Elon Musk's car company Tesla appears to be leading the "arms race" for lithium-ion batteries — for now. Musk recently announced plans to build the world's biggest lithium-ion battery storage project in South Australia. Meanwhile, construction of the company's highly anticipated 35-gigawatt-hour (GWh) "Gigafactory 1" is still underway. "There's a kind of arms race on batteries around the world. We know that Elon Musk with Tesla has got this Gigafactory. The Chinese are racing to overtake him; they'll have three times the capacity. And then in Germany, we've just heard announcement of a new plan for a $1 billion factory on batteries," Giles Keating, chairman at investment consultancy Werthstein Institute, told CNBC Monday. A report published by Bloomberg Intelligence in June said factories planned by Chinese companies could have the capacity to produce more than 120 GWh by 2021 – enough to supply 1.5 million Tesla Model S vehicles. And a German consortium of companies led by Frankfurt-based start-up TerraE Holding GmbH is preparing to set up its own 34 GWh lithium-ion battery cell production facilities, touted as Germany's answer to the Gigafactory.

Lithium-ion batteries are rechargeable batteries. When they are connected to a charger, lithium ions move in an opposite direction to when they are being used, restoring the battery for reuse. The batteries are thought to be a sustainable alternative to petroleum and diesel, as they can be recharged rather than burned. Battery storage is fundamental to the renewable energy sector. Tesla's Gigafactory is used to produce batteries for solar-powered homes, utilities and the Tesla Motors brand of electric cars. As well as an energy efficient alternative to burning fossil fuels, lithium is now a sought-after commodity for investors.

Big automakers 'in denial'

Keating, a former Credit Suisse research chief, said big automakers such as Daimler, BMW and Volkswagen have been "in denial" about the force of electric cars. "I think Tesla was always all about electric cars, whereas I think the conventional auto manufacturers, they were in denial. They just kind of almost wanted batteries to be weak so that they wouldn't have to go that route so that their existing route of business can continue, if I'm brutal about it," he said.

He added that the batteries these carmakers develop were "miserable," and that the push to pass diesel emissions tests rather than invest heavily in electric technology meant manufacturers avoided having to innovate. "For most conventional manufacturers it was about beating the emissions rules rather than about trying to revolutionize stuff," Keating added. Last week, executives from BMW, Daimler, Opel and Volkswagen came to an agreement with politicians to cut emissions by updating the software of 5 million cars. Volkswagen in particular has come under pressure ever since the infamous "dieselgate" scandal. The auto giant's software allowed it to cheat pollution standards during test conditions, but not when actually out on roads.

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