Delve into a comprehensive exploration of Japan's demographic challenges and their profound impact on the battery industry, as ENAX unveils its strategies for global expansion and innovation.
Japan has a very aged population and a low fertility rate, and as a result, experts are now predicting that the population will drop below 100 million people by 2050. Of course, this raises several issues, the most prevalent being a labor crisis and a shrinking domestic market. As a pioneer in lithium-ion batteries, to what extent do Japanese companies need to look overseas to ensure their long-term business continuity?
Historically, batteries were manufactured at their destination due to their considerable weight and voluminous size. Additionally, given their combustible nature, transportation expenses were typically elevated. Furthermore, European and American governments are increasingly focused on attracting investments in local production and consumption to enhance economic security.
As you pointed out, Japan is grappling with a declining population, and its current share of the global gross domestic product (GDP) stands at approximately 5%. Looking ahead, over the next five to ten years, it's anticipated that this percentage could decline further, potentially reaching 4% or even 3%.
Going forward there is going to be less demand in Japan for batteries because of the drop in population and local production in other regions. I think that in order to survive manufacturers are going to have to have a more outward-looking perspective and a partner-oriented mindset.
It is often said during our interviews that partnerships are a key aspect of entering new markets and developing new products. What role do partnerships play in your business model and are you looking for any partnerships right now both domestically or overseas?
Recently we have been taking part in more projects that involve partnerships with overseas companies. This is especially true for battery cell development where we are seeing more and more cases. In the past, we have had partnerships with Japanese OEMs but this trend has shifted now. More recently, almost all the projects we have had involved some sort of overseas partnership.
When we look at our regional competitors in countries like China and South Korea, they excel at mass production using established technologies and techniques. Our strategic focus is on forging partnerships with American and European ventures, primarily because these companies display a strong appetite for innovation and emerging energy technologies, showing a high level of dynamism in their field.
In contrast, ENAX boasts a significant track record in the battery business, with our involvement dating back to 1996. Over the years, we have dedicated extensive efforts to research and development. Our core competence lies in the realm of establishing production processes, particularly during the initial phases of manufacturing.
Especially in the United States, numerous ventures possess advanced technology that enables higher energy density in their batteries. However, they often lack the expertise required for large-scale manufacturing. In response, we extend our support by offering insights and assistance in setting up the initial manufacturing processes. This collaboration facilitates the transition of newly developed battery technologies from the conceptual stage to actual production.
The general consensus is that battery manufacturing is an exceptionally challenging endeavor, demanding a substantial scale of capabilities. In recent times, much attention has been drawn to the gigafactories emerging in Europe and the United States. However, the reality within these facilities is that, even though they have successfully established large factories, they encounter considerable difficulties in achieving the anticipated production volumes.
Effectively, what we observe are expansive factories grappling with the transformation of battery production into a mass manufacturing process. To address this challenge, these gigafactories are reaching out to engineers from Japan and South Korea. These experts are being enlisted to provide invaluable support in the implementation of efficient production lines, ultimately enabling these facilities to achieve higher production yields.
You spoke there about these US companies that have developed very cutting-edge technologies but are unable to bring them to market or mass production. Could you talk about some of the trends in the battery world that your company is involved in?
In regards to solid-state batteries, Toyota is saying that they will start commercialization in 2027, with their vehicles not using solid-state batteries until at least that date. It might take a bit longer to reach commercialization because putting those batteries into mass production status are actually quite challenging. Cost-wise, it will be quite difficult to reduce the costs because it will take a more extended amount of time to bring production up to scale. Additionally, solid-state batteries right now are known to be rather expensive to produce.
Considering all these factors, it appears prudent to maintain a focus on ongoing enhancements in lithium-ion battery technology. In my view, lithium-ion batteries have the potential to remain at the forefront of the industry for a considerable period yet.
I worked for Sony, and I was involved in the display business for a long time, so I know a lot about what has happened in the LCD space. People were saying twenty-five years ago that LCDs would be replaced by other types of displays, but it turns out that LCDs actually won against plasma displays. Then people kept saying that OLEDs would win against LCDs, but even today that hasn’t really happened, and LCDs retain a large market share. The dynamic range of LCDs is much bigger than it used to be so LCDs now have almost an equivalent performance level as OLEDs. I think the market has essentially divided into camps for each of these two display types. OLEDs do have a higher cost but the incremental improvements to LCDs have allowed them to remain a leader in the market. I think this anecdote will also ring true with the upcoming battery wars, with both types being able to exist in the market together, and each having their own use case.
One of the main issues presented to the production of lithium-ion batteries is the insufficient supply of critical materials for batteries, to the point where even Tesla is struggling to secure enough resources despite their partnership with Panasonic. Reducing the requirements of rare earth materials and exponentially increasing supplies will be key to creating sustainable production supply chains. How do you believe lithium-ion battery supply chains can be adapted in order to overcome this shortage in supplies?
Major players in the industry are trying to do something about this problem with supplies, but I think it is important that all of us try to keep cool heads because the supply side really does have a variety of issues including the one you mentioned as well as political and legal issues. Countries are pushing for electrification in order to meet SDGs, and thus we have many different subsidies being developed by different governments to assist with expediting this transformation.
We must carefully assess whether our products will appeal to the general consumer market. It's crucial to maintain a delicate balance between supply and demand. Given the numerous upcoming factory developments, it's imperative for our industry to determine if there will be sufficient demand to match the expected supply. Even if consumers embrace electric vehicles (EVs), we might encounter oversupply issues.
Historically, both the semiconductor and LCD panel markets have grappled with supply-related challenges, leading to price fluctuations. I anticipate a similar pattern in the battery industry. Mass production necessitates substantial investments, and if everyone rushes to establish factories, prices will drop initially. However, as prices decrease, supply volumes will contract, resulting in heightened demand, which, in turn, will drive prices back up.
With all of this in mind, we really need to think carefully about the balancing point between supply and demand. It might be tempting with all the subsidies coming from the government to jump in head first. It pays to be prudent. We are a company with sales of JPY 2 billion and a headcount of 90 employees so we aren’t a big company, and because of that reason, I’m reluctant to rush into this kind of model.
ENAX has been working mainly on pouch-type of battery cells
With all of these incentives being introduced by world governments, obviously, you are now facing a lot more competitors. What are your core strengths or competitive advantages that set you apart from your competition not only domestically but also globally?
Our company has long been engaged in the development of batteries, so we feel that we are very good at coming up with proper processes for mass production, in particular the initial startup phase of mass production. As I mentioned earlier, there are many companies that have developed technologies for batteries but have struggled to take those new technologies to a mass production scale. With the incentives now being thrown around there will now be a lot more companies that will start building gigafactories, but honestly, there is a bit of a gap developing between R&D fields and mass production. What I believe is happening is a lack of connection between R&D and the actual production of batteries, so I think this widening gap is where we can really shine and apply our capabilities to expand the market. I think this market in particular is where ENAX can grow as a company, so in that sense, I think we are entering an exciting new era for ENAX.
We are actively engaged in safety evaluations as well, which are an integral aspect of battery production. While many Chinese manufacturers produce batteries at a lower cost, consumers often express safety concerns about these inexpensive options. Consequently, we frequently receive requests to assess and validate the safety of these batteries.
Another noteworthy strength of ours lies in our ability to meticulously control battery performance. This implies that even when utilizing more budget-friendly batteries, they can be deemed safe if employed correctly. Our expertise in this area enables us to design safety battery management systems (BMSs) and battery packs to ensure the safe usage of batteries, even those at a lower price point.
You’ve mentioned today your ideas of entering the US market more, and in March 2022 a significant trade agreement was signed between the US and Japan regarding EV minerals. The goal is to boost the EV industry with USD 7500 in tax credits to Japanese automakers. This deal has the potential to reshape the landscape around the industry and presents a lot of new prospects for Japanese companies. How can your firm take advantage of this agreement to enhance your competitiveness as well as contribute to the growth of the EV market in general?
I know that this act attracts automotive manufacturers to invest large amounts of money for the production of batteries and gigafactories in the US, but in order to popularize EVs in the market, battery prices, which take up almost half of EVs prices, have to be reduced That is why a lot of manufacturers are trying to establish gigafactories right now, with the incentives allowing them to produce existing types of batteries at a cheaper cost. We are not really that interested in this area however, instead, we are more interested in developing future types of batteries that will come to prominence in the next five to ten years.
Another key industry is the energy industry, and the transition towards more renewable energy sources is still very challenging and has many issues remaining such as efficiency or the difficulties in energy storage. We know that your company develops batteries and energy management systems (EMS) with storage capabilities. How is your company trying to alleviate these challenges for renewable energy?
Yes, we are very interested in getting into this field of industrial EMS and Energy Storage Systems (ESS). The batteries in this field tend to be cheaper, mass-produced batteries that mainly come from China. In order for our company to be able to utilize our strengths in this field we need to embrace the shift to lithium iron phosphate batteries (LFP). However, the problem with LFP batteries is that hard to estimate the state of charge (SoC) while discharging. We tend to use changes in voltages during charging and discharging to estimate SoC. In the case of LFP, this change is very small and it is very difficult to judge the remaining amount of power in the batteries. Our concern is that they are probably not fully utilizing the current batteries to their maximum potential.
With our company’s vast experience in the battery field, we believe that eventually, we will be able to increase the efficiency of these LFP batteries by around 5-10%, which will make the lifecycles longer. If you take the current lifecycle of LFP batteries, which is about fifteen years, then we will be able to increase that by around one year. I think this is a particular area where we can differentiate ourselves from our competitors.
Recycling batteries is a notoriously hard thing to do. Some batteries need to be separated into materials such as iron, aluminum, and copper, as well as toxic metals like cobalt, manganese, or nickel. Each of these needs to be recycled, but it is hard to have someone manage that from top to bottom. Recently however ENAX developed an industrial battery disposal scheme to partially overcome this issue. Could you introduce us to this battery disposal scheme and explain what people should do with batteries after use?
There might be a bit of a misunderstanding there because we actually haven’t developed our own battery disposal scheme. Instead, we were certified by the Ministry of the Environment as a larger recycler which allows us to acquire used cells from users and then put them through the recycling process.
Certainly, we recognize the importance of the recycling market, and we acknowledge that action needs to be taken. Presently, it's regrettable that the industry has not made significant strides toward establishing robust recycling practices for cell battery recycling. During previous visits to recycling sites, I observed that they aren't primarily recycling used batteries. Instead, their focus seems to be on recycling defective batteries identified during the production process. The quantity of these batteries is relatively small. They are placed inside a large iron can and subjected to combustion for approximately 8 hours until they transform into a substantial black mass. Subsequently, chemical reactions are employed to dissolve these materials, resulting in substances that are not large in volume. On top of that, it has not been proven that these materials are suitable for manufacturing purposes yet. Many companies assert that the technology required to recycle these materials and reintegrate them into the production cycle is still underdeveloped. Given our view of this as a significant market, we are dedicated to making contributions in this domain, as well as continually exploring new technologies through ongoing research efforts.
At your core you’re an R&D company, so what would you say is the main focus of your R&D right now? Are there any new products or developments that you would like to showcase for us today?
We consider the market we are in to be very prospective, and right now existing batteries are not meeting the specifications required for the EV transition yet. This means that new developments in batteries are necessary for the next generation. In terms of the flying car concepts, this is a very difficult thing to do, especially when compared to traditional cars. Once that vehicle is in the air we need to make sure that the batteries are providing enough power to keep the vehicle afloat, even if the remaining battery level is getting lower. Otherwise, it would be very dangerous. Consequently, we are now prioritizing the development of advanced battery technologies tailored for electric vertical take-off and landing (eVTOL) aircraft applications.
You entered the US market in 2003, and we also know that you entered China in 2004 through a joint venture with Evonik Industries. Since then you have expanded even more by opening a material procurement department and an electro-production plant as well as a joint venture with China Automotive Technology Center to open a battery assembly plant. What location is next in terms of the continued progress of your international expansion? What strategies will you look to employ to continue to grow abroad?
In the past, we engaged in several joint ventures, particularly in China. In 2010, we entered into a joint capital venture with The Innovation Network Corporation of Japan (INCJ). Subsequently, in 2016, Sekisui Chemical became a significant shareholder in our company. Then, in 2019, that investment was transferred to Daiwa PI Partners, which is a part of the Daiwa Securities group and operates as a private equity firm. At present, Daiwa PI Partners holds complete ownership of our company. Our current operations consist of this office in Tokyo, a small manufacturing facility and R&D located in Yonezawa City. Our operational footprint is more streamlined compared to a decade ago, largely due to the capital formation changes.
As I mentioned earlier, our collaborations with U.S. ventures often involve companies with impressive technologies but limited manufacturing capabilities. Besides these partnerships, we are dedicating significant attention to the development of batteries that will align with future specifications expected to emerge within the next five to ten years.
Would you say that you are targeting European or US OEMs with those services?
In order to complete the processes of mass production we have to establish factories which require a large amount of investment. For this part, we are not yet sure how this will play out because there are various options. One of those options is joint ventures but we’ve yet to really discuss that internally.
Imagine that we come back on the very last day of your presidency and interview you all over again. What goals or dreams do you hope to achieve by the time we come back for that new interview and you are ready to pass on the baton to the next generation of ENAX executives?
Being entirely owned by a private equity fund, the company's ultimate objective is likely to pursue a public offering and achieve an exit strategy. To consider such a move towards going public, a myriad of foundational elements must be established, spanning organizational structure, personnel systems, and the intricacies of daily operations. This extends to the cultivation of a business management philosophy and fostering a workforce mindset aligned with the company’s goals. As CEO, my aspiration is to critically assess and fortify our core businesses to secure stable growth for the future. The pinnacle of my goals is to nurture a company culture where employees find joy and fulfillment in their work, leading to a happier life, which, in turn, propels the business and the organization to greater heights.