Earlier this week, McKinsey & Company published a report entitled “Battery Technology Charges Ahead” (click here to read the full report).  The report provides a well-reasoned and refreshingly optimistic outlook for the advanced battery sector through 2025.  The report concludes: “[G]iven the path to substantially lower battery prices, which are now coming into view, executives should be considering bold actions to capitalize on one of the biggest disruptions facing the transportation, power, and petroleum sectors over the next decade or more.”

McKinsey predicts that the price of a complete automotive lithium-ion battery pack could fall from $500 to $600/kWh today to about $200/kWh by 2020 and to about $160/kWh by 2025.  According to the report, about 33% of these cost reductions will come from increased manufacturing efficiency, 25% from lower materials and component prices, and about 40-45% from technological improvements in the energy density of lithium-ion cells.  The report does not even mention expected improvements in the efficiency of battery systems.

The McKinsey report also notes the relationship between battery prices and gasoline prices in predicting demand for electrified vehicles.  That insight is not new, but the report includes an excellent visual representation of the issue, which I have reproduced in this week's issue of the NAATBatt Advanced Battery Weekly.

Importantly the report notes that many of the new technologies that will drive down battery costs are likely to appear first in batteries used outside the automotive sector, where product cycles are shorter (a point that NAATBatt tried, without success, to make to the DOE back in 2008).

The McKinsey report drives home an important point about the prospects of the advanced battery industry in a week otherwise filled with news of the continuing economic challenges at A123 Systems and the bankruptcy of Valence Technology:  The factors that will drive the growth of the advanced battery market are real and the opportunities in the industry are tremendous. 

The value of a company or an industry cannot be measured by cash flow alone.  As David Wells of Kleiner Perkins recently observed, the market is not a counting game, it is a weighing game.  While your payroll manager many not fully appreciate David’s quip, there is truth to it.  And as battery prices fall and petroleum-based fuels become more expensive, the advanced battery industry will get heavier and heavier.