Auto Industry

Power struggle

Less heralded battery firms mount a challenge

CATL-w

R&D centre of CATL in Ningde

Cars that don’t run on petrol would seem to be less of a fire risk. That should count in Tesla’s favour over the longer term, although the American automaker was red-faced this month after a Model S went up in flames in Shanghai. The electric vehicle was parked at a Supercharger station in the city and the conflagration destroyed another Tesla nearby.

But for Tesla, a change in policy in China poses the bigger risk. Take the rules in major Chinese cities that exempt electric vehicles (EV) from restrictions on obtaining new licence plates. At the moment, Tesla imports also enjoy free licencing but there is no guarantee the policy will last, especially if the policy mood darkens towards American brands. “Policy changes can and do come suddenly in China, and a ‘Trump effect’ could derail Tesla’s resurrected China business. It would be very easy to exclude imported EVs from the plate exemption, as they have been in years before,” a contributor wrote in Forbes this month.

Just ask Samsung and LG, which know a thing or two about damaging policy changes in China’s EV market. The South Korean firms control about a third of the world’s EV battery market but when China’s Ministry of Industry and Information Technology (MIIT) renewed its certified vendor list last year, the two Korean giants were shocked to be excluded. The 60 or so MIIT-approved vendors – all of which are eligible to receive government subsidies – are predominately Chinese-owned (see WiC334).

The Financial Times noted this week that China’s battery firms are beginning to feature in an industry that has been led for decades by South Korean and Japanese brands such as Panasonic. According to Sina Auto, new energy vehicles are an inevitable replacement for China’s hydrocarbon-powered cars, particularly as the government is keen to tackle chronic air pollution. “Setting the industry standard for EVs could be as important as securing oil resources in the past,” the news portal suggests.

In fact, the government has just published another policy directive calling for EV makers to double their production capacity by 2020. It took a similar approach on solar power about a decade ago, although WiC readers are familiar with the stories of fallen giants such as Suntech Solar (for more on the topic see Francois Perrin’s essay in WiC333 for his comparison of China’s solar strategy with that for EV batteries).

Many of China’s industry leaders in EV batteries will be unfamiliar to foreign investors. For instance, Contemporary Amperex Technology, or CATL, was established as late as 2011 in Ningde, a third-tier city in the coastal province of Fujian. A capital raising in October last year, however, valued the private sector firm at Rmb80 billion ($11.5 billion).

“It [CATL] is set to become China’s Panasonic,” the Financial Times suggested this week.

Last year the Fujianese firm had the capacity to produce 7.6 gigawatts hours (GWh) of batteries but that number could expand to 50GWh by 2020, some 40% greater than planned output at the Gigafactory, the US-based joint venture between Tesla and Panasonic.

Third on the FT’s list of top battery producers is Lishen, another fast-growing EV-related firm based in Tianjin.

The Warren Buffett-backed BYD has also been in the battery market for more than 10 years. But BYD is also a major producer of electric vehicles, Sina Auto points out, meaning that many car makers prefer to give their contracts to independent battery makers such as CATL (that may change: in February CATL agreed to buy a 22% stake in Finnish automaker Valmet Automotive).

OptimumNano Energy, whose Shenzhen headquarters is neighbour to BYD’s, could also emerge as a dark horse. It is relatively ancient in Chinese terms, having been founded in 2002, but in recent years it has come up with a much more flexible growth model.

The OptimumNano Innovation Alliance was set up in 2013 to promote demand for EVs in China. The alliance is, in fact, an open platform to match potential clients such as local governments and municipal transportation firms with auto part makers, electrical engineers and even carmakers. OptimumNano’s role is to offer the EV power solutions and provide the after-sales services.

Most of the vehicles produced under these kinds of arrangements aren’t flash rides in the Tesla style but more functional beasts (such as shuttle buses and garbage trucks). But according to the Economic Observer, OptimumNano’s platform has signed up more than 1,000 companies nationwide. Most of participants are small- and medium-sized enterprises (only 70 of the companies have listed on the stock market) but the aggregation of demand is driving sales. OptimumNano batteries have been integrated into more than 20,000 EVs as a result.

BYD is also wooing cross-sector allies in order to safeguard its status as China’s leading maker of electric cars. It still uses its proprietary lithium-iron phosphate batteries, a type used by few of its peers. However, it said this week that it will cooperate with 13 other firms including China Mobile and Didi Chuxing to promote the use of EVs in the public sector.

BYD has about 25% of China’s EV market and last year more than 500,000 vehicles were sold (up by half year-on-year).

However, sales slowed markedly in January, when BYD managed to sell just 605 EVs, or less than a tenth of its monthly average last year. The slowdown, CBN has reported, has been prompted by expectations that the government is going to roll out new incentives for buyers of electric cars, which has triggered a wait-and-see approach among consumers.

There are rumours that producers might get another round of new subsidies too, although they probably won’t apply to foreign battery firms. And with the THAAD missile defence controversy raging (see this week’s Talking Point), there’s scant chance that the new policies will bring much commercial comfort to Samsung or LG.


© ChinTell Ltd. All rights reserved.

Brought to you by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.