BRIAN KENNY: Today’s case is another in our trilogy of shows that focus on the social purpose of the firm. Many automotive countries around the world have put a stake in the ground about when they will convert entirely to electric vehicles. For some, those dates are right around the corner, which means they will need batteries, lots and lots of batteries to power those vehicles. So where will they come from? Today’s case takes us to Stockholm, Sweden, where an upstart battery maker is trying to recreate the value chain for European car manufacturers making the switch to EVs. Today on Cold Call, we welcome Professor George Serafeim to discuss the case, Northvolt, Building Batteries to Fight Climate Change. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Podcast Network. George Serafeim’s research focuses on the intersection between sustainability and digital transformation, and he is a repeat customer here on Cold Call. George, thanks for joining me.
GEORGE SERAFEIM: Great to be here, Brian.
BRIAN KENNY: Always good to have you here. And this is, as I mentioned in the intro, this is one of three cases that we’re discussing on the social purpose of the firm, so we’ll talk a little bit more about that in a moment. And I think for anybody like me who’s been on the fence about getting an EV, the last two times I changed up my car, I thought about: Should I do it? Should I do it? And I haven’t taken the plunge, so maybe you can convince me in the course of this conversation that that’s a reasonable thing to do. Do you drive an EV? I should ask that…
GEORGE SERAFEIM: Well, I drive a hybrid one.
BRIAN KENNY: A hybrid, okay.
GEORGE SERAFEIM: So I guess I’m midway there.
BRIAN KENNY: A little further down the path than I am. I’m still in a combustible. But what is it? It’s an I-C-E. What is that? Internal combustion engine vehicle.
GEORGE SERAFEIM: Internal combustion engine vehicle.
BRIAN KENNY: Yeah, anyway. So I think maybe we can push some people over the edge with this conversation, which would be great. Let me ask you to start just by telling us what the central issue is in the case and what your cold call is when you start the discussion.
GEORGE SERAFEIM: So Northvolt is a very exciting company. The reason why it is very exciting is because it’s every entrepreneur’s dream. Right? So I start and say, “Have you ever heard of a company that before it has sold a single unit of the product, they have secured 55 billion of revenues?”
BRIAN KENNY: That’s amazing.
GEORGE SERAFEIM: They have raised eight billion. Right? They have recruited thousands of people that are working the factories. And every aspiring entrepreneur says, “I wish I could do that.” So it’s a very, very exciting company. And actually, I start the class, and my cold call is you might say a very counterintuitive one, which is, “Do you think Northvolt is a good or a bad idea? And if so, for whom?” And I split it down to the customers, meaning European car manufacturers, investors in Northvolt, European governments that are supporting Northvolt, and of course, for the entrepreneurs themselves. And that is actually a very, very interesting discussion to have.
BRIAN KENNY: I bet there’s a little bit of sort of division across the class on that one too.
GEORGE SERAFEIM: It’s kind of interesting because the yes answer is a pretty obvious one. It comes from the fact that you have secured so many revenues, you have raised so much capital, you have been able to attract an enormous amount of people to go not to San Diego to work, but to work in the Arctic Circle, where it is a little cold, I would say.
BRIAN KENNY: It’s a little cold.
GEORGE SERAFEIM: So, you could see how the success and the good idea story is a pretty obvious one, and also, you might say that it’s a very attractive one because this is a very rapidly expanding market, the one for batteries, as you said before. We need a lot of batteries in the future, so from that perspective, it’s a great idea, business idea. It’s also a great idea because they have been able to secure, for example, access to low cost green energy. But at the same time, there’s a real question about whether this is indeed going to help. Is this going to help because: Are the batteries going to be cost competitive? Already, your Asian manufacturers and competitors have incredible scale that gives them incredible cost competitiveness. Can you get there? And if you can, can you get there fast enough? Because that market is expanding so fast, you need to deliver batteries yesterday.
BRIAN KENNY: Yeah. And this gets a little bit I guess to the social purpose of the firm, so I’m wondering: How did you hear about Northvolt? And why did you decide to write that case as part of this new course that we’re doing on the social purpose of the firm?
GEORGE SERAFEIM: Well, I have been writing a series of cases on what you would call those climate solutions companies, basically companies either entrepreneurial firms, or established companies that are transitioning their businesses to provide products and services that are going to experience a tremendous amount of growth in the future because we’ll need them in order to reduce carbon emissions in the economy. And one of them is batteries, and batteries are needed because you need to store electricity somewhere, much like we now have internal combustion engine vehicles, gas tanks to store the gas, you need to store it somewhere. So batteries are going to be needed for that. And of course, batteries are going to be needed whenever you need to store electricity somewhere. Right? So, when we think about that, I think about companies that are able to deliver that scaling process. And we have an enormous amount of interest among students, among participants here in being entrepreneurs and creating those companies. So I see Northvolt as a very, very interesting company that illustrates many of the tensions and dilemmas that an entrepreneur has about key questions. How do I raise financing for this? Is it equity? Is it debt? How do I actually assemble a team? What are the credentials of the founding team that gives us enough credibility to get the customer agreements, to get the capital? Where do I locate? How do I make a choice about location? Why up there in Sweden? What are the competitive advantages when it comes to that? So a series of what I say critical decisions that an entrepreneur and a founding team needs to make, and they’re all being illustrated in the Northvolt case.
BRIAN KENNY:
Yeah. That raises all of those issues. We throw a lot of these terms around, greenhouse gas emissions and things like that. I don’t want to assume that people understand even a concept as basic as net-zero. Can you just explain a little bit about net-zero and the main drivers of climate change?
GEORGE SERAFEIM: At a very, very simple level, Brian, what net-zero means is around mid-century, we need to basically reduce dramatically the carbon emissions that we’re emitting every year. But because we cannot really reach zero emissions, meaning that we won’t emit anything as the economy, they’re so-called very costly carbon emissions that would be very costly for us to reduce. So as a result, that’s where the concept of net comes. And net means you need negative emission technologies, either nature-based ones, such as for example, reforestation, or you need technological ones, such as carbon capture and storage, basically sucking carbon out of the air and storing it on Earth, that allows you to create negative-emission technology. So then you can think about it. You can say, “Okay. We’re at 100% right now. We’ll reduce by 80%.” The rest 20% is just too costly, so we need to develop this negative-emission technology for the rest of the 20%. And that’s where the term net-zero comes from. And scientists basically are saying that more or less, we need to get there around mid-century in order to keep from increasing the temperature well below two degrees Celsius.
BRIAN KENNY: Mid-century’s not that far away. Right?
GEORGE SERAFEIM: It’s about 30 years from now, a little bit less than that. But when you consider the scale of change, think about it, like cars, we have more than a billion of them on the road. Right? Changing them is actually not a trivial exercise because you and me … How long you have had your car already?
BRIAN KENNY: The one that I’m driving right now, five years.
GEORGE SERAFEIM: Five years. And most people actually keep it for about 10 to 12. So even if you would say, “Look, I have the best car to offer for you,” it actually takes time for people to change some of those things. And then when you think about everything that we’re doing from heating and cooling and buildings and everything else, it’s just a very large-scale transformation that we need to experience across the economy.
BRIAN KENNY: Yeah. It’s funny if I think back about the early days of COVID when we essentially shut entire communities down around the world. And all these photos started to emerge of places that normally are covered in smog. And then all of a sudden, you could see the Himalayas and things that you couldn’t ever see before. And it was because the cars were off the road, so cars are a big problem. Yes?
GEORGE SERAFEIM: Yes. Road transportation is a significant cause of pollution, air pollution, and of course, carbon emissions as well. So, to the extent that you could decarbonize them, meaning that you could actually use electric vehicles and preferably that electricity coming from low-carbon energy sources, then you could make a dent.
BRIAN KENNY: Yeah. You defined this in the case as a problem of the commons. What does that mean?
GEORGE SERAFEIM: The problem of the commons is this idea that because we don’t have well-defined property rights, meaning that you cannot stop me from overusing the park, being there all the time and consuming it, we tend to have over-consumption of these common goods and public goods. And you can think about the problem of climate change in a similar spirit in the sense that because the atmosphere is really not owned by someone, we’re overusing it because we are over-polluting it by putting too much carbon out there.
BRIAN KENNY: And assuming that it’s a problem of the commons, then the solution should also be the commons. Right? Everybody owns a piece of the solution. Right?
GEORGE SERAFEIM: Well, that’s why this problem is so challenging, because it’s truly a global problem. It knows no borders. And it’s a global coordination problem because even if you reduce your carbon emissions, but I increase mine, then we’re back at being-
BRIAN KENNY: Yeah. It’s like a trade-off.
GEORGE SERAFEIM: Being Sisyphus, basically. Right?
BRIAN KENNY: Yeah.
GEORGE SERAFEIM: We’re pushing the rock and it comes down.
BRIAN KENNY: Yeah, yeah. Are there examples you can think of where we have collectively solved a problem of the commons?
GEORGE SERAFEIM: Sometimes we have. A well-known example of that is for example, the ozone layer. Right? If you remember kind of back in the ’80s, we all-
BRIAN KENNY: Unfortunately, I remember the ’80s very well, George.
GEORGE SERAFEIM: I love the ’80s, by the way. But we all got very scared because we were thinning the ozone layer. And that was causing actually really serious health consequences for a lot of people instead of … Including skin cancer and so forth. So as a result, the world came together to create something that is called the Montreal Protocol, and as part of that, phasing out substances that were responsible for causing the thinning of the ozone. And in general, as the world, as we’re looking back 30, 40 years later, we have been enormously successful in terms of reducing those types of emissions that were causing that effect.
BRIAN KENNY: Yeah. I remember in particular, aerosol cans were a big problem.
GEORGE SERAFEIM: Exactly. Refrigerants, those types of things.
BRIAN KENNY: That’s a great example. So let’s talk a little bit about Northvolt. The founders are a really interesting story. Tell us how the idea for the company itself emerged.
GEORGE SERAFEIM: It’s this super interesting perspective almost on entrepreneurship. Right?
BRIAN KENNY: Yeah.
GEORGE SERAFEIM: We all tend to dream that you become an entrepreneur, you have this great idea. But you always had it, and this was always your strategy plan, and you were working on it over 20 years. But the reality of actually many great ideas is it starts with a hunch, and a cold call at night, basically. Right? And this is what happened, Carl-Erik basically has these companies that rely on supply chains from Asian manufacturers. And as basically their important border obstacles to materials, moving through, he’s asking himself, “Why can’t we have a value chain here in Europe that we can actually secure, and as a result, diversify our supply chain.” And he’s looking at that, and he finds on LinkedIn, Peter Carlsson, who used to be at Tesla, and he was heading there several supply chain and manufacturing and battery related work. He calls him up in the middle of the night, and there they go.
BRIAN KENNY: We’re assuming that EVs are really cutting down on emissions. How much do they actually cut down?
GEORGE SERAFEIM: The answer is it depends. So let me say what it depends on. So the first thing is that basically in order to create the battery, you need actually a lot of energy. So where the battery gets manufactured makes a big difference, and this is why they’re located up in the Arctic Circle because they have access to a lot of hydropower that is very green energy, very low carbon energy. And by the way, it’s also very cheap. So, when you make the battery with low-carbon energy, that actually reduces the carbon footprint from the supply chain perspective and the manufacturing perspective of creating an EV. And then of course, the other big part is where you drive the car. So, if you drive the car in a country, in a location, where in general most of the electricity, when you charge your car, is also coming from solar and wind and lower carbon sources, then actually, the reduction in the carbon emission relative to driving an internal combustion engine vehicle can be very, very dramatic. So on a total lifetime let’s say of ownership of let’s say 10 years, you could actually reduce emissions up to 80%.
BRIAN KENNY: Wow.
GEORGE SERAFEIM: Maybe even more, actually, by an electric vehicle. But now do the opposite experiment, and you say, “Well, what if I produce it primarily, the battery, using coal? And then I drive and the electricity grid is primarily using coal, which tends to be the most high carbon intensive fuel, then you could imagine where you could get into a situation where actually, you haven’t reduced at all. Right?
BRIAN KENNY: Yeah.
GEORGE SERAFEIM: Or even a situation where you have increased carbon emissions. Right?
BRIAN KENNY: Right.
GEORGE SERAFEIM: At the very extreme. So it really depends where you manufacture the battery and where you drive the car.
BRIAN KENNY: Makes perfect sense. And Europe, if we think about the EU in particular, have been much, much more aggressive and committed to sustainability measures than the United States, or Asia, or many other parts of the world. So it kind of makes perfect sense for them to do this here. What are some of the steps that the EU in particular, has taken to reduce CO2 emissions?
GEORGE SERAFEIM: Well, it’s quite interesting because actually, in one of the exhibits, we have the average carbon intensity, meaning carbon emissions per unit of electricity produced for each one of the grids in the different EU countries. And one of the things that you see is that basically, over the decades, that carbon intensity has declined significantly, being a manifestation of the fact that indeed, many European countries have been able to decarbonize their grids pretty significantly. That is important because then when you drive the car, that is a lower carbon car, as we discussed before. And the centerpiece I would say of the European strategy for reducing carbon emissions has been the European Union carbon market, where they have imposed a price on carbon, and they have allowed it for trading where if you need it to actually emit a unit of carbon, you will need to purchase that allowance from somebody else. And that has been a big driver I would say of the strategy of Europe toward de-carbonization. That being said, Brian, I also think that is important to acknowledge that pretty much all regions have a de-carbonization strategy. China has one. And actually, this is one of the reasons why the strongest I would say battery manufacturers, much like CATL, are locate in China, because they are creating all these incredibly powerful, efficient, and competitive climate solutions companies. And of course, now in the US, we have the Inflation Reduction Act, which is a big push of the US towards creating those climate solutions, industries, and value chains and be able to become competitive in the future.
BRIAN KENNY: Yeah. So that’s really interesting. And I think we see these targets that all of these governments put out there, and Europe has very aggressive ones. And I wonder: Are they too aggressive? We put the stake in the ground and we say this is where we’re going to be by 2030, or 2040, or 2050. What happens if you don’t make that? Is it demoralizing?
GEORGE SERAFEIM: It’s a classic management question, actually, that you’re asking. Right? So all organizations, governments, companies, we at HBS, we set targets. Right?
BRIAN KENNY: Yeah.
GEORGE SERAFEIM: And in general, almost like the recipes, you need to set ambitious targets to motivate people. Right? But not so ambitious that actually, it’s impossible to get, and then the target becomes irrelevant. Right? So the question is: What is the nature of the target that allows for people to come together, to align, to cooperate, and row the boat in the same direction? Right? So when you look at some of the targets for de-carbonization that Europe has set, now actually, they are not that different from example from the US one, because both the US and Europe have basically net-zero goals by close to mid-century. And depending on the European country, it might be a little bit earlier than that. And then when you actually observe, for example, China, it’s a little bit later than that, reflecting on the less state of GDP per capita, basically, gross domestic product per capita. And in countries like India, a little bit later, closer to 2070, reflecting that. Right? So I think from that perspective, we need to view it from the perspective of how ambitious you wanted to be because: What is the urgency behind that goal?
BRIAN KENNY: Okay. So let’s go back to Northvolt then with all of this in mind. What were the founders hoping to achieve in starting the organization? And what was the strategy that they chose to move forward?
GEORGE SERAFEIM: I think it’s a really interesting strategy because what they are doing is they’re creating this virtue cycle between customer offtake agreements, so getting the commitment from customers to basically enter into those offtake agreements from the products, and then raising financing on the back of those offtake agreements. And that financing is really critical because this is not a business that is creating an app to sell you something. This is hard capital expenditure, a lot of manufacturing, a lot of equipment, a lot of people. You need billions and billions to build what Northvolt is doing. So as a result, you need that. And of course, in order to get both the customers on board and the investors on board, you also need to get governments on board.
BRIAN KENNY: Right.
GEORGE SERAFEIM: Right? And this actually a critical component because the founders are looking where Europe is going from a government strategy perspective. And they are saying, “We can actually help you deliver that.” Right? And when you see that, then the question also becomes: What are the strategic choices that the firm is making? And some of them are extremely, extremely important. What we discuss about before, location is extremely important. Why? Because it allows you to get cheap access to energy, and at the same time, differentiation. So somebody doesn’t say, “Okay, it’s a commodity product. This is just a battery.” No, actually, it’s a greener battery. And when your customers also have their own de-carbonization targets, you’re actually enabling them to reach those.
BRIAN KENNY: Yeah. That’s brilliant.
GEORGE SERAFEIM: So, I think certain of those elements are really critical in terms of creating an outcome for a startup that is a very interesting outcome.
BRIAN KENNY: And these founders had some credibility. They had some street cred. I mean, they both held important positions in important firms, and they knew a lot about what they were trying to do here.
GEORGE SERAFEIM: Totally. And I think that is the other critical piece here. So you are getting two of the founders that are coming from Tesla with incredible credentials in the marketplace, not being some, no disrespect, Brian and George suddenly saying, “We will build a battery manufacturer.”
BRIAN KENNY: Right, right.
GEORGE SERAFEIM: But these people know what they’re doing, and then with them, two other incredible entrepreneurs financiers, that actually have a lot of credibility in building companies and raising a lot of capital in doing so. Right? And then the location is also a competitive advantage because you’re in this Swedish environment, where actually it’s a high trust, cooperative market economy, where you can actually get industrial groups and other partners to become part of an ecosystem to support the creation of this entrepreneurial activity. And as we discussed before, also with the help of the European Investment Bank that is providing a loan to the enterprise, and that is extremely important. So you’re building that ecosystem. But what is the glue around that ecosystem is the credibility of the founding team.
BRIAN KENNY: I was fascinated at the fact that they were able to line up so many customers. It was this sort of cart, horse thing that they had to deal with. You need the investors, but you need the customers to get the investors. But you need the investors to make the customers feel like something’s going to happen. How did that play out?
GEORGE SERAFEIM: It’s almost a cycle that you’re getting through. So I think it’s really, really important to get a smaller initial financing to do not only industrial level production, but a demonstration and visibility production. That is key. And part of that key also is not actually trying to say, “Okay, by the way, this is an unproven innovative technology.” By the way, they’re not trying to make solid state batteries or something that really doesn’t exist yet. They’re making lithium ion batteries that is a proven technology. It works. And as a result, it’s removing that aspect of risk from this endeavor. So then as a customer, what is your risk at that point? Well, your risk is: Can they scale up? And can they deliver those batteries?
BRIAN KENNY: Is it less expensive for these OEMs to buy their battery from a battery that’s made more locally than to have them made in Asia and shipped over?
GEORGE SERAFEIM: I think my initial reaction is probably it’s cheaper to buy them in China and ship them over.
BRIAN KENNY: Really? Okay.
GEORGE SERAFEIM: That is my initial reaction. But I think there are a couple of ifs here. Right? The first one is the cost of the actual energy. If you can actually get the cost of energy to be really, really low, you might be able to actually deliver cost competitiveness. The second one is the rate at which you are scaling production. You should be able to achieve massive economies of scale if you are getting to the level of what is called gigafactory, which is what Northvolt is building as well. And of course, then you also have the cost of transportation.
BRIAN KENNY: Yeah.
GEORGE SERAFEIM: Right? And when you take all of those things into account, I think you can get close to that cost that you might be incurring from Asia. I think in my view it’s pretty hard to get below that given the effectiveness that those companies have been able to achieve.
BRIAN KENNY: Sure, yeah.
GEORGE SERAFEIM: But can you get close to that? And then can you deliver it at much lower carbon emissions? This is exactly what they’re doing.
BRIAN KENNY: Which really helps them to make their target, so there’s a tradeoff that they might be willing to make. Vertical integration was a critical part of their strategy. What are the raw materials that go into making a lithium ion battery? And are those materials accessible in a cost effective way?
GEORGE SERAFEIM: That is a huge bottleneck. When you look at actually the availability of a lot of those materials, they exist in very, very specific areas of the world and everybody’s trying to get them.
BRIAN KENNY: Of course.
GEORGE SERAFEIM: Right? So securing them is incredibly important. And one of the things that Northvolt has done has done backward vertical integration in order to be able to de-risk cost inflation in the value chain. And the other thing that they’re doing is they’re implementing what we call circular economy principles, in plain English, meaning reuse, recycle, of elements that are going into the batteries to be able to decouple future growth of battery production from the rare materials that you actually need because if you can take back some of those batteries, then you can disassemble, you can take back the rare materials, you can reuse them. Right? And that actually is enabling you again to do a couple of things. The first one is to protect yourself against cost inflation. And the second one is not have to mine again all these rare minerals, again, decreasing the carbon emissions that are embodied in the batteries, and as a result, be able to produce and deliver a lower carbon battery.
BRIAN KENNY: So, if they build this gigafactory, how many batteries will they be able to make when they’re at scale?
GEORGE SERAFEIM: Gigafactories probably can deliver about 600,000 of EVs or so. Again, it depends on the size a little bit. You can make them a little bit bigger. You can make them a little bit smaller. But let’s say for the sake of that argument, about 600,000 EVs.
BRIAN KENNY: A year?
GEORGE SERAFEIM: Yes.
BRIAN KENNY: Okay, okay. I think the case cites this too, the number of EVs that are on the roads these days in terms of the overall number of cars that are on the roads, pretty small. Right?
GEORGE SERAFEIM: It’s accelerating very fast, but the stock is small. It’s a few million already. I think by now, just Tesla has I think sold something like four million in their lifetime. So, you can scale that up and not everything that is being sold, and it’s probably in the low two digit millions of electric vehicles out of a stock of hundreds of millions.
BRIAN KENNY: But if all of these OEMs are going to meet their targets, we’re going to see a huge bump in that number. So you’re probably going to need a lot of gigafactories to be able to provide all the batteries.
GEORGE SERAFEIM: A lot of gigafactories.
BRIAN KENNY: We talked a little bit about it before, but I’m wondering. Do you think a Northvolt model would work in the United States?
GEORGE SERAFEIM: It depends, I think. Right? I think it depends on a couple of things. The first one is clarity of government direction. There needs to be stability in policy as you’re moving forward. In general, businesses thrive on stability of government action. To that extent, I think that could facilitate that. The other element is I would say the access to cheap low carbon energy. And then of course, the ecosystem that you create around you. Right? So you need an ecosystem of parts, manufacturers, and customers, and everybody to align around that. So I think it needs a little bit of a coordination, and that is exhibited with differential ability across different states and across the history.
BRIAN KENNY: Sure. Yeah. And you also need an infrastructure in the country that will make buyers like me, who are sitting on the sidelines waiting to make that move, feel comfortable about it. We’re so comfortable with our gas powered vehicles that that’s a big step for a lot of people.
GEORGE SERAFEIM: Electric car charging infrastructure, a huge one.
BRIAN KENNY: Yeah. 100%. This has been a great conversation, as it always is with you. I’ve learned a lot. One more question for you would just be: If you want people to remember one thing about the Northvolt case, what would it be?
GEORGE SERAFEIM: The one thing, Brian, that I would say is that at the end of the class, I wrap up and I say, “When you have this Venn diagram where three circles intersect, magic happens.” And that is the right people, in the right location, at the right time. Right? And I think the Northvolt case illustrates some of that. So, I leave many of my students with that thought. And I ask them to think about: What are the capabilities and credibility that they bring that is unique and differentiates them? Are they in the right location of the business that they’re trying to build? And is the time right? Is it too early or too late? Because both of them can be destructive.
BRIAN KENNY: Right. And I think the lesson there is when you get the idea, make the call, no matter what time of night it is. George, thanks so much for joining me.
GEORGE SERAFEIM: Thank you so much for having me.
BRIAN KENNY: If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate Rising, Deep Purpose, IdeaCast, Managing the Future of Work, Skydeck, and Women at Work. Find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we’d be grateful. If you have any suggestions or just want to say hello, we want to hear from you. Email us at [email protected]. Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR podcast network.
