By Jonathan Michael Feldman, September 22, 2024; Updated September 23, 2024

Introduction

I have studied industrial policy for several decades. So I was rather disappointed to learn what Swedish journalists and most politicians have to say when it comes to Sweden’s present Northvolt crisis. The key factors supporting a coherent industrial policy can include the combination of extensive state support matched to an experienced production platform. Where does experience come from in a relatively new sector? It comes from building upon the experience of related suppliers and others who do something very much like what the new sector does. Building massive new factories uncoupled from detailed and extensive production experience and state funding to cover risks seems like an absurd proposition.

Mechanism I: Corporate Failure

Swedish Television had a segment on the company Northvolt, a company facing severe economic challenges right now. The company is supposed to be the future of electric battery production in Europe and is based in Northern Sweden. An article by Richard Milne, published in The Financial Times on September 19, 2024, which a colleague referred me to after I wrote an initial draft of this article, reads as follows: “Northvolt’s sub-Arctic battery factory in northern Sweden was meant to symbolise Europe’s green fightback against China and the US. Instead, the start-up is in danger of turning into an emblem of the continent’s failure to stay in the race. The Swedish battery company has raised more capital than any other private group in Europe — more than $15bn in equity, debt, and government support. It is now struggling to secure funds as it tries to increase production at the gigafactory in Skellefteå while scaling down other projects and cutting jobs.”

The most remarkable reasons for the difficulties were never addressed by recent Swedish Television coverage, i.e. the success of the mission was highly improbable as could be understood by an examination of basic realities of industrial policy, industrial economics, and the character of the relationship between production and innovation. Milne’s article quotes Lars Lysdahl, a battery expert who works at Rystad Energy. Lysdahl noted the intense competition from China and argued that it is very difficult for start-ups to scale up in their early phases. These challenges are severe when it comes to battery cell development. One reason is that capital is quickly spent in such early, innovative stages. Lysdahl also explains that Northvolt tried “to do too many things” simultaneously and had “too many plans.” In contrast, the company’s competitors built up their capacity by first focusing on cell production, rather than doing “everything at once.”

Milne notes that carmakers delayed their plans and deliveries for electric cars. Yet, what is missing in this assessment is what I have noted as a requirement for addressing successful new product development risk, i.e. a diversified production system to balance the different performances that a company can be in. For example, the Budd Company (based in the Philadelphia area of the United States) used its presence in automotive markets to balance its presence in passenger rail markets and vice versa. When the auto segment of that company collapsed, the company entered a severe downward spiral. Yet, the spiral took place as state policies hurt passenger rail and helped the company’s competitors. Northvolt’s diversification effort seemed constrained into a series of segments tied to the same sector. The company has investigated “buyers or partners for its materials, recycling and energy storage businesses.”

Mechanism II: Media Failure

How did Swedish TV cover this story? See link: https://www.svtplay.se/video/e2dPVkZ/agenda/ikvall-21-15 The answer is that one of the factors pointed out as the cause, was supposed to be the CEO’s silence or the fact that he hides from media and the public. This is an utterly superficial example of a cause so downstream as to be exceedingly derivative and therefore trivial. Other key factors Swedish television coverage identified were clearly symptomatic and thus downstream and similarly trivial. See Plate 1 below. In contrast to what I and the Financial Times describe, Swedish Television (SVT) focused on surface phenomena (see Plate 1). The surface issues they highlighted included the following.

Production problems: That is not a cause of failure, but simply a descriptive symptom of a failure.

Quality deficits: That is not a cause of failure, but simply a descriptive symptom of a failure. Relates to a lack of experience, testing and long-production experience to iron out difficulties which in any case are learned often by learning by failing or doing. That learning often requires state financing to reduce market pressures while that learning happens. Yet, the government official from the Sweden Democrat (SD) party was antagonistic to any meaningful, deep industrial policy.

Dissatisfied customers: Clearly a symptom of failed production. Highly derivative.

An unsafe workplace: Evidence of a company that “cut corners” to save money probably because it lacks the necessary capital or mis-spends capital to compensate for a lack of experience. Also evidence of sloppy managers who are infused with hubris and rewarded by speculators who don’t understand how to develop a massive new industry.

Despairing employees: This is a byproduct of a failed managerial and production system. It could not possibly be a root cause, but is rather symptomatic of something done to such workers by higher ups. Referencing the objects of a failed system begs the question of the causation.

A managing director who hides: This too is utterly symptomatic of someone who does not want to expose himself to media and public scrutiny because of all the failed steps in the corporate strategy.

Plate 1: SVT Agenda Program Identifies Northvolt Failures

Source: SVT Agenda, broadcast September 22, 2024.

Mechanism III: State Failure

On the program on the Northvolt crisis, the business minister Ebba Busch gave one of her worst performances. All she could do, learning from Sweden’s Prime Minister, is to tell stories about problems and refuse to propose any meaningful answers. Her modus operandi: Tell a story that repeats the problem and evidences a superficial empathy (psychologize), say what might be nice, and refuse to do any deep thinking and make the necessary commitments. It is clear that Sweden would often be better off using an AI program rather than rely on government officials to address problems. As it is government employees are trained by media consultants who teach them how to dodge journalists’ questions by creating what are called “catch all narratives” by international relations scholars, i.e. stories that attempt to please everyone (without expending real costs) and thereby avoid larger truths. Why do politicians study the lessons of media consultants rather than gain knowledge from industrial economists and industrial policy scholars? The answer is that most politicians are economically under-educated because their value added is apparently political marketing, not deep industrial knowledge. Voters and not industrial artefacts are the politician’s object.

Milne writes that the Swedish Prime Minister argued that “it was up to private investors and the company to solve matters,” when it is obvious that large amounts of state investment are necessary to promote a business start-up like Northvolt. In contrast, the right-wing SD party government leader for industrial questions complained about the company’s Chinese machines and manuals and the links between Northvolt and China. Yet, Sweden put its Volvo factory and production system into Chinese ownership, because the state refused to spend money to facilitate production on a large scale (with potential exceptions being nuclear power and military production). Also, the Swedish state spends massive amounts, billions of Euros on ramping up military budgets, sending military aid to Ukraine, but refuses to do the same for green conversion. SD’s modus operandi is to identify obvious problems, like failed integration, and make them worse by undermining the capacity of the state to solve them. Under the leadership of Busch, the Christian Democratic Party now tries to emulate this formula which appeals to persons having the most superficial conception of reality.

Of course, the government follows the same script as did its predecessor government during the Saab Automobile failure, i.e. it can claim that it knows nothing about how to build cars and industries and should not take risks. The China dependency is true but begs the question of why the state fails to learn and mobilize to replace the Chinese inputs with its own industrial system, procurement incentives, training system, and networking with European producers to replace or deeply complement the Chinese supply chain. We have spending money without any production intelligence. The failure of the state to be introspective, bold and ambitious is just the other side of the limited capacities of politicians and the feeder systems into these politicians coming from media, universities, and political parties. It is a circular and systemic failure. The Swedish government takes risks by backing the nuclear power, military adventurism initiated by NATO planners and military industrial sectors, however. Why? Because it sees the future of its own political fortunes in those risks and industries.

A counter argument is that the electric vehicle industry is facing slower sales, but Sweden’s subsidy to polluting energy sources compounded the difficulties. The country has engaged in massive and accelerated military spending, money that could have been better spent on building more charging station infrastructure and mass transit. Military budget funds represent an opportunity cost against green industrial development, even as the defense industry increasingly markets itself as being green (while the Pentagon is one of the world’s largest polluters).

Solutions are Possible, but Difficult

It is ironic that critics of the government during the Saab Automobile crisis turned to China to bail out Sweden. The Northvolt crisis clearly shows that Sweden (like other parts of Europe) has very little idea of what is required for competition with China and the USA. China uses cheap, inexpensive products to entice Europeans to move off the path of relative self-reliance. The USA advances military adventurism with human rights propaganda to divert Europeans from spending on civilian production. Here, the Swedish military sector clearly benefits and is part of the political “crowding out” of the green industrial sector. Neither the right nor the left offers much of a solution, although apparently the Green Party made some noises about helping Northvolt. Yet, government intervention at this stage is a bit late in the game. Sweden required a greater scale of state/university involvement in the sector to scale up to the necessary (design, planning and production) challenges. Perhaps Sweden should invite 100 South Korean industrial policy planners and industrialists to remake the country’s economic model (with the necessary trade union support systems of old).

In order to address the problems elaborated above, a five step program is necessary.

First, Sweden requires greater media accountability and far more critical business reporting. This step is necessary to put pressure on company’s managers, financiers, politicians and universities which themselves often sidestep the necessary questions. The Swedish government now epitomizes “power without knowledge,” as the country embodies a severely warped technocratic state led by narrow-minded bureaucrats who are rewarded by the extent to which they embody superficiality that sells politically and consolidates power. The alternative formula is the integration of knowledge with power.

Second, any elements of society that understand the failure mechanisms of business, media, and government spheres should consolidate their power into an alternative space. It would be in the interest of the Green and Left parties to promote this space, if they have the intellectual capacity to do so. The deference to business leaders and entrepreneurs and the speeches that use a lot of empty green business discourse are clearly insufficient. Right now, however, one of these parties seems to emphasize the enlargement of state services rather than material wealth production. In contrast, the Social Democratic party of decades ago at least built up industrial science parks linked to experienced and somewhat diversified producers like Ericsson, another company facing severe challenges (for similar reasons as Northvolt, i.e. a weak industrial policy support and intervention system).

Third, if any enlightened politicians are elected, they might promote an alternative kind of business education which involves the study of industrial policy and cooperative business development. In contrast, a search in Google Scholar suggests that student papers are what most research on Northvolt consists of.

Fourth, the enlightened individuals in business, universities, politics, and media should form study circles to identify the various challenges associated with industrial production. Apparently, this competence is now degraded in Sweden. Sweden should be an advocate for a more robust and competent industrial policy at the national and European Union levels. Instead, politicians babble about free markets and business solutions. In any case, the study circles should form the core of a prelude to the creation of a state-business-corporate research program and steering mechanism for state capital to support green industrial development.

Fifth, a media campaign must be launched to go on the offensive against business incompetence. Sometimes Swedish Television has done this as in their campaigns exposing criminality by banks and financiers. Apparently, the Swedish left’s way of doing this has been suboptimal if not existent. Some political parties have dabbled in Marxism, but the use of that approach has often been used to deconstruct rather than reconstruct the system. Various scholars like Seymour Melman and Joseph Lieberman explain the necessary agenda of exposing business incompetence and necessary solutions as do more recent studies by Jon Rynn and Dani Rodrik which outline green production needs and industrial policy options. My own approach has been elaborated elsewhere.

For further explanations for the failures of the business model, see Annex 1. On the state’s failures, see Annex 2. I have put my response to the AI answers in brackets and in bold letters. The failure of the AI responses are outlined in Annex 3.

Annex 1: Question 1: About a Failed Industrial Policy

Northvolt undertook to build several factories for a complex technology on a massive scale, but the company had zero production experience before that. Is this correct? Is this scenario likely to generate failure, particularly when there is no massive state support? (Author).

The Answer from ChatGBT4

Yes, the statement is correct—Northvolt, a Swedish battery manufacturer, committed to building large-scale battery production facilities despite having no prior production experience. The company was founded in 2016 with the ambitious goal of developing lithium-ion batteries for electric vehicles (EVs) and energy storage, aiming to compete with established battery makers like Tesla, Panasonic, and LG Chem. Its founders, including former Tesla executive Peter Carlsson, leveraged their expertise from the industry, but Northvolt itself did not have prior experience in large-scale battery production.

Potential for Failure

Building complex technology factories on a massive scale without prior production experience is a risky endeavor, particularly in a competitive, capital-intensive industry like battery manufacturing. Several factors could contribute to potential failure in this scenario:

1. **Production Complexity**: Large-scale lithium-ion battery production requires precision in chemistry, safety, automation, and quality control. Without prior experience, it is challenging to achieve high-quality, reliable production processes, which can lead to costly delays and setbacks.

2. **Supply Chain Challenges**: Securing materials like lithium, cobalt, and nickel at competitive prices is critical. Northvolt would need to establish a strong and stable supply chain, which requires experience and deep industry relationships.

3. **Competition**: Established players like Tesla, CATL, and LG Chem already have economies of scale, robust R&D departments, and extensive production experience. New entrants with no production background must innovate rapidly while competing against these giants.

4. **Capital Intensity**: Battery manufacturing requires significant upfront capital investment, often in the billions. Without state support or sufficient private backing, financial constraints could limit Northvolt’s ability to scale, fund R&D, or weather initial losses.

5. **Lack of State Support**: As you noted, without massive state support, it is more challenging to take on such a high-risk venture. State support can provide subsidies, loans, and access to grants for R&D, and incentivize local demand for EV batteries, all of which can ease financial and operational burdens.

Why Northvolt’s Approach Could Succeed

Despite these risks, Northvolt has managed to gain significant traction for a few reasons:

1. **Strategic Partnerships**: Northvolt has secured partnerships with major automotive and industrial players such as Volkswagen, BMW, and Volvo, which provide long-term purchase agreements and financial backing. These partnerships reduce market risk and help with funding. [It is unclear to what extent the capacities of these firms were in battery production and how involved they were in Northvolt’s actual production. A separate inquiry to ChatGBT4 stated: “Volkswagen, BMW, and Volvo are major automotive manufacturers with experience in electric vehicle (EV) development, but they did not have extensive battery production experience prior to partnering with Northvolt. These companies have historically relied on external battery suppliers rather than producing batteries in-house. Here’s a closer look at their involvement in Northvolt’s production and their own battery expertise.” So the AI program is bit confused. See Annex 3 below].

2. **European Green Transition**: Northvolt has benefited from strong demand for sustainable, locally-produced batteries as part of Europe’s transition to green energy. The EU has supported battery projects through its Battery Alliance and various other programs aimed at reducing reliance on Asian imports. [Macroeconomic demand is hardly equivalent to the role played by demanding customers and users who place demand and thereby adjust production to demands put by such procurement actors or customers. See references, below.]

3. **Innovation and R&D**: Northvolt is focusing on advanced battery technologies and recycling, aiming to develop more efficient, eco-friendly battery solutions. If successful, this could provide a technological edge over competitors. [A wish for success is not a reason for success].

4. **Experience of Founders and Team**: While Northvolt as a company lacked production experience, its leadership, particularly Peter Carlsson, brought industry expertise from Tesla, which has been critical in navigating complex production challenges. [One manager or even a few does not equal the experience of actual engineers, production workers and others who gain learning and production experience in actually working on a problem. If this was the selling argument, it was a ridiculous premise. Whoever bought this argument has a very low level of knowledge of production systems.]

Conclusion

While Northvolt did face significant risks due to its lack of production experience, its approach is less likely to lead to failure because of the strategic partnerships, market demand for local, sustainable batteries, and regional support for green energy initiatives. That said, a venture of this scale without state support would be much riskier, as capital and operational challenges would be harder to overcome. Northvolt’s ability to align with European environmental goals has been crucial in mitigating these risks. [Your answer is deficient for reasons stated above.]

Annex 2: Question 2: Failure to Mobilize Experienced Suppliers and the Universities

Were there supplier companies with experience similar to Northvolt that could have been part of the original production system in Sweden and thus reduce risk, increase production success and lower quality and production problems (but such companies were not acquired and there was no massive university mobilization to develop complementary inputs)? (Author).

The Answer from ChatGBT4

Yes, there were and are several experienced supplier companies in the global battery manufacturing ecosystem that could have played a key role in reducing Northvolt’s risks, improving production success, and ensuring higher quality, but Northvolt did not initially acquire these companies or fully mobilize universities to develop complementary technologies. Here’s a breakdown of the key points related to the potential benefits of involving such suppliers and institutions, and how Northvolt’s strategy unfolded without fully leveraging them:

1. Experienced Battery Suppliers and Partners

The battery production ecosystem involves specialized suppliers for critical components like:

Electrolytes: Companies like Umicore or BASF (with deep expertise in cathode materials) and electrolyte suppliers such as Mitsubishi Chemical or Soulbrain have years of experience in creating high-quality materials that are integral to lithium-ion battery performance.

Anode and Cathode Production: Established players like POSCO Chemical, Nippon Denko, or Hitachi Chemical offer expertise in the design and production of these crucial battery components. Their existing production know-how could have helped mitigate quality control issues.

Battery Production Equipment: Equipment suppliers such as Wirtz Manufacturing (for battery plate manufacturing) or KOBELCO (for electrode production) could have provided the machinery and experience to streamline and improve production processes.

Benefits of Integrating Suppliers

Risk Reduction: By incorporating suppliers with long-established production capabilities, Northvolt could have reduced technical and operational risks. These suppliers could have transferred process knowledge, equipment expertise, and quality control methods, which Northvolt, with its limited initial experience, had to develop from scratch.

Higher Initial Quality: Working with experienced suppliers could have helped Northvolt avoid the steep learning curve involved in producing high-quality batteries, thereby reducing the risk of defective or suboptimal products in the early stages.

Faster Ramp-up: Rather than having to build everything from the ground up, integrating specialized suppliers would have accelerated production ramp-up times, getting products to market faster.

2. Missed Opportunities for Supplier Acquisitions

While Northvolt has since developed partnerships with various suppliers and automakers (e.g., Volkswagen and BMW), there was no initial push to acquire experienced suppliers or companies to bring in-house expertise in battery production. This could have been a missed opportunity to:

Gain Immediate Manufacturing Expertise: Acquisition would have immediately infused Northvolt with practical production knowledge, proprietary manufacturing techniques, and access to proven supply chains.

Control Over Critical Inputs: By owning key suppliers, Northvolt could have secured control over the quality and availability of raw materials and components, reducing dependency on external markets.

3. Lack of Massive University Mobilization

Another significant aspect of the scenario is that Northvolt did not initially involve a massive mobilization of universities and academic institutions in Sweden (or Europe more broadly) to develop complementary inputs, conduct advanced R&D, or train the workforce required for this cutting-edge industry. Such a mobilization could have greatly benefited Northvolt’s project in several ways:

Advanced R&D: Universities could have spearheaded research in innovative battery chemistries, production processes, and recycling technologies, helping Northvolt gain a competitive edge while reducing the costs of in-house research.

Workforce Development: University partnerships could have helped address the skills gap in battery technology by establishing training programs specifically designed to prepare engineers, chemists, and technicians for employment at Northvolt’s factories.

Access to Knowledge and Innovation: Swedish universities, such as the KTH Royal Institute of Technology or Chalmers University of Technology, have expertise in areas like material science, renewable energy, and electrochemistry, which could have been leveraged for collaborative innovation projects. This would have driven better integration between theoretical advancements and industrial applications, reducing risks.

Missed Benefits of University Partnerships:

Localized Innovation: A well-established partnership with Swedish and European universities would have created a localized innovation ecosystem, reducing reliance on global supply chains for inputs and technology. This could have mitigated risks, especially in the wake of global supply chain disruptions (like those seen during the COVID-19 pandemic).

Long-Term Technological Competitiveness: Mobilizing universities and research institutes to focus on next-generation battery technologies could have positioned Northvolt to stay ahead in the race for more efficient, affordable, and eco-friendly batteries.

Annex 3: AI Admits to its limitations

I directed ChatGBT4 to address the limits of its previous answers. Here was the reply.

Your critique highlights an important inconsistency in my earlier responses regarding the roles of Volkswagen, BMW, and Volvo in Northvolt’s journey. I understand your point that while these companies were indeed significant partners of Northvolt, my initial response could have better clarified their actual experience in battery production and level of involvement in Northvolt’s manufacturing process.

Here’s a refined clarification that should resolve this confusion:

1. Automakers’ Expertise in Battery Production

• While Volkswagen, BMW, and Volvo are major players in electric vehicle development, they historically did not have extensive experience in manufacturing batteries.
• Volkswagen, for example, sourced batteries from suppliers like LG Chem and CATL before taking more aggressive steps to develop in-house battery capabilities, including partnerships with Northvolt.
• BMW and Volvo similarly relied on third-party suppliers for their EV batteries and lacked internal battery production expertise.

2. Involvement in Northvolt’s Production

• Volkswagen, the most significant of the three, not only entered into long-term supply agreements with Northvolt but also invested in the company and became involved in a joint venture battery factory in Salzgitter, Germany. This gives Volkswagen a direct role in scaling production, although this came after Northvolt had already embarked on its production journey, rather than at the outset.
• BMW and Volvo primarily signed supply agreements with Northvolt for batteries but were not deeply involved in production operations in the early stages. Their involvement was primarily to secure a battery supply for their EVs, not to contribute expertise or know-how to Northvolt’s manufacturing processes.

ChatGBT4: Conclusion

The confusion stems from how their partnerships were presented. While these automakers are crucial partners for Northvolt in terms of demand and financial support, they did not significantly reduce Northvolt’s production risk through direct involvement in battery manufacturing, as they themselves lacked deep battery production expertise. Therefore, their contribution to mitigating production challenges was more financial and strategic (i.e., securing orders and funding) rather than operational or technological.

In this context, the earlier statement about these partnerships reducing market risk is accurate in the sense that they provided funding and ensured long-term demand, but their lack of battery production expertise means they did not play a direct role in overcoming the technical and operational risks associated with Northvolt’s entry into large-scale production.

References

For more information on some of the reasons why green production can fail related to state and corporate failure, see my article on industrial policy here: https://journals.sagepub.com/doi/10.1177/00225266221080407

For an analysis of why industrial policy requires mobilization from below as well as a diversified production platform, see my article on green jobs here: https://labordoc.ilo.org/discovery/fulldisplay/alma995318865002676/41ILO_INST:41ILO_V2

On demanding customers who improve production by suppliers, see: Jonathan M. Feldman, “The Conversion of Defense Engineers’ Skills: Explaining Success and Failure Through Customer-Based Learning, Teaming and Managerial Integration.” Chapter 18 in The Defense Industry in the Post-Cold War Era: Corporate Strategy and Public Policy Perspectives, Gerald I. Susman and Sean O’Keefe, eds. Oxford: Elsevier Science, 1998: 281-318.