Northvolt: Another Case Study In Hyper-Failing.

Dear Reader,

I have been watching Northvolt’s slow but near-certain slide into bankruptcy. As a passionate advocate for maximizing value and using capital efficiently, I want to critically explore how $13B could be best used and how hype cycles like “sustainability” and “green” can distract from profitable business models. Let’s look at the reasons for Northvolt’s failure and what could have changed their trajectory.

Drama cannot be the prerequisite for deeper inspection.

Northvolt is an eight-year-old European battery manufacturer. Since 2016, it raised $13 billion in debt and equity. Its biggest stakeholders are Volkswagen and Goldman Sachs, and it has received significant support and investments from the European Investment Bank, the European Union’s lending arm. It has $30 billion in outstanding orders from European car manufacturers that it could fulfill.

Given the massive government support, it has no real competition inside Europe, and almost every European car manufacturer is willing to buy what it produces. Yet, Northvolt burned through the cash it raised and filed for bankruptcy without delivering significant benefits to its stakeholders.

Most of the reaction I see is sadness that Europe couldn’t establish its own battery manufacturer, similar to how the European governments’ actions led to Airbus. However, I do not see much introspection on how $13 billion could have been better allocated. To put this into perspective, countries like Armenia, Mongolia, Madagascar, Niger, and Kyrgyzstan each have a GDP of approximately $13 billion. Where is the accountability?

So, maybe my first takeaway is that we would be better off learning from all situations – not just the ones that make weeks of global headlines because of ethics failures. Even straightforward failures like this one offer valuable lessons.

What did $13 billion buy Europe? Battery capacity for 24,000 Teslas!

I say Europe because I follow a few newspapers, and it’s clear this was a European project with a European spotlight and far less global attention. It was also a European government-like project rather than a truly capitalistic endeavor. That’s the first clue.

The world’s largest battery manufacturer, CATL, which started in 2010, now boasts a total capacity of over 280 GWh. Along with other Chinese manufacturers, such as BYD, automotive battery production is largely dominated by Asian players.

The primary reason for Europe’s excitement about Northvolt is to limit Chinese dominance in electric vehicle and battery manufacturing. Europe’s goal wasn’t breakthrough technology – It was battery production in Europe at a reasonable cost, which improves the survival prospects of struggling European car manufacturers.

Any capability can be assessed along four effectiveness vectors: speed, flexibility, quality, and cost. But which of these did Northvolt plan to excel on?

We don’t have much data on Northvolt’s processes as a private company. So, it’s hard to speak for flexibility or speed. We know that the company had significant challenges getting products to market. So, it doesn’t seem like the company figured out flexibility and speed, especially given what we know about quality and cost.

Quality could mean a battery's lifespan or sustainability factors. Northvolt never developed a truly groundbreaking battery technology. The company’s website promotes a novel sodium-ion battery, but it doesn’t seem to be in production.

Northvolt’s creation predominantly focused on trying to create a battery production system in Europe with similar quality to those of CATL or other Chinese competitors while keeping costs relatively competitive.

One path to improving costs might be to create a more efficient battery technology. But there is no evidence of such a breakthrough. By all accounts, Northvolt’s per KWh production cost is still twice that of CATL’s.

Economies of scale is another way to reduce cost per KWh. To this end, Northvolt has been creating gigafactories. The first and only operational one is in Skellefte?, Sweden. It started building five other factories, but none of those are operational yet. They are all generally slated for 60 GWh capacity. By comparison, Tesla’s gigafactory in Nevada has a capacity of 37 GWh, and CATL has factories exceeding 100 GWh.

The highest production volume reported by Northvolt was 60,000 cells per week in September 2024 for their 157 Ah capacity, 3.6 V lithium-ion batteries.

Based on this peak weekly production, their operational plant capacity is approximately 1.76 GWh/year. For context, an average Tesla road car requires a battery capacity of 75 KWh and produced 1.8 million cars in 2023, while Europe produced 2.4 million EVs. By my calculations, Northvolt spent $13 billion to achieve an annual production capacity for only 24,000 Teslas! This is only 1.3% of Tesla’s annual production and 1% of Europe’s annual EV production.

This suggests that Northvolt hasn’t achieved a novel battery design or manufacturing capability, even if we look at it as an expensive research project that someone can buy out of bankruptcy. So, let’s look at Northvolt through the lens of Congruence to see what we could have done differently.

Lesson 1: Hyperscaling does not work.

I honestly don’t know why anyone still thinks hyperscaling is viable. Many have tried to push this model for companies with little intrinsic value-creating core, aiming to pump up market prices in the short term and then dump them on public markets.

In stark contrast, OpenAI is not a hyperscaled company. It is a one-in-a-decade company with an earth-shattering new product in a greenfield that scaled as it was created. Trying to replicate something like OpenAI artificially is futile.

OpenAI also offers a B2C software capability, which is nothing like a hardware-intensive, B2B battery offering that allows near-zero mistakes. Furthermore, high-cost, critical-capability B2B offerings sold to conglomerates are even harder to scale because each major customer wants nuances tailored into their purchases.

Even while struggling with production challenges at their first gigafactory, Northvolt began building five more factories. Why? Even if scaling quickly was viable, what core capability was Northvolt actually trying to scale? A new kind of battery? A new manufacturing process?

The CEO of CATL, the world’s largest battery manufacturer, said: “They have the wrong design . . . they have the wrong process . . . and they have the wrong equipment. How can they scale up? . . . So almost all mistakes together.”

An alternate path: If we change no other ingredients, Northvolt should have channeled all their mindshare and capital into achieving a model plant in Skellefte?, Sweden, without investing in almost ten other labs and factories.

Lesson 2: Company purpose is not wishful thinking.

“The verdict of the IPCC report in late 2018 was unequivocal: the world needs to act within 12 years in order to avoid catastrophe. . . . In 2017, a start-up announced a bold and simple plan: develop the world’s greenest battery cell and establish a European supply of batteries to enable the future of energy. . . .” That is Northvolt’s description of their history.

We all want to do important things. However, the core ingredients each individual or group brings to the table are inherently different. Those ingredients are created in part by nature and in part by nurture. More importantly, we need some humility to recognize that such skill exists on a wide spectrum, and will or desire alone isn’t enough. Thinking that anyone who passes through Tesla can do “Elon things” is not realistic.

In Congruence, I define Company Purpose as a company’s boundary. Boundaries are essential because we will invest and operate aimlessly without them. What was Northvolt’s boundary? It had all the support any company in the world could hope for, including European carmakers lining up to “buy local.”

Unfortunately, the early stakeholders – employees who started the company – set out to do all of the following:

1. Create a high-quality and high-sustainability battery.
2. Cut battery production costs to compete with China, where general production costs are 65% lower than in Sweden, where Northvolt is based.
3. Serve all car, truck, and air transportation needs across Europe and, perhaps, the West.

They attempted all of this despite lacking prior experience to support their ability to succeed. Unsurprisingly, they didn’t deliver any of these benefits to the European market, except raising money and their own individual profiles.

The two other key stakeholders – customers and governments – expected benefits that were more hopeful than realistic. Auto manufacturers have been desperate to compete with China, while governments have sought to appease constituents by attempting to save European auto industry jobs.

Investors – primarily car manufacturers struggling with EVs and market-price-focused players like Goldman Sachs – seemed more interested in the “green” hype than in performing realistic due diligence. The rising internally set company price appeared to take precedence over feasibility. Were they simply hoping to take Northvolt public and cash out?

An alternate path: If Northvolt founders had chosen just one of the three objectives I listed above and targeted a niche customer base and an investor base that attracted less fanfare and European politics, they might have realistically worked towards that one market benefit effectively over time. Northvolt failed to productize effectively because its company purpose lacked focus and balance.

Lesson 3: Brand associations are not skills or expertise.

Two founders and Vargas Holdings created Northvolt.

According to their own website, Northvolt founders relied on their credentials as "ex-Tesla" employees and “supply chain executives” as their primary qualifications. They worked at Tesla for a few years, among thousands of other employees.

Vargas Holdings, their primary early backer, was a fund created in 2014 – just two years before Northvolt’s inception – by two individuals with sales backgrounds but no investment or cross-functional company-building experience.

I am sure they are smarter than me and have great experience. But we are talking about a continent-level, economics-bending effort. The transition from established brands, with the comfort of salaries and expense accounts, to creating anything from scratch is a significant and challenging leap, not to mention something this enormous.

The broader Northvolt executive team also appears to lean heavily toward sales, marketing, and trendy topics like DEI and sustainability. While commercial skills are undoubtedly important, Northvolt already had unrivaled attention within Europe and $30 billion in backorders. I struggle to see how the team described on their website could credibly tackle the company’s three critical objectives:

1. Designing high-quality batteries.
2. Developing novel manufacturing processes.
3. Creating a profitable business model that could serve an entire continent.

An alternate path: A company needs a true playmaker or two who can develop a system that attracts the correct talent to fit an optimal organization design. In the absence of such a system, empire-building takes over, which often implies excessive spending on people and assets and increasingly dilutes value creation.

In my view, Northvolt successfully hyped a well-intentioned yet aspirational idea during its inception, convincing many stakeholders to invest heavily based on that vision. However, the company failed to create a congruent path to deliver on those promises, which has led to top investors like Volkswagen and Goldman Sachs having now written off most of their investments.

As a market, we continue to distort behaviors by capital engineering companies from thin air – pumping money into them without ensuring the foundational capabilities are in place. Here are my takeaways:

• Northvolt did not have a tangible company purpose other than to “beat China,” which isn’t a purpose.
• Northvolt didn’t know how to make batteries or develop a novel manufacturing process from scratch. They raised billions to learn on the job.
• Even with access to billions in cash, Northvolt’s leadership team was staffed based on perception qualities rather than deep skills needed to solve continent-level problems. Top layers were filled with generalists focused on their careers rather than problem-solving. This often leads to mediocre hires beneath them in siloed empires where employees become the primary stakeholders instead of customers and investors.

Capitalism works when investments are directed to value creators capable of delivering under real-world conditions and over the course of time. Northvolt, sadly, was not one of them.

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John Oommen | Congruence Architect.