by Steve LeVine
19
The Car Man
Jon Lauckner was a third-generation Detroit native. His father worked at Chevrolet for three decades. His father’s father worked for Fisher, GM’s internal body-making division. And Lauckner himself had left Detroit to go to business school at Stanford before returning to General Motors. Slightly cocky, with short, clipped brown hair, fashionable glasses, and a big, carpeted office, he ran GM Ventures, the carmaker’s investment arm. In 2006, he took out a fountain pen and notepad and, on the fly, jotted out the design and economics for the 16-kilowatt-hour power train that five years later propelled the Chevy Volt concept car. The plug-in hybrid combined Lauckner’s battery with a gasoline-fueled engine, the former feeding a 149-horsepower electric motor. When the battery ran down, the 84-horsepower internal combustion engine took over. Intended to brand GM as a carmaker with the chops to compete on the leading edge of technology and style, the Volt was named 2011 car of the year by Motor Trend, which called it “a moonshot.” Though it boosted GM’s image, the Volt did not actually sell well. The car cost $41,000 and most motorists were unimpressed by the forty miles it could travel on a charge. Studies showed that that was the maximum average distance that American motorists traveled in a day. But in practice, actual potential buyers wanted to pay less, drive farther, and charge up where and when they wanted. Until these benchmarks were met, most were not buying the Volt or any other electric.
The problem was the battery—GM would not disclose the specific composition beyond saying that it contained the first-generation NMC chemistry blended with Thackeray’s breakthrough spinel. It was reliable and stable, its cells built by LG Chemical and the pack by GM, and large—it used just ten of its sixteen kilowatt-hours of size. The battery needed that technically idle capacity to conform to how motorists actually drove, including a habit of drawing down the charge until it was almost spent but still insisting on fast acceleration. When a lithium-ion battery was nearing exhaustion, the electrons began to resist extraction, meaning cars became sluggish; a solution was auxiliary energy—the Volt’s extra six kilowatt-hours—with which the electrons still moved fast when you pressed the accelerator. Only, the cost of adding the cushion meant that, even if an owner rarely bought gasoline, the savings in fuel did not compensate for the vehicle’s elevated price.
Lauckner’s calculus was that later generations of the vehicle would validate the economics. By 2020 or so it would be competitive with purely gasoline-driven vehicles. But getting to that year required nerve. “That is the race,” said one of his GM colleagues. Lauckner’s current aim was to make as much of a technological jump as possible in the next-generation Volt, to be launched in 2016 or so. He needed a much better battery, one that would cost thousands of dollars less and take the car much farther. He believed that NMC 2.0 was his best chance.
That was why Lauckner did something unprecedented. Detroit orthodoxy was to work with big, safe, established suppliers whose products were proven and that themselves would not collapse. But Lauckner embraced Envia, an unknown start-up company, to produce the most crucial component in the next-generation Volt.
The relationship went back to January 2009 when, eighteen months after he and Kumar raised their initial funding, Mike Sinkula managed to obtain a meeting with GM. Kumar was “really scared”—he had only rudimentary lab results and, since he had spoken to no potential customers as yet, no sense whether “I am too early, or too late” in divulging even that data. But “it made sense to show it at least once and see what they tell us.”
In a basement conference room in a GM office outside Detroit, Kumar talked through two dozen charts tracking the high capacities that his juiced-up adaptation of the NMC cathode was already achieving, along with what he thought was possible through Envia’s version of NMC 2.0. He expected tough questions, but the GM men were “surprisingly positive.” A little over a week later, an e-mail arrived from Mark Verbrugge, the head of GM’s research and development arm: would Kumar mind shipping some samples of his NMC cathode? Later, Kumar was told that Verbrugge had been to Argonne in the intervening days and checked his claims. Kumar sent the cells.
Kumar didn’t hear back for six months. But when Verbrugge at last called, he said GM wanted to negotiate a “joint development agreement” with Envia. The idea would be to collaborate for eighteen months on Kumar’s cathode and try to meet a few serious milestones. Verbrugge understood that, unlike the incumbent suppliers, Envia did not have much cash in the bank. So GM would pay $1.5 million for the work. It was an enormously prestigious offer representing “lots of value to Envia,” Kumar said. At a California battery conference, Kumar found himself surrounded by his newfound GM colleagues. He noticed sidelong glances from other vendors enjoying no such attention.
The early results from the collaboration were not perfect—Envia persistently failed to satisfy a couple of GM’s important metrics. But those it did meet “got GM really excited.” Lauckner, who directed GM’s high-risk investments, was particularly impressed. Speaking with Kumar, he found him to be a “rocket scientist” on par with or smarter than the best battery guys he had met anywhere. Kumar described “one of the most interesting—if not the most interesting—potential new cathode materials” that GM had found anywhere, Lauckner said. Their performance, if borne out when the material was made in large batches, could make the second-generation Volt a winner. Lauckner said he wanted to make a substantial direct investment. Kumar sensed an aim of turning Envia into a “GM-centric company.”
From Envia’s side, Lauckner’s interest was opportune. The company was essentially insolvent. Kumar had burned through almost the entire $3.2 million with which he started. Bay Partners and Redpoint Ventures had invested another $7 million in Envia after that, but it was almost gone, too. Kapadia was on vacation in India when he received an urgent call from Kumar, who said the firm was nearly broke. “When you wrote the first check, you said, ‘I’ll stand by you,’” Kumar said. “You need to come and help me.” He was holding serious discussions with numerous companies, but none had signed a licensing deal, and the cash had to last until one or more did. “Spend three months with me,” he said.
Kapadia cut short his vacation. When he arrived, he found a gloom hanging over the researchers. The talk was of a fire sale of Kumar’s ingenious work. Assembling the team, Kapadia uttered a single phrase that all would remember: “We are not for sale.” Morale soared. GM was knocking on their door.
Kapadia understood immediately that GM wasn’t “just any investor.” Just as Kumar’s battery material could salvage the second-generation Volt, a relationship with GM could save Envia.
Lauckner proposed that GM Ventures lead a $17 million round of fresh investment in the start-up. GM itself would throw in the biggest share—$7 million. Kumar and Kapadia agreed. The remaining $10 million came from two Japanese companies, Asahi Kasei and Asahi Glass, both big suppliers of battery materials and thus smart strategic connections for Envia. Now there was the cash—and industry credibility—for Kumar to concentrate on his lab work and not mere survival.
Start-ups are unpolished objects, but so was the GM team. Lauckner was not a trained venture capitalist; neither was any member of his team. They “didn’t come across as experts or even as seasoned venture capitalists like the [other Envia investors],” said Anish Patel, a Lauckner subordinate. “It was a big learning process from our side.” But Kapadia and Kumar found Lauckner to be an astute businessman and, more important, authentic. They trusted him.
The toughest challenge for Lauckner was resistance within GM itself. The most powerful executives in almost any internal battle over GM’s fleet were the engineers. They had among the most demanding jobs in the company, since it was their responsibility to ensure that new models were flawless at launch. Consumers, the media, and Wall Street could be ruthless in the event of a serious defect. That was why the big carmakers relied almost entirely on long-standing parts suppliers, larg
e enterprises that, unlike start-ups, had less incentive to exaggerate the capabilities of a single product and jeopardize the sale of their much larger line of merchandise. In the case of volatile lithium-ion batteries, carmakers contracted exclusively with the big Japanese and South Korean chemical companies. Such contracts could be worth many billions of dollars. To win them, the suppliers endured a grueling qualification process often lasting years. The issues were not only consistent quality but the fundamental health of the suppliers—no carmaker would contract with a company that seemed in peril. So their financial wherewithal was reviewed exhaustively.
No start-up could withstand such scrutiny, the engineers said. The cells for the Volt batteries made of the NMC and Thackeray’s spinel were supplied by LG Chemical, which, having won the Obama administration stimulus funds, built a factory in Troy, Michigan. The GM engineers advocated another LG battery for the next-generation model, this time containing a blend of the NMC and Goodenough’s stable lithium-iron-phosphate. They flatly opposed any licensing deal with Envia.
Mistrust ran deep between the engineers and the venture capital team. The composition suggested by the engineers would be inferior to pure NMC because lithium-iron-phosphate delivered less energy per unit mass. But in the engineers’ math it was described as delivering the same performance. That made Lauckner’s team think that “some people were manipulating the data to their benefit.” From the engineers’ side, there seemed to be suspicion that Lauckner was not impartial, either, because he had orchestrated the $7 million Envia investment. A senior LG research scientist encouraged such doubts when he told GM in Kapadia’s presence that he would have advised his own company to buy Envia—except that its technology “did not work as advertised.”1 Kumar later counseled Kapadia to ignore such remarks—the South Koreans were merely envious that a start-up might win some of their business. Still, for now, the GM engineers possessed the advantage in the discussions—there would be no license with the start-up.
Lauckner held himself aloof from foreign bidders on Envia. He said little more than that, if Envia were to be acquired, he preferred that the buyer be American.
His attitude went deeper than the problem with the engineers. Just two years earlier, GM had itself filed for bankruptcy and required a $49 billion federal bailout in order to survive and regroup. The government came to own 61 percent of the company. Even after a $20 billion IPO in 2010, the government still today held a 32 percent stake. That grated on GM executives and made them ultracautious about new long-term obligations. GM would not buy a battery company, even if it was a clever move, because it was safer to stay lean and focus on building cars and trucks. Lauckner sat on Envia’s board and knew Kumar, Sinkula, and Kapadia as well as a business partner could. But there was no bypassing this ingrained opposition to the acquisition of a supply company.
When you asked Lauckner about a potential buyout, he would change the subject. Kumar reckoned that he was gaming events. The GM man was alert: in the case of any formal bid from a foreign firm, he would move rapidly with the objective of keeping Envia in the United States or at least ensuring GM guaranteed access to its batteries. But ultimately, Lauckner seemed to rely on Envia’s loyalty should a choice arise between masters. He hoped his early support would pay off for GM.
Kapadia said it was hard to fathom the lack of private American interest in keeping Envia at home. He rang Chamberlain. Was he willing to approach to his American industry contacts and suggest a bid for Envia? Kapadia reckoned that, as fathers of the NMC and the vanguard in the battery race, the Argonne guys would feel duty-bound to help keep Envia—a commercializer of their material—in the United States.
He was right. Chamberlain “felt lucky” to be called on by Kapadia. At his core, he said, “I’m a true believer. I think it would help this country to have a manufacturing footprint in this technology.” Chamberlain was also eager for the chance “to prove the case that the stuff we do in the lab can have importance outside the lab.” It could be a straight line—from Argonne to Envia and on to a larger manufacturer. If the NMC made it the whole way, there would be personal dividends—“opportunities for me.” Plus it would be fun. He said, “I get juice from the deal. It’s the rush of playing poker.”
With GM hanging back, Chamberlain knew whom to call first—BASF. It seemed a stretch, but Chamberlain said that even though it was headquartered in Germany, BASF, when it was operating on American shores, seemed equal to any domestic company. In fact, three years before, he had already begun pushing BASF and Envia toward this very acquisition. At the time, Chamberlain reckoned that the deal could be done for $20 million. But now the price would be ten times that figure, the number that Chamberlain heard had been offered for the company.
Chamberlain explained to BASF, in addition to two American companies and three potential foreign buyers with whom he had the same conversation, that Envia had executed an exceedingly clever strategy. Rather than marketing a battery through middlemen such as big chemical companies, Envia had gone directly to the end user, which was automakers. Envia lacked the capability to manufacture in volume. Its technology was not yet commercially ready. But it had an open door to Toyota, Honda, Nissan, and GM.
In the industry that Chamberlain knew best—semiconductors—a vendor’s most prized possession was a “spec sheet,” a precise description of the metrics needed to comply with a company’s product standard. With the spec sheet, you could custom-make a part specifically for a big buyer. But spec sheets were closely held by chipmakers, who feared tricks by competitors seeking to obtain insider knowledge.
Chamberlain sensed that the carmakers were even more secretive. They were even less likely to divulge their specs. Yet Kumar had managed to obtain the spec sheets of four major global carmakers. It had taken the Envia founder several years, but he had ingratiated himself to a point where he intimately understood the technological needs of Toyota, Honda, GM, and Nissan. All of them were speaking of commercializing his work—the technology of a thirty-man start-up. That gave Envia a competitive edge over BASF, Dow, and DuPont, all of them “machines when it came to sales, marketing, and understanding a customer’s needs,” Chamberlain said.
Based on what he was hearing, Chamberlain calculated what Envia management stood to earn in a buyout. The VCs now owned 46 percent of the company. Kumar’s share had been whittled down to 10 percent; Sinkula’s was even less. Still, if the company was sold for hundreds of millions of dollars, they would be wealthy. Kapadia, too, had been awarded stock as CEO. But when Chamberlain plumbed the subject with Kumar and Kapadia, they expressed surprise. Why, we’ve never actually done the math, they said. “We only want the best success for the technology,” they would say.
That was what they should tell Chamberlain or anyone else on the outside, the Argonne man thought. But it was also rubbish. Kumar and his partners had in fact spent much time on their calculators. Kapadia had hired Goldman Sachs and Morgan Stanley for independent advice. Both he and Kumar said they favored cashing out—whenever it was in their interest. But to turn one of the interested car giants into an actual buyer, they needed to advance their technology a bit more.
They could also take a greater risk and go to the equity market. They could offer shares in an initial public offering—an IPO, the traditional aim of Silicon Valley start-ups seeking to monetize their years of toil. They had a firm idea of what an IPO should raise. A billion dollars, Kumar said.
That was Kumar’s and Kapadia’s personal goal—a $1 billion payout.
Late one night, Chamberlain called Kumar’s founding partner, Sinkula. “Look, I am about to put my reputation on the line by pulling the string on this,” he said, meaning to stir up American interest in Envia. “You need to tell me whether you really have something that is worth that much money.”
Sinkula replied, “Why would Toyota, Honda, and GM be coming to us and saying how good Envia’s technology is if it wasn’t? I would not jerk you
around on this. We have an actual technology.”
Chamberlain later said, “At some level, I have to trust that.”
He went back to his central motivation, which was “to do something for the United States of America.” He believed it would be decidedly disadvantageous for the United States if Envia migrated to Asia.
20
Bell Men
Some said the problem with batteries was that until recently no one had declared them an urgent need. Neither consumers nor carmakers had said they wanted a vastly improved battery. Given demand, the market would have supplied one.
If this was true, all that was required to win the battery race was the declaration of a commercial crisis. Time would take care of the rest. But Peter Littlewood, Argonne’s deputy director, said it wasn’t. The problem went much deeper than words and economic theology. It was big and required a big answer.
Littlewood primarily blamed industry. Companies that could encourage and develop transformational inventions resisted them because “people go out of business.” Sony worked to improve its batteries, but only by a few percentage points a year. The readiness of consumers to accept the current pace of improvement was part of the problem, too. But given industry’s tens of billions of dollars in investment and anticipated profit, there simply was no rationale for a big leap. “It is the Microsoft model,” he said. “Why write decent software when you can keep selling people upgrades?” Because of such professional self-sabotage, batteries were a disaster. “You open the damn things up, and they are a mess,” Littlewood said. “I mean they are an affront to the eye.”
Littlewood formerly ran the theoretical physics department at Bell Laboratories. He was part of a cabal within the scientific and managerial leadership of the national labs and the Department of Energy—former senior Bell scientists and managers who saw their private-sector prior employer as a model for how research should be run. Eric Isaacs, Argonne’s director and Littlewood’s boss, was also a Bell veteran. The directors of two other national labs were as well, as was the Department of Energy’s chief scientist, Bill Brinkman, along with Steven Chu, the secretary of energy, who won a Nobel Prize for work he’d done at Bell.