FINANCIAL TIMES Electric cars: China’s battle for the battery...

FINANCIAL TIMES


Electric cars: China’s battle for the battery market
Beijing invests billions to try to squeeze out Japanese and South Korean rivals

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by: Henry Sanderson, Tom Hancock and Leo Lewis
The headquarters of CATL, China’s fastest growing battery maker, lie on the edge of the city of Ningde, a stone’s throw from ponds where farmers raise carp and a street of cheap noodle restaurants and vehicle repair shops frequented by migrant workers. Inside the vast factory, battery parts move silently on automated conveyor belts. Signs on the walls encourage workers not to waste materials or time, or indulge in “unnecessary bending” for their own safety.

The plant looks like lots of others dotted across the country. But with a valuation of $11.5bn, Contemporary Amperex Technology Ltd, to give it its full name, is anything but mundane. It is set to become China’s Panasonic — a national champion — and a key part of Beijing’s ambitious plan to remake theglobal battery market and exploit rising demand for electric cars.
“We want to become a leading enterprise, like the front carriage of a train, driving an entire supply chain,” says Neill Yang, CATL’s marketing director. His office overlooks cranes and cement mixers, which are building a dormitory and offices to house 20,000 workers.
CATL, which had capacity to produce 7.6 gigawatts of batteries last year according to Goldman Sachs, says that by 2020 it plans to produce more than the gigafactory, the Tesla Motors and Panasonic joint venture that opened in Nevada in January and is expected to be the largest producer in the US. That would potentially make it the biggest battery factory in the world.

Tesla's gigafactory in Nevada, US © Bloomberg
Backed by aggressive government policies —ranging from subsidies for electric vehicles to restrictions on foreign rivals — China’s battery companies are beginning to dominate an industry which has been led for three decades by South Korean and Japanese manufacturers such as Panasonic, which makes the battery cells for Tesla cars.
Beijing last week called for companies to double electric vehicle battery capacity by 2020 and encouraged them to invest in factories overseas. As carmakers invest more heavily in electric vehicles the lithium-ion battery will be a key technology for at least the next decade, creating a market Goldman Sachs estimates will be worth $40bn by 2025 and dominated by China.
“It will not be easy to surpass Japanese and South Korean companies,” says Mr Yang. “But we think over the next 10 years, there may only be 10 lithium battery producers left, with the top three taking 60 per cent of the market.”
Since 2012 China has spent billions of renminbi subsiding its electric carmakers, turning Shenzhen-based BYD, which is 25 per cent owned by Warren Buffett’s Berkshire Hathaway, into the world’s largest electric car and bus maker with a market capitalisation of $18.7bn. As well as boosting supplyChina is also creating demand: by 2020 it predicts 5m electric vehicles will be on its roads, from 1m today.
China’s approach has echoes of the one it took on solar power a decade ago. It dominated the industry by lowering costs and driving prices down by 70 per cent and could do the same for batteries, says Gordon Orr, former Asia chairman of McKinsey. That would make electric cars more competitive — batteries account for up to half the total vehicle cost — but it could also mean a drastic loss of market share for manufacturers in the rest of Asia, the US and Europe.
“We know how [solar] panned out. China got the net result it wanted but in the process [there was] billions of dollars of value destruction,” Mr Orr says. “I do see the characteristics of heading down that same path, and whether it’s CATL or others who win at the end is impossible to predict.”
In every device

Lithium-ion batteries revolutionised the consumer electronics market after Sony commercialised them in 1981. From the Walkman to the iPhone they form a central part of the gadgets in everyday life. Now they are set to play an equally big role in transportation, helping to reduce the dependence on oil.
Since the 1980s battery production for the electronics industry has been dominated by companies in South Korea and Japan. But China has caught up. In 2013 it outpaced Korea as the world’s largest supplier of lithium batteries for all electronic devices, according to Goldman. A year later that lead increased as China’s electric vehicle market took off. In 2016 507,000 battery electric and plug-in hybrid vehicles were sold in China, an increase of 50 per cent over the previous 12 months.
While Panasonic is the world’s largest supplier of electric vehicle batteries globally, China’s BYD and CATL were just behind, according to figures collated by Bernstein, the research group.
“The Japanese invent it, the Koreans look to expand and build it out and the Chinese end up dominating it as that’s where the market ultimately is,” says Duncan Goodwin, head of global resources equities for fund manager Barings. “We are going to see a significant step up in manufacturing capacity driven by China and Chinese demand."

If Chinese battery companies deliver on their targets they will have capacity to produce 121 GWh of batteries by 2020, according to Bloomberg New Energy Finance. That compares with a target of 35 GWh for Tesla’s gigafactory when it reaches full capacity next year. A single GWh would power 40,000 electric cars to each travel 100km.
“The Chinese are massively building up their capacity to get a stranglehold on this market,” says Simon Moores, head of Benchmark Mineral Intelligence in London.
Foreign companies at bay

In 2015 in the eastern Chinese city of Nanjing, South Korea’s LG Chem opened a battery factory. The same year Samsung SDI followed suit, opening a plant in Xian in central China and declaring that it would “forge its foothold in the world’s biggest new energy vehicle market”. A year later Beijing released a list of companies allowed to supply batteries in the country. Not a single foreign company was included. Separately Beijing released draft guidelines at the end of last year that said car battery manufacturers would need to have at least 8 GWh of production capacity in China to qualify for subsidies — a target that only BYD and CATL can meet.
“China seeks to acquire world-class foreign battery technology while keeping overall Chinese ownership and control,” says Michael Dunne, head of Dunne Automotive in Hong Kong. “It has been very careful to cultivate local battery champions while using licensing procedures to hold foreign companies at bay.”
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BYD has particularly benefited from government support. Beijing has provided subsidies for electric buses using lithium-iron phosphate (LFP) batteries, a type used by BYD but not by many foreign manufacturers due to its lower power capacity. As a result BYD sold 11,000 of its e-buses last year, up from virtually zero in 2013, according to Macquarie. “The [Chinese] tailor-made the subsidy programme to make sure neither Samsung or LG Chem would get any part of it,” says one international commodity trader.
To allow electric cars to go farther on a single charge, a critical factor for batteries is their energy density. For now China lags behind Korean makers in terms of the technology to provide greater energy density, according to Bernstein analysts. The frontrunners in the market are LG Chem, Samsung SDI, SK Innovation and Panasonic “with Chinese suppliers playing catch-up,” it says.
“Because the Chinese have artificial government protection they are able to grow scale that’s bigger than the Koreans,” says Mark Newman, an analyst at Bernstein. “They are still a couple of years behind but they’re narrowing the gap due to their scale.”
Increasing the amount of power the battery can store on one charge will be crucial. But that will require continued innovation, says Varun Sivaram, a specialist in energy security at the Council on Foreign Relations.
“In electric vehicles if you keep decreasing the cost but don’t increase the performance you reach a limit — the car’s too expensive because the energy density is not high enough,” Mr Sivaram says. “My belief is that the [Chinese companies] will not ultimately win out. You will need higher energy density batteries and manufacturers who have the next generation technology will win.”
Access to raw materials

Even more than the subsidies or barriers to foreign operators, the greatest advantage for Chinese battery manufacturers over rivals such as Tesla is access to raw materials. Chinese companies have been making inroads over the past year into the lithium-ion supply chain, buying up mining assets from cobalt to lithium to help cut costs.

A BYD e5 electric vehicle on display at the Beijing International Automotive Exhibition in April 2016 © Bloomberg
This year Ganfeng Lithium, one of the country’s largest producers of the battery chemical, bought a 19.9 per cent stake in an Argentine lithium project. The deal followed on the heels of a purchase last year of a 2.1 per cent stake in Chile’s SQM, the world’s largest lithium producer, by Tianqi Lithium.
Similarly in cobalt, China Molybdenum, a mining company partially owned by a Chinese local government, paid $2.65bn last year for the Tenke mine in the Democratic Republic of Congo. The mine contains one of the world’s largest concentrations of cobalt and offers “security of supply of a critical battery material for decades to come,” according to Investec. Cobalt traders say most of Tenke’s supply is likely to go back to China, where prices have doubled since October.
Chinese companies are also likely to disrupt the battery material supply chain and drive down prices, according to analysts at HSBC. “China’s aggressive push to promote the domestic electric vehicle market will accelerate an expansion in the local ecosystem,” they said.
In Ningde CATL says it has a staff of 1,000 people working in its research and development department. The company has more than 2,000 battery-related patents and analysts at Goldman Sachs said in January they expect it to “catch up with global peers in product quality”.

From left, Elon Musk, chief executive officer of Tesla Motors, Jeffrey Straubel, chief technical officer and co-founder of Tesla, and Yoshihiko Yamada, consultant at Panasonic © Bloomberg
National Electric Vehicle Sweden, which bought the bankrupt Saab carmaker in 2012, signed a battery supply agreement with CATL earlier this year.
“The Chinese government has a list of approved battery makers and if you don’t choose one of those you will not be allowed to apply for subsidies in the Chinese market,” Anders Bjornberg, director of R&D at NEVS, says. “CATL are also competitive with the Japanese and Koreans, it’s not that we have taken the second-best choice. It’s the best choice in China.”
Mr Yang says the company’s first aim is to serve domestic Chinese customers rather than export to the global market.
Yet CATL cannot hide its global ambitions. Mr Yang concedes the company hopes to work with Tesla, has been in contact with General Motors and its current clients include Volkswagen and BMW. In January it bought a 22 per cent stake in Finnish auto supplier Valmet Automotive. It also has an eye on building a factory in Europe. That’s “not a distant prospect,” Mr Yang says.

The rivals: Japan prepares for a fight it cannot afford to lose

When Japan looks at the global battery market in 2017 — the shifting technologies, the emerging players and the intensifying competition — it recalls the past two decades of industrial history and winces.
It has watched as its dominant position in semiconductors, TVs, white goods, mobile phones and even high speed rail has been first dented then battered by competition from South Korea, China and elsewhere. But batteries, runs the mantra from everyone in the supply chain, is a battle Japan has told itself it “cannot lose”.
As well as Beijing’s high-profile backing of its domestic battery industry, much of Japan’s urgency, say lithium experts, is driven by the assumption that the fundamental dynamics of the lithium market are poised to change: batteries are about to overtake all other industrial users of the metal as the prime source of demand. At the corporate level, say lawyers involved in recent battery supply chain deals, Japan’s determination has prompted an acceleration of asset sales, purchases and joint-venture formations.
High-performance materials companies like Ube Industries,Sumitomo and Central Glass are investing heavily in new battery production capacity around Asia. Others like Murata Manufacturing are pushing ahead with acquisitions. In July, the company is expected to complete the purchase of Sony’s battery business, before working on a supply deal with Samsung Electronics.
Japan’s sense of panic has been intensified by the Trump administration’s scuppering of the Trans-Pacific Partnership trade deal. That pact, say producers, was to have been beneficial to Japan’s battery industry, which had already begun to invest in capacity in Vietnam on the assumption it could then export to the US and Canada. Leo Lewis