EVs: Chemical balance

The automotive industry's $6 trillion transition from the internal combustion engine to electrification is often contemplated in tantalizing, investor-relevant timeframes of 10-15 years. This has been supported by rapid consumer uptake, with electric vehicle (EV) sales said to be growing at 60% a year in China and 2018 marking a record year globally with two million units sold. 

However, private equity and venture capital access to the trend will be more nuanced than the headline figures suggest. That’s because most opportunities have less to do with directly tapping the surging appetite for EVs across the next decade and more to do with putting out spot fires along the way. 

To some extent, this can be taken literally. In recent months, spontaneous combustion has become the most dramatic example of how the EV industry’s medium-term expansion ambitions could be stalled by regulatory or marketing headwinds related to lingering technical hurdles. 

One of the higher profile cases occurred in February when the driver of a Tesla in the US was killed by a fire sparked under the hood. Terrifyingly, the “thermal runaway” properties of the lithium-ion battery meant that thousands of gallons of water were required to douse the blaze, which continued to spontaneously reignite even after the car was removed to the tow yard. 

Concerns are more acute in China, where strong government EV mandates have appeared to press for quantity over quality. There were an estimated 40 spontaneous EV fires in the country last year and at least three have been reported in 2019 to date. Local media are beginning to regularly circulate surveys that report up to 70% of owners now regret purchasing their EVs.

Investors addressing this issue will have to break some new ground by shifting the burden of technical problem-solving in the EV components industry from manufacturing to computation. Some precedent for this can be seen in the camera space, where hardware digitization has been able to realize both increased performance and lower unit cost of production. 

Pulling off a similar metamorphosis with EVs will be all about the battery, which today accounts for about 50% of the cost of the average vehicle, compared to 2-5% for consumer electronic devices like smart phones. The problem here is that modernizing batteries will require doing something that has never been done on a large scale: combining big data software with chemistry. 

While big data and artificial intelligence (AI) have experienced gradual integration in various medical and industrial fields in recent years, traditional inorganic chemistry remains a black box. Most of the data used in the battery segment, for example, has focused on optimizing charge and discharge rates by tracking unit performance under different conditions. Little AI has been applied to actually understand the interactions of the ions inside.

Taking this step is a much about culture as it is about science, which could bode well for venture-style company building strategies in an industry typically dominated by an oligarchy of heavyweight players. 

Historically, car makers have not considered battery makers to be technologically progressive or forthcoming about the true performance standards of their products. Battery makers, for their part, have contended with difficulty attracting digital talent and dwindling margins as prices for basic batteries, EV or otherwise, plummet. 

The resulting trust gap has opened the door for third-party suppliers that can breathe new technologies into EV subsystems, especially batteries. Qnovo, a US-based battery data specialist that operates primarily in Asia, offers a case in point. The company, which has received funding from a number of VCs including Intel Capital, has transitioned from a focus on consumer electronics to automotive as the EV safety issue has intensified.

“If you cannot marry the data to the fundamental chemistry that’s taking place inside the battery, you’ve missed a huge insight,” says Nadim Maluf, CEO of Qnovo, noting that his team is a 50-50 split between chemists and software engineers. “You don’t think twice about whether or not your gas tank is going to blow up because those problems were fixed 50 years ago. We haven’t fixed those problems in EVs yet.”

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