In the loop: Vertical integration

[00:00:02] Speaker A: Welcome to in the loop, where we break down the complex world of battery manufacturing into bite sized, understandable pieces. At Norfolk, we believe that batteries are the building blocks of our electric future. But how do they really work? From raw materials to innovative techniques to recycling, in the loop is your backstage pass to the captivating journey batteries embark on before they power our world. Tune in, be curious, and we'll make sure to keep you in the loop. Welcome back. I am your host, Annalee, and in today's episode of in the Loop, we will be exploring the concept of vertical integration at Norfolk. I'm joined by my colleague Andreas Klein, who works in strategy. Welcome to the studio, Andreas. [00:00:51] Speaker B: Hey, thanks. [00:00:52] Speaker A: So, as I mentioned, we're going to talk about vertical integration today, and I thought that maybe the best way to start with that is what does vertical integration even mean? [00:01:00] Speaker B: Yeah, I was struggling with that a lot. I started in consulting maybe 8910 years ago, and many people were telling me, vertical integration is the thing and everyone is doing it, and you need to be upstream and you need to be downstream. And I was completely lost, right. I didn't know what all of those words meant, so what I did was I started to just nod and pretend that I knew. And some years later, someone told me, you just need to imagine you're a little man in a boat on a river, and if you start upstream, you naturally flow down. So when you think about a material or something that is manufactured, in the very beginning, you have some materials, they are not refined. It's just raw materials. And then they start in that boat, they float down the river. Someone is doing something somewhat, and out comes a better product, and then this better product gets worked again and it becomes a better product and a better. And in the end, you have this one thing that you're using until end of life, and then the boat stops. So upstream means you go from the product that you want to manufacture further up that river towards the raw materials that you put in. If you look downstream, then basically you at some point reach the end of life and there comes recycling. And that's basically. [00:02:29] Speaker A: It sounds so simple. [00:02:30] Speaker B: Yeah. If someone only would have told me. [00:02:33] Speaker A: Yeah, exactly. Because I was going to point out the fact that you also talked about how beforehand, before you started working here and when you're consulting, that you kept hearing that word. And that was the same when I started here because I kept hearing the word and I was so confused. But eventually, once you start understanding how Norfolk is building batteries, you then understand what is meant by vertical integration. It's those steps. But if you're not in it, when you just hear vertical integration, you're confused because, yeah, to me, it just didn't make any sense. [00:03:02] Speaker B: I completely agree. And also, you don't know what position am I in, right? [00:03:06] Speaker A: Yeah. [00:03:06] Speaker B: So when you talk about Northold and this whole battery value chain, am I now in the battery cell? Am I in the materials? What the heck am I doing? So what is my centerpiece? And from what centerpiece do I calculate upstream and downstream. And I think that is the first thing that we need to understand. So with Northworld, we are talking about a battery cell. So there is materials coming in, and then we have a small battery cell, and you need to do something with it until you can really use it in a product. So you need to integrate it. And this centerpiece, this is the first thing that we need to lock in. [00:03:40] Speaker A: I also get questions. We get questions on our channels and social media as well. So I think it's good that we can sit down and talk about this, because I also want to know a little more about the details about vertical integration. So how does a traditional battery manufacturing chain look like? [00:03:55] Speaker B: So, traditionally, most players in the battery industry, they only do one thing in this value chain. And typical battery cell manufacturer, they only do cell manufacturing. So they have many supplies. Those supplies supply materials like the cans, some active materials, maybe electrode sheets or the electrolyte. And then the cell manufacturer basically puts everything together in its processes, and out comes the battery cell. And this is really the one piece that typical standard cell manufacturing looks like. If we now talk about players that are more vertically integrated, they start to do more themselves, so they not purchase everything, and they start doing maybe their own electrode sheets, they start doing their own active materials. They start to put the battery cell into a system themselves. So that becomes more of a wider range of capabilities that they cover along this complete manufacturing cycle. So not only the battery cell, and historically, or in the past, all the players just did battery cell. And then some started to do more, and it became of a trend. [00:05:04] Speaker A: What started that trend? Why did manufacturers start to take things in house? [00:05:10] Speaker B: Multiple reasons for that. So, first of all, if you only assemble a battery cell, you cannot really adjust the behavior of it. You have most of the performance parameters of a battery cell, how much energy is in, how fast you can charge and discharge it. Right. How safe the cell is. All this is only, to a certain extent, determined by the cell manufacturing process itself. Many things are determined by the materials that you're using. And if you're locked in with a supplier, the supplier has the knowledge and he can basically adjust it. But you yourself, you cannot really differentiate within the market, only if you do it yourself. You have those fast learning effects and you can really start to tune the cell and the performance as you really need it. And on the downstream, the vertical integration started because once you have a battery cell, you can sell it to people that do the integration. But many of those larger projects in the first years when electrification, so meaning making vehicles or cars electric, was not so mature, there was a need for battery systems that can directly be plugged into the vehicle or into the application. And if you don't cover that kind of integration part yourself, you will always have a middleman, so you don't have the customer relationship. And this is why those cell players started to move in both directions. They started to do cell manufacturing themselves, they started to do active materials by themselves. But it's only a very little that really do the whole piece right, because it's so complex, it's so many things you need to cover and many just go into partnerships and try to influence those parameters indirectly. [00:06:49] Speaker A: Yeah, you just have less control and freedom over what you can do with your products. That's basically what you're saying if you were to simplify it. [00:06:56] Speaker B: Yeah, you simply don't have the freedom to adjust everything and to be the in ownership and in control of the product to the full extent. A second piece, and that I didn't mention before is we have these extreme push towards sustainability and towards low CO2 footprint. If you really want to influence that, you need to influence not only the cell manufacturing process, which is to some extent energy heavy, but not so much, but also the most CO2 intense processes across this whole value chain. So talking about additive material production, this is where really a high amount of energy flows in, and most of the players do it with gas. But if you shift this or change this into an electric process and you use renewable energies, then you really can make a difference. But you need to be able to do that. You don't or cannot rely all on your supplier. So in the end, if you don't vertically integrate into it in house, you will never have the possibility to adjust and to change your CO2 footprint in your sustainability aspect. [00:08:08] Speaker A: So how does vertical integration challenge the traditional approach? What would you say is the main thing of like an advantage of doing vertical integration? [00:08:17] Speaker B: I think the main change towards only doing cell manufacturing or being covered in most of the other sets via partnerships is that you're able to have a circular economy all on one side, all under one control, meaning that you have all the advantages of that. You can use your materials that you produce yourself. If you are upstream enough, you can even use recycled material that you feed into your upstream processes. Then you make an active material, put it on the electrode sheets, you put it into a cell, you do it in a system, and then you have to recycling. And the recycling again feeds into the raw material. On the very top becomes not a line, but it comes a circle, right. You can really connect the two ends. And if you're able to do that on one roof and on one side, you can integrate all those processes and it becomes a real efficient and automated kind of setup. And this is the advantage that you have. So it's not only covering the value chain and vertically integrate, but also integrate those processes on one side, under one roof, on not necessarily one roof, but at least in one location. [00:09:24] Speaker A: Many roofs, but one location. [00:09:26] Speaker B: Many roofs, but one location. Exactly. That's the one. [00:09:28] Speaker A: But circular. Exactly. With your analogy. But would you like to take step by step, what the vertical integration looks like? [00:09:37] Speaker B: Yeah, absolutely. Let's again take one step back and talk about the centerpiece, the cell. So I think in one of your previous episodes, you already covered on how a cell is manufactured, what components go in. But in general, you have cell manufacturing. You have those big electrode rolls, then they get cut or folded, they get put into a housing. Then there comes some liquid electrolyte on top that activates the process. Then it goes into formation and aging, meaning some cycling, some testing, some adjusting, basically the cell for the final use. And then it gets an offline tested and it's a cell. So now from this we have two connection points. We go upstream and we talk about the electrode manufacturing. And that shocked me, actually, that some cell manufacturers are not even doing that themselves. They have suppliers for electrode. They really only do the mechanical assembly. So that is even something. [00:10:38] Speaker A: So they get their roles from other suppliers. [00:10:40] Speaker B: Exactly. Either from other suppliers or if it's a larger company, it sometimes supplies themselves from other sites. But this is where vertical integration really already starts. It is not that everyone is doing electrode manufacturing themselves. So we have this cell manufacturing and before that, the electrode. So it meaning that there's active material that comes on sheets that gets dried and pressed, and then it gets on a big, big roll that's got fed into the cell manufacturing process. So this is the first step. Now we think about, okay, what do you put on those electrodes? It's really the active material. So you have two types, anode and cathode. Typically, the cathode is accounting for the highest share of cost and of CO2 imprint in a battery cell. So this is the first thing that you really need to cover and do in house. There is already a P cam. It's called a pre manufactured kind of material composition that you feed into it. You cannot only do the cam. You need to do cam and Pchem together in order to being able to then further integrate upstream. And only then you're able to take in real raw material from the market or from recycling and go with it along the full value chain until they have battery cell. So we have electrode manufacturing, then we have cam, p cam, and we have the raw material taken. This is only the upstream part. Right now we talk about downstream part. I mentioned the system integration, and I think in the beginning I only touched it briefly. But let's think about how those markets in general work. There is a play that says, okay, I want to electrify my product portfolio. For example, it can be automotive, it can be bus, truck, industrial, doesn't really matter what. But this first step means that the player does know nothing, and I literally mean nothing about battery. He wants to have a black box, maybe two cables, right? Power in, power out. That's it that he wants to integrate into his. Into his vehicles. So if you give him a battery cell, that is only a component in this huge system, because like Mike said, you need not only have the battery cell, you need to have then integrated into a module. So a little bit bigger Lego block, let's say Lego, I think is a good example. So the battery cell is the smallest Lego block. You put some of them together in a housing, then you have the middle part. You put those larger Lego blocks together with some cooling and some wiring and some electrical monitoring, like the battery management system. And then you have a battery system, right? And this is the black box that they want. So if you only supply the cell and they want a system, then you cannot supply them. So you need to start thinking about, do I want to do this vertical integration downstream as well? Doing module system, developing my own bms, finding a solution for the cooling so that I can supply those customers in markets that are growing, where they are not so mature, where they simply don't know what to do or do. I want to have a middleman that I supply this to and then he gets the customer interface. And later, when the market takes off, I might have a disadvantage. So this is why Northwood said, okay, we go so far upstream, we also need to go downstream because we want to supply markets that are emerging. We want to be on the front tier of this industry. And to address these markets, we need to have the system. So we have a whole department and it's doing that. That's the first downstream step. Then comes the last downstream step, because after it is integrated in some kind of application and it's used over its complete lifetime, at the very end you need to do something with all this material because it has value and you cannot just throw it away because it's chemical waste to some extent, and electrical waste. So you recycle it. And if you recycle it, you get out. In the best case, you get very good raw material out. Typically you need to then filter it or basically advance it so that it's a grade that you can use in a battery. And this grade that you can use in the battery for nickel, manganese, cobalt, aluminum, lithium, all those elements that need to manufacture battery that you can put it on top. So what Northwell did, not only the system, but we also went to the end of life and used basically our recycling technology to directly recycle those raw materials to a grade that we can use in a battery system. And this grade that you can use in the battery system, this is really something that is unique in the market because typically you recycle, then you get materials that are not so pure that you can directly use them. So you need to refine them again, and then you can put them into the battery. But we are able to cover this whole process overview. And one really cool thing with that is since we have that recycling and the direct feed in on top. So this circle that I mentioned, what we are able to do is we can also utilize all the scrap that is being produced along the battery production in p chem chem, electron manufacturing, cell manufacturing system manufacturing, and the flight batteries. Everything that drops out because it's not good enough or is a waste, we reuse and feed back in on the top so we can be super efficient. [00:15:51] Speaker A: Yeah, exactly. Because then, like you said, there's a, if there's waste, there's definitely valuable materials or chemicals on a sheet. For example, if something went wrong with a sheet in a machine, or if there's some sort of leftover chemicals in upstream, you could definitely feed it back into the chain, right? [00:16:12] Speaker B: Yeah, exactly. Is that the case? That's exactly the case. Leftover chemical? [00:16:17] Speaker A: Correct. [00:16:18] Speaker B: No leftover chemical status. That made my day. [00:16:20] Speaker A: What is the advantage of having all of this on site? Because some people could have the question of, is it worth the costs, could it be more energy intense? Could it be locally? I don't know. You can think of small towns and there's a massive factory that just pops up out of nowhere. People who are just questioning why have everything on one site. [00:16:44] Speaker B: There are different approaches to this. Right. When we look into the market, many try to centralize their care manufacturing to really fully utilize their plant and then distribute across their different cells production facilities. So it's a little bit distributed. For Northvolt, this was not an option simply because we live to the rule that we want to build the greenest and most sustainable battery. So we need to have access to renewable energy. And we are looking very closely on what countries and what grids will be able to basically supply this green energy. So the advantage that we are having is we can access with everything on one side, not only all the advantages that I mentioned before when it comes to circular integration, because otherwise you have all those logistics and it becomes a nightmare. [00:17:29] Speaker A: Too complicated? [00:17:29] Speaker B: Yeah, at least in that extent, yeah. But we can basically use all those advantages for an integrated manufacturing setup and the efficiencies go with it. But also we can use the energy conditions and the country conditions that we have in our core locations. To be fair, we also will not have every site equipped with the full vertical integration approach. But our plan is to have some sites that are fully vertically integrated where we can close this loop. And we will have some sites that will focus on certain elements. For example, here in Sweden, in Ed, in our number one facility, we will have a full vertical integration. When we talk about dry, our third plant in Germany, this will be focused on sand manufacturing only in North America. And six, again, we will have a full circular economy. So it will differ a little bit on where it really makes sense. But once we have a site selected that it's suitable for a full vertical integration, this is the way to go forward. [00:18:32] Speaker A: How would you say now we could step into Norfolk, because you're already doing that now, when you're talking about greener batteries, how do these different parts of the battery manufacturing process and vertical integration feed into Norfolk, making better batteries? [00:18:49] Speaker B: So if you think about what Northvault is promising, is the most sustainable and highest performing battery cells for us. And what we learned also over the past years, highest performance does not always mean we need to go into the full extreme in one KPI. What we really need to do is we need to being able to adjust a cell behavior exactly to what the customer and the use case needs, because there will be some use cases where the battery needs to be very fast charging and super energy dense. But there will also be use cases where those tool, those two performance parameters are not so important. Where it's way more important, that is absolute maximum sustainability, maximum safety. And you can adjust this with the elements and the compositions that you're using in your active materials. So as we are having the influence on that, we really can determine these factors. And the very core, of course, also with our cell design and with the way that we are producing the battery cells, but even more when we talk about those compositions on the upstream elements. So this is really the thing that helps us to make a, I would say better battery. The integration of scrap, the use of renewable energies, the change of the process from a gas driven manufacturing to a electricity based manufacturing with 100% renewable energy coverage. These are the elements that make a difference when it comes to sustainability and CO2 footprint. Because the battery cell in general has 100 equivalent per kilowatt hour in production. So in its battery itself, complete as. [00:20:35] Speaker A: It is, that's a lot. [00:20:36] Speaker B: That's a lot. And it's too much to make electric mobility sustainable in the long term and over a lifetime. So there needs to be improvement on that. What we are promising is we go down from that 100, so we reduce it by 90%, which is a lot. Okay. Of course, we won't do it by tomorrow. It's our target for 2030, but we are on a very good track for that. And our LCA shows that we will be reaching around about 30, 35 already. So this is really great news. But we are only able to do that because we can influence all the production processes and the conditions not only of this dangling together to sell, but really making everything that is up and down as well. [00:21:20] Speaker A: Yeah. [00:21:21] Speaker B: And the circular economy that I mentioned with the recycling is also one of the huge enablers. Only with a certain amount of recycled material that you can really bring down those footprints. [00:21:32] Speaker A: So customizing, making better batteries with customers, and then also, of course, the clean aspect of it. [00:21:38] Speaker B: Absolutely. And for any investor who is listening, also the cost, of course, is a very important factor. [00:21:43] Speaker A: 100%. [00:21:44] Speaker B: 100%. We are able to integrate all those processes very smoothly and very efficient together. So we can reduce the active headcount that is needed to produce battery cells. And we are eliminating all those cost intense margin and middlemans and the transportations. So it is a very efficient way of manufacturing. And this really sets us apart from the rest of the battery manufacturers and the players that have announced capacities in Europe, because there's not many people that are as crazy or as bold to do the same thing that we are doing in general. [00:22:18] Speaker A: I mean, that's always been the statement is, it's really hard to make batteries. I don't want to quote Peter directly, because then I'm going to swear in this podcast, but it's really, really hard to make batteries. But then on top of that, it's really hard to make our batteries. [00:22:33] Speaker B: I 100% agree. Some people that do not know what they're getting into say everyone can do battery, but no one can do vertical integration on the same time. I would say nobody can do batteries. And literally nobody, nobody can do vertical integration at the same time. Except Norfolk. [00:22:48] Speaker A: Except Norfolk. [00:22:49] Speaker B: Because everyone that's here is really so engaged. And it's crazy, right? [00:22:55] Speaker A: I mean, it wouldn't work without those people. [00:22:57] Speaker B: No, it's literally crazy. People that work at Northvault that want to change the world do everything. [00:23:03] Speaker A: You pick and choose the craziest people from different industries, and then you just bring them all together. And that's what Norfolk is. [00:23:08] Speaker B: Yeah. [00:23:09] Speaker A: What are the challenges with vertical integration? [00:23:11] Speaker B: So maybe let's start with the challenges of battery manufacturing. Only that one, right? So it sounds rather simple. You have some electrodes, you cut them, you put them on top of each other very neatly. Then you put them some kind of in the battery housing. Then you close that, you have a little hole, you fill in this electrolyte, you activate it, test it, ship. It sounds super easy. And in a lab scale, in a low production volume. And if it's not all at absolute maximum speed, that also is not the most complicated piece. As soon as we talk about manufacturing in larger scale. So gigawatt hour scale, where you have like thousands and thousands of cells running through day by day by day. And you cannot afford to have line stops, you cannot afford to have high yields on those batteries because the materials in the battery cell is super expensive, right. It becomes really, really challenging. And this is already first piece where many players are struggling. The second point is that if we now think about the complexity of even adding one more step to it, then it becomes frightening. You add the cathode active material, but not only that, you add the p cam as well. You add the recycling. Then you have a whole team doing system. And system manufacturing is our own business because it's not only putting mechanically battery cells together, but also to having the software programming the behavior. Right. The battery management system, having sensors, selecting the right suppliers for it, having thermal insulation, having cooling, all that. Now suddenly a liquid comes in with liquid cooling. So you see how different kind of. [00:24:46] Speaker A: Customers too, because you have the automotive and then you have different customers and systems. [00:24:50] Speaker B: Yeah. And everyone wants his own kind of special piece. So, yeah, even on customer base, it becomes a huge variety. So the variant tree and the complexity explodes. Basically, this is the biggest challenge. And to handle this, you really need a very, very strong and dedicated team that is able to cope with, with these very fast changing environments. [00:25:10] Speaker A: And that are crazy. [00:25:11] Speaker B: And that are crazy. The second piece is you cannot really do this kind of development and this kind of craziness in a company that is a normal, slow, big corporate company. You need to be super fast and agile, but you also need to cope with the fast growing amount of employees that you're having. Because we are not talking about only assembly, we are talking about everything. And for all those, we need expert, we need production capacities, we need so many people, we will grow extensively fast. So it's not only the sheer technology and the complexity of the production process, it's also the processes inside of a company that need to be in place but cannot slow down the company. So we need to find this or work on this very thin line to make that happen. And these are one of the biggest challenges that we actually see. [00:26:01] Speaker A: I mean, it's also like a societal shift too. If you're looking for all of these new people for this new industry, there's also that component of how do you get the people to start working in an industry that's so new if they don't have the background or the education in it? So that's also a challenge in itself. [00:26:15] Speaker B: I completely agree. We need to educate many people in advance or in parallel. And when you think about how little amount of experts that we need are out there in the market, there's a huge bidding war basically on those kinds of experts. I think Northvolt has a unique position in that because when I look at the numbers of applications that roll in year by year and the attraction that Peter has been able to manifest for this company, it is a magnet for talents. So we really have a very, very good pick of those little, few experts. And people are willing to come here to work because they see the change that we are doing. If you look in the western market and you start applying filters on all those announcements that are made, are those companies really backed by customer contracts? Are those companies backed by a stable funding background? Do the companies have the drive? Is there a technology? Is there already something in place in terms of production? Do they have the ability to really win in this complex industry? The list of companies becomes very short, very fast, and you're basically left with either incumbents that are trying to settle in the western markets and have challenges because of their cultural differences and because they completely underestimated the complexity of the european landscape. And you have Northvolt. [00:27:41] Speaker A: Then my question goes to, are there other companies that are doing this? [00:27:46] Speaker B: It's not so many that are doing the same, but it's changing. Right. People are trying to vertically integrate because they see the value of becoming circular, of influencing the most important components of a battery. [00:27:59] Speaker A: So you see that trend going up? [00:28:00] Speaker B: I see that trend going up, but it's not necessarily something that everyone will be able to achieve. [00:28:06] Speaker A: Awesome. Do you have anything else that you'd like to add? [00:28:09] Speaker B: I think I have said everything that is on my mind until now. It's a real pleasure and I can speak from my heart that I would have never thought on how much fun it is to work with Northold and in this environment and to make a change. So it's great to have the chance to be part of something that big. [00:28:37] Speaker A: Yeah, that's awesome to hear. [00:28:39] Speaker B: Super. [00:28:39] Speaker A: I'm glad that you're glad to be here. [00:28:42] Speaker B: Yeah, I'm glad that you're glad that I'm glad to be here. [00:28:45] Speaker A: Thanks for joining me. Andreas. This was awesome. And thank you so much for deep diving on this whole concept. I hope that people who are listening now understand what vertical integration is. [00:28:54] Speaker B: I hope I didn't lose all of them. [00:28:56] Speaker A: Yeah, no, I don't think you did. [00:28:57] Speaker B: Wonderful. [00:28:58] Speaker A: Thank you so much. [00:28:59] Speaker B: Thank you.