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Will markets follow?

By Nathan Peck | MiBiz
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WEST MICHIGAN — The Obama administration threw down the challenge to the auto industry: Get 1 million electric vehicles on the road.

When the administration directed $2.4 billion toward battery manufacturers as part of the American Recovery and Reinvestment Act, plans for drawing those dollars to Michigan kicked into high gear. To date, nearly $900 million in U.S. Department of Energy funds have gone to projects planned for or currently under way in Michigan.

The grants, which are matched 50-50 by investors, represented a concerted public-private effort to jump start the electrification of automobiles in the U.S. and are an attempt to create from scratch a domestic battery industry.

The Michigan Economic Growth Authority (MEGA) has stepped in with aggressive tax credits to leverage the state’s automotive history in drawing manufacturers to the state. Lithium ion battery technology has long been centered in Asia, but some say Michigan may own 65 percent of the global battery production capacity within the decade.

“The (Michigan Economic Development Corp.) realized early on that the stimulus funds were coming down the pipe,” said Randy Thelen, president and CEO of Lakeshore Advantage. “We were able to get state policy and legislation in place to leverage the state’s overwhelming expertise in automotive manufacturing.”

Bringing new technology is an inherently risky venture, and many technologies, from the railroads to cellular phones have at some point relied on government intervention to bring them to market. The state has done a good job in helping mitigate some of that risk, particularly the upfront capital expenses associated with building new production facilities through tax incentives, said Lynn Gandhi, a corporate tax attorney with Honigman, Miller, Schwartz and Cohn LLP, who has worked on several tax incentive agreements for battery manufacturers.

“It is very difficult now to develop the infrastructure and distribution network you need,” Gandhi said. “The benefits are intrinsic. You end up reducing the vehicle cost through assistance on the infrastructure costs that went into the production of the vehicle.”

If you build it, they will come

The hope, many say, is that Michigan develops that “critical mass” of technology, talent and investment to make it the go-to place for automotive battery technology. Much of the world’s battery supply chain runs through Asia and Europe, and decisions to build in Michigan can send ripples through the supply chain.

Take the case of Johnson Control Inc.-Saft (JCS). The Department of Energy grants and Michigan tax incentives influenced the JCS decision to come to Michigan, abandoning plans to build in France. Since deciding on Holland, the partners have moved engineering operations from France to Michigan.

“We were already in production in France, through our partnership with Saft,” said Mary Ann Wright, VP and managing director of business accelerator for Johnson Controls. “Prior to the (stimulus) dollar-for-dollar match, our expansion plans were not in the U.S. It changed our strategy. It turned our strategy upside down. You cannot underestimate the impact of the investment by the U.S. government.”

Those decisions, in turn, helped bring Toda America to Battle Creek. The Japanese supplier of cathodes for lithium ion batteries decided on Michigan in part due to proximity to manufacturing plants slated to come to Michigan. The $70 million plant was formally announced in February, and will be built in the Fort Custer Industrial Park in Battle Creek. JCS helped convince Toda to locate its facility in Michigan, rather than in South Carolina.

“The state made a play, through the D.O.E. and incentives, to be the center of battery technology…Michigan has positioned (itself) to be the center for advanced battery manufacturing, bar none,” said Wright. “What that means for the supply base is that all the suppliers are Asian, and very few of the critical suppliers are here. We will start attracting suppliers here.”

Market strength questions

The risky part of the equation, experts say, is the market for electric and hybrid vehicles is largely untested. In 2009, hybrid vehicle sales in the U.S. were a little more than 290,000. In comparison, January U.S. car sales alone totaled 365,000. Many say that government fleet purchases will likely spur the first spike in demand for electric vehicles, and as the industry matures, the state should expect some consolidation, some winners, and some losers.

“The investment is great, but it quickly becomes a capacity versus demand question — there is a huge gap between the two,” said Wright. “The demand is not at volumes that allow plants to run efficiently and effectively.”

Government fleets are desirable for electric and hybrid vehicles because of their large purchase order sizes, the fact that the vehicles aren’t driven long distances and that drivers can utilize central fueling points. Additionally, many see export opportunities abroad for electric vehicles.

Thelen is bullish about the prospects for the industry in West Michigan. For a region that has relied heavily on the furniture industry, the growth potential could be staggering. Conservative projections put the economic impact of advanced battery technology at a $25 billion industry by 2020, and range as high as $60 billion. Office furniture, by contrast, is a $12 billion industry.

Next steps

Now that plants are coming, the state needs to act to make the state friendlier to businesses in order to keep manufacturers in the state, says Gandhi.

“The goal initially was to attract a certain amount of mass, extend legislation if you have to, and develop a more friendly business tax climate” Gandhi said.

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