If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high.
from Economics Basics: Demand and Supply
While the world of supply and demand is practically speaking a little more complex than the above example, I used it because quite frankly it is the best way to illustrate what manufacturers of the lithium ion batteries used in electric cars will be facing in 2012 as the anticipated pent-up demand for their product hasn’t and likely won’t any time soon materialize.
There are of course a number of interesting questions this situation raises including the fact that unlike a CD, where there is no shortage of playing devices and thus the ability to discount product can result in its movement, with the paucity of electric cars on the roads where is the market for even a bargain basement battery unit?
Within this limiting context what ripple effects will be felt throughout the industry and does this disequilibrium have the potential to impact other, non-related sectors or perhaps even to a certain extent the economy as a whole?
While true economic equilibrium in which “the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded,” is in reality limited to a conceptual ideal, the real-world give and take towards achieving this balance is critical. However, and as is the case with the electric car (the demand) and the batteries (the supply), there is no real ebb and flow elasticity. In short, the battery manufacturers perhaps fell for their own hype (and the hype of the electric car manufacturers), and stockpiled product for which there is no ready market regardless of cost.
Adding further insult to injury, you can’t just dump these batteries in the nearest junk-yard meaning that whatever excess is on hand, you have to store it. It is kind of like owning acres and acres of land in the South Pole in that there is nothing practical that you can do with said real estate.
Unless there is a way of converting or re-manufacturing car batteries so that they can become useful in all of the mainstream products that are powered by lithium ion batteries, your bottom line is going to take a massive hit. Perhaps even pushing some companies to the brink of bankruptcy.
It is at this point that the fall-out factor kicks into high gear.
To begin could this mark the turning point for the old supply model which, according to the book “How Companies Win” is now beginning to seek new solutions in a world in which the consumer, for the first time ever, is enthroned in the driver’s seat of the global economy?
In referencing the emergence of the new economy that includes dot.com boom and bust survivors such as Amazon, eBay, Yahoo, Orbitz, and Google, the How Companies Win authors indicated that the new demand driven economy is based on what customers want, rather than what the suppliers already have.
This is at the heart of what has been called the era of oversupply which is defined as follows:
Oversupply is a situation where significantly more supply exists than there is demand to absorb it. Oversupply is often characterized by a lack of differentiation, with price becoming the primary factor underlying purchase decisions. As a consequence, pricing power virtually disappears, and organic growth and profitability become increasingly difficult to achieve.
The authors then added that in an era of oversupply it is now imperative that companies construct a framework that encompasses and aligns everyone toward meeting not just the current but the latent and emerging demand of your highest profit customers and consumers.
Unfortunately and for a variety of reasons the electric car market does not fall into this all important category of emerging high profit customer demand. Although in a kind of ironic twist product differentiation is not the problem nor, as alluded to earlier, can lower prices stimulate sales.
In the end it is the absence of demand that will be the undoing of many companies, potentially creating instability in the global supply chain that may even have a spill over impact on satisfying the needs of high profit customers and consumers in healthy markets.
To state the obvious, I have the feeling that this is a story in which the ending is still being written and as a result I along with many others will be monitoring the events in earnest as they unfold over the coming year.
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Procurement Insights 
Bernard vanHaeften (@B_vanHaeften)
December 4, 2011
Government’s have the power to shift demand, as is being seen in Europe where the classic incandescent light bulb has been withdrawn from sale to force consumers to adopt the low energy bulbs.
The technology may be newer, and it may be ‘greener’ (whatever that is) but the simple fact remains that the primary function of the new bulb’s, providing light, is not as good as the old technology.
The same can be said for the 1st generation of electric cars. There are very few people who can afford the premium of an electric car and who will be happy with the inferior product that they’ve bought in terms of range, speed and refill time. In urban areas the range and speed issues probably don’t amount to much, but the killer is the time difference between filling a tank with gas (minutes) and charging a Lithium-Ion battery (hours).
Generally Government’s are not stupid and the legislation for killing the incandescent bulbs didn’t happen overnight – the new bulbs must have been around for at least 15 years – but Europe waited until the performance of the new technology was within 90% – 95% of the old product otherwise there would have been a massive public backlash.
No doubt a similar approach will happen with the internal combustion engine (gas or diesel), unless we run out of oil far sooner than predicted. Governments will act to conserve what stocks of oil remain by initially banning the sale of cars that completely rely on the internal combustion engine, in favour of hybrid and new, or emerging, technology(s).
The stockpiles of LI cells may seem like a dead weight, but the company(s) that work out how to improve the recharge time and to efficiently recycle the materials will be the ultimate winners.
piblogger
December 4, 2011
Great perspective on a complex situation Bernard. As always your commentary is appreciated.