As the lithium-ion battery (LIB) industry matures, key players in the value chain may want to re-evaluate their business models. That’s because the LIB ecosystem is a complex network of chemical suppliers, auto OEMs, cell manufacturers, recyclers and refiners. Some processors may opt to outsource certain functions, while others may adopt a vertically integrated model to gain control over quality and return on investment.

The question for each manufacturer is, which approach will minimize risk while maximizing profitability? A look at current chemical-industry models could provide the answer. From our shared chemical engineering experiences, we have all worked on projects with owners/operators, joint-venture partners, licensees, and engineering, procurement and construction arrangements. Each of these models is unique, and we can bring this experience to the LIB marketplace.

Most of the global market has adopted a “trading model.” In this structure, recyclers take ownership of end-of-life batteries or production scrap by purchasing them directly from the OEMs, battery producers or brokers. Recyclers produce black mass, or refiners process the battery materials and sell them back to the market. As you can imagine, this poses a risk due to uncertainty about the chemistry, quality and availability of the scrap material.

These factors can increase costs and negatively impact revenues because some buyers might opt for virgin materials if quality or availability is low. Also, as we’ve seen in recent years, electrification is a politically charged issue that faces significant regulatory limitations, trade barriers and high shipping costs.

Learning From Chemical Industry Models

The first approach is the ownership model (OM). In this case, chemical or pharmaceutical companies develop a process and then, based upon revenue assumptions and market size, as well as the capital and operating costs, they can either build a new plant or expand an existing location. This has the highest capital cost but provides maximum control of the project and return on investment. 

As I write this column, I can immediately think of three extreme cases of OM results. The first case involves a polymer plant that led to significant success and later expansions. In the second example, a plant manager called me on a Saturday night to tell me the U.S. Food and Drug Administration denied the pharma approval, but “not to worry.”  He said the delay would be minor, and he was correct. However, two other plants weren’t so lucky. In these instances, FDA approval and market shifts resulted in complete project terminations with equipment put into storage, a devastating result for the process and project teams. In these two cases, speed to market and external market forces were evaluated and found to be an acceptable risk.  For more information on this topic, you can read my blog “Strategic Project Management for Complex Process Systems.” 

For recyclers and refiners, the OM approach enables a complete closed-loop project in which the automotive OEM operates the battery and recycling plant. In this case, the feed material is known, which allows for a cost-effective plant and future flexibility, and the revenue stream also is known since the material is refined and used internally. The capital costs are high, but the risks are minimized.

Outsourcing Pros and Cons

Another well-established approach in the chemical industry is the tolling model (TM). Here, the owner develops the process and approves it before outsourcing it to a toll manufacturer. The toll manufacturer should have specific experience and equipment to produce the chemical or pharmaceutical in the correct quantities, within the required schedule, and most importantly, to the desired quality. There are certainly risks to this, especially if multiple toll manufacturers produce the precursors and the final product. 

However, it requires little or minimal capital investment and a much quicker time to market.  Chemical and pharmaceutical companies have large internal outsourcing evaluation groups to ensure the correct selection of the toller. These groups should evaluate the tollers’ technical and equipment capabilities, quality and control processes, environmental/health and safety protocols, confidentiality, IP controls, and their supply chain and schedule experiences. 

For recyclers and refiners, under the TM approach, ownership of the end-of-life battery or scrap remains with the battery OEM while the recycler charges a fee to produce black mass and/or battery materials. This requires extreme care from the recycler or refiner in receiving, storing and producing the individual feedstock materials, similar to batch-to-batch integrity, which is well known to chemical and pharmaceutical engineers. 

Specific contractual agreements must be carefully developed to minimize costs, track revenue streams and ensure that any production issues are captured to correctly characterize the impacts.  The selection of a recycling partner by the automotive OEM and/or the battery OEM must follow the same evaluation parameters as those used for the selection of the chemical or pharma toller.

A License for Risk-Sharing

A third possible strategy is the licensing model (LM). The LM approach is common in the pharmaceutical sector, where one group grants the rights to another group to further develop, manufacture or commercialize a drug. This speeds growth and the delivery of new treatments to patients. The primary benefit of an LM approach is risk-sharing, especially for a new drug or pharma treatment. It also allows smaller companies to gain greater market access through their larger industry partner as well as their innovative technologies and products. 

For larger companies, the LM approach is also a way to gain additional revenue from existing products and expand their product portfolios without directly investing in new equipment or expanding geographic markets. 

For recyclers and refiners, since this marketplace is in its infancy, the LM approach may be useful as startups can combine resources and technologies to minimize risk and gain access to innovative recycling techniques for battery materials. Of course, with the LM approach, there can be intellectual property risks and similar concerns.  This will be a longer-term solution in the current marketplace.

All of the Above

Most likely, the LIB market will adopt a hybrid approach using all the models. Every player will need to find the balance among investments, feedstock flexibility and production and the growth of the market or risk. For example, we may find toll agreements between automotive OEMs and recyclers, licensing between battery manufacturers and refiners, as well as between different refiners. 

Finally, in the long term, the ownership model may prevail if battery and automotive OEMs are required to track their materials from cradle to grave and maybe back again. As the LIB market matures and technology improves, these strategies will most certainly change over time.