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The Learning by Doing Effect in the New Energy Vehicle Battery Industry

Jan 21-2025   



The 4th Peking University-Tsinghua University Seminar on China's Economy was held at the National School of Development at Peking University.  Li Shanjun, Kenneth Robinson Professor of Applied Economics and Policy at Cornell University, gave a keynote speech entitled "Drive Down the Cost: Learning by Doing and Government Policies in the Global EV Battery Industry". The study discusses how government subsidies for new energy vehicle batteries can reduce long-term production costs through the "learning by doing" effect and shape the international competitive landscape of the industry.

 

There is a trend that new energy vehicles are replacing fuel vehicles. Battery costs account for 20% to 60% of the total cost of new energy vehicles, so reducing battery costs is key to popularizing new energy vehicles. From 2010 to 2020, the cost of batteries per kilowatt-hour has dropped by nearly 90%, which has become an important driving force for the rapid popularization of new energy vehicles.

 

In economics, the Learning by Doing Effect refers to the fact that production costs continue to fall as production experience increases. The production process of new energy vehicle batteries is complex, environmentally demanding and technologically fast changing, so the accumulation of experience is very important. In the early stages of battery production, the scrap rate can be as high as 80-90%; however, with the accumulation of experience, the scrap rate can be reduced to a lower level. The Learning by Doing effect may be the driving force behind the continuous decrease in battery cost. The existence of the Learning by Doing effect is important for us to understand industrial policy.        

 

To estimate the magnitude of the Learning by Doing effect in the new energy vehicle battery industry, and to further assess the impact of related industrial policies, our study collects data from three sources. The first is data on the models, configurations and sales of all new energy vehicles sold between 2013 and 2020 in 13 countries, including China and the United States. The second is the battery technology pathway and supplier for each new energy vehicle, as well as the production capacity of each battery supplier, from which the experience of each battery supplier is calculated. Finally, the study collects the support policies for new energy vehicles in each country.

 

The data indicate that the supply of batteries for new energy vehicles is highly concentrated, with the top six suppliers accounting for more than 75% of the batteries. Each country subsidizes new energy vehicles to varying degrees, with Norway and the United States providing the largest subsidies. After controlling for other characteristics of the vehicle model, the price of the remaining part of the price (which mainly reflects the cost of the batteries) shows a significant negative correlation with the experience of the battery suppliers.

 

The study also constructs a structural model of the new energy vehicle industry. On the demand side, consumers make choices based on their different preferences and the characteristics and prices of different new energy vehicles. On the supply side, there are two types of manufacturers: battery manufacturers and new energy vehicle manufacturers, both operating in a monopolistically competitive market structure. The price of the whole vehicle is determined by the following process: first, based on the cost of the battery, the battery manufacturer and the new energy vehicle manufacturer decide the premium price of the battery and the final price of the battery according to the Nash-in-Nash bargaining model; then, based on the price of the battery and the price of the other parts of the vehicle, the new energy vehicle manufacturer decides the price mark-ups in the monopolistic competitive environment, and the final price of the whole vehicle is formed.

 

The estimation results show that there is indeed a significant Learning by Doing effect in battery production, with battery production costs decreasing on average by 0.113% for every 1% increase in battery production experience. Overall, the Learning by Doing effect contributes 36% of the battery cost reduction over the 2014-2020 period. In addition, the battery production Learning by Doing effect has a significant spillover effect within a country, i.e. the experience of one battery plant can reduce the production costs of other battery plants in the country. Using the estimated parameters for counterfactual simulations, the study finds that the Learning by Doing effect can significantly amplify the role of subsidies in promoting new energy vehicles.

 

Overall, this study finds that there is a significant Learning by Doing effect in the new energy vehicle battery industry, and that this effect has important implications for understanding industrial policy and international industrial competition.

The Learning by Doing Effect in the New Energy Vehicle Battery Industry

Jan 21-2025   



The 4th Peking University-Tsinghua University Seminar on China's Economy was held at the National School of Development at Peking University.  Li Shanjun, Kenneth Robinson Professor of Applied Economics and Policy at Cornell University, gave a keynote speech entitled "Drive Down the Cost: Learning by Doing and Government Policies in the Global EV Battery Industry". The study discusses how government subsidies for new energy vehicle batteries can reduce long-term production costs through the "learning by doing" effect and shape the international competitive landscape of the industry.

 

There is a trend that new energy vehicles are replacing fuel vehicles. Battery costs account for 20% to 60% of the total cost of new energy vehicles, so reducing battery costs is key to popularizing new energy vehicles. From 2010 to 2020, the cost of batteries per kilowatt-hour has dropped by nearly 90%, which has become an important driving force for the rapid popularization of new energy vehicles.

 

In economics, the Learning by Doing Effect refers to the fact that production costs continue to fall as production experience increases. The production process of new energy vehicle batteries is complex, environmentally demanding and technologically fast changing, so the accumulation of experience is very important. In the early stages of battery production, the scrap rate can be as high as 80-90%; however, with the accumulation of experience, the scrap rate can be reduced to a lower level. The Learning by Doing effect may be the driving force behind the continuous decrease in battery cost. The existence of the Learning by Doing effect is important for us to understand industrial policy.        

 

To estimate the magnitude of the Learning by Doing effect in the new energy vehicle battery industry, and to further assess the impact of related industrial policies, our study collects data from three sources. The first is data on the models, configurations and sales of all new energy vehicles sold between 2013 and 2020 in 13 countries, including China and the United States. The second is the battery technology pathway and supplier for each new energy vehicle, as well as the production capacity of each battery supplier, from which the experience of each battery supplier is calculated. Finally, the study collects the support policies for new energy vehicles in each country.

 

The data indicate that the supply of batteries for new energy vehicles is highly concentrated, with the top six suppliers accounting for more than 75% of the batteries. Each country subsidizes new energy vehicles to varying degrees, with Norway and the United States providing the largest subsidies. After controlling for other characteristics of the vehicle model, the price of the remaining part of the price (which mainly reflects the cost of the batteries) shows a significant negative correlation with the experience of the battery suppliers.

 

The study also constructs a structural model of the new energy vehicle industry. On the demand side, consumers make choices based on their different preferences and the characteristics and prices of different new energy vehicles. On the supply side, there are two types of manufacturers: battery manufacturers and new energy vehicle manufacturers, both operating in a monopolistically competitive market structure. The price of the whole vehicle is determined by the following process: first, based on the cost of the battery, the battery manufacturer and the new energy vehicle manufacturer decide the premium price of the battery and the final price of the battery according to the Nash-in-Nash bargaining model; then, based on the price of the battery and the price of the other parts of the vehicle, the new energy vehicle manufacturer decides the price mark-ups in the monopolistic competitive environment, and the final price of the whole vehicle is formed.

 

The estimation results show that there is indeed a significant Learning by Doing effect in battery production, with battery production costs decreasing on average by 0.113% for every 1% increase in battery production experience. Overall, the Learning by Doing effect contributes 36% of the battery cost reduction over the 2014-2020 period. In addition, the battery production Learning by Doing effect has a significant spillover effect within a country, i.e. the experience of one battery plant can reduce the production costs of other battery plants in the country. Using the estimated parameters for counterfactual simulations, the study finds that the Learning by Doing effect can significantly amplify the role of subsidies in promoting new energy vehicles.

 

Overall, this study finds that there is a significant Learning by Doing effect in the new energy vehicle battery industry, and that this effect has important implications for understanding industrial policy and international industrial competition.