The recent sanctions imposed on ZTE by the US Department of Commerce have caused a great stir, and the most direct manifestation of this in the Chinese market is the surge in popularity of the chip manufacturing industry. The CCTV Evening News has repeatedly mentioned the need to revitalize China's chip manufacturing industry, and related stocks in the domestic stock market have risen accordingly. But can this kind of government-driven policy actually have a short-term, direct, and positive impact on the chip manufacturing industry? I've already discussed the existing problems in the mobile phone industry in previous articles, so I won't repeat them here. However, because of the ZTE incident, I can't help but think of a company that is very similar to ZTE, and also a hot topic in the new energy sector: CATL (Contemporary Amperex Technology Co., Limited). So, let's take a look at the current state of China's lithium battery manufacturing industry.
On April 4, 2018, CATL received approval from the IPO review committee and was expected to complete its IPO in May. From the initial release of its prospectus to successful approval, the entire process took less than five months.
CATL has been listed in both the Hurun Greater China Unicorn Index released in December 2017 and the "2017 China Unicorn Enterprise Development Report" released by the Torch Center of the Ministry of Science and Technology in March this year. This company, which was established less than 7 years ago, has already achieved a valuation of 100 billion yuan.
In 2011, Zeng Yuqun founded CATL. But in fact, as early as around 2000, Zeng Yuqun, along with Liang Shaokang, Chen Tanghua and others from the same former employer—the globally renowned independent hard drive supplier SAE—established Amperex Technology Limited (ATL), a 3C battery manufacturer registered in Hong Kong and with its factory in Dongguan.
ATL is not only a battery supplier for Apple iPhones, but also a reputable company in the industry for solving the problem of battery pack bulging after repeated charging and discharging, and for its excellent safety and stability during the 2016 Samsung phone battery explosion scandal. ATL's technological advantages have undoubtedly benefited CATL's development. CATL's rise to fame was made possible by becoming a supplier to BMW Brilliance in 2012. At that time, there were very few battery companies in China, and BYD, a company with a good reputation, did not export its batteries, supplying only its own mass-produced vehicles. Meanwhile, the Chinese government's subsidy policies made foreign companies more inclined to choose domestic battery companies.
After 2012, CATL became a power battery supplier for leading domestic automobile companies such as Yutong Bus, SAIC Motor, and BAIC Group.
As of the end of 2017, CATL had 3,425 R&D personnel, 907 domestic patents and 17 overseas patents, with a total of 1,440 domestic and overseas patents pending. During the same period, Guoxuan High-Tech, another leading battery company, had 1,114 employees, while other second-tier battery companies had between 600 and 700 employees.
According to data from China Industry Information Network, global power battery shipments reached 42.6 GWh from January to September 2017, with CATL ranking second globally and Wotema ranking fourth. Domestic power battery shipments in the first three quarters reached 32.02 GWh, a year-on-year increase of 42.1%. Among them, the top ten power battery companies produced 24.48 GWh, accounting for 76.5% of the total, which is basically the same as the concentration in 2016.
Meanwhile, research data from GGII (Gaogong Lithium Battery Research Institute) shows that CATL's power battery system sales were 2.19 GWh, 6.80 GWh, and 11.84 GWh in the past three years, respectively. In 2017, it even captured 30% of the Chinese market share, surpassing well-known domestic and foreign companies such as BYD and Panasonic, and winning the global power battery sales crown.
However, CATL, which has been on a winning streak, faces similar problems to ZTE, both in terms of its own products and the raw materials involved in those products. In other words, it lacks control over core technologies and raw materials.
The technology sector was strongly constrained by Japan's TDK.
TDK Corporation is a globally renowned electronics brand, primarily providing electronic components for 3C products. During the IPO review committee's questioning on April 4, 2018, in addition to routine due diligence inquiries, several questions concerned the relationship between TDK and CATL. This was partly due to the review of foreign ownership ratios in listed private enterprises, and partly to disclose TDK's past and present relationships with CATL.
According to the prospectus, TDK is the actual controller of ATL. From April 2014 to June 2016, Zeng Yuqun, chairman of CATL, served as vice president and senior vice president of TDK. In October 2015, ATL transferred its 15% stake in CATL to Ningbo Lianchuang. After the transfer, ATL no longer directly or indirectly held any shares in the company.
Furthermore, during the reporting period, TDK directly or indirectly held shares in Shanghai Yuequan, a separator supplier for CATL. CATL also sold power batteries, energy storage battery systems, lithium battery materials, and provided consulting services to TDK. The IPO Review Committee required CATL to respond to the relationship between its actual controller and ATL and TDK, whether CATL is currently under the actual control of TDK, and whether there are any issues of nominee shareholding or other related interests.
Excessive government support
According to publicly available information, during CATL's second capital increase on January 15, 2016, state-owned enterprises CMB No. 3 and GF Securities participated. By September 2016, after the third capital increase, CMB No. 3 held 24.0524 million shares, representing 4.38% of CATL's shares, becoming its fifth-largest shareholder. Other companies directly or indirectly holding shares in CATL include CMB Power, Mingrui No. 7, and SDIC Innovation.
In addition, during the reporting period, the National Development Fund, the Jiangsu Zhongguancun Science and Technology Industrial Park Management Committee, and CMB Leasing, among others, provided substantial funds through various means, including equity-like debt financing, low-interest loans, and financial leasing, totaling over RMB 1 billion. Furthermore, CATL's non-operating income during the reporting period was RMB 71.1904 million, RMB 189 million, and RMB 18.6555 million, respectively. Except for subsidies from 2017, which have not yet been received, the remaining income mainly consisted of government subsidies.
At the policy level, in addition to the macro-environment of national encouragement for the development of new energy vehicles, some detailed regulations also directly benefit domestic battery manufacturers. In March 2016, the recommended catalog of new energy vehicle models in the "Rules for the Administration of Access to New Energy Vehicle Manufacturers and Products (Revised Edition)" was bundled with the "Specification Conditions for Automotive Power Batteries." This means that most models included in the recommended catalog must be equipped with power batteries that meet the requirements of the aforementioned documents to receive the corresponding subsidies. This effectively excludes foreign battery companies and promotes the development of domestic enterprises.
Late entry into the lithium battery raw materials sector
When it comes to the manufacturing of lithium batteries, the main raw materials are cobalt and lithium.
Regarding cobalt metal, according to data from Antaike, global cobalt consumption in 2017 was approximately 115,000 metric tons, representing a year-on-year increase of nearly 11%. The battery industry accounted for a significant 59% of this consumption.
According to data from Antaike, China's cobalt smelting output in 2017 was close to 66,000 metric tons, an increase of about 14% year-on-year. Currently, output and capacity are mainly concentrated in large enterprises such as Huayou, GEM, Jinchuan, Tengyuan, Jianna, Kelixin, Maolian, Hanrui, Xiongfeng, and Kaisheng.
Based on the current shareholding structure of these 13 companies, CATL is not among them. As for Glencore, Luoyang Molybdenum, Sherrett, and Vale, which have global pricing power, the possibility of them acquiring shares at this time is almost zero.
Regarding lithium metal, lithium salt prices continued to rise in 2017.
In terms of global lithium resource development, 2017 saw a pattern of four parts brine and three parts ore.
Among the existing brine lithium extraction giants, FMC added 8,000 tons of lithium hydroxide capacity, while SQM, Albemarle, and Xinxing maintained their existing capacity and output. On the ore side, in addition to Tianqi Lithium-Talison mine, new mines including Galaxy Resources' Mt Cattlin mine and Ganfeng's Mt Marion mine are accelerating their development.
Although CATL could not make any substantial investment dealings with these companies, it still indirectly made some resource investments.
On March 10, 2018, *ST Jilin issued an announcement stating that due to its inability to meet the funding needs for the operation and project construction of North American Lithium, its wholly-owned subsidiary Jilin International planned to transfer all of its equity in North American Lithium to CATL's wholly-owned subsidiary, CATL Canada. After the transaction is completed, CATL will acquire a controlling stake in North American Lithium.
The announcement indicates that North American Lithium's main business is lithium mining, beneficiation, and smelting. Following its acquisition of North American Lithium in 2016, the company optimized and upgraded its production processes. The beneficiation plant began trial operation in July 2017 and is currently in the trial production stage for lithium oxide concentrate, not yet in commercial production. Meanwhile, North American Lithium has completed its 43-101 feasibility study report, covering investment analysis and construction plans for lithium carbonate. It is currently continuing to optimize the development plan for the lithium carbonate project and exploring ways to reduce construction costs as outlined in the feasibility study report.
On March 3, *ST Jilin issued an announcement stating that CATL planned to invest CAD 50 million in North American Lithium and another CAD 16 million to subscribe for convertible bonds of North American Lithium. Prior to the capital increase, Jilin International held 36,592,364 ordinary shares of North American Lithium, representing 68.61% of the company; the Quebec government held 3,751,369 ordinary shares, representing 7.03%; and CATL Canada held 12,989,600 ordinary shares, representing 24.36%.
However, in terms of the overall layout of raw materials, CATL is still at a disadvantage.
According to Sister Ba, although this analysis focuses on CATL, it largely represents the current state of China's entire lithium battery manufacturing industry. If companies cannot control core raw materials and technologies, if they cannot accelerate the realization of an industrial closed loop, if they only realize the severity of the problem when their supply chain encounters issues, or if their final trump card still relies on government pressure... then ZTE will not be the last company to be severely punished during China's manufacturing transformation.
