BERLIN - Germany has earmarked 1 billion euros ($1.2 billion) to support a consortium looking to produce electric car battery cells and plans to fund a research facility to develop next-generation solid-state batteries, three sources told Reuters.

The measures, expected to be announced next week, are designed to reduce the dependence of German carmakers on Asianelectric vehicle (EV) battery suppliers and protect German jobs at risk from the shift away from combustion engines.

Berlin's push to shape industrial policy marks a break with its generally "hands off" approach to business decisions and is part of European efforts to forge battery alliances to counter the dominance of Chinese, Japanese and Korean firms.

Ensuring local companies are involved throughout the electric vehicle supply chain is particularly important for Germany as it has become so economically dependent on thesuccess of its car industry. But Germany's car battery push could be too late. Asian market leaders are ramping up output and some experts saythere's a risk of a glut that could hinder the establishment oflarge-scale battery cell production by European newcomers.

For Chancellor Angela Merkel's fractious ruling coalition,the plan is also a way to show voters ahead of three electionsnext year in eastern Germany that it can get its act together to help Europe's largest economy thrive in the electric car era.

"We have a concentration of risk in the automobile sector.The industry is too dependent on the combustion engine," DeputyEconomy Minister Christian Hirte told Reuters.

"The governmenttherefore wants to help the sector in its efforts to diversify."

Hirte said Berlin was in talks with several companies andother governments in Europe to support a battery cell factory.

"There are possibilities for example in the Lausitz region,maybe in cooperation with Poland," said Hirte, who is thegovernment's coordinator for Eastern German affairs and for small- and medium-sized enterprises policy.

"One thing is clear: you cannot ignore east Germany if you are planning such mega projects. There is a lot of space and the acceptance among the population is great.

"Companies involved in talks with Economy Minister Peter Altmaier about building a factory include German battery maker VARTA Microbattery, chemical giant BASF and Ford's German subsidiary Ford-Werke GmbH, three people familiar with the matter told Reuters.

A spokeswoman for BASF said it would attend a meeting withAltmaier next week.

Varta and Ford declined tocomment.Varta specialises in batteries for hearing aids and largestorage systems for solar energy.

It said last month it wasstudying the production of large lithium batteries and was inintensive discussions with relevant market actors.

TOO LATE?

Volkswagen's supervisory board is due to discussits electric car and battery cell strategy at a meeting on Nov.16. The German carmaker has said in the past that it wasstudying battery cell production at its plant in Salzgitter.A source told Reuters on Thursday that the board woulddiscuss a far-reaching alliance with South Korean battery cellmaker SK Innovation.Some analysts say Europe is already too far behind in therace with Asian firms, at least with the current technology.

Boston Consulting Group has estimated global battery cell production capacitywill exceed demand by about 40 percent in 2021, exerting massivepressure on prices and making it hard for new entrants to makemoney.

South Korea's LG Chem is already supplying someGerman carmakers with EV batteries made in Poland while SamsungSDI Co and SK Innovation are planning factories inHungary.

The announcement by the world's biggest EV battery maker -China's Contemporary Amperex Technology Ltd (CATL) -that it would build its first European plant in eastern Germanyand has struck a deal with German carmaker BMW hasbeen welcomed by the government.

But Merkel told business leaders it was "extremelyimportant" Germany also develops its own battery cell capacityto secure the country's role in the car industry.

For years, German car bosses have been reluctant to pushahead with electric cars, instead focusing on diesel engines.But they now face a challenge to make combustion engines complywith tougher emissions rules introduced following the emissionscheating scandal that engulfed Volkswagen.

Despite BCG's predictions of a glut, analysts at consultantsMcKinsey & Company and Germany's Fraunhofer Institute say therewill be room for European newcomers as demand is likely tooutstrip supply when automakers ramp up EV production.

German carmakers have warned, however, that jobs coulddisappear - because it takes less time to build electric carsand as positions shift overseas to foreign battery makers.

Germany's VDA auto industry association has said a ban oncombustion engine-powered vehicles in 2030 would threaten436,000 jobs at car companies and their suppliers.

"Battery cells are a key technology and an important part ofthe value chain. That's why we want to locate this in Germany,"Hirte said.

EUROPEAN ALLIANCE



Recognising the importance of a homegrown battery industryfor jobs and profits, the European Commission launched its own European Battery Alliance in 2017 but Sweden's Northvolt is seen as the only serious contender to emerge so far.

As part of Berlin's push, Economy Minister Altmaier istalking to German and European companies as well as neighbouringcountries to try to join forces.

He is coordinating his effortswith Brussels to resolve any state aid and antitrust issues.

"In a few years, Europe will have a competitive battery cellsector that can survive without state aid," Altmaier said in September after meeting the EU's Vice-President for Energy UnionMaros Sefcovic, who has been the driving force behind the EBA.

Altmaier is expected to announce more details of his batterycells plan during a two-day conference in Berlin starting onNov. 12 that will be attended by Sefcovic.

The billion euros earmarked for a German battery cellsconsortium would help establish a first factory, probably inwestern Germany, two sources familiar with the plans said.Berlin is also willing to support a second plant, possiblyin the Lausitz region near the German-Polish border where two ofthe regional elections in 2019 will take place, they said.

An Economy Ministry spokeswoman said Altmaier was in talkswith all relevant parties and no decisions had been made.

In addition, the government wants to spend up to 500 millioneuros to co-finance a research factory to help put Germancompanies ahead of the curve when solid-state batteries areready for the mass market, another source told Reuters.

Lithium-ion batteries are likely to be overtaken in a matterof years by solid-state technology that is expected to producecheaper batteries with higher energy density.

The location of the research factory has not been decidedand the government is about to start a tender process in whichauthorities and firms can pitch for the site, the source said.

A Science Ministry spokesman said the government wassupporting efforts to develop solid state batteries by bringingtogether leading research institutes with the private sector.

Companies involved in the network, known as FestBatt,include Varta, BASF, Volkswagen, BMW, car parts makerContinental, conglomerate Thyssenkrupp,carbon fibre specialist SGL Carbon, Belgian materialsfirm Umicore, Coperion and Heraeus, the spokesman said.

For now, German carmakers are sourcing battery cellspredominantly from Asian suppliers such as CATL, LG Chem andSamsung SDI although BMW has struck a partnership withNorthvolt.Underlining the uphill battle German firms face, one of theworld's biggest automotive suppliers, Bosch, has optedout of making lithium-ion cells, saying it would be toocostly.

Hans-Martin Henning, an electric mobility researcher atFraunhofer, is less pessimistic."If automakers boost their electric car production to 10 to20 percent of total sales in coming years, Europe will needbattery cell factories with more than 100 gigawatt hours," he said, well above the capacity planned by Asian producers so far.

"We'll need far more battery cells in Europe - and this musthappen pretty fast indeed," Henning said.

The expected shift to solid-state batteries could also makeEuropean suppliers less dependent on the rare earth resourceslargely controlled by China that are used in lithium-ion cells.

"The landscape will change dramatically in coming years,"Porsche CEO Oliver Blume told Reuters. "Europe absolutely has a chance." (Reuters)