battery demand. Identifying customers the key to evaluating related stocks; we focus on companies in the Nissan supply chain We think major earnings disparities will emerge among battery and materials makers as car li-ion battery demand rises sharply. First-generation EVs are scheduled to hit the market in 2012, and the battery/materials to be used are largely complete. After that, we do not expect major changes in supply relationships among auto, battery, and materials makers (see Exhibit 2). In evaluating battery/materials makers, we therefore focus on the final customers. Automakers have differing stances on EVs, and we think EV-related suppliers could enjoy first-mover advantage. We focus on battery/materials makers in the Nissan supply chain, in particular, as Nissan is putting the most effort into EVs. Nissan has said it will have a 200,000-strong EV production structure in place in 2012 and we think it is looking for sales of 200, ,000 EVs in Furukawa Electric up to Buy from Neutral; reiterate Buy on Ube Industries; GS Yuasa initiated as Sell We have upgraded Furukawa Electric (5801.T) to Buy from Neutral on three factors. (1) We think the company remains the top supplier of copper foil for car batteries and expect it to benefit from growth in copper foil volume per Wh. (2) We are positive on medium-term growth potential in electrical applications (super-high voltage cable). (3) We expect a cyclical earnings recovery and additional restructuring measures. We have raised our 12- month target price to 480 from 350, representing 16% upside. We reiterate our Buy rating on Ube Industries (4208.T) on two factors. (1) The company remains a major supplier of electrolytes and (2) we expect its automobile product market share to increase significantly with a shift to dry-process production technology in battery separators and expect growth in usage volume per Wh. We have raised our 12-month target price to 280 from 250, representing 9% upside. We have initiated coverage of GS Yuasa (6674.T) with a Sell rating. We think the company will likely continue to dominate in car li-ion batteries but the stock looks very overvalued. Our 12-month target price is 700, representing 25% downside. For further details, see Exhibit 3 and the company sections at the end of this report. Valuation premium may persist Looking at valuation trends in solar cell/wind turbine stocks, we see a premium versus other sectors during the early stage of industry expansion in (see Exhibit 4). We Goldman Sachs Global Investment Research 3

4 think FY3/10 will mark the beginning of an expansion phase for car li-ion batteries, and we think a valuation premium could persist for the next two to three years (see Exhibit 3). We think Furukawa Electric and Ube Industries do not enjoy a full premium as battery-related stocks and see further upside. GS Yuasa merits a premium in our view, but we think the current premium is too high. Exhibit 1 below shows main players in the consumer electronics (CE) and car li-ion battery markets. Exhibit 2 shows earnings growth potential through FY3/15 in related stocks. Exhibit 1: Top car li-ion battery makers are not top makers of consumer electronics li-ion batteries Major players in li-ion batteries for consumer electronics and cars Lithium ion battery market shares for consumer electronic applications (2008) Hitachi Maxell Panasonic NEC Tokin Sanyo GS A123 ATL E-One (TDK's subsidiary) Lishen BAK BYD LG Chemical Other Sony Sanyo Electric Samsung SDI Auto lithium ion battery makers Company Owned by Stake Panasonic EV Energy Toyota (7203.T, Jpn) 60% Panasonic (6752.T, Jpn) 40% Sanyo Electric (6764.T, Jpn) - AESC Nissan (7201.T, Jpn) 51% NEC (6701.T, Jpn) 42% NEC Tokin (NEC subsidiary) 7% Lithium Energy Japan GS Yuasa (6674.T, Jpn) 51% Mitsubishi Corp. (8058.T, Jpn) 34% Mitsubishi Motors (7211.T, Jpn) 15% Blue Energy GS Yuasa (6674.T, Jpn) 51% Honda (7267.T, Jpn) 49% Hitachi Vehicle Energy Hitachi (6501.T, Jpn) 65% Shin-Kobe Electric M(6934.T, Jpn) 25% Hitachi Maxell (6810.T, Jpn) 10% Toshiba (6502.T, Jpn) JCI-Saft Johnson Controls (JCI, US) 51% Saft Groupe (S1A.PA, France) 49% BYD (BYDDY, China) - SB LiMotive Samsung SDI ( KS, South Korea) 50% Bosch (unlisted, Germany) 50% A123 Systems (IPO scheduled, US) Ener1 (HEV, US) LG Chemical ( KS, South Korea) Continental AG (CONG.DE, Germany) SK Energy ( KS, South Korea) Source: Company data. Goldman Sachs Global Investment Research 4

5 Exhibit 2: We expect much higher market shares in car batteries for NEC, GS Yuasa, Nippon Denko, Kureha, and Ube Earnings growth potential at related companies through FY3/15 Code Company FY3/09 FY3/15 Assumption Sales growth Product Li-ion % of % of Li-ion Market Market from FY3/09 related total total related share in share in to FY3/15 sales sales op sales CE appli. car appli. Lithium-ion battery company ( bn) (%) (%) ( bn) (%) (%) 6701 NEC Battery % Loss X 1% 40% 6674 GS Yuasa Battery 3.0 1% Loss X 0% 14% 6501 Hitachi Battery % Loss X 3% 10% 6752 Panasonic Battery % X 9% 7% 6764 Sanyo Electric Battery % >30% X 30% 5% Battery material companies 5563 Nippon Denko Cathode 1.0 1% 0%-10% X 1% 40% 4047 Kanto Denka Kogyo Electrolyte salt 2.1 5% 10%-20% X 40% 40% 4208 Ube Industries Separator 10% 40% % 10%-20% X Electrolyte 40% 40% 4023 Kureha Binder 70% 70% 30 2% 0%-10% X Anode Small 20% 4109 Stella Chemifa Electrolyte salt % >30% X 40% 40% 5801 Furukawa Electric Copper foil % 20%-30% X 50% 50% 4217 Hitachi Chemical Anode % 10%-20% X 50% 40% 5012 Tonen General Separator % 0%-10% X 30% 10% 4100 Toda Kogyo Cathode % Loss X 10% 5% 3407 Asahi Kasei Separator % 10%-20% X 40% 10% Notes: FY3/15 sales estimates calculated using market share assumptions based on projected FY3/15 market size and competitive landscape. For NEC s and Panasonic s car li-ion battery businesses, sales and profits are recorded as contributions from equity-method affiliates. Source: Company data, Goldman Sachs Research estimates. Valuation: We forecast share price premiums for next year or two Exhibit 3 shows valuations of li-ion battery maker stocks. The stocks have risen rapidly on expectations, chiefly among individual investors, for car li-ion battery market growth, and we think some valuations may have risen too far. For comparison, historical P/E trends in pure solar cell-related stocks and pure wind turbine-related stocks (based on next-fiscal year I/B/E/S consensus EPS estimates) show that sharp rises in P/E are frequently followed by sharp declines (see Exhibit 4). This exhibit also shows that the average P/E multiple for pure solar cell-related stocks has peaked at around 40X next-fiscal-year consensus EPS estimates. Given these historical trends, it is hard to imagine the stocks of li-ion battery makers (who are not pure players) continuing to trade at P/Es of over 40X. Accordingly, we think it is essential to identify battery-related stocks that are lagging behind and have real earnings growth potential. At the same time, however, we note that solar cell-related and wind turbine-related stocks were afforded a valuation premium in We think abnormal valuation premiums that the market currently attaches to some battery stocks may disappear in the next month or two, but believe the market will continue to attach some valuation premiums to these stocks. Goldman Sachs Global Investment Research 5

6 Exhibit 3: Valuations for some stocks seem very high after recent rally Valuations of li-ion battery, battery material, and equipment maker stocks Code Company Country Rating Target Price Currency Market P/E P/B Stock performance price cap FY1 FY2 FY0 3 month 6 month 12 month $mn (X) (X) (X) Lithium-ion battery makers 6674 GS Yuasa Japan Sell , % 82% 60% 6501 Hitachi Japan NR , % -11% -61% 6701 NEC Japan NR , % 55% -34% 6752 Panasonic Japan NR - 1,303 33, % 21% -45% 6764 Sanyo Electric Japan NC , NM NM 86% 85% -1% 6810 Hitachi Maxell Japan NC - 1,105 1, % 39% -20% KS Samsung SDI Korea NC - 103,500 KRW 3, % 95% 19% KS LG Chemical Korea NC - 142,000 KRW 7, % 98% 34% HEV Ener1 US NC $ % -20% -11% CBAK China BAK China NC $ % 37% -35% BYDDY BYD China NC - 31 HKD 2, % 164% 205% Average 56% 59% 10% Material makers 0% 4208 Ube Industries Japan Buy , % 6% -32% 5801 Furukawa Electric Japan Buy , % -2% -12% UMI.BR Umicore Belgium Buy* Euro 2, % 22% -50% 4217 Hitachi Chemical Japan Neutral ,455 3, % 64% -32% 3407 Asahi Kasei Japan Neutral , % 26% -19% 5563 Nippon Denko Japan NC % 38% -43% 4100 Toda Kogyo Japan NC % 113% -5% KQ L&F Korea NC - 44,000 KRW % 144% 87% 4080 Tanaka Chemical Japan NC - 1, % 173% 25% 5741 Furukawa Sky Japan NC % 3% -35% 4023 Kureha Japan NC % 14% -24% 5302 Nippon Carbon Japan NC % 23% -50% 5012 Tonen General Japan NC , % 9% -1% KS SK Energy Korea NC - 103,000 KRW 7, % 40% -8% 4109 Stella Chemifa Japan NC - 3, % 162% 38% 4047 Kanto Denka Kogyo Japan NC % 62% -21% KS Cheil Industries Korea NC - 44,150 KRW 1, % 15% -17% Average 41% 54% -12% Equipment makers 6407 CKD Japan NC % 63% -31% 6245 Hirano Tecseed Japan NC - 1, % 87% -10% 6246 Inoue Kinzoku Kogyo Japan NC % 5% -26% Average 38% 52% -22% Notes: Based on June 25, 2009, closing prices. *Conviction List. Valuations based on Shikiho estimates for Toda Kogyo, Tanaka Chemical, Hirano Tecseed, and Inoue Kinzoku Kogyo, and on I/B/E/S consensus estimates for other non-covered (NC) companies. For target price methodologies and risks, see the individual company sections and our related reports published earlier today (see cover for references). For important disclosures, please go to Source: Datastream, Shikiho, I/B/E/S consensus, and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 6

7 Exhibit 4: Solar cell, wind turbine stocks were afforded valuation premiums in Consensus forward P/Es of overseas pure plays in solar cells and wind turbines (X) 50.0 FY2 P/E trend for solar-related companies FY2 P/E trend for wind-power-related companies Valuation premium on expected market expansion /1 05/7 06/1 06/7 07/1 07/7 08/1 08/7 09/1 Notes: Solar cell-related stocks are Renewable Energy Corp, Renesola, LDK Solar, PV Crystalox, Aleo Solar, Trina Solar, Solarfun, Power Holdings, Yingli Green Energy, JA Solar Holdings, Motech Industries, Suntech Power Holdings, Solarworld, Q- Cells, First Solar, SunPower Corp., Conergy, and Centro Solar. The solar cell-related P/E is a weighted average of these stocks. Wind turbine-related stocks are Vestas Wind Systems, Gamesa Corp. Tecnologica, Tecnologica, REpower Systems, and Nordex. The wind turbine-related P/E is a weighted average of these stocks. Source: Datastream, IBES consensus estimates. Goldman Sachs Global Investment Research 7

8 Li-ion battery market poised to grow 2.2X by 2014 We forecast the li-ion battery market will grow to 1.8 tn in 2014, 2.2X the 2009 level, on growth in automobile-related demand. We expect a gradual shift in hybrid electric vehicles (HEV) to li-ion batteries from NiMH, and we forecast growth in electric vehicles (EV) will proceed in line with automakers plans (we think EVs will spread more rapidly than generally expected thanks to government subsidies). We forecast overall HEV sales volume of 3.4 mn vehicles by 2014, with 25% of these using li-ion batteries, and expect EV sales volume to rise to 300,000 vehicles by We see EVs driving battery demand, however, because EVs require at least ten times the battery capacity of HEVs, meaning EV production growth has a greater impact on battery demand (see Exhibits 5-7) than HEV production growth. Exhibit 5: HEVs likely to remain the eco-car mainstay, but EV sales volume to climb to 300,000 vehicles by 2014 Eco-car sales volume forecast: Exhibit 6: EVs likely to drive li-ion battery demand Li-ion battery demand forecast: (thousand units) 4000 (MWh) EV units 7000 Li-ion battery demand for EV PHEV units HEV (Li-ion battery) units HEV (NiMH battery) units Li-ion battery demand for PHEV Li-ion battery demand for HEV E 2010E 2011E 2012E 2013E 2014E E 2010E 2011E 2012E 2013E 2014E Note: PHEV = plug-in HEVs. Source: Goldman Sachs Research estimates. Note: PHEV = plug-in HEVs. Source: Goldman Sachs Research estimates. Exhibit 7: We expect li-ion battery market to grow to 1.8 tn by 2014 on growth in automobile use Li-ion battery market forecast: ( bn) Li-ion battery market for CE Li-ion battery market for EV Li-ion battery market for PHEV Li-ion battery market for HEV E 2010E 2011E 2012E 2013E 2014E Notes: CE = Consumer electonics. PHEV = plug-in HEVs. Source: Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 8

9 Best-case scenario: Market grows to 4.3 tn by 2020 Our best-case-scenario calls for the li-ion battery market to grow to 4.3 tn by 2020 based on the assumption that in 2020 there will be 2.2 mn HEVs using NiMH batteries, and 6.5 mn HEVs, 1.9 mn plug-in HEVs (PHEV), and 1.2 mn EVs using li-ion batteries (see Exhibit 8). We also expect growth in electric power storage applications beginning around Liion batteries are currently more expensive per Wh than other batteries, making them more difficult to use, but they are attractive for their high energy density (they can be made compact more readily), and once costs come down we think they will be used more widely in households (see Exhibit 9). Exhibit 8: Best-case scenario market grows to 4.3 tn by 2020; additional potential in power storage Our best-case-scenario for 2020 based on assumption of 2.2 mn HEVs using NiMH batteries and 6.5 mn HEVs, 1.9 mn PHEVs, and 1.2 mn EVs using li-ion batteries in 2020 ( bn) Li-ion battery market for CE Li-ion battery market for EV Li-ion battery market for PHEV Li-ion battery market for HEV Could be higher due to boost from power storage applications E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Source: Goldman Sachs Research estimates. Exhibit 9: NAS batteries have life-cycle and cost per Wh advantages in electric power applications Comparison of battery properties (as of 2009) Electric double layer capacitor Lithium-ion capacitor Lead-acid battery NiCd battery NiMH battery Lithium-ion battery NAS battery Voltage 2~3V 2~4V 2.0V 1.2V 1.2V 3.7V 2.08V Energy density CE:40~80 CE:150~200 2~20 10~40 25~45 40~ (Wh/kg) Car:40~60 Car:50~100 Power density 1,000~5,000 1,000~5, ~ ~ ~2, ~3, (W/kg) Price CE: 40 CE: 40~80 4,500 6,000 10~ ( /Wh) Car: 120~150 Car: 100~200 Cycle lifetime More than More than ~ ~1, ~1,000 2,500 (times) 10K 10K Charge efficiency ~88% 80~90% 80~90% 94~96% 1 Issues Low energy density Low battery efficiency Self-discharge Risk of igniting Monitoring is needed Source: NEDO, AIST, GS Yuasa. Goldman Sachs Global Investment Research 9

10 2009 is year one for li-ion battery-equipped vehicles We regard 2009 as year one for li-ion battery-powered vehicles, and many autos fitted with li-ion batteries HEVs, PHEVS, and EVs are scheduled to be launched between now and 2012 (see Exhibit 10). The li-ion battery specifications and suppliers have largely been decided for these first-generation models. During the next 12 months or so decisions are expected for the second generation currently under development with launch targets of Exhibit 10: Many li-ion battery-equipped vehicles to be launched by 2012 Launch schedule for HEVs (li-ion battery-equipped models), PHEVs, and EVs Car maker Brand name/model name Launch Battery supplier HEV Daimler Mercedes S JCS HEV Nissan Fuga 2010 AESC HEV Hyundai/Kia Avante 2010 LG Chemical HEV Hyundai/Kia Sonata 2010 LG Chemical HEV GM Saturn;Vue/Aura/Malibu 2010 Hitachi Vehicle Energy HEV BMW 7 series 2010 JCS HEV Honda Civic 2011 Blue Energy HEV GM Chevrolet;Silverado 2012 LG Chemical HEV GM GMC Sierra 2012 LG Chemical HEV GM Cadillac;Escalade 2012 LG Chemical HEV VW Audi A1 After 2011 Sanyo Electric HEV VW Touareg After 2011 Sanyo Electric HEV VW Audi Q7 After 2011 Sanyo Electric HEV VW Porsche Cayenne After 2011 Sanyo Electric HEV VW Touran After 2011 Sanyo Electric HEV Toyota Undecided Unknown Panasonic EV Energy HEV Daimler Mercedes ML-class Unknown A123 HEV Daimler Mercedes E-class Unknown A123 PHEV BYD auto F3DM 2008 BYD PHEV Toyota Undecided 2009 Panasonic EV Energy PHEV GM Saturn 2010 JCS, A123 PHEV GM Chevrolet;Volt 2010 LG Chemical, A123 PHEV Ford Undecided 2012 JCS PHEV VW Golf Twin Drive Unknown GAIA, Evonik/LiTec PHEV Daimler Sprinter Unknown JCS EV Tesla Roadstar 2008 Tesla Motor EV Mitsubishi imiev 2009 Lithium Energy Japan EV Think City 2009 EnerDel, A123 EV BYD auto F3e 2009 BYD EV Tata Indica Vista EV 2009 Electrovaya EV Nissan Undecided 2010 AESC EV Renault Undecided 2010 AESC EV Subaru Stela 2010 AESC EV Daimler Smart 2010 Tesla Motor EV BMW MINI 2010 E-One EV Porsche Carera 2010 Unknown EV Ford Van-type commercial car 2010 Unknown EV Chrysler Dodge 2011 A123 EV Tesla Undecided 2011 Tesla Motor EV Ford Small passenger car 2011 Unknown EV PSA Undecided 2012 Lithium Energy Japan EV GM Opel;Flextreme 2012 Unknown EV VW Undecided Unknown Toshiba Source: Company data, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 10

11 Solid demand growth prospects for EVs on government subsidies and battery cost declines We do not see li-ion battery vehicles as competitive from a pure cost/return standpoint in the initial EV growth phase since the gasoline cost savings are unlikely to offset the battery cost. However, we think sales of 300,000 EVs per year are feasible by It took almost ten years for HEV sales to reach 300,000 vehicles per year, starting at 4,000 in 1997 and reaching 300,000 in 2005, but we expect a faster pace with EVs because (1) EVs offer greater social benefits than HEVs and have good prospects for government subsidies, (2) battery costs should be significantly reduced by mass production, and (3) cost and time requirements for EV battery-charging infrastructure are not as great as might be expected. Nissan Motor, which is putting considerable effort into EVs, has said it will have a 200,000- strong EV production structure in place by 2012 and we think it is looking for sales of 200, ,000 EVs by Mitsubishi Motors has set a 30,000 EV sales target for This may look bullish but in light of factors (1) to (3) above we think demand growth will be in line with EV makers targets. EVs are commuter cars for now, but latent demand is substantial Most of the EVs coming to market in the next few years will be models designed for commuting that can travel kilometers without needing recharging. Traveling longer distances requires greater battery capacity and raises the hurdle for recouping investment. EVs are unlikely to become mainstream while distance constraints exist, but we see a substantial commuter market. In Japan, 90% of people travel no more than 50 kilometers per day on average (see Exhibit 11). Very few travel more than 100 kilometers. EVs are particularly well suited for business use over fixed distances with many stops and starts. In developed nations, vehicle ownership averages more than one per household, suggesting the second-car market amounts to more than 60 mn vehicles (see Exhibit 12). Exhibit 11: 90% of Japanese drive less than 50 km daily on average User motoring distances in Japan Exhibit 12: More than 60 mn second-cars in developed markets Vehicle/household ownership in developed nations (2006) (% of total users) 30% (mn units) % 20% % 80 Number of households (right axis) Number of passenger cars owned (left axis) % 60 Passenger cars owned per household (right axis) 0.6 5% % Average mileage per day (km) 0 Japan USA England Italy Spain Germany France 0 Source: Motor Fan (March 2008 issue), Toyota. Source: JAMA, Eurostats, and Census. Goldman Sachs Global Investment Research 11

12 Initial growth drivers (1): Social benefits; prospects for the same type of subsidies as solar cells EVs offer greater social benefits than HEVs in two respects. The first is CO2 emissions. Using a scale of 100 for gasoline-powered vehicle CO2 emissions, HEVs rank at 70 and EVs at only 27 (see Exhibit 13). The second is gasoline usage (see Exhibit 14). EVs use no gasoline at all and can be charged overnight using surplus electric power capacity. This should reduce reliance on oil and boost energy efficiency. Tokyo Electric Power estimates that current night-time surplus electric power capacity would be sufficient to meet demand even in a scenario of full-scale EV substitution, implying that investment in additional capacity would not be necessary. EVs can therefore be seen as a public good deserving of government subsidies, which counteracts the argument that high cost will obstruct penetration. We draw a parallel with solar cells. The solar cell market has grown quickly with support from subsidies as developed economies promote alternative energy to reduce oil dependence. However, the power they produce still costs about 32/kWh versus standard household electric power of 21/kWh, meaning users cannot recoup their investments without subsidies (see Exhibit 15). EVs offers greater oil savings than solar cells per kilowatt, and we therefore see a strong incentive for government subsidies. Solar cell subsidies in developed economies range from 200,000 to 600,000 per kilowatt, and we see considerable potential for EV subsidies as well (see Exhibit 16). EV targets and subsidies in various countries/cities are shown in Exhibit 17. Exhibit 13: EV offers low CO2 emissions CO2 emissions per kilometer Exhibit 14: EVs use no gasoline Annual gasoline consumption assuming 10,000 km/year EV CNG EV Diesel hybrid Diesel Gasoline hybrid HEV Gasoline Future FCV Gasoline Current FCV (g-co2/km) ,000 1,200 Source: Mitsubishi Motors. Note: Assumption for EV power supply is nuclear and alternative energy. Source: Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 12

13 Exhibit 15: Solar cell power generation cost is high but penetration is rapid due to government support Power generation cost comparison for Japan (2009) Exhibit 16: Crude oil savings per EV top solar cell 1kW equivalent, so we see good prospects for govt. subsidies Crude oil savings from EV and solar cells; solar cell subsidies (2009) ( /kwh) Solar Crude oil saved by unit/1kw Subsidy per unit/1kw (liters) ( ) EV 10,000? Japan 6, ,000 Germany 4, ,200 Italy 6, ,600 US 8, ,000 China 6, ,500 0 Solar Electricity Petroleum price (household) LNG (Normal) Wind LNG (MACC) Coal Nuclear Source: Goldman Sachs Research estimates based on industry materials and statistics. Notes: Working life assumption of 10 years for EVs, 20 years for solar cells. Solar cell subsidies include feed-in tariff cost (difference between purchase price and general electric power price). Source: Goldman Sachs Research estimates based on industry materials and statistics. Exhibit 17: Only certain governments have announced EV targets/subsidies so far, but we expect more to follow National/regional EV targets and subsidies Country/region Target/support Japan Support: Subsidy for half the cost of (EV price - base car price) Tax benefit: 100% of automobile weight tax up to 3/2012 Tax benefit:100% of automobile tax up to 3/2012 Kanagawa Support: Subsidy for a fourth the cost of (EV price - base car price) Prefecture Tax benefit:100% of automobile tax up to 3/2012 Tokyo Support: Smaller firms get subsidy for a fourth the cost of (EV price - base car price) Tax benefit:100% of automobile tax up to 3/2012 Target: Introduce 1 mn units of PHEV and EV by 2015 US Support: Subsidy up to $7,500 for PHEV and EV Target: Introduce 500,000 units of HEV and EV by 2015 China Support: Start subsidy for commercial vehicles in 13 cities including Beijing and Shanghai. Subsidy for HEV is up to Rmb 50,000, subsidy for EV up to Rmb 60,000. Germany Target:Introduce 1 mn units of PHEV and EV by 2020, 5mn units by Ireland Target:Increase EV volume to 10% of total by 2020 Spain Target:Introduce 1 mn units of EV by 2014 Source: Government releases. Initial growth drivers (2): Battery cost is largely fixed and can be halved by mass production Exhibit 18 shows our estimates of the cost breakout for li-ion batteries by application and capacity (Wh). On the consumer electronics side, cost is much lower for a notebook li-ion battery ( 24/Wh) than a cellphone battery ( 62/Wh) because the standard-sized battery for Goldman Sachs Global Investment Research 13

14 notebooks (the 18650) is conducive to mass production benefits whereas cellphone batteries are customized by model. We think car li-ion battery costs will still exceed 100/Wh in 2010 because (1) the long electrodes entail a difficult winding process and (2) safety considerations entail a high-cost inspection process. However, we think the cost difference with cellphone batteries stems largely from differences in production volume. We assume that annual production will be only several hundred thousand units for EV li-ion batteries in 2010 versus several hundred thousand to several million per model for cellphone li-ion batteries and mn for notebook batteries. EV li-ion battery unit costs should be greatly reduced by 2014 assuming annual production ranging from several million to several tens of millions and attendant decline in the fixed cost ratio and improvements in throughput and yield (see Exhibit 19). We think materials prices will be lower than in current cellphone and notebook PC applications because the higher number of batteries per model will be conducive to mass production benefits. Exhibit 18: Mass production to halve cost by 2014 Li-ion battery costs, cost breakout per Wh Exhibit 19: Fixed-cost ratio too high at present Breakdown of li-ion costs per Wh Cellphone NotePC EV (2010) EV (2014) (2009) (2009) ( ) 3.3Wh 7.4Wh 16,000Wh 16,000Wh Annual production volume million million 0.2 million cells million cells Cost breakdown Material cost , ,000 Other variable cost ,000 64,000 Labor cost , ,000 Depreciation cost , ,000 R&D cost , ,000 Cost of battery cell ,600, ,000 Packaging cost 400, ,000 Cost of battery pack 2,000,000 1,199,000 ( /Wh) R&D cost Depreciation cost Labor cost Other variable cost Material cost Cost per Wh Material cost Other variable cost Labor cost Depreciation cost R&D cost Cost of battery cell Packaging cost Cost of battery pack Cellphone (2009) NotePC (2009) EV (2010) EV (2014) Source: Goldman Sachs Research estimates based on company interviews. Source: Goldman Sachs Research estimates. Illustration: Cost curve for CE li-ion batteries Exhibit 20 shows how cost declined for notebook li-ion batteries. Between 1995 and 2000 production increased by a multiple of 15, to 485MWh from 32MWh, while the unit price fell to 46/Wh from 160/Wh. Breaking the unit price down to unit cost ( /g) and energy density (Wh/kg), we find that unit cost decline made the larger contribution and we attribute this to mass production benefits. We expect car li-ion battery production to increase by a multiple of about 140 between 2009 and 2014, to 11,300MWh from 82MWh, meaning the unit cost reduction should be as substantial as it has been for consumer electronics applications (see Exhibit 21). Goldman Sachs Global Investment Research 14

15 Exhibit 20: Consumer electronics battery unit cost significantly reduced by volume growth Change in battery capacity unit price, unit cost, energy density Exhibit 21: We expect similar cost curve for car batteries Our projections for car battery capacity unit price, unit cost, energy density Price/Whm, unit cost, energy density for battery Price per Wh ( /g, left axis) Unit cost ( /g, right axis) Energy density (Wh/kg, left axis) Price/Whm, unit cost, energy density for battery Price per Wh ( /g, left axis) Unit cost ( /g, right axis) Energy density (Wh/kg, left axis) E 2011E 2013E 2015E 2017E 2019E 0 Production volume of cylindrical-type (18650 size) Automotive li-ion battery production volume 1,600 1,400 1,200 1,000 Production volume of cylindrical-type (18650 size) li-ion battery (MWh) 60,000 50,000 40,000 Production volume of car li-ion battery (MWh) , , , E 2011E 2013E 2015E 2017E 2019E Source: Ministry of Economy, Trade and Industry. Source: Goldman Sachs Research estimates. EV investment recoupable given government support and battery cost reduction Exhibit 22 shows the number of years required for recouping EV costs depending on different battery cost and subsidy assumptions. We estimate EV fuel cost at about 9,000 assuming an electric power cost of 1/km (overnight charging) and 10,000 km/year of use. This represents an annual fuel cost saving of about 110,000 over a gasoline-powered vehicle. We estimate the battery cost for the i-miev model Mitsubishi Motors launched in June 2009 at 2.4 mn ( 150/Wh X 16,000 Wh), which means it would take 22 years to recoup the vehicle cost through fuel cost savings, but we note that the low level of annual production (1,400 vehicles) pushes up the cost. We estimate that mass production will lower battery cost to 100/Wh by 2011 and 75/Wh by 2014, and we expect the combination of cost reductions and subsidies to significantly reduce the time required for recouping investment. Japan has a system whereby 50% of the cost increase from EV batteries is subsidized. In the United States, subsidies of up to US$7,500 are available per EV and PHEV (40%-50% of 16,000 Wh battery cost). By 2011 or so, we think it should be possible to recoup investment within ten years, which is the EV lifespan. 1 A rise in gasoline prices would increase the cost competitiveness of EVs, which use no gasoline. If the price of gasoline in Japan were to rise from the current 120/liter to 1 Repeated charging diminishes li-ion battery power. The deterioration depends on use but more than 60% of power (equivalent to approx. 100 km) remains after 150,000 km over ten years so there is no obstacle to commuter use. Goldman Sachs Global Investment Research 15

16 150/liter, the annual fuel cost saving would be 150,000, shortening the period for recouping investment. Exhibit 22: EV cost could be largely recouped if battery price falls to 75/Wh by 2014 Period for recouping EV cost depending on battery costs, subsidies (highlights show less than ten years) Time to recoup investment assuming oil price of $65/bbl Time to recoup investment assuming oil price of $100/bbl (years) (years) Battery cost ( /Wh) Battery cost ( /Wh) % % % % Battery 20% Battery 20% subsidy 30% subsidy 30% % % % % Now in 2011 in 2014 Now in 2011 in 2014 Note: Our assumptions are (1) 16 kwh battery capacity, (2) 10 km travel possible per kwh, (3) overnight charging ( 9/kWh), (4) 10,000 km annual driving distance, and (5) 12 km/liter fuel consumption for gasoline-powered vehicles. Source: Goldman Sachs Research estimates. The price of Mitsubishi Motors imiev is high, at 3.2 mn after subsidies, but we expect it to decline to around mn in 2014 assuming current subsidies remain in place (see Exhibit 23). In this scenario the increase in cost compared with a minivehicle or other gaspowered cars would be almost recouped through the annual fuel cost savings. EVs have acceleration and quiet motoring benefits that cannot be achieved with gas-powered vehicles, and we think growth in demand is feasible once the battery cost obstacle is overcome. Exhibit 23: Reasonable cost performance given lower battery price would reduce effective EV price to mn by 2014 from 3.2 mn now Performance comparisons: minivehicles, regular gas-powered autos, hybrids, EVs Car name i Fit New Prius imiev Car maker Mitsubishi Motor Honda Toyota Mitsubishi Motor Car type Mini vehicle Gasoline HEV EV Price 1.46mn 1.56mn 2.05mn 4.59mn -Subsidy None None None 1.39mn Real price 1.46mn 1.56mn 2.05mn 3.20mn fuel consumption 18.6km/litter 17.2km/litter 35.5km/litter 10km/kWh Annual fuel cost ( ) 87,000 94,000 56,000 9,000 Tank capacity (liter) Available driving range 580km 536km 958km 160km Max. output (kw) Max. torque (N m) Displacement (liter) Notes: Annual fuel cost calculation based on US Department of Energy Fuel Economy Guide and 10,000 km of driving per annum. For i and Fit we used the highest torque model in the lineup. Source: US Department of Energy Fuel Economy Guide, company data. A market for used li-ion batteries would reduce cost further Although power capacity declines 20%-40% when a li-ion battery is used in an EV for ten years (assuming a 1,500 cycle), more than 10 kwh in capacity remains in a 16 kwh battery, which is sufficient for storing electric power (storing power overnight for use during the day). Japanese households used around 10 kwh/day and if this were stored overnight the Goldman Sachs Global Investment Research 16

17 saving would be 120/day since the difference between the daytime and night-time electricity prices is 12/Wh. This works out to 44,000 over a year and 220,000 over five years. Therefore, if a market for used li-ion batteries for storing electric power were to come into existence, the residual value of EV li-ion batteries would increase and this, in turn, would facilitate recouping battery investment. Initial growth drivers (3): EV-charging infrastructure a surprisingly small obstacle Charging infrastructure tends to be seen as the greatest obstacle to EV penetration since commuters will want to be able to recharge quickly and easily, but estimates by Tokyo Electric Power indicate that this may not be that great an obstacle. Tests begun by Tokyo Electric Power in 2006 indicate that (1) EVs could run without fear of running out of power if one high-speed charger were available every five square kilometers (requiring 84 chargers in central Tokyo) and (2) the main pattern of use by Tokyo Electric Power staff is to recharge on return to the office rather than on the road. Tokyo Electric Power projects a selling price of 3.5 mn for a high-speed charger, implying an initial cost of 7 mn on the assumption that installation also costs around 3.5 mn, although it would vary according to site conditions. The cost of two such chargers for 84 central-tokyo facilities works out to about 1.2 bn, suggesting Tokyo Electric Power could put the facilities in place in central Tokyo in a relatively short time without outside financing. Condominium power points are easy to install, and according to Tokyo Electric Power they could be provided nationwide for several tens of billion yen. (See our April 27, 2009 report, Electric vehicle charging infrastructure may be surprisingly easy.) A more difficult issue is who would be responsible for financing the charging infrastructure. For condominiums, the investment would not be that great, but not all residents would have EVs, which would raise the question of who should bear the costs. This is an area where government investment could help circumvent problems. Shift in HEVs to li-ion batteries lagging; NiMH batteries should still see use Most HEVs use NiMH batteries, not li-ion ones. By 2011 or so, we think the two should cost roughly the same about 100/Wh and we expect the shift in HEVs to li-ion batteries to occur in stages. However, we think NiMH batteries will remain in use a while longer as an industrywide shift to li-ion batteries for HEVs is proceeding slowly (see Exhibit 24). Specifically, we think Toyota, the largest HEV manufacturer, is behind in moving to li-ion batteries, and Honda also appears to be shifting slowly. Blue Energy, a li-ion battery manufacturing joint venture set up between GS Yuasa and Honda, plans to start mass production of the batteries from autumn We therefore expect HEV No. 2 Honda to use the batteries in its HEVs, starting with the Civic scheduled to go on sale in We think it is very likely the Fit and CR-Z models scheduled to go on sale in 2010 will still use NiMH batteries, with the actual shift to li-ion batteries beginning in That said, models equipped with li-ion batteries have a short track record, and we do not see Honda rapidly stepping up production of li-ion battery-equipped models; we think the shift to li-ion will be gradual. Many overseas manufacturers have used li-ion batteries from the start. GM plans to launch HEV and PHEV models from 2010, Volkswagen HEVs from 2011, and Hyundai HEVs from 2010 (Exhibit 10). Goldman Sachs Global Investment Research 17

18 Meanwhile, Toyota plans to introduce 500 PHEVs equipped with li-ion batteries by the end of 2009, although we think full-scale mass production of vehicles equipped with the batteries is very likely to begin around 2013 or Some in the market believe this is because the incentive for manufacturers to shift to li-ion batteries is diminished in light of NiMH batteries improved reliability and track record. We believe one cause behind the delay is the fact that li-ion batteries are taking longer than Toyota expected to become established as reliable. Panasonic EV Energy (a joint venture between Toyota and Panasonic) uses nickel-based cathode materials in the batteries they develop for Toyota. Such materials are generally known to readily generate heat at high temperatures. Compared with industry peers that use very safe manganese-based materials, Toyota probably faces high technological hurdles in ensuring the safety of its batteries. Exhibit 24: We expect a marked shift to li-ion batteries in HEVs around Breakdown of our HEV sales volume projections by battery type (thousand units) Volume of Li-ion battery-embedded HEV Volume of NiMH battery-embedded HEV E 2011E 2013E 2015E 2017E 2019E Source: Goldman Sachs Research estimates. Automakers stance on eco-cars The following comments represent the views of our automobile sector analysts in various regions, including Kota Yuzawa in Japan, Patrick Archambault in the US, and Stefan Burgstaller in Europe. Toyota Motor Toyota s eco-car strategy revolves around hybrid technology and we think the company s HEV sales will reach the 1 mn mark as early as We expect Toyota to stay ahead of Honda, the No. 2 in HEVs (300, ,000 vehicles), in scale given a hybrid weighting of well over 10% in consolidated sales volume. Toyota wants to apply hybrid technology to all its models sooner rather than later and will be accelerating vehicle development to that end. For these reasons, we see Toyota as a winner in the hybrid era we expect to extend over the next five to ten years. The company continues to use NiMH batteries in its third-generation Prius. More than ten years of development work on these batteries has delivered adequate cost and safety characteristics, and we do not think Toyota will shift quickly to li-ion batteries for massproduced hybrid vehicles. We expect li-ion batteries to be used in the PHEV planned for launch by Goldman Sachs Global Investment Research 18

19 Honda Motor Honda launched the Insight hybrid in 2009 and is shifting its eco-car focus to hybrid technology. The company uses mild hybrid, which is generally lower cost than the strong hybrid used by Toyota (excluding mass production benefits). The Insight price was set at a low 1.89 mn, but sales appear to be suffering to some extent from a Toyota Prius price offensive. We think whether the company achieves its 200,000/year hybrid sales target will depend on Prius production constraints. The next target, backed by new products including small sports and Fit hybrids that capitalize on mild hybrid attributes, will be annual sales of 400,000 units (over 10% of consolidated sales). Because mild hybrid technology is difficult to apply to larger models, Honda s eco-car penetration strategy for its Accord and higher-class models centers on diesel and fuel cell technologies. The company has not announced a clear stance on EVs. Nissan Motor Nissan is continuing with HEV development (a rear-wheel drive luxury sports sedan) but EVs are central to its next-generation eco-car strategy and it plans EV launches in Japan and the United States in 2010, ahead of Toyota and Honda. However, we do not expect immediate penetration for Nissan EVs on the view that HEV demand will grow more quickly over the next few years on the basis of cost and infrastructure. We therefore expect little earnings impact from EVs for the time being. We think Nissan will need to come up with responses to the wealth of market data Toyota and Honda have accumulated with their HEVs and PHEVs and to battery motor production costs. Li-ion battery production for Nissan EVs began in spring 2009 at Automotive Energy Supply (AESC), the company s joint venture with NEC. The company expects to have production capacity for 50,000 vehicles in The plan is to undertake further investment to give it capacity of 200,000 EVs per year. Exhibit 25: Renault-Nissan promoting greater EV adoption by partnering with national and regional governments and other institutions Timeline of Renault-Nissan partnerships announced to date Announcement date Partner 2008/1/21 Israeli government 2008/3/27 Danish government 2008/7/9 Portuguese government 2008/7/22 Tennessee state government 2008/10/9 EDF (Major electricity producer in Europe) 2008/11/19 Oregon state government 2008/11/20 Monaco government 2008/11/21 Sonoma County, California 2008/12/16 EOS (Swiss electric power company) 2009/3/2 Greentomatocars (private hire service company in the UK) 2009/3/2 Electromotive (recharging station provider in the UK) 2009/3/4 Yokohama City 2009/3/9 Tucson metro area in Arizona 2009/3/23 One North East (the regional dev. agency for the North East of England) 2009/4/10 Ministry of Industry and Information Technology of China 2009/4/16 Phoenix metro area in Arizona 2009/4/22 Oak Ridge National Laboratory 2009/4/24 Hong Kong government 2009/5/6 Singapore government Source: Company data. Goldman Sachs Global Investment Research 19