QuantumScape // Keep the Champagne on Ice

QuantumScape // Keep the Champagne on Ice

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Welcome back everyone! I’m Jordan Giesige and this is The Limiting Factor. This is the second of three videos on QuantumScape – the good, the bad, and the ugly. The last video was the ugly and today we’re going to cover the bad, which is QuantumScape’s premature claims of a game-changing breakthrough in battery technology. Before we begin, a special thanks to my Patreon supporters and YouTube members.

This is the support that gives me the freedom to avoid chasing the algorithm and sponsors, and I hope will eventually allow me to do this full time. As always, the links for support are in the description. Back to QuantumScape. First, we need to set the scene.

On September 10th 2020, the Hindenburg report on Nikola motors made allegations of fraud that resulted in the resignation of Trevor Milton as Executive Chair of Nikola. The Hindenburg report was well-constructed with clear and verifiable information that directly contradicted what Nikola was saying publicly. In other words, there was a red hot example in the sustainable energy space of a company making bold claims that actually didn’t have a market ready product. On October 15th, just a month after the Hindenburg report, QuantumScape made bold claims without a market ready product.

At this point, QuantumScape was just a curiosity for me, and one of a large number of companies jumping in on SPAC mania. SPAC is an acronym for Special Purpose Acquisition Company. A SPAC is a shell company that raises capital to merge with a private company, which allows the private company to go public with less risk than a typical direct listing. On November 27th, the SPAC process was complete, and QuantumScape was now a publicly listed company. QuantumScape raised $680 million dollars in the process and they advised that the money would fund the company through to the second half of 2024, when they would start pilot scale production at 1 GWh in the QS-1 pilot plant. The QS-1 pilot plant would lay the groundwork for a 20 GWh expansion, eventually leading to 91 GWhs of cell production in 2028.

This didn’t sit well with me. In my view, QuantumScape was making forecasts and promises 8 years into the future with what I could only guess was an early stage prototype. Furthermore, just after Battery Day, I said that wouldn’t be surprised if other companies make announcements in the next few years to try and grab some media headlines and capitalise on hype. In other words, my gut reaction was that QuantumScape yolo’d into battery mania and a frothy capital market to catch a wave of money. I wished them the best and I thought to myself that I’d follow up in 3 years to see if they were actually delivering anything.

Although QuantumScape could succeed wildly, it would take another 5-10 years before that future would actually play out. On the flip side, it could end up as another soul to the heap of failed battery companies that made big promises and then flopped. So, as at the 27th of November 2020, this is where we stood. People hadn’t yet put away their pitchforks after the Nikola debacle, and the capital market was overheating, which made people even more suspicious of big claims.

However, QuantumScape appeared to have the capital they’d need and could lay low because there wasn’t anything left to prove at this point. Then, on the 3rd of December QuantumScape announced that they’d be releasing performance data for their solid state battery on the 8th of December with a panel stacked with some of the best minds in the battery industry. This was a bit of a shock to me, I thought maybe I’d perhaps severely underestimated the company. Then, I thought back to the timeline QuantumScape provided, which showed that they wouldn’t really hit large scale production until the late 2020s.

Unless they planned on completely changing the timeline released just 2 months earlier, an unveiling seemed premature. Things just weren’t adding up. Let’s dive into what QuantumScape presented on the 8th of December. I’m not going to go through every slide of the presentation in detail, because each slide could be its own video.

Rather, I’ll focus on the main things that jump out at me on each slide. This slide claims that a lithium metal battery like QuantumScape’s is necessary to reach an energy density of greater than 325 watt hours per kilogram. This isn’t true. The research paper this slide was drawn from was published in 2015. That is, the information here is out of date and I, along with the rest of the industry, expect conventional lithium ion to do much better than what we see here. The same is true with this slide.

The information is true for the average chemistry today, but when your product isn’t hitting the market for another half decade, you need to factor in improvements. In other words, of course the chemistry you’re planning to release in 4 years is going to look good if you compare it to today’s chemistries. It’s a strawman. Here we see the first slide showing actual data.

QuantumScape’s data is showing a 2C charge rate, which means a 100% charge in 30 minutes. The other data is for a Tesla on a Supercharger. Taken independently, QuantumScape’s result is great for a solid state battery, but it’s not an apples to apples comparison. We’re comparing a lab cell to production cell. A production cell is stress tested in dozens of ways, can survive real world conditions, and came off an actual production line. Furthermore, as I covered in my fast charge video, I expect that the charge rate on Tesla vehicles will increase over time, and they’ll eventually be capable of an 80% charge in 15 minutes.

I could be wrong here and I’m still waiting for confirmation in a Tesla product, but I expect that by 2025 at the latest, Tesla’s battery chemistry will be capable of performance similar to what we see from QuantumScape, but in real world conditions. The next thing worth noting is that the battery cell they’re using here is only a single layer. For me, this confirmed that the development of the battery cell is still at a very early stage. If we look at it in terms of technology readiness level or TRL, a single layer cell is probably a TRL of 3, which is a proof of concept.

QuantumScape is currently working on making multi-layer cells, which means they’re currently at a TRL of 4. I think their plan of burning through the next 5 technology readiness levels in next few years is ambitious. Not impossible, but difficult, even if they use off the shelf technologies for production. For perspective, when Tesla received the Dry Battery Electrode plans from Maxwell, it was probably at around TRL 6 and it’s taken them 2 years to get to TRL 8, with another year to go before we see TRL 9. That is, roughly a year for each TRL, and Tesla is no slouch when it comes to rapid development. Let’s take a look at the next slide.

Most people wouldn’t understand the test used to produce this graph, which begs the question of what audience QuantumScape was targeting with the presentation. Let’s take a step back for a moment. I see two ways to go about revealing a technology breakthrough. Option one is the marketing approach.

Speak directly to the general public and investors and keep the information at a high school chemistry level. And, if you do display a slide like this, take the time to explain how the test works, why it was used, and why the specific testing conditions were chosen. The presenter, Jagdeep, did say that it’s a materials level test, but those words only make sense if you know what a materials level test is.

A materials level test means that it’s not a functioning battery cell, but rather, the test is intended to test the performance of one material. In this case, the solid electrolyte. The key message that the general public would have picked up on is that this is awesome performance, but they wouldn’t understand that the performance was in very narrow and specific conditions. Option two is to gear the presentation to a highly technical audience. To get buy-in from a technical audience, it would take more robust proof, like 3rd party testing, making data sets of the original measurements publicly available after the presentation, and providing limited information about the materials and methodology used. The payoff for sharing information to people who are knowledgeable and influential is that they could have distilled the significance of QuantumScape’s announcement for the general public.

Instead, we got a strange hybrid of these options: Too technical for the general public and not robust enough for a technical audience. This approach left the technical audience unsatisfied and non-technical audience dazzled. QuantumScape has said they’re releasing all this information under the banner of transparency, but that doesn’t hold water.

It’s marketing masquerading as transparency. Marketing is focusing on the benefits of your product and transparency is full access to information – good and bad. QuantumScape’s presentation was clearly the former.

There’s nothing wrong with marketing, but painting marketing with the brush of altruism by calling it transparency isn’t accurate. This slide continues the pattern we’ve seen so far. It’s initially impressive, but less impressive when you understand that simulated charge and discharge cycles of a track are not the same as time on the track, which involves temperature variations and large amounts of vibration that would probably kill a lab scale prototype test cell. And, again, it’s compared with a lithium ion cell that can actually survive real world conditions. We’ll skip the low and high temperature performance slides because I’m putting these in the good bucket for the next video. With that said, the fact that QuantumScape provided high and low temperature data and no room temperature data leaves me curious.

Liquid electrolyte batteries perform well at a temperature range of 10 to 45 Celsius. This is because they degrade at high temperatures, which shortens battery life, and freeze at low temperatures, which slows down the charge and discharge rate. Overall, taking into account cycle life and discharge rates, liquid electrolyte batteries perform best at roughly the same temperatures that are comfortable for people, in other words, room temperature. Solid state tends to perform better at very high temperatures and very low temperatures, but this is of course dependent on the type of solid electrolyte used. QuantumScape is using a ceramic electrolyte that exhibits good high and low temperature performance.

High temperatures soften up the solid materials in a solid state battery, allowing better contact between the solid layers, which increases charge and discharge rates. At very low temperatures the solid electrolytes are already solid and can’t freeze like a liquid electrolyte, so ceramic solid electrolytes perform better at low temperatures as well. What this all tells us is that the use case for solid state batteries is the inverse of liquid electrolytes.

In English, liquid electrolyte batteries can outperform solid-state batteries at room temperature, which is why I’m curious about the performance of QuantumScape’s batteries at room temperature, not just the extremes. This slide provides a good lay of the land in terms of solid state, but again, there are some inaccuracies in terms of liquid electrolytes. The charge rate of liquid electrolyte batteries is being improved as we speak and will continue to improve over the next few years. Cycle life is a solved problem for liquid electrolytes. Jeff Dahn’s batteries are humming way in the lab logging millions of virtual miles.

This brings us to the panel discussion. The panel discussion was mostly glowing and positive. There was some cursory discussion of the challenges, but overall, it felt staged. For example, early in the panel discussion, Dr Stan Whittingham said it looked like QuantumScape was about to make a breakthrough. At which point, the moderator said “Stan, you’ve seen the data here.

I think you’d say from the data you’ve seen here this does really represent a true breakthrough in the space right.” Stan responded, “Yeah I’ve not seen data this good anywhere else.” This exchange didn’t sit well with me. The moderator was fishing for compliments that suited that narrative. I would have been more impressed if Stan’s original words had been allowed to stand, because they were positive but couched in caution.

In other words, it was a professional response. Digging for an even more positive response looked desperate. Furthermore, what was the moderator’s definition of breakthrough? I’d want the term defined, because it’s an abstract and overused word.

In my view, it’s only breakthrough if it can actually be scaled and delivered into the hands of customers. My guess is that’s why Stan originally said it was nearly a breakthrough. To pour further cold water on the panel, most of the people on the panel appear to either be on QuantumScape’s payroll or part of the QuantumScape story. How are we to know those influences didn’t colour the responses of the panel? In short, we don’t. Everything said could have been honest opinions, but when money and relationships are involved, it immediately taints perceived objectivity. I certainly couldn’t watch the panel discussion without carefully listening for bias.

I know I wasn’t alone here given all the questions I received on social media about why experts with such great reputations were putting it on the line for QuantumScape. I still don’t have the answer for that, and I wish I did. In an information vacuum, people tend to start jumping to the worst possible conclusion. It doesn’t help that some people felt duped when they found out QuantumScape’s technology isn’t pure solid state, and the cathode contains gel. Whether it matters technically if there’s gel in the battery cell remains to be seen, but it should have been called out in their presentation because what QuantumScape has done isn’t technically pure solid state.

This is public relations and game theory 101. If you acknowledge potential fish hooks, it takes power away from your critics because it allows you to control the narrative around those fish hooks. Next, let’s look at the disclaimer on QuantumScape’s presentation. Much like the disclaimer in the Scorpion report, there are some gems in here. Let’s look at a few. The first, “QuantumScape may not be able to successfully develop a solid-state battery” confirms that they haven’t yet successfully developed a commercial size solid-state battery.

In my view, they shouldn’t have gone public until they had a multi-layer battery cell of the size that will be needed for vehicles. I’ve heard the argument that QuantumScape needed the capital. Is that really true? It doesn’t appear to be. There’s nothing to indicate they were running short on capital. There also doesn’t appear to be a capital shortage in the private market.

So long as the start-up is delivering on milestones and has a persuasive profit opportunity, they tend to be able to raise the money they need. The private investors can then cash in when the start-up has an actual product that’s generating revenue. Why wait until there is an actual revenue generating product? Because the normal way a market operates is it looks at the risk vs profit or potential profit. That is, unless the company has a track record of revenue or innovation, a product on the market or within a couple years of being on the market, it’s speculative. It tends to be in overheated and overhyped markets that people will pile into companies with no history of revenue, no history of innovation, and no market ready or near market ready product. This set up the QuantumScape SPAC for suspicion.

Why would private stakeholders push to go public if QuantumScape’s solid-state tech is still in development? People assume it’s because the private investors are looking to exit their position and grab for cash before they’ve actually created a market ready product. In my view, the likeliest reason for going public was primarily to take advantage of the buckets of capital raining down on SPACs. I doubt private investors would have protested going public and I expect many will take advantage of the high share price to exit their position.

Employees paid in stock wouldn’t have objected either because it would have made that stock more liquid. In my opinion, the second reason for going public is that people within the company believe that they have something special. The initial capital raise would have allowed QuantumScape to build a base of capital and further capital raises could accelerate development. This already happened with QuantumScape’s capital raise this spring to double the production capacity of their pilot line. QuantumScape is either very confident that they’ve got something that can scale or they’re trying to catch reality up to their promises, or it could be both.

In other words, I don’t think QuantumScape is a fraudulent company dumping worthless shares on the market. I think it was mostly motivated by the irresistible amount of liquidity available in the market. This capital may allow QuantumScape to gain greater leverage to advance the product.

I don’t doubt that employees and investors will benefit from QuantumScape going public, but the logic doesn’t follow that the reason for going public was to pump and dump. In other words, given the context, QuantumScape’s SPAC does look suspicious, but after that, for me the trail runs cold. And, as we’ll see in the next video, QuantumScape has real potential. With that said, would I be willing to invest in QuantumScape? I like to invest in high risk/high reward companies, but the risk vs reward isn’t there for me yet with QuantumScape. In my view, QuantumScape may be worth considering as an investment at the right price and when they hit further milestones, but you have to determine a price and entry point that takes into the account the risk/reward ratio you’re comfortable with.

QuantumScape is high risk and potentially high reward, but significant profits don’t appear to be on the horizon for another 5-10 years. As always, that’s not investing advice, just my perspective. Do most investors appreciate how much risk is involved here? My view is no.

QuantumScape’s presentation didn’t include a sober view of the risks and development path and instead poured gasoline on the hype. This brings us to disclaimer two. QuantumScape may encounter delays which prevent it from commercializing a product. By ringing their bell about 4 years too early, they’ve set the company up for massive expectations.

If their timeline slips, they’ll be pilloried. If this happens enough, partnerships could sour and QuantumScape could unravel. If they eventually deliver, the excitement will be tempered by critics who justifiably say it’s about time.

There’s little opportunity to outperform and surprise here because the excitement for what should be a 2024 news story was frontloaded to December 2020. Finally, disclaimer three. QuantumScape may not be successful in competing. This actually needs to be defined better.

I think QuantumScape can carve out a niche, and that’ll be covered in the next video. However, at least for the 2020s, they don’t have a mass market Tesla killer. Exhibit 1: Sandy Munro is already declaring the 4680 cell the winner for the 2020s.

There isn’t really a way around the logic here. If both Tesla and QuantumScape deliver on their promises, Tesla will be delivering 30 times the gigawatts of QuantumScape. Exhibit 2: Work by Bloomberg NEF backs up what Sandy is saying and what I’ve been saying. It’s not going to be until the early to mid-2030s that solid state batteries are produced at volumes comparable to what lithium Ion is at today.

Let’s summarise. In December, QuantumScape announced a solid state battery breakthrough. Calling it a breakthrough depends on whether you consider developments at lab scale worthy of being called a breakthrough. Their presentation definitely didn’t steelman the liquid electrolyte competition they’ll likely see in the mid- to late-2020s and the information that was presented didn’t appear to be clearly aimed at the public or academia.

This diluted the message from an academic perspective and dazzled a public that wasn’t equipped to critically assess the presentation. After the presentation, they had a panel of experts that appeared to be on the company payroll. I’ve seen several of these panel experts speak in other forums. They were engaging to listen to and I learned a lot.

In this case, it seemed performative. With some of the greatest battery minds out there and a Nobel laureate on the panel, this was a wasted opportunity. It felt like they were using prize winning race horses to deliver beer. From an investing lens, there is long term potential in QuantumScape that will be covered in the next video but it’s high risk and the disclaimer clearly lays out those risks. They don’t yet have a market ready product, and if they do develop a product on time, it may be more expensive than what’s on the market. If there is a cost premium, this means they’ll have to justify the cost premium and find someone who’s willing to pay that premium.

Engineers and finance experts seem to be in agreement that even if QuantumScape does deliver, solid state isn’t going to change the game this decade. If QuantumScape had just quietly executed after getting their funding, I don’t think there would be controversy around the company. Instead, they rang the church bells and drove investors into the stock before they had a market ready product and after they already had the requisite capital. By taking this approach, QuantumScape made a rod for their own back. First, in the mind of the public, they’ve already claimed victory and success, now they have to deliver under the shadow of expectation. Even if they do succeed and become profitable, they’ve set themselves up for an incredibly stressful half-decade.

Second, they threw the barn doors wide open for the Scorpion Report covered in the last video. The Scorpion report is a direct result of QuantumScape boldly announcing a breakthrough while not having a market ready product, in a presentation that didn’t consider the audience, in market where it seems like every company is making a mad grab for crash, in an industry that had just experienced allegations of large scale fraud in the form of Nikola. Now that we have a clean slate a sober view of the Scorpion report and the QuantumScape presentation, we’re left with the question of what potential their technology actually holds. In the video, that’s exactly what we’ll be looking at. In the longer term, what are the benefits that solid state provides that conventional lithium ion is unable or unlikely to be able to compete with? If you enjoyed this video, please consider supporting me on Patreon with the link at the end of the video. I am also active on Twitter.

You can find the details in the description, and I look forward to hearing from you. A special thanks to Chris Lenahan, Bill Walsh, Chris Thomas, and Robert Sjovall for your generous support of the channel, my YouTube members, and all the other patrons listed in the credits. I appreciate all your support, and thanks for tuning in.

2021-08-13 16:15

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