For every power battery manufacturer to become a true leader, they must undergo a trial by fire. After all, in the grand undertaking of ending the era of gasoline-powered vehicles, we have only just taken the first step in a long journey.
The listing of CATL (Contemporary Amperex Technology Co., Limited), the world's largest power battery manufacturer, on the A-share market marks a glorious moment for my country's power battery industry. However, for every power battery manufacturer, becoming a true leader requires enduring trials and tribulations. After all, in the grand undertaking of ending the era of gasoline-powered vehicles, we have only just taken the first step in a long journey.
King? Dead?
The current power battery industry can be described as half fire and half ice water.
With a lightning-fast approval process of 24 days and a valuation of 100 billion yuan in its final round of private equity financing, CATL is undoubtedly the leading new energy vehicle stock. Behind it lies the burgeoning new energy vehicle market.
At the Beijing Auto Show in April 2018, new energy vehicle manufacturers unveiled more than 50 new car logos, leaving seasoned automakers bewildered and unable to recognize them all. According to the national "13th Five-Year Plan," China's electric vehicle production and sales should reach 2 million units by 2020, tripling the 777,000 units sold in 2017.
Driven by the surge in new energy vehicle production, the demand for power batteries will also experience rapid growth. It is estimated that the global demand for power batteries will be 88 GWh in 2018, 205 GWh in 2020, and 583 GWh in 2025, respectively. The market size will exceed 120 billion yuan in 2018 and grow to 215.3 billion yuan in 2020.
After several years of reshuffling, the landscape of China's power battery industry has gradually become clear: CATL has made a comeback, BYD is closely following, and the third tier is vying for third place in the fierce competition. Even the once-powerful Wotema has experienced dramatic rise and fall within just a few months.
At the height of CATL's success, Wotema, the third-largest power battery supplier in China last year, suddenly faced a crisis, accumulating debts of 20 billion yuan. Of this, 2 billion yuan was overdue, and the shares of the company's controlling shareholders were frozen by the courts. Its parent company, Jianrui Woneng, subsequently suffered a sharp decline in its stock price, plummeting from a peak of nearly 13 yuan to less than 4 yuan. Its market capitalization, which was 30 billion yuan at its peak, fell to less than 10 billion yuan.
Why are battery companies, all vying for a share of this rapidly growing market, experiencing such starkly contrasting fortunes? This chaotic situation inevitably raises concerns, suggesting a significant hidden danger lurking beside CATL's throne. Could today's Wotema be a harbinger of CATL's future?
CATL (Contemporary Amperex Technology Co., Limited) grew from an unknown small county in eastern Fujian to a highly sought-after unicorn company in just seven years. ATL, founded in Hong Kong by Zeng Yuqun, gradually dominated the consumer electronics lithium battery supply chain after securing an Apple iPod order in 2003. However, ATL faced an awkward situation due to TDK's investment and controlling stake, as a Chinese company was not qualified to produce lithium batteries, which were in short supply for China's new energy vehicles. After the Olympics, recognizing the growing trend in China, Zeng Yuqun returned to his hometown of Ningde and founded CATL.
In 2012, Panasonic had already become a battery supplier for Tesla, and BMW, which was developing batteries for its i series, urgently needed a battery supplier with solid technology and controllable costs. Through Apple's supply chain, BMW set its sights on CATL, a company that had only recently been established. Huang Shilin's team devoured 800 pages of German documents and also "devoured" BMW, a major customer, thus entering the automotive industry's supply chain directory.
There's an unwritten hierarchy in the automotive supply chain: suppliers of luxury cars > suppliers of joint venture models > suppliers of domestic brands. New suppliers entering the automotive market typically start by winning over domestic brand clients before gradually gaining favor with high-end customers. This process requires quality and a strong reputation, often taking years. Unexpectedly, CATL (Contemporary Amperex Technology Co., Limited) has gone against the grain, securing a dominant position with BMW.
Since then, CATL has made rapid progress. In 2017, CATL shipped 12 gigawatt-hours of batteries, surpassing Panasonic, which supplies batteries to Tesla, to become the world's largest power battery company.
Technological advantages, an open system, and top-down customer resources... these are all factors that contributed to CATL's rise to prominence. But the most crucial factor is the whitelist that established CATL's position among China's leading battery giants.
In 2015, foreign companies such as Panasonic, LG, and Samsung entered the Chinese market with their mature ternary lithium battery technology. While domestic brands were generally offering ternary lithium batteries at a price of 2.5-3 yuan/Wh, these Japanese and Korean companies employed their usual tactics: low prices to seize market share and starve newcomers. These foreign battery manufacturers even shipped 18650 batteries at a loss of 1 yuan/Wh, quickly securing orders from major Chinese automakers.
Japanese and South Korean companies have also "courted death" in this way.
The Ministry of Industry and Information Technology quickly intervened, releasing the whitelist 1.0, which excluded EVs using foreign batteries from the subsidy list… Savvy automakers swiftly grasped the general direction and promptly terminated their procurement agreements with foreign battery manufacturers. Domestic battery companies, represented by CATL, BYD, and Wotema, became the biggest beneficiaries of the whitelist.
The whitelist is a double-edged sword, casting a shadow of immense uncertainty over the seemingly glamorous power battery industry. But is this dramatic rise and fall limited to Watma alone?
And then there's BYD. Before any other players entered the market, BYD, led by battery tycoon Wang Chuanfu, was the first to break into the power battery field.
However, as the largest closed system in the automotive industry, BYD's batteries are only for internal use. "Except for tires and glass, BYD can manufacture all kinds of parts itself." This is a widely accepted rumor.
In 2017, BYD's new energy vehicle sales reached 113,000 units, surpassing Tesla to become the world's number one. However, because it produced and used all its power batteries in-house, its battery sales were surpassed by CATL for the first time. In April 2018, major listed companies released their first-quarter financial reports, showing that BYD's net profit had decreased by 83%. "The glory days are over!" Automotive media outlets widely reported this. Like Watma, BYD stumbled due to its lithium iron phosphate technology route, the abrupt policy changes following the crackdown on subsidy fraud, and its closed system, allowing CATL to overtake it.
However, the battle was far from over. In March 2018, BYD announced that it would spin off its power battery company for a separate listing. Subsequently, media reports revealed that two Dongfeng Motor models would be equipped with BYD's lithium iron phosphate batteries, making Dongfeng Motor its first external customer.
Automakers are welcoming this move: competition creates opportunities for cost reduction. Following Dongfeng, BAIC, Great Wall, Changan, FAW, and other companies have also made substantive contact with BYD's battery division.
In April 2018, BYD fought back. BYD regained the top spot after a year with 1.32 GWh of installed capacity, while CATL lost with 1.25 GWh. BYD's shipments of ternary lithium batteries increased rapidly, quickly closing the gap with CATL.
It's too early to say who the king is.
Upstream and downstream? Domestic and foreign investment?
If the battle among industry giants is fraught with uncertainty and the landscape of the top three domestic lithium battery manufacturers remains stagnant, then formidable rivals in the supply chain are also lurking all around, and the struggle between them can be described as fierce and cutthroat.
Vehicle manufacturers extend one hand, and raw material suppliers extend another, quietly strangling the throats of intermediate battery companies. With the phasing out of electric vehicle subsidies, OEMs are bearing enormous cost pressures. The names of power battery manufacturers, who account for one-third of costs, consistently appear at the top of the cost-reduction lists in purchasing departments year after year.
When battery costs drop to 1 yuan per watt, the cost of electric vehicles will fall below that of gasoline-powered vehicles for the first time. Everyone in the industry hopes this turning point will come as soon as possible. Faced with demands from OEMs' purchasing departments to reduce costs by 20% this year, what should power battery manufacturers do?
The cost of a battery comes from cathode materials (such as nickel-cobalt-manganese ternary or iron phosphate materials), anode materials (graphite), electrolytes, and separator materials. Currently, nickel, cobalt, and manganese account for 90% of the cost of cathode materials. Cathode materials previously accounted for about 35% of the total cell cost, but this figure has now risen to 50%. In other words, the cost of ternary materials has reached as high as 45% of the battery cost, and this proportion continues to rise as cobalt prices increase.
Cobalt, affectionately known in the industry as "Grandma Cobalt," saw its price rise from $32/kg to $75/kg in 2017, an annual increase of 114%. In the first quarter of 2018, the price reached a new high of $95/kg, a 26% increase.
The competition among power battery companies has now escalated to vertical integration of the supply chain. Whoever controls upstream mineral resources controls pricing power. Cobalt and lithium mines are essentially the oil reserves of the electric vehicle era; whoever controls them has a chance to win the battle.
Therefore, the prospects for power battery companies are merely "beautiful on the surface." Squeezed between automakers and raw material suppliers, their profit margins have been squeezed very thin. Even leading companies like CATL earn only processing fees similar to those of Foxconn. In 2017, CATL's overall gross profit margin decreased by 7.41 percentage points compared to the previous year. This was back when CATL held a dominant position.
What happens when stronger competitors enter the city with more advanced technology and lower costs?
While domestic battery giants are locked in fierce competition and facing attacks from all sides of the industry chain, foreign battery companies have quietly made their move. On May 22, 2018, the China Association of Automobile Manufacturers released a whitelist of power batteries and hydrogen fuel cells, and shockingly, LG and Samsung SDI were among those listed.
One stone stirs up a thousand waves.
With the 2020 subsidy deadline approaching, major foreign companies are gearing up for a new round of high-profile investments in China this year. Huayou Cobalt plans to invest 4 billion yuan with LG to establish a joint venture; SKI and BAIC's electric control system is also preparing to restart; and with Tesla's production plans in China, Panasonic recently launched its capacity expansion plan in the country. Powerful Japanese and Korean battery manufacturers are well-prepared and poised to launch a siege against newly established Chinese battery manufacturers.
The power battery industry is a fiercely competitive three-way battle, with numerous players vying for dominance. Outside the established players, however, many others are also vying for control, making it difficult to maintain a stable position. Even a giant like CATL received 409 million yuan in government subsidies in 2017, accounting for approximately 10% of its net profit attributable to shareholders. When subsidies disappear and gross profit margins plummet under pressure from both upstream and downstream competitors, how long can its current success last? The case of Wotema may serve as a cautionary tale. Technology is king, cost is secondary; vertical integration of the supply chain and a strategically built customer base… these are all life-or-death tests that power battery companies will inevitably face.
"A humble room, an empty hall, once filled with officials' tablets; withered grass and dry willows, once a stage for song and dance." This world is never short of fleeting prosperity and ephemeral wealth. The international battlefield for power batteries will continue to be turbulent until a true champion emerges in the global market.
