I recently read two articles about Northvolt’s bankruptcy in the German Manager Magazine and Capital. To my surprise the financial audit on which a €600 million convertible bond was granted by the KfW[1] was made public at the end of June. I analyzed the report and share some takeaways in this article with you.
There is a surprising number of gaps and questionable assumptions in the report.
I conclude that two main items would have saved €600 million from being lost:
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Go see! Visit the factory. Take some experts with you. Even if you just write the financial report.
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Wishful thinking does not work. Trust, test, and model your gut feel.
Please note that this article is based on public information and my personal assessment. The views expressed are my own and not those of my employer. I hope that the accountable people had better and more information. Drawing these conclusions in hindsight is easy.
Background
Northvolt wanted to become a significant global supplier of Lithium-Ion batteries. Their main value proposition was to be a European company, vertically integrated, and focused on green batteries with a low lifecycle climate impact.
The Manager Magazine article covers the decline of Northvolt over time. It focuses on major investors and customers pulling out over time. They cite that both VW and BMW experts did not see timelines and quality align as promised.
The Capital article is focused on the German plant Northvolt Drei. It states that there was a lot of pressure to finance the project. Apparently this pressure came from Northvolt as well as upper levels in the federal German government. State and local governments had over a hundred questions—most of which went unanswered. Meanwhile the investment of public direct funding were pushed through.
The PwC Report
If you trust the article the €600 million convertible bond was largely based on a single PricewaterhouseCoopers (PwC) financial audit. It states the loss of all capital occurs in <1% of cases[2].
The report’s quality is bad. Here are the key issues I had with it:
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It’s purely a financial report. No new technical experts were consulted to put the financial assumptions into perspective.
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The assessment is based on a Northvolt financial spreadsheets ending at the EBIT (earnings before interest and taxes) line. Additional due diligence information is also cited. Missing and incomplete information is called out in multiple places.
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The report is mainly based on 7 phone conferences. Not a single visit to existing facilities or in-person meeting is mentioned.
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PwC mentions that plans are “ambitious” multiple times but does not adjust the business plan to account for a more realistic scenario.
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Some core statements in the report are qualitative only[3].
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PwC took the two Northvolt provided scenarios to calculate the risk to the financing by only varying the base interest rate and volatility. They did not alter key assumptions that Northvolt made.
What the Report Reveals about Northvolt
There were two main points that raised a flag for me in Northvolt’s business plan as described in the report.
First, Northvolt planned to lower profitability over time by pulling out of the micro-mobility market by 2030. Instead they shift a large volume of their revenue to the automotive customers where the price per kWh is 10% lower[4]. Hmm! No one would actively reduce the value of a venture backed company.
Second, the capital investments reduce greatly over time. At the same time the manufacturing equipment is depreciated over 10 years. Lithium-Ion battery technology is still developing rapidly. Most of Northvolt’s assets will likely need to be replaced completely sooner.
To evaluate Northvolt I would have reduced the revenue from micro-mobility over time and increased capital expenditure over time. Both together reducing the present value of the investment.
What should have happened
Go see! Take experts with you and learn. How about taking a cell sample from what is made that day and test it in an independent lab?
Adjust the “ambitious” management cases to the actual base rate for the process and industry. Northvolt was just tailoring Lithium-Ion processes not pushing the boundary.
Finally, I don’t know what questions and concerns the administrators in Germany had. Certainly, they overlapped with mine. I wish that the next time these questions will be answered as in any good due-diligence.