Charging the future: Asia leads drive to next-generation EV battery market

Transcription

1 September 27, 2016 Asia: Automobiles Charging the future: Asia leads drive to next-generation EV battery market Pushing the limits of lithium-ion batteries and investing in all-solid-state batteries Equity Research Battery market to grow 6X by 2025E We believe the rapid adoption of electric vehicles and hybrids over the next decade will spur an enormous increase in the market for EV batteries and heightened demand for advances in battery technology. We forecast a six-fold increase in the market for EV batteries to US$24 billion by 2025, fueled by increases in energy density to lower prices. In this report, we outline where we see Asian companies leading this growth and pioneering efforts to find the next-generation battery technology to replace lithium-ion. Powering the transition to EVs Our battery market forecasts rest on our expectations for a 30% CAGR in sales of electric vehicles (EVs) to 2025, along with a 36% CAGR in sales of plug-in hybrid electric vehicles (PHEVs) to reduce CO2 emissions. We expect that over that span, the gravimetric energy density of EV batteries will climb to over 500 Wh/kg from 200 Wh/kg in 2015, likely requiring transition to a post-lithium technology. Investing with eye to lithium s limits Our approach is to look for companies that will benefit from expansion and innovation in the lithium-ion battery (LIB) market, as well as those invested in the development of potential successor technologies. We believe the postlithium transition could start from Among a range of alternatives we focus on all-solid-state batteries that would do away with the liquid electrolyte found in most lithium-ion batteries and offer advantages in size and cost. Asian at heart of battery ecosystem LG Chem (CL-Buy), Korea s leading battery manufacturer, has supply contracts with multiple automakers, and in our view has an edge over rivals from both a technical and cost perspective BYD (Buy), China s leading EV manufacturer, is mass-producing its own inexpensive batteries. In addition, we highly value Toyota s long-term strategy to focus on all-solid-state batteries, but remain Neutral due to US auto slowdown concerns in the near term. Kota Yuzawa +81(3) kota.yuzawa@gs.com Goldman Sachs Japan Co., Ltd. Yipeng Yang +86(10) yipeng.yang@ghsl.cn Beijing Gao Hua Securities Company Limited Nikhil Bhandari nikhil.bhandari@gs.com Goldman Sachs (Singapore) Pte Masaru Sugiyama +81(3) masaru.sugiyama@gs.com Goldman Sachs Japan Co., Ltd. Shuhei Nakamura +81(3) shuhei.nakamura@gs.com Goldman Sachs Japan Co., Ltd. Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, 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

2 September 27, 2016 Asia: Automobiles Table of contents Our thesis in four charts: Battery market to grow 6X by 2025E Executive summary: Battery race starting to rev up in Asia 10 Asian beneficiaries of LIB growth, development of post-lithium technology Key industry themes Battery race accelerating with energy density likely to double, market up 6X by 2025E Up the technology curve: Next-generation LIBs, then all-solid-state batteries EV and PHEV penetration set to accelerate through 2025E Stocks in focus LG Chem: Strong and diversified EV battery client base; reiterate CL-Buy BYD: To benefit from China s fast-growing NEV market, valuation attractive; reiterate Buy Panasonic Corp: Leading LIB supplier globally, but Neutral on tough market outlook Toyota: Leading all-solid-state battery development, but Neutral on stiff competition Toray: No. 2 supplier of LiB separators globally, further expansion underway; Neutral Samsung SDI: Shifting focus from mobile to EV, but challenges ahead; Neutral Other beneficiaries Appendix Disclosure Appendix Prices are as of September 21 close for Japanese companies and September 22 close for non-japanese companies. The Future in numbers The drive for better EV batteries sits at the nexus of multiple trends. See our theme pages for related work on Cars 2025, The Low Carbon Economy and The Great Battery Race. Get a 2-minute audio summary from author Kota Yuzawa. Listen here Lighter, Faster, Cheaper, Apr 7, 2016 Disruption in China s new car market, Feb 29, 2016 BYD (1211.HK) Buy: Electrifying the world s largest new car market; reinstate at Buy, Aug 31, 2016 The Low Carbon Economy, Nov 30, 2015 Electric Vehicles customer acceptance & continued scaling; check, Apr 7, 2016 The Great Battery Race, Oct 18, 2015 China Energy Storage: Charged up and ready to grow, Jun 8, 2016 LG Chem ( KS) Buy: Right chemistry and charged batteries; initiate at Buy (on CL), Jan 22, 2016 Goldman Sachs Global Investment Research 2

3 Charging The Future in numbers BATTERY BOOM ON THE WAY 6x GREATER DEMAND, GREATER DENSITY 2x ASIA TAKING THE LEAD 50%+ Increase in lithium-ion battery (LiB) demand expected between 2015 and 2025, rising from 58 GWh to 387 GWh. Demand for automotive batteries is slated to rise from 15 GWh to 279 GWh during the same period. (p. 12) Increase in energy density expected between 2015 and 2025, from 200 Wh/kg to 550 Wh/kg. (p. 10) Percentage of global output from Asian battery makers. (p. 6) SATISFYING THIRST FOR RANGE 60 kwh COST TO COME DOWN Battery capacity needed to achieve a driving distance comparable with that of a gasoline-powered vehicle (around 300 km/200 miles). (p. 11) US$272 to US$100 per kwh Cost for auto batteries from 2015 to 2025E. Improvement in energy density should help drive this decline. (p. 10) THE LARGEST MARKET - CHINA 300,000 New Energy Vehicle sales (excluding hybrids) in China (2015). (p. 29) 3,000+ The All-Solid-State Batteries Future Patents for all-solid-state batteries filed in , far higher than other post-lib technologies. 71% of these applications were filed by Japan, Korea and China. (p. 19) What is an all-solid-state battery? An orthodox LiB has a separator and liquid electrolyte between the cathode and the anode. An all-solid-state battery, on the other hand, has only a solid electrolyte between the cathode and the anode, and contains no liquid. There is no need for a separator, as the solid electrolyte also takes on that function. These batteries are known as all-solid-state batteries as they contain absolutely no liquid. Why are all-solid-state batteries needed? All-solid-state batteries have advantages in terms of safety, and they also offer stable performance through a wide range of temperatures, which is why they are being developed for automotive applications. As they eliminate the need for liquid electrolytes and separators, all-solid-state batteries could in theory have much higher energy density. Competition to develop solid electrolytes will be the key. Lithium-ion battery Negative current collector Positive current collector All-solid-state battery Negative current collector Positive current collector Li+ Li+ Li+ Anode Li+ Separator Liquid Cathode Li+ Li+ Li+ Anode Li+ Li- Li- Li- Li- Li+ Li+ Li- Solid Li- Li- Li- Li- Li+ Li+ Li- Cathode Is the production method different? A mass production technique for all-solid-state batteries has yet to be established. However, in many cases the production of relatively largecapacity all-solid-state batteries for automotive applications involves a pressurized process, which means that facilities will differ from those used to make conventional LiBs. Solid electrolytes are generally less conductive than liquid electrolytes, but a number of companies, including Toyota, are vying with each other to develop solid electrolytes that have ionic conductivity on a par with, or even exceeding, that of liquid electrolytes. Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 3

4 Our thesis in four charts: Battery market to grow 6X by 2025E Exhibit 1: Bullish on demand outlook for EVs, PHEVs Outlook for EV/PHEV sales, E CAGR Exhibit 2: Forecast rapid increase in energy density, battery costs halving Outlook for energy density, battery costs (Thous.) E 2025E CAGR Li-ion battery All-solid-state battery PHEV 397 1,272 2,787 22% China ,339 36% Need technological breakthrough Post LIB (All-solid-state battery) Non-China ,448 16% EV 251 1,322 4,014 32% 400 Next generation LIB 400 China ,890 30% Non-China ,123 34% PHEV+EV 648 2,594 6,801 27% Global auto demand 88, , ,494 2% Note: Excluding low speed EV in China Current LIB Cost(USD/Wh, RHS) Energy density(wh/kg, LHS) E E Source: IHS, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research. Exhibit 3: At battery cost of US$100 per kwh, EVs could represent cheapest solution for reducing CO2 Additional cost to reduce CO2 by 1g Exhibit 4: We project six-fold growth in automotive battery market LIB market outlook, by application (GWh) Automotive battery market (USD) 2015 $ 4bn 2025 $ 24bn Mobile phone PC Tablet Machine tool Automotive Others Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 4

5 Executive summary: Battery race starting to rev up in Asia PHEV, EV penetration set to pick up pace; EVs key to CO2 reduction Almost two decades have passed since Toyota launched the world s first mass-produced hybrid vehicle (HV) in By 2015, the hybrid vehicle market had grown to 2 mn units, making an enormous contribution to CO2 reduction. Over the coming 10 years, we think electric vehicles (EVs) and plug-in hybrid vehicles (PHEVs) will demonstrate remarkable growth. In recent years, environmental regulations have been strengthened and tightened, forcing automakers to review their powertrain strategies. In addition, we see significant support for EV growth from stepped-up new energy vehicle (NEV) subsidies in China. Moreover, advances in lithium-ion battery (LIB) technology (huge leaps in energy density) could result in an increase in battery capacity per vehicle. We see the EV market expanding from 250,000 units in 2015 to 4.01 mn units in 2025 (CAGR of 30%) and look for PHEV sales to rise from 400,000 units to 2.78 mn units (CAGR of 36%). Over the same period, we expect the HV market to grow from 2.16 mn units to mn units (CAGR of 20%). The lower the cost for batteries, the more sense it will make to adopt an EV-based business model. We calculate that in PHEVs, the additional cost to lower CO2 by 1 gram is US$139. Based on a battery cost of US$272 per kwh in 2015, we calculate that in EVs, the additional cost to lower CO2 by 1 gram would be US$124, similar to that for PHEVs. That cost would shrink to US$31, though, in the case of a battery cost as low as US$100 per kwh. This would make EVs an inexpensive solution for reducing CO2 emissions, on a par with vehicle light weighting and downsizing turbo engines. From the automakers perspective, we see grounds to continue investing heavily in EVs through Turning point ahead for batteries; six-fold growth in automotive battery market by 2025E We look for the automotive battery market to expand considerably, in tandem with growth in the EV and PHEV markets. We expect a roughly six-fold increase in LIB demand between 2015 and 2025, from 58 GWh to 387 GWh, with demand for automotive batteries rising from 15 GWh to 279 GWh over the same period. Thus far, mobile phones and PCs have been the main source of demand for LIBs, but over the next decade we think rapid growth in automotive applications will bring battery operations to a major turning point. Even allowing for an average annual decrease of about 5% in battery prices to encourage greater uptake we think the market for automotive LIBs could grow sharply in size between 2015 and 2025, from US$4 bn to a massive US$24 bn. For further details on LIB demand, see our October 18, 2015 report Global: Clean Energy: The Great Battery Race. Rapid improvement in energy density; focus on all-solid-state batteries The history of automotive LIBs is one of unstinting efforts to improve energy density (gravimetric or volumetric). In , Nissan announced plans for large-scale investment in pouch-type batteries with manganese spinel as the cathode material, going on to launch the Leaf EV. At the time, we estimate that gravimetric energy density was Wh/kg, but by 2015, batteries with ternary cathode materials were achieving gravimetric energy density of over 200 Wh/kg. Looking ahead, further technical advances will likely lift this figure to 300 Wh/kg by 2020, and over 500 Wh/kg in 2025 and beyond. Similarly, the aim is to boost volumetric energy density from 500 Wh/l in 2015 to 700 Wh/l in 2020 and 1,100 Wh/l in 2025 and beyond. We note this will likely require a transition to so-called post-lithium ion technology. Among the many next-generation battery technologies, we focus on all-solid-state batteries. Goldman Sachs Global Investment Research 5

6 10 Asian beneficiaries of LIB growth, development of post-lithium technology While innovation in battery technologies is proceeding at a rapid pace worldwide, battery development is booming in Asia in particular. Asian battery makers currently have around 50 GWh of production capacity, equivalent to 50% or more of global output (consumer electronics/automotive battery capacity combined), and have monopolistic shares of 50%-80% of core component materials, such as cathode materials and separators. Asian producers have also taken the lead in the development of nextgeneration batteries. Japan accounted for 53% of patent applications filed in , followed by the US at 13%, Europe at 12%, Korea at 10% and China at 8%. We reiterate our Buy ratings on LG Chem (CL) and BYD on the back of rapid LIB business expansion. We remain Neutral on Toyota over short-term US auto market slowdown concerns, but highly value its long term strategy to focus on all-solid-state batteries. We also spotlight seven other battery and related product makers from among the many Asian names in this space. LG Chem (battery manufacturer, Korea, CL-Buy): A major battery manufacturer with total production capacity of 13 GWh (our estimate, consumer electronics/automotive battery capacity combined), for a 13% share of the global market. It has wellestablished automotive battery supply agreements with Hyundai, General Motors, Ford, and other major automakers. LG Chem also has an edge in terms of technological development, having successfully developed ternary (nickel, cobalt, manganese composite) batteries with energy density of more than 200 Wh/kg. BYD (automaker, China, Buy): Sales have been growing rapidly on the back of China s NEV policies. BYD currently mass produces batteries using lithium ferrophosphate as a cathode material, but also plans to develop batteries with improved energy density, mainly through the use of ternary (nickel, cobalt, manganese composite) technologies. We see advantages in terms of cost competitiveness for automakers producing batteries in-house under a vertically integrated business model. Toyota (automaker, Japan, Neutral): Toyota is the world s largest producer of nickel-metal hydride batteries for hybrid vehicles, but has made no major investments in LIBs. We believe the company considers all-solid-state batteries essential to growth in EV uptake. We see appeal in Toyota s accumulating expertise in the field of all-solid-state batteries, including the development of (solid) electrolytes with high ionic conductivity, but think any real-world applications are unlikely to become a reality before Panasonic (battery manufacturer, Japan, Neutral): A major battery manufacturer with total production capacity of 10 GWh (our estimate, consumer electronics/automotive battery capacity combined), for a 10% share of the global market. Sales of automotive batteries in FY3/16 stood at around 150 bn, but we expect this figure to rise sharply to 350 bn by FY3/19. Panasonic is also responsible for supplying nickel cobalt aluminum batteries to Tesla, and has decided to invest around bn in the US automaker s Gigafactory project. Toray Industries (separator maker, Japan, Neutral): A hybrid chemical maker that makes wet separators, with a 20% market share in separators, second to Asahi Kasei, which has a 45% share (including its Celgard acquisition). Despite the fact that the separator business accounts for only 1.2% of sales, the company is planning aggressive capacity additions in coming years. Samsung SDI (battery manufacturer, Korea, Neutral): SDI has built a solid track record with increasing market shares in consumer/mobile battery business. However, we do not expect SDI s success in mobile battery will directly translate into EV battery industry given diverging industry dynamics and customer base. We foresee three major challenges for SDI s EV battery business including limited customer base, slower cost reduction, and regulation risks in China. Goldman Sachs Global Investment Research 6

7 Asahi Kasei (separator maker, Japan, Not Covered): The only maker of both dry and wet separators, the company has a dominant, 45% separator market share (Asahi Kasei acquired rival Celgard, which makes dry separators, in 2015). The separator business accounts for 6% of sales. According to Asahi Kasei, the business is expected to make 2.5 bn in operating losses in 2016 due to goodwill amortization from the Celgard acquisition. Tanaka Chemical (cathode materials maker, Japan, Not Covered): A pure play that mainly makes positive electrode precursors. On August 31, 2016, Tanaka Chemical announced plans to raise capital by issuing new shares via a private placement to Sumitomo Chemical. This would take Sumitomo Chemical s stake in Tanaka Chemical to 50.1%. The two have been collaborating already on development of next-generation nickel-cobalt-manganese (NCM) cathode materials with a nickel weighting as high as 90%, which should contribute to further increasing batteries energy density. W-Scope (separator maker, Japan, Not Covered): A wet separator pure play, with a 5% separator market share. It currently has a 65% consumer electronics separator weighting and a 35% automotive separator weighting, but is targeting market share growth in automotive separators with the shift from wet to dry separators. Its head offices are in Japan, and it is listed in Japan, but all of its production bases are in Korea. Hitachi Zosen (all-solid-state battery maker, Japan, Not Covered): A machinery maker engaged in the ship engine and environmental plant businesses that is devoting energy to the development of all-solid-state batteries that make use of machine stamping technology. With all-solid-state batteries, the process of applying pressure is important in order to boost electrolyte and positive/negative electrode conductivity, and Hitachi Zosen s press technology is used for this. The company has already succeeded in 200 Wh/kg aluminum laminate trial production. Goldman Sachs Global Investment Research 7

8 Exhibit 5: Stock selection premised on rapid increase in demand for automotive batteries Valuations for related stocks (Valuation) Mkt cap Curr Price TP Return P/E P/B ROE Rating (mn USD) ency (local) (local) Potential FY17 FY16E FY17E FY17 FY16E FY17E FY17 FY16E FY17E OEMs Toyota 203,469 Neutral 6,144 6,400 4% % 9.0% 9.1% BYD (H) 6,370 Buy HK$ % % 14.5% 16.6% Battery makers LG Chem 14,326 Buy CL 238, ,000 40% % 11.1% 10.6% Panasonic 25,603 Neutral 1,052 1,100 5% % 9.7% 10.2% Toray 15,961 Neutral 986 1,000 1% % 9.6% 9.4% Samsung SDI 6,202 Neutral 99, ,000 6% % 2.6% 3.9% Asahi Kasei 11,377 NC % 8.2% 8.3% Tanaka Chemical 171 NC 1, W-Scope 667 NC 2, % 17.4% 18.4% Hitachi Zosen 888 NC % 6.6% 6.5% Toyota Battery, <1% BYD Batter y, 7% LG Chem Battery, 16% Panasonic EV battery, 2% Consum er battery, 1% Toray Battery, 1% Non- Battery, 99% Non- Batter y, 93% Non- Battery, 84% Non- Battery, 97% Non- Battery, 99% Samsung SDI Non- Battery, 56% EV battery, 7% Consu mer battery, 37% Asahi Kasei Non- Batter y, 94% Battery, 6% Tanaka Chemical Non- Battery, 18% Consume r battery, 50% EV battery, 32% Consume r battery, 65% W-scope EV battery, 35% Hitachi Zosen Battery, <1% Non- Battery, 99% Note: NC=Not Covered. All target prices are on a 12-month timeframe. Shares shown above in terms of sales (based on FY2015 company data). Source: Datastream, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 8

9 Key industry themes Key industry themes Goldman Sachs Global Investment Research 9

10 Battery race accelerating with energy density likely to double, market up 6X by 2025E Battery history one of tackling energy density The history of automotive LIBs is one of unstinting efforts to improve energy density (by gravimetric or volumetric). In , Nissan announced plans for large-scale investment in pouch-type batteries with manganese spinel as the cathode material, going on to launch the Leaf EV. At the time, we estimate that gravimetric energy density was Wh/kg, but by 2015, batteries with ternary cathode materials were achieving gravimetric energy density of over 200 Wh/kg. Looking ahead, further technical advances likely will lift this figure to 300 Wh/kg by 2020, and over 500 Wh/kg in 2025 and beyond. Similarly, the aim is to boost volumetric energy density from 500 Wh/l in 2015 to 700 Wh/l in 2020 and 1,100 Wh/l in 2025 and beyond. Improvement in energy density to reduce battery cost Improving energy density on per unit gravimetric /volumetric basis is expected to contribute significantly to the reduction in battery costs. We estimate the cost of automotive batteries was around US$272 per kwh in 2015, and we forecast it will decline to US$197 per kwh by 2020 and US$100 per kwh by This is because the improvement in energy density should not only reduce materials costs but also increase economies of scale through greater automotive battery penetration. We note, though, that achieving a twofold increase in gravimetric/volumetric energy density by 2025 likely will require a transition to so-called post-lithium ion technology. Among the many next-generation battery technologies, we focus in particular on all-solid-state batteries. Exhibit 6: Energy density likely to take off over the next 10 years Energy efficiency per unit weight and volume forecasts Exhibit 7: Battery costs could halve kwh cost forecasts (US$) 1,200 1,000 LiB Current Wh/L Future(All solid) Wh/L Current Wh/kg All Solid Battery etc. 1, LiB All Solid Battery etc. 800 Future(All solid) Wh/kg Current LiB 272 Future LiB Post-LiB E 2025E 2030-E E 2025E 2030-E Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 10

11 Why does energy density need to double? The launch of the Nissan Leaf heralded the first EV boom around However, factors like limited driving distances and high prices prevented consumers from really embracing the EV. Recent technological advances have increased the possibility of the launch of more convenient EVs. Tesla s Model 3 and BYD s e5 appear likely to ignite a second EV boom. Battery performance is hugely important in determining the competitiveness of EVs as a product. We believe our ideal EV is likely to appear on the market in That is, an EV that has no drawbacks for consumers vis-a-vis a gasoline-powered vehicle apart from the battery charging time. We estimate a battery capacity of 60 kwh will be essential to achieve a driving distance comparable with that of a gasoline-powered vehicle (around 300 km or 200 miles). If by 2020 batteries with an energy density of 300 Wh/kg and 700 Wh/l and a cost of US$150 per kwh are realized, the cost per battery could be around US$9,000. Also, a volume of 86 L would eliminate the battery as a constraint on cabin and luggage space. It seems possible that by 2030 a 60-L battery will be available at a cost of US$6,000. This could allow automakers to offer consumers EVs that have almost the same performance as gasoline-powered cars. Exhibit 8: Driving distance of km is the norm at present Driving distance and battery capacity Exhibit 9: 60 kwh battery capacity needed for mass-market EV Driving distance and battery capacity forecasts (Range, mile) Range /60kWh capacity Zoe Fit EV i3 e-up! i-miev Spark EV Soul Leaf B-class E Model3 Bolt EV ModelS y = x R² = E 2030E (Battery quality) Energy density (L) 500 Wh/L 700 Wh/L 1000 Wh/L Energy density (kg) 200 Wh/kg 300 Wh/kg 500 Wh/kg kwh cost 270 $/kwh 150 $/kwh 100 $/kwh (Battery system) Capacity 60,000 Wh 60,000 Wh 60,000 Wh Size 120 L 86 L 60 L Weight 300 kg 200 kg 120 kg Cost 16,200 $ 9,000 $ 6,000 $ 20,000 15,000 10,000 5,000 0 Battery cost Battery size Battery weight E 2030E (Battery capacity, kwh) Source: Company data, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 11

12 Improving energy efficiency to expand the EV and PHEV markets over next decade Almost two decades have passed since Toyota launched the world s first mass-produced HV in The market for HVs had grown to 2 mn units by 2015 and contributed significantly to improved fuel economy. Over the coming 10 years, we think EVs and PHEVs also will demonstrate remarkable growth. We think advances in LIB technology (huge leaps in energy density) could result in an increase in battery capacity per vehicle. We see the EV market expanding from 250,000 units in 2015 to 4.01 mn units in 2025 (CAGR of 30%) and look for PHEV sales to rise from 400,000 units to 2.78 mn units (CAGR of 36%). Over the same period, we expect the HV market to grow from 2.16 mn units to mn units (CAGR of 20%). EV market growth could lead to a six-fold increase in the automotive battery market to US$24 bn We look for the automotive battery market to expand considerably, in tandem with growth in the EV and PHEV markets. We expect a roughly six-fold increase in LIB demand between 2015 and 2025, from 58 GWh to 387 GWh, with demand for automotive batteries rising from 15 GWh to 279 GWh over the same period. Thus far, mobile phones and PCs have been the main source of demand for LIBs, but over the next decade we think rapid growth in automotive applications will bring battery operations to a major turning point. Even allowing for an average annual decrease of about 5% in battery prices to encourage greater uptake we think the market for automotive LIBs could grow sharply between 2015 and 2025, from US$4 bn to a massive US$24 bn. Exhibit 10: We expect strong EV and PHEV demand EV and PHEV volume forecasts (K units) Exhibit 11: Automotive battery market could grow six-fold over the next 10 years LIB market forecasts 8,000 7,000 6,000 52% EV PHEV YoY 60% 50% (GWh) Automotive battery market (USD) 2015 $ 4bn 2025 $ 24bn 279 5,000 4,000 3,000 2,000 20% 27% 35% 27% 38% 18% 22% 40% 30% 19% 20% , E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 10% 10% 0% Mobile phone PC Tablet Machine tool Automotive Others Source: IHS, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 12

13 LIB capacity utilization is currently low; we estimate US$25bn investment by 2025 LIB makers appear to have surplus capacity. Global production capacity is 100 GWh (combined consumer electronics and automotive battery capacity). In 2014, actual production was 45 GWh, equating to a capacity utilization of just 45%. Capacity utilization rates at major battery makers are also around 70%. Thus, even excluding start-up battery makers in China, factories are not particularly busy. We believe many battery makers are still not able to fully use the excess capacity built during the first EV boom. The appetite for battery-related investment is rising, however, with an eye on , and we believe some major investment announcements are likely over the next few years. Tesla s Gigafactory is scheduled to commence operations at the end of 2016 and aims to increase output to 50 GWh by The total investment is US$5 bn (including a US$1-2 bn investment by Panasonic in a cell production line). Tesla has received more than 300,000 advance orders for the Model 3 (orders based on the refundable deposit of US$1,000), and the astonishing demand prompted it to bring forward the start of Gigafactory production. Also, in response to emission testing irregularities, Volkswagen announced it would invest to increase battery production capacity to 150 GWh by VW is revising its diesel strategy and accelerating investment in EVs and PHEVs. In China, meanwhile, with the government offering generous subsidies for new energy vehicles (NEV), BYD and many other battery makers are announcing large investments. Based on Tesla s Gigafactory, 1 GWh of capacity requires capex of US$100 mn. On this basis, we calculate a total investment of more than US$25 bn will be needed to realize battery demand of 279 GWh by Exhibit 12: Surplus battery capacity LIB maker capacity and utilization Exhibit 13: 1 GWh of production capacity requires investment of US$100 mn Examples of LIB factory investments Production(2014)(GWh) Capacity(GWh) Operation ratio 80% 70% 60% Capacity (GWh) CAPEX (mn$) CAPEX/ Capacity SAFT 2008/ LG Chem 2010/ A / Loitech 2011/ % Nissan AESC 2012/ , BYD % Tesla 2017~ , % 15 20% % 0 Samsung LG Panasonic SONY Lishen ATL BYD Others 0% Source: Avicenne, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 13

14 Up the technology curve: Next-generation LIBs, then all-solid-state batteries Innovation for next-generation LIBs Gravimetric energy density was just Wh/kg when lead-acid batteries debuted in 1859, but this increased to Wh/kg with nickel-hydride batteries in 1990, and LIBs developed in 1991 achieved Wh/kg while trying a variety of different materials. Main LIB components include (1) cathode materials, (2) anode materials, (3) separators, and (4) liquid electrolytes. However, we expect cathode materials and separators to change significantly in automotive batteries by Ternary materials (NCM) are already the mainstream for cathode materials, but we expect the nickel ratio to rise to 80-90% from the current 30%. We also think separators will change from dry-type separators to the wet-type separators widely used in consumer products. Each step is a technological innovation to achieve even higher energy density. Transition to post-lib from 2020; all-solid-state in focus We believe transition to post-libs could start from 2020 because the theoretical limits of LIBs are coming into view. We provide further details later in this report, but think all-solid-state batteries are promising candidates for automotive batteries. All-solid-state batteries replace liquid electrolytes with solid electrolytes to substantially increase energy density and make it easier to enhance heat resistance and ensure safety. These batteries have properties that Toyota and other automakers regard as well-suited for automotive batteries. Battery and component makers also face changes Nissan s potential sale of its battery subsidiary Automotive Energy Supply Corporation (AESC; Nissan owns 51%, NEC owns 49%), reported by the Nikkei on August 5, underscores the difficulty in establishing a business strategy in battery development amid rapid technological innovation. Over the past years, the positive electrode materials used in automobiles have evolved from iron phosphate (mainly preferred by Chinese automakers) to manganese (used by Nissan), nickel acid (mainly Tesla), and ternary materials (the current mainstream). With ternary materials set to become more nickel rich over , we expect a further rise in energy density. The accuracy of the Nikkei report is unknown, but we believe the competitiveness of the manganese materials that Nissan has opted is gradually starting to wane. Both battery makers and component makers are struggling with the trends and pace of technological innovation. Goldman Sachs Global Investment Research 14

15 Exhibit 14: Major changes in battery materials Technological trends for the main four components of LIBs 2010s Cathode $2.5bn LFP, LMO, NCA NCM(Nickel rich) LiCO Anode 0.8bn Graphite Graphite/Si Graphite /LTO Separator 1.15bn Dry Wet None Electrolyte 0.68bn EC(Ethylene Carbonate) EC/PC (Propylene carbonate) LGPS - Solid Source: Goldman Sachs Global Investment Research. Exhibit 15: Many components and materials makers are Japanese and Korean at present Market shares for four main components and materials makers (2014) Cathode Anode Separator Electrolyte Nippon Denko, 3% Mitsubish i Chem, 5% Tanaka Chem, 5% Nippon Chem, 5% Others, 22% Toda Industri al, 10% Nichia, 20% Umicore, 15% L&F Material, 15% Showa Denko, 5% Nippon Carbon, 5% Tokai Carbon, 10% JFE Chem, 10% Kureha, 3% Mitsubis hi Chem, 15% Others, 2% Hitachi Chem, 30% BTR, 20% MitsubisTeijin, hi 3% Chem, 5% Sumito mo Chem, 5% Ube Industri es, 5% SK Innovati on, 10% Others, 7% Celgard, 15% Asahi Kasei, 30% Toray, 20% Central Glass, 8% Fuji Chem, 10% LG Chem, 10% Chell Industri es, 15% Others, 2% Panax, 15% Ube Industri es, 20% Mitsubis hi Chem, 20% Source: Company data, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 15

16 Rapid technological changes for cathode materials, cause for reluctance in large investments Companies are competing hard to develop cathode materials in particular because these contribute directly to raising energy density. The competitive environment is severe, and some industry reorganization has taken place during the past year, including Toda Kogyo selling its entire cathode material business and Sumitomo Chemical increasing investment in Tanaka Chemical. For automotive applications, LFP (iron phosphate) is the safest and lowest priced, and is being increasingly used by Chinese makers. Despite the drawback of low energy density, we expect localized penetration to increase its presence to 15% in 2025, from 10% in LMO (manganese-based) is not well-suited for high energy density in automotive applications, as indicated by the reported sale of AESC. We expect its presence to decrease to 9% in 2025, from 20% in Consequently, we expect NCA (nickel acid lithium) material (used by Tesla) to expand with the Gigafactory startup, rising in presence to 14% in 2025, from 9% in We expect NCM (ternary) to achieve high growth on a shift to nickel-rich material. However, we expect NCM adoption to gather pace in the Chinese market amid efforts to increase energy density, resulting in a faster shift in demand to NCM from LFP. Exhibit 16: NCA and NCM are main cathode materials, but LFP rising in China Cathode material mix Exhibit 17: Cathode makers have specialty areas Cathode material market shares by manufacturer 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 10% 20% 9% 9% 25% 36% LFP LMO NCA NCM LCO 15% 14% 36% 26% E LFP: Using phosphoric acid iron. Low energy density. Adopted by Chinese battery makers and we expect high volume growth. LMO: Using manganese. Low energy density and expecting low volume growth. NCA: Using Lithum nickelate. Adopted by Tesla and Panasonic in their 18,650 type battery. NCM: Ternary system battery (cobalt, nickel, manganese). Aiming to improve energy density by increasing nickel composition from current 30% to 80-90% in the future. LCO:Lithium cobalt oxide. Mainly for consumer electronic components. CY2014 LCO CY2014 LMO Nichia 13% JGC 16% Umicore 17% Chinese local 26% B&M 7% Nippon Denko 8% Easpring 6% ShanShan 9% Reshine 11% Reshine 8% L&F 16% Nichia 7% Other China 14% Others 26% Others 16% CY2014 LFP CY2014 NCM Internal 29% Nichia 15% Cleriant 8% Umicore 31% Aleees 10% L&F 8% STL 11% ShanShan 11% Pulead 13% Reshine 4% Zhuoneng 6% Other China 8% BTR 2% Others 23% Others 21% CY2014 NCA Sumitomo Metal Mining 57% Toda 14% Nihon Kagaku Sangyo 13% Ecopro 5% Others 11% Source: Avicenne, Goldman Sachs Global Investment Research. Source: Avicenne, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 16

17 Innovations in separators Battery separators create a barrier between the positive (anode) and negative (cathode) electrodes to prevent electrical short-circuits between internal battery components. While ionic conductivity is essential, separators also require a porous structure with exceptional mechanical strength. A particularly important role of the separator is the so-called shutdown function. This function will close (fill in) the pores on multilayer separators to prevent ionic transfer if the battery temperature rises abnormally for any reason (overheats). We estimate that the automotive separator market was worth around US$600 mn in 2015 and totaled 0.5 bn m2 on a surface-area basis. Separator usage is typically around m2 per kwh, so as auto batteries rapidly increase to 279 GWh in 2025E from 15 GWh in 2015, we expect the separator market to rapidly grow to 7 bn m2. Over the longer term, however, there is risk of the market shrinking as separators would become unnecessary if all solid-state batteries emerge as the successor to lithium ion batteries. Among major battery makers, Asahi Kasei has a global separator share of 30%, Celgard 15%, Toray Industries 20%, and Sumitomo Chemical 5%. Wet type separators may become a mainstream for auto Separators come in two types: wet separators and dry separators. Wet separators have become the most widely used type in consumer electronics applications, but dry separators remain the mainstream in automotive applications. Wet separators have the advantage of being stronger than dry separators, which means they can be thinner. The main obstacle to the broader adoption of EVs and PHEVs is range, and increasing the energy density of batteries has become a pressing issue. Dry separators generally comprise three layers of polypropylene/polyethylene, but wet separators can be made using a single layer, which in theory means thickness of just 6-7 microns is possible (compared with 16 microns for a dry separator). The disadvantages of wet separators are a more expensive manufacturing process and greater difficulty in ensuring safety. Wet separator manufacturing production costs are structurally higher because additional facilities are needed due to the use of solvents. That said, the price differential versus dry separators has now shrunk to around 10%-20%, thanks to the increasing size of production lines and volume efficiencies. On the safety front, there are issues associated with the use of high-nickel cathode materials. However, technology has now been developed to increase heat resistance by adding a special ceramic coating to wet separators, and we expect to see an increase in the number of manufacturers using wet separators for automotive applications. Goldman Sachs Global Investment Research 17

18 Exhibit 18: Separator market is growing rapidly Separator demand by total surface area (1,000m2) and market scale ( mn) Exhibit 19: We see greater uptake of wet type separators Estimated demand for wet and dry type separators for automotive application (1,000m2) 9,000, ,000 8,000,000 8,000,000 7,000,000 6,000,000 5,000,000 Auto Non-auto Market size 600, , ,000 7,000,000 6,000,000 5,000,000 Wt Dry 4,000, ,000 4,000,000 3,000,000 2,000, ,000 3,000,000 2,000,000 1,000, ,000 1,000, E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research. Cutting costs while improving energy density We would expect higher energy density to reduce battery costs. As of 2015, we estimate cell costs at US$250 per kwh, pack costs at US$140, and total costs at US$390. By 2025, however, we think costs could be reduced to US$164 for cells, US$25 for packs, and US$189 overall. We expect the four main components noted above to see annual cost reductions of 3-5%, and also expect decreases in R&D costs and depreciation based on mass production benefits. Packs have a high ratio of fixed costs, making them likely to benefit from mass production. At present, Tesla has the most aggressive outlook for battery price declines, and seeks to reduce total costs to US$100 by Our estimate is generally near the market consensus, and we expect no fundamental cost breakthrough until the mass production of all-solid-state batteries. Goldman Sachs Global Investment Research 18

19 Exhibit 20: We expect battery unit prices to decrease by half LIB cost breakdown (US$) Exhibit 21: with Tesla having the most optimistic cost outlook kwh unit price outlook (US$) High estimate Low estimate (Tesla) Pack cost Cathode Anode Electrolyte Separator Others Depreciation Direct labor Energy R&D Sales&Adm Margin E 2025E E 2017E 2018E 2019E 2020E Source: Avicenne, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research. Search for suitable post-lib technology: All-solid-state batteries in the lead Post-LIB development competition is growing more severe as LIBs approach their theoretical limits. All-solid-state battery technology has advanced noticeably in the past 5-10 years amid intensifying development competition with lithium-air batteries, multivalent ion batteries, and sulfur-based batteries. More than 3,000 patents for all-solid-state batteries were filed in , far higher than other post-lib technologies. Toyota/Tokyo Institute of Technology, Hitachi Zosen, Ohara, and other companies have announced technological innovations for all-solid-state batteries in Goldman Sachs Global Investment Research 19

20 Exhibit 22: Post-LIB development Features of next-generation batteries Exhibit 23: All-solid-state battery development has picked up in recent years Number of patent filings in All-solid state battery Lithium-air batteries Replace electrolyte liquid to solid. High level of safety since inorganic solid electrolyte is noninflammable. Electrolyte is sulfur. Uses oxygen as cathode active material. High energy density but need high level of technological innovation. 3,500 3,000 2,500 Others Korea China Europe US Japan Sodium ion battery Replace cathode material from Li+ to Na+. Sodium is rich as a natural resource and possibility of further cost reduction. 2,000 Polyvalent ion battery Battery using polyvalent cations with divalent or trivalent ion (Li + is monovalent). Research is ongoing for various ions such as Mg 2+, Ca 2+ etc. 1,500 Sulfur-based batteries Sulfur-based batteries use a sulfur material for the positive electrode, but sulfur is water soluble, so sulfur-based solid are frequently used for the electrolyte. 1,000 NAS Cathode material: sulfur, anode material: sodium, and electrolytes: ceramic. Energy density is 110Wh/kg. Operation temperature is high ( ) All Solid Battery Lithium-air Battery Na ION Battery Polyvalent ion battery Sulfer-based battery Organic Battery Source: Goldman Sachs Global Investment Research. Source: NEDO, Goldman Sachs Global Investment Research. Strengths and weaknesses of all-solid-state batteries All-solid-state batteries seek to increase energy density and reduce cost by replacing liquid electrolytes with solid electrolytes. These batteries have high potential for quickly eliminating EV disadvantages in our view. In addition to raising energy density, they offer prospects for improved safety and operating temperature flexibility. However, technological hurdles remain for mass production. All-solid-state batteries require new production processes, including pressurization and calcination. There is also risk of producing toxic hydrogen sulfide (sulfide-based solid-state electrolytes produce hydrogen sulfide in reaction to moisture). Companies are examining various methods to address hydrogen sulfide, including the use of sturdy cases that are hard to break and use of hydrogen sulfide gas detectors to quickly detect gas generation. Goldman Sachs Global Investment Research 20

21 Exhibit 24: All-solid-state batteries feature greater energy density and safety; need to overcome mass production challenges Advantages and disadvantages of all-solid-state batteries Merits Safe Wide range of operating temp. High energy density High volume energy density Demerits Low productivity Low power density Unknown accidents Less risk of fire due to no liquid electrolyte. Especially in low temperature. It is possible by using sulfur for electrode material. Easy to form a layered structure. Need pressurization or calcination to form a solid electrolyte. Conductivity of solid electrolyte is not very high. Some research warn against a generation of hydrogen sulfide. Source: Goldman Sachs Global Investment Research. Exhibit 25: LIB using liquid electrolyte between cathode and anode LIB diagram Lithium ion battery Exhibit 26: All-solid-state battery using solid electrolytes rather than liquid electrolytes All-solid-state battery diagram All-solid-state battery Negative current collector Positive current collector Negative current collector Positive current collector Li+ Li+ Li+ Li+ Li+ Li+ Li+ Li+ Li+ Li+ Li- Li- Li- Li- Li- Li- Li- Li- Li- Li+ Li- Li+ Anode Separator Liquid Cathode Anode Solid Cathode Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 21

22 Multiple players in all-solid-state battery development Toyota, Sekisui Chemical, and Hitachi Zosen are targeting mass production of all-solid-state batteries in Samsung Elec., Daimler, and Sony have also announced R&D initiatives, but their mass production timeframes are unknown. BYD has launched a special team and is conducting research into all-solid-state batteries. Leading auto parts maker Bosch acquired the all-solid-state battery venture company Seeo. Consumer electronics maker Dyson also entered the battery business by acquiring Skit3. We think expectations are rising for using all-solid-state batteries not only for automotive applications, but for consumer products as well. All-solid-state battery production processes differ greatly from current LIBs The production of all-solid-state batteries can be broadly separated into three main methods. (1) Hitachi Zosen and Toyota use a powder pressing process that applies pressure to sulfide-based solid electrolytes and the cathode/anode. This method increases ionic conductivity by making the contact state more adhesive through component interface movement. Ensuring ionic conductivity within the solid state is the primary hurdle for replacing liquid electrolytes with solid electrolytes. (2) Bosch and Sekisui Chemical are developing a coating-based process that performs roll-to-roll layering. Electrolytic materials often use semi-solid materials. (3) Dyson and Applied Materials are developing a semiconductor process, but expansion to high-capacity automotive batteries is difficult. We would expect this to be used mainly for consumer products. Exhibit 27: Growing interest in all-solid-state batteries for both automobiles and consumer products Leading manufacturers and technological features Powder and pressure Coating Semiconductor Mass production Hitachi Zosen established a mass production method. Mass production is possible by roll-to-roll process. Under development Energy density High value from the research done by High Tokyo University and Tokyo Institute of Technology. Average High theoretical value but unsuitable for mass production. Power density High value from the the research done by High Tokyo University and Tokyo Institute of Technology. Average Challenge is how to make a separator thinner. Safety Risk: generation of hydrogen sulfide from sulfide-based electrolyte. Sekisui Chemical is confident in the safety of the battery. High level of safety Battery makers Toyota Sekisui Chemical (acquired Enax) Dyson (acquired Sakit3) Hitachi Zosen Bosch (acquired Seeo) Applied Materials Samsung Zeptor Source: Nikkei Elec, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 22