The state-backed “gigafactory”: all aboard the next Concorde

State functionaries do not have a good record of picking winners. That won’t stop them doing it again

The government’s ambition of creating new industries, levelling up the regions and turning post-Brexit Britain into a tech powerhouse has generated lots of rhetoric so far, but not much in the way of concrete plans.

Last week, we finally saw an actual decision. The business secretary, Kwasi Kwarteng, announced that the ambitious start-up Britishvolt would get £100m of state funding to help it build a vast new factory to make the batteries for electric cars in Northumberland. The gigaplant has the potential to make batteries for 300,000 cars a year, creating 3,000 skilled jobs on the site, and another 5,000 among suppliers. If it all goes according to plan, it will make the UK a player in the battery industry. 

Danger: high-voltage risk

Of course, everyone wishes Britishvolt well. There is no question that the world will need lots of car batteries. The market for electric cars is exploding. Tesla already makes one of the best-selling models in the UK and every major car manufacturer is pouring billions into creating new models. In a decade, petrol-powered cars may well be a historical relic. But just because an industry is huge doesn’t mean it can be profitable. The battery business faces some big challenges. 

First, soaring raw-material prices. Batteries that are powerful enough to drive a car have lots of metals inside them, many of which are in short supply. Lithium is the most crucial, and the price has more than doubled over the last ten years. Cobalt and nickel are almost as important, and miners are struggling to keep up with soaring demand. Building a huge new plant is one thing. Getting the supply chains in place to feed in all the raw materials will be far harder. There will be a constant threat of shortages and rising prices destroying any profit margin that might otherwise be there. 

Second, we are about to see massive overinvestment. Just about every other country in the developed world is trying to get into battery production. French president Emmanuel Macron is putting €700m into a plan to develop a domestic battery industry. The German government is putting in €1bn. The EU has launched a European Battery Alliance to funnel subsidies into plants across the continent.

On the other side of the Atlantic, US president Joe Biden is spending billions on developing the American industry, with huge subsidies for US manufacturers, along with subsidies for charging networks.

It is not hard to work out what is about to happen. In a few years’ time, there will be far too many batteries being produced by companies that have been massively subsidised to ramp up production. That is great for anyone thinking of buying a new car. But with prices falling and many state-owned companies selling at below cost price, it will be terrible for manufacturers. 

A fast-moving target

Finally, the technology behind electric vehicles is still developing very rapidly, and so are customers’ preferences. Is a 400- or 500-mile range crucial, or does it not make much difference, given that most of us typically only drive ten or 20 miles a day? Will rapid charging make it irrelevant anyway? Will we actually own an electric car, or prefer simply to borrow one on an app when we actually need it? The market has not decided yet, but it will make a huge difference to the type of batteries that are in demand. 

Likewise, we hardly even know what materials will be used. For example, India’s giant Reliance Industries is spending big money on developing sodium- rather than lithium-based batteries, including on the acquisition of UK-based Faradion, a specialist in the technology. Sodium is far cheaper than lithium, and there is plenty of it in the world. Until the answers to these questions become clear, it is impossible to know what batteries will be needed, with what capacity, and what they will be made of. 

In truth, many of the state-backed battery plants have the potential to turn into massive white elephants. We have plenty of history to tell us that governments are typically very bad at making those kinds of strategic choices. They back the wrong technologies and spend too much money at a time when everyone else is getting into the market. This gamble could turn out to be a 21st-century Concorde.

Recommended

What to do as the age of cheap money and overpriced equities ends
Investment strategy

What to do as the age of cheap money and overpriced equities ends

The age of cheap money, overpriced equities and negative interest rates is over. The great bond bull market is over. All this means you will be losin…
29 Sep 2022
These 3 top value stocks offer
Share tips

These 3 top value stocks offer

Professional investor Adam Rackley of Cape Wrath Capital highlights three overlooked value stocks to buy.
29 Sep 2022
Why everyone is over-reacting to the mini-Budget
Budget

Why everyone is over-reacting to the mini-Budget

Most analyses of the chancellor’s mini-Budget speech have failed to grasp its purpose and significance, says Max King
29 Sep 2022
Bank of England spends £65bn to “restore orderly market conditions”
Budget

Bank of England spends £65bn to “restore orderly market conditions”

The Bank of England has said it will spend £65bn buying bonds to stabilise the financial markets after the government’s mini-Budget. Saloni Sardana ex…
29 Sep 2022

Most Popular

Earn 4.1% from the best savings accounts
Savings

Earn 4.1% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
27 Sep 2022
How the end of cheap money could spark a house price crash
House prices

How the end of cheap money could spark a house price crash

Rock bottom interest rates drove property prices to unaffordable levels. But with rates set to climb and cheap money off the table, we could see house…
28 Sep 2022
What changes to the pensions charge cap mean for you
Pensions

What changes to the pensions charge cap mean for you

The government could raise the pensions charge cap – the amount you can be charged in your workplace's default pension fund. Saloni Sardana explains w…
27 Sep 2022