Catalyst with Shayle Kann - What went wrong at Northvolt?

Episode Date: December 12, 2024

Northvolt’s ambition was to become a European batterymaker to rival Chinese battery behemoths like CATL and BYD. They wanted to offer a homegrown supply chain to western automakers. But in November, the company announced its bankruptcy. So what went wrong? In this episode, Shayle talks to Sam Jaffe, principal at 1019 Technologies. They walk through Northvolt’s timeline from founding to bankruptcy, including the loss of a $2B deal with BMW. They discuss lessons learned and cover topics like:  What went well — from fundraising billions of dollars to securing major off-takers What didn’t go well — like trying to build multiple types of batteries, in multiple factories, on multiple continents How venture capital investors may have pushed the company to be too ambitious The tradeoffs of choosing NMC over LFP Challenges with their equipment supplier Wuxi LEAD The upside: Sam’s belief that Northvolt’s factory will ultimately make batteries Recommended resources Latitude Media: What Northvolt's bankruptcy means for Europe's battery ambitions Intercalation: Battery production is genuinely difficult Bloomberg: Northvolt Has Major Obstacles Ahead Even With Bailout In Reach Catalyst is brought to you by EnergyHub. EnergyHub is working with more than 70 utilities across North America to help scale VPP programs to manage load growth, maximize the value of renewables, and deliver flexibility at every level of the grid. To learn more about their Edge DERMS platform and services, go to energyhub.com.

Latitude Media, podcast at the frontier of climate technology. I'm Shail Khan, and this is Catalyst. Their investors wanted them to be huge, and they wanted them not to build one factory, but to build six gigafactory simultaneously, which is just an impossible task to handle. Coming up, Sam Jaffe and I try to make sense of what went wrong at North Fult. When utilities need flexible capacity they can count on,

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That's F-I-S-C-H-F-T-T-P-R.com. I'm Shail Khan. I invest in revolutionary climate technologies at energy impact partners. Welcome. All right. The North Volt bankruptcy. You've heard of it, I'm sure. If you're a battery technology entrepreneur, you know how big a deal it is. If you're in Europe, you probably know how big a deal it is. If you're an investor in battery technology or in climate tech in general, you probably also know how big a deal it is. But having talked to many people about it over the past few weeks, I've found two things. First, many folks, even in climate tech, don't realize exactly why it's important. And second, there are so many competing visions of what actually happened, what went wrong,

what could the company have done differently, if anything, and what it means about the market. But suffice it to say it is a big deal. Northville was among the highest funded private companies in Europe overall. Public reports have said they raised something like 15 billion euros. In reality, that wasn't all actually awarded already, and some of it was debt, but that's real money, and it was definitely in the billions. North Volt was also viewed as Europe's great hope for homegrown EV battery manufacturing to counter the rising tide coming from Asia and from China in particular in recent years. And, of course, this reinforces a lesson that many companies have learned the hard way, which is that making batteries is really frigging hard. Anyway, I think it's worth a deep dive. both to tease out the actual story, the history of what happened with Northville,

but probably more importantly, the lessons that we should and should not take from it as far as the future of battery manufacturing and venture capital for hard tech things. So that's what we're doing this week. I had Sam Jaffe join me. Sam's been on this podcast a number of times before, but he is a close watcher of the battery industry, and these days he's a principal at 1019 technologies. Here's Sam.

Sam, welcome back. Thank you. Thank you very much. So Northfold. All right, there's a lot to talk about here. And we should start with neither you nor I have particularly inside information here, right? So we're going to be talking about stuff that's in the public domain for the most part. But there's so much to unpack, I think.

And from what I've seen, a lot of, I don't know, misguided public thought about both what happened and what it means. So let's see if we could tease it out. I want to start with just going through the history of how Northfold got to where it is today. Take me back, I guess, to start to the founding, 2016, or earlier if you want to go there. Like, give me the beginnings of Northfold. Yeah, so I guess it goes back to, as so many things in the battery industry do, it goes back to Tesla. Peter Carlson was a Tesla battery guy. He was one of the people, that helped to build the original gigafactory. And he left Tesla and was trying to figure out what to do next.

And one of those options was to build a battery company in Europe. And amazingly, he did that. Several other people had that spreadsheet, but he followed through on it. And that was the birth of Northwalt. And the concept was build a battery, a major battery player that's located and headquartered in Europe that is able to supply the European automotive and energy storage industries and able to be on an equal footing with the Asian giants that dominate the battery industry. Yeah, maybe contextualized. So back when Northfolk was getting founded, 2016 or thereabouts, who were the dominant players? in the lithium ion battery market then, and how does that compare to today?

I think it's close to today, what it was 10 years ago, with the exception that the clear leaders were the Koreans and Panasonic. So by the Koreans, I made LG. At that time, I was called LG Chem. Now it's called LGES. And Samsung SDI.

And to a lesser extent, S-K. which is now referred to as S-K-on. And then Panasonic, of course, had the Tesla contract and was probably at that point because the Gigafactory had been built and was up and running, they might have been the number one producer at that point.

The Chinese were there. CATL was producing in large amounts and B-YD. I think the biggest change in the industry today is that there were probably close to 100 Chinese battery manufacturers. And today there's 10 that matter and that do it at scale. And really, there's two that completely dominate the industry, and that's B-Y-D and C-A-T-L. So China was definitely producing batteries

was definitely part of the overall competitive mix, but it was a little bit different landscape at the time. And my suspicion is that the founding, principle, the funding idea with North Fult, probably predicted that the rise of China. I mean, you know, we've seen this happen in solar, for example, and there were lots of European solar companies that rose and fell. And, you know, I've heard a lot of talk about, okay, we're going to do it differently in the batteries this time. We're going to have a homegrown battery manufacturer. We're going to support it with public funding and with procurement and all that kind of stuff.

And we're going to make sure that the whole supply chain doesn't ultimately shift to China as it basically did in the solar context. And so my guess is that even back then, they were foreseeing what you described has happened since then with the rise of CATL and B.D and saying, OK, North Volt and a few others, but really mostly North Volt is kind of the answer to that. Yeah, I think that China's rise to dominance

in the battery industry was just about the least disguised or most poorly hid story. of the last 10 years. It was clearly going to happen. And it happened essentially according to the same rulebook as what happened in solar and in other industries, and is today happening with cars. I think that the emergence of CATL, which was essentially a company that was really invented in the back rooms of the industrial governmental complex in China about 12 years ago, that and it essentially just you know it followed the plan perfectly and is now the largest producer in the world okay so that's the premise upon which norfolk was based do you know you know we said homegrown battery

manufacturer do you know how vertically integrated they intended to be i mean we're going to talk about how much they ended up trying to do but were they going to be a cell supplier were they just going to make packs are they going to do it all do we know yeah So Northfault was going to, and they do produce cells today, and it was essentially a large battery cell factory. They also make them into packs and modules, but I think their main business was to be a cell producer. Okay.

All right, so let's walk through the history then. So they found the company with this idea. We're going to build a European homegrown battery supplier to feed this growing industry. What do they do? over the intervening eight years? They raised a lot of money. They were very successful at that.

And I think that's the sign that the venture capital model is capable of raising that level of money. And by that amount, it's essentially about $14 billion in total, including actual actual capital raised, essentially people saying we will contribute this amount in the future to future raises

and tax credits which were a large part of that 14 billion. And some debt, we should say too, right? So it's a mix of equity and debt. Right, and debt, right. I think that the

issue is not, does the Western European North American venture model, is it capable of raising that level of money? It is. The question is,

is what are the strings attached to it? And I think it's good to go back to look at how it's done in China. There are definitely strings attached to capital raising in China, but it's more of kind of a backroom negotiation where it's not necessarily something laid out on paper. Within the venture community and venture investors, when they contribute that amount of money, they expect go big or go home.

And in this case, they went home. But if you set aside the venture investor mindset there, is there a version, well, let's talk about what going big meant for Northfall. I don't know whether this was the venture investors pushing this or whether this was management pushing this. But going big, I think we should clarify, I think what you mean is not build a big factory because they had to build a big factory. There are economies of scale that are hard to escape in battery manufacturing. So that part seems inevitable to me. My suspicion is what you mean is they did a lot of things that weren't just building a big factory. So let's, assuming that I'm right about what you mean there,

let's talk through all the things over the years that North Fult decided to do that go above and beyond just we're going to build a battery factory in Europe. Yeah, that's a great point because it really comes down to the definition of big. In other words, their investors wanted them to be huge. And they wanted them not to build one factory, but to build, what they ended up trying to do was build, essentially build six gigafactories simultaneously, which is just an impossible task to handle.

And I think that the concept of build, perfect, and then repeat was not applied. And they tried to do everything at once. Yeah, so what were those six gigafactories supposed to do? They weren't all replicas of each other. They were doing different things, at least some of them, right?

So let's just walk through what the portfolio of North Fult prior to failure and bankruptcy. Before things started to turn south, like at the peak, what was the portfolio of what they were trying to? do. Yeah. So they first of all, they were going to, they were, they were working on establishing a second factory in Germany that would, that would directly produce for the German automotive industry. Then they were essentially doing the same thing in Eastern Europe. And then the IRA happened

and all of the subsidies available to building factories in the U.S. happened. And they said, okay, we're going to do that in North America. So right there, that's a total of four factories. Additionally, they bought a next-generation battery startup called Kewberg, which made lithium metal batteries, or was developing lithium metal batteries. And they established the goal was to establish a factory that would build those types of batteries also in the U.S.

and they had a very large R&D facility in California also. Right, which lithium metal, potentially super high energy density, could be for aviation batteries or just much higher energy density. But like earlier stage, for sure, not the scale of the gigafactory with known technology idea. Right. And when they purchased Kuberg, Kuberg was specifically an aviation battery company. They full on stated, we are developing futuristic, batteries for future applications.

And then there was also a sodium ion battery that they were developing, and they were planning to build a factory for that also. So three different types of batteries, different generations of batteries, different continents, it was extremely ambitious. Virtual power plants are becoming a reliable way for utilities to manage capacity, But enrolling devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched, and being able to prove it, from the control room to the living room.

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Yeah, I want to come back to the supply chain bit because from everything that I have learned and speaking to a few people, that actually does seem to be a critical mistake or a critical failing ultimately. But before we get to kind of what went wrong, I mean, we should say there were strong indications that if they could build it, that if you build it, they will come. They did have strong indications of demand, right? Like their output were. should they have been able to produce it, seemed like it was going to be spoken for. Yeah, they had a lot of traction with carmakers, especially the European car makers, and they had very, very realistic purchase orders

from European car makers, including VW, including BMW, and others. And, you know, that's exactly what you need and exactly what you want. But that's, again, when it takes a long time to build a battery factory

and you can get a purchase order and you don't show up and those batteries never get made or delivered. So we've got this company. They raise a ton of money and they're trying to do a bunch of things at once, clearly. But the main thing, the first thing, the thing, as you said,

they had not yet perfected is they've got this gigafactory in Sweden that is supposed to be ramping up and rolling off the line, you know, high quality, high throughput, reasonable cost lithium ion batteries. And it started to become clear, I think, what, earlier this year, that at least publicly, that production was not anywhere near where it was supposed to be. Yeah, I think it happened even last year in 2023, where there were publicly acknowledged, signs that things were not going smoothly.

So if you can imagine the complexity of battery manufacturing, it is not one factory. It is 18 mini-factories doing separate things to build to end up with a battery, all of which have to be choreographed and perfectly timed with each other to make it work and to optimize it. And it's chemistry, you know, it's hard science about. make that work right. So it's definitely not every battery factory that I've been familiar with has had significant problems with ramping up.

The most famous, of course, is the first Tesla Gigafactory, which apparently they had close to half of their cells that they produced in the first year of that factory's production had to be discarded because they weren't getting the quality right. they fixed that and they ended up doing it very efficiently, but it was very painful. So it's something that everybody goes through, but they were having an especially bad time. And I think a lot of that leads to their equipment supplier choice and their relationship with that equipment supplier. Yeah, that seems to be the crux what I was referring to earlier.

I want to get to that in one second. But so, yeah, the result of that is that at least from what became public, Steve Levine at the information reported earlier this year that North Volt was operating, that factory was operating at about 80 megawatt hour capacity, which is one 200th of nameplate capacity, basically. And it got bad enough at one point, not just that they weren't producing enough, but that there were enough quality issues that then I think the thing that really seemed to, you know, make the slope of the downturn for the company accelerate a lot

was BMW cancelling this big $2 billion order because of quality issues as far as I understand it? So I think there's another element, not just to the BMW cancellation alone, but to the entire automotive industry and to the Northfold story, which is they made a chemistry choice, an MC, high nickel content cathode material,

that turned out to be not wrong, but not as much of a no-brainer as was expected. In other words, LFP re-emerged, lithium-iron phosphate re-emerged in 2018, 2019, and the carmakers realized this isn't, you know, we don't necessarily have to make these cars with high nickel content, cobalt containing very energy-dense batteries.

There's a way to do it with LFP. The Chinese have shown that. But Northfold had committed to NMC. You can't just turn around and change the cathode and make the batteries exactly the same way at the battery factory. So I think that was one element of it is in addition to the, I don't want to call it a lowering of demand for EVs, but there's certainly been a slowdown in the demand for EVs in Europe, which led to this. was also a decision, I think, by the car manufacturers in Europe saying, let's reassess our chemistry choices, which leaves a 40-gigawatt-hour plant in Sweden to be especially exposed

when they can't really change their chemistry. Okay, so all these things going on. But let's get to, I think, what seems to be sort of the heart of the challenge, which you alluded to, which is the relationship between and choice of equipment supplier than Northfold made. So talk to me about Northfold's equipment supplier and what you've seen as where things went wrong there. So they chose as their main equipment supplier, a Chinese company called Wooshy Lett. And there's a conundrum when building a battery factory, which is that there's very few companies that produce, as I mentioned, there's essentially 18 stages that you're,

each with its own different types of equipment. And there's very few companies that make every one of those pieces of equipment. And especially there's very few non-Chinese companies that you can essentially go and say, I want everything. In China, Wushi is one of the few that you can do that. And they chose Wushi. So essentially, they're providing most of the equipment for that factory, and they're essentially in charge of making the equipment,

installing it at the factory, and then making sure it works right. And somewhere in that three-step process, things broke down. Probably the third part, making sure it works right. Yeah. So I reached out to a couple friends of mine who have as much battery manufacturing experience as anybody in the world about this.

And universally, they all really dialed in on this. equipment supplier relationship. And there's some public information on this, too. There was a North Holt employee who wrote a blog post in Swedish, but it got translated a while back, sort of laying out their view of the challenges, and this was at the heart of it as well. It seems like there were quite a few components of why this ended up being a challenge, this relationship between Wushi-led and Northfold. But I'll read you a quote from one of my friends and get your reaction on it. He said, you need flexible, responsive equipment suppliers who want to work with you, preferably, who speak your language, and then you need a focused team that is only trying to make

one version of one product ramp in a first factory. And so there's a bunch of things embedded in there, right? It's like, was the, was Wushi Lead incentivized properly to learn alongside North Fult and try to work out the kinks? Was there a language divide, which is the type of thing you don't think about often as being a real challenge, but it turns out, given how hard it is to make batteries, actually it does become a thing, and then there's a focus question, all kind of embedded within there.

Does that align more or less with sort of how you see that challenge? Yeah, although I would make the assumption that the reference to language there is an abstract concept of language. I don't, you know, there's obviously... No, I think it's literal, actually. I mean, there is no Swedish battery equipment provider. Well, but that's a challenge, right? Yeah, yeah, it is.

And maybe that language is English. People in Sweden speak good English. But the point being, like, I actually think it is a literal reference to there having been a language challenge. And to your point, right, if the primary thing that ended up being the struggle was not the provisioning of equipment, but getting it to work, working out the kinks and workshopping it. That's a nuanced thing. I don't know.

I can see how language actually does become a challenge there. Yeah. And also, you know, culture. And I'm not talking about broad Chinese culture versus broad Swedish culture, but it's kind of the business culture in China. You know, if you think of what's been going on in China in the last 30 years, is everybody has been building enormous factories that make everything. constantly and they're doing it quickly and then they're and they're making it work and everybody

is is essentially calibrated to that that process and that focus as he said and then i think that there's also an element within china of within chinese business culture of promising the moon and delivering what you can but everybody understood that in the first place that you were promising too much probably anyway. Let's call it the Elon Musk approach to business communications. So I think for that to work, I mean, I've been involved in factory development where I've seen this firsthand, which is the equipment suppliers are embedded in that factory for between one in two years. And the factory owner is married to those people. They become the most critical people in the success of the company. And if you're not paying 100, just like in marriage, if you're not

paying 100% of your focus on making that relationship work, bad things happen. And I'm sure that had something to do with it was just, you know, it's people that working on different motivations, on different schedules, on different set of expectations on the two sides, and not communicating. That's what, whether it was a language issue or a cultural issue or just bad management, they weren't communicating clearly from the reports that I've seen. I wonder what you think about the institutional knowledge challenge. That's another thing that I've heard a few times now where, you know, obviously there's not a ton of, there are not that many people in the world who really know how to make batteries at scale.

Prior to North Fult, very few of them were in Sweden, one would assume. And so they had to sort of import that institutional knowledge. And, you know, you can hope that your equipment supplier delivers some of it. But one point somebody made to me is, look, equipment suppliers actually don't know how to make batteries. They know how to operate their piece of equipment or pieces of equipment. The institutional knowledge on how to make batteries sits in the OEMs for the most part. And so you have to marry that experience in operating, in setting up and operating equipment with the bigger picture, as you said,

it's 18 separate sub factories sort of combining together and working in perfect concert. So, I mean, we'll get to this in the question in a minute of what lessons we should and shouldn't take here. But how do you think about this challenge of like if you're building a de novo gigascale battery facility, how do you get the institutional knowledge that you need? such that you don't repeat mistakes that somebody else made. Yeah, that's a really interesting point because keep in mind that until the Tesla Gigafactory was built, nobody, and that was back in 2014, 2015 when it was being built,

nobody knew how to build a battery factory of this scale. There was no institution of knowledge. It had to be invented, and there definitely is some now, especially in China and in Korea. and we're building them in the U.S. today, and there are other enormous factories being built in Europe also. It would be easy to criticize the Silicon Valley venture capital model and say, oh, they were, make it till you make it, fake it approach

doesn't work if you fail while you're faking it. But at some point, you have to invent that. institutional knowledge. And that's okay. The problem is that the investors of the company have to interpret the goal and the focus of that company correctly. And if their goal and focus and their investors had pushed them very hard to get that one factory to work right, do anything you can to get that one factory to work right, and then we'll figure out everything else later. I think it could have worked.

But this applies to, I mean, think of the fusion industry. There's so many fusion startups that are collecting enormous amounts of investment, venture capital investment. And again, you definitely have to invent institutional knowledge. There is no such thing as a functioning, ongoing fusion reactor today. I think that the Silicon Valley mindset, is probably the right way to do that, the right way to invest and to shepherd those companies,

at least one or two of those companies to success. But you have to keep things focused. When those amounts of money are involved, it's hard to do that. All right, so let's talk about the lessons here. I've seen so many articles since Northville announced filed for bankruptcy, you know, offering various lessons about what does this mean

about everything from the veterans? a capital model, as you said, to battery manufacturing outside Asia, et cetera, et cetera. Let's start with what you think the wrong lesson is, and then we could talk about what we think the right lesson is. I think the first, the one that I've heard repeatedly is, well, you can't build batteries in Europe or in outside of China or anywhere except for China. And that is definitely not true. Europe has close to 100 gigawatt hours of battery manufacturing today.

The U.S. will in the next few years have close to 300 gigawatt hours. It is possible. Yes, the labor costs will be higher. Probably energy costs will be higher. The cost of capital will be higher. But all of that is, you know, that's the nature of commerce. It costs more to do things, but often it can be done better and it can be done appropriately. in Europe and in North America.

I think that's the most important misguided lesson to be learned. It is possible, and it is being done. Okay, and then in your mind, what is the right lesson? Again, it goes to the venture capital model. And I think there's so much to be celebrated about the venture capital model, but when the venture capital is high risk, high reward. And by high reward, you mean in this case, their investors said, don't be a 40-gigawatt-hour battery company, be 150-gigawatt-hour battery company,

build six factories at the same time, whatever it takes. And that's what I think was the fundamental problem. I won't disagree with you about what happened. I will say I don't think that is inherent to the venture capital model. Like I would separate out what Northfold tried to do from. Now, it is true, you know, in venture capital. As a venture capitalist, I'll defend my kind. You know, our job is to take big swings. But that doesn't inherently mean we're trying to push companies to do too many things all at once, right? I think there's a alternate version of events, wherein with the exact same investment and the same investors, Northwolt could

have done the thing that you said would have made more sense, which seems like clearly in retrospect the right thing, which is build the factory, get it working, prove it, and then scale from there, do it again, get into another technology, et cetera. But build from a foundational base if we know how to make batteries. They clearly thought that they had that in hand much sooner than they actually did, and that gave them the confidence to branch out into a variety of things that distracted them and, you know, disperse their resources elsewhere. I don't think that's inherent to the venture capital model is what I'm saying. There's lots of companies that can raise that kind of capital

and do the one thing right before really kicking off the bunch of things. For me, that's the right lesson. It's not about the venture capital model. It's about in battery manufacturing in particular. This is true of lots of places, but it seems especially true. You know, the truism is the battery manufacturing is hard. It is. It seems to be.

And thus, if you're going to do something, the more novel it is, for whatever reason, either because it's novel technology or because you're building the first ever gigafactory in Sweden or something, focus, at least in the early days, seems to be the key component that if you lose, you're just subject to a bunch of risk, right? And eventually, you know, as things started to go south for North Pole, I think they tried to retrench back. to that. Yeah. Yeah, I think so. I was also involved with a company called Better Place that raised $800 million back in like 2010, 2011. 2010, yeah, and then like it went south in 2012 or something. Yeah, and it was a very

similar story where, you know, and I guess that's, I'm not necessarily saying that the venture capital doesn't work. I'm saying at that at those levels, it became, its weaknesses start to be exposed in terms of shareholder expectations and what winning means. The other thing I would say about Northfold is the executives and the current shareholders, I think they have exited stage left. But that factory, I believe strongly, is going to be making batteries. Somebody else is going to own it, and they are going to be making batteries. And it's going to, you know, in the end, they'll say, yeah, poor, poor guys that lost their money on it.

But in the end, they built a battery factory that will be, I think, producing batteries. Well, that's a good high note to end on. For this whole story, this whole saga, hopefully we'll get a Swedish gigafactory operating at full capacity and making lithium lithium-ion batteries that go into vehicles and on the grid. Sam, thank you so much for the time, as always, and helping me walk through this story. All right. Thanks very much, Phil. Sam Jaffe is a principal at 1019 Technologies. This show is a production of Latitude Media.

You can head over Latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. Pralud Beck's visionary is accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more at Praludadventures.com. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquan, theme song by Sean Marquan. Stephen Lacey is our executive editor. I'm Shail Khan, and this is Catalyst.