If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high.
While the world of supply and demand is practically speaking a little more complex than the above example, I used it because quite frankly it is the best way to illustrate what manufacturers of the lithium ion batteries used in electric cars will be facing in 2012 as the anticipated pent-up demand for their product hasn’t and likely won’t any time soon materialize.
There are of course a number of interesting questions this situation raises including the fact that unlike a CD, where there is no shortage of playing devices and thus the ability to discount product can result in its movement, with the paucity of electric cars on the roads where is the market for even a bargain basement battery unit?
Within this limiting context what ripple effects will be felt throughout the industry and does this disequilibrium have the potential to impact other, non-related sectors or perhaps even to a certain extent the economy as a whole?
While true economic equilibrium in which “the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded,” is in reality limited to a conceptual ideal, the real-world give and take towards achieving this balance is critical. However, and as is the case with the electric car (the demand) and the batteries (the supply), there is no real ebb and flow elasticity. In short, the battery manufacturers perhaps fell for their own hype (and the hype of the electric car manufacturers), and stockpiled product for which there is no ready market regardless of cost.
Adding further insult to injury, you can’t just dump these batteries in the nearest junk-yard meaning that whatever excess is on hand, you have to store it. It is kind of like owning acres and acres of land in the South Pole in that there is nothing practical that you can do with said real estate.
Unless there is a way of converting or re-manufacturing car batteries so that they can become useful in all of the mainstream products that are powered by lithium ion batteries, your bottom line is going to take a massive hit. Perhaps even pushing some companies to the brink of bankruptcy.
It is at this point that the fall-out factor kicks into high gear.
To begin could this mark the turning point for the old supply model which, according to the book “How Companies Win“ is now beginning to seek new solutions in a world in which the consumer, for the first time ever, is enthroned in the driver’s seat of the global economy?
In referencing the emergence of the new economy that includes dot.com boom and bust survivors such as Amazon, eBay, Yahoo, Orbitz, and Google, the How Companies Win authors indicated that the new demand driven economy is based on what customers want, rather than what the suppliers already have.
This is at the heart of what has been called the era of oversupply which is defined as follows:
Oversupply is a situation where significantly more supply exists than there is demand to absorb it. Oversupply is often characterized by a lack of differentiation, with price becoming the primary factor underlying purchase decisions. As a consequence, pricing power virtually disappears, and organic growth and profitability become increasingly difficult to achieve.
The authors then added that in an era of oversupply it is now imperative that companies construct a framework that encompasses and aligns everyone toward meeting not just the current but the latent and emerging demand of your highest profit customers and consumers.
Unfortunately and for a variety of reasons the electric car market does not fall into this all important category of emerging high profit customer demand. Although in a kind of ironic twist product differentiation is not the problem nor, as alluded to earlier, can lower prices stimulate sales.
In the end it is the absence of demand that will be the undoing of many companies, potentially creating instability in the global supply chain that may even have a spill over impact on satisfying the needs of high profit customers and consumers in healthy markets.
To state the obvious, I have the feeling that this is a story in which the ending is still being written and as a result I along with many others will be monitoring the events in earnest as they unfold over the coming year.