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Power play

CATL gets major new investors to fuel its EV battery business in China

Zhang Lei w

Now a key investor in CATL: Hillhouse Capital’s boss Zhang Lei

An important new relationship is crystallising in the electric vehicle (EV) sector, although few feel confident enough to hazard a guess about where it might end up. During Tesla’s second quarter earnings call last week, the company’s founder and CEO, Elon Musk, confirmed that it is starting volume production with a new battery supplier in China, Contemporary Amperex Technology (CATL).

The Chinese company is supplying its lithium ferro phosphate (LFP) batteries for the Model 3 cars Tesla makes in Shanghai. Musk said that this will allow existing suppliers LG Chem and Panasonic, to ramp up production of their rival lithium ion phosphate (L-ion) batteries for pipeline products such as Tesla’s new truck (the Semi), which require batteries with higher energy density.

Does this new relationship mean that CATL (see WiC499) will become to Tesla what TSMC (an R&D-led manufacturer) has been to Huawei? Certainly, a battery is as integral to an EV as a computer chip is to a smartphone.

Tesla is likely to score a lot of political points with the Chinese government by endorsing a domestic company as a key technology supplier. However, Musk has also predicted that Tesla’s own energy storage and battery business will be as large and as important as its auto one in the not too distant future. The latter’s huge potential is one reason why Tesla’s share price has shot up 5.2 times over the past year.

One of Tesla’s biggest advantages over other auto manufacturers is its vertical integration, which has positioned it at the technological cutting edge across the entire value chain, batteries included.

It intends to stay there. To this end, it purchased San Diego-based battery company Maxwell Technologies last year so it could get its hands on the latter’s dry electrode capabilities.

So would a better analogy of the relationship between Tesla and CATL be the one between TSMC and Intel? The US chip company is also vertically integrated, but it is now turning to TSMC for some of its advanced production needs after falling behind the Taiwanese firm in rolling out the latest manufacturing technology.

Tesla situation here differs too – but by diversifying its battery suppliers after formerly relying on Panasonic (then adding LG Chem) and now CATL, it is also demonstrating that it won’t be beholden to a single manufacturer.

It’s possible to stretch the chip analogy even further. Battery and chip production share many similarities, not least the fact that both industries are engaged in a process of constant and costly technological evolution.

The power and range of EVs, for example, depends on improving battery energy density (getting more energy per unit of space) in the same way that a chip’s power is determined by how many more transistors can be crammed onto it. What differentiates the two and complicates battery production is the unstable nature of the various chemical elements that make batteries work. A compromised battery is a fire risk, not a good look for a car.

Japan’s Toyota has spent the past decade trying to achieve breakthroughs in this area through solid-state technology – replacing flammable liquid electrolytes with solid non-flammable alternatives. Earlier this year, it partnered with Panasonic and has since developed a working prototype with potentially eight times more energy density then current batteries.

However, solid-state batteries are still viewed as a ‘potential’ rather than an actual technology. They have a tendency to warp after repeat charging and therefore have a short shelf life.

Battery producers face similar problems with nickel. Higher concentrates produce higher energy density but can lead to thermal runaway (overheating).

This has been exacerbated by the desire to reduce the amount of cobalt in L-ion batteries. Cobalt is more stable than nickel but it has sourcing issues (much of it is mined in the Democratic Republic of Congo; see WiC329) and cost concerns (it is a rarer mineral).

This is why the latest L-ion technological iteration, known as NCM811 or NCA811, have ratios of 80% nickel, 10% cobalt and then either 10% manganese (LG Chem) or 10% aluminium (Panasonic). The previous generation, known as NCM622/NCA622, had 60% nickel, then 20% cobalt and 20% manganese or aluminium.

Raw material costs are particularly important as they account for around half of a battery’s price tag. Half of that ratio again comes from the cathode (where the nickel, manganese and cobalt are deployed). Power is generated when lithium ions travel through a conductor (electrolytes) from an anode (the negative pole normally made from carbon) to a cathode (the positive pole) and back again.

LFP batteries have less energy density, but on the plus side, their production costs have dropped substantially over the past five years. The costs are now almost comparable to L-ion batteries (Rmb0.55 to Rmb0.6 per kilowatt hour vs Rmb0.5 to Rmb0.55). During the earnings call, Musk said their efficiency has also improved enough to install them in the Model 3.

CATL says it can now make a battery with an average life span of 16 years. This is double the current industry standard.

What is not clear is whether the two companies have developed the super-long-life battery together, as Reuters reported in mid-May, or separately, as Tesla also has a long-standing relationship with Canada’s Dalhousie University. All is likely to become clear during Tesla’s battery day in mid-September (postponed from the spring because of Covid-19).

In the meantime, CATL is forging ahead with an ambitious plan to launch more production capacity (52GWh) than it actually sold in output terms in 2019 (40.25GWh). The Shenzhen-listed company has just completed an Rmb19.7 billion ($2.81 billion) capital raising led by Hillhouse and Honda Motor.

Honda’s decision to buy 1% of CATL’s outstanding equity is part of a wider partnership between the two companies to co-develop battery technology. This fits with CATL’s strategy of working with many different auto companies, unlike local rival BYD, which until recently kept its battery business largely to itself.

This diversification is what has helped the Ningde-based company develop from a very low base just five years ago to become the country’s leading producer. Domestic partnerships with Chinese companies including BAIC (since 2016), SAIC (from 2017), Dongfeng (beginning 2018) have been followed more recently by tie-ups with foreign automakers including BMW and Volkswagen.

So far most of CATL’s output has found a domestic home, with overseas sales accounting for less than 5% of the total in 2019. The construction of its first overseas factory in Germany should change that proportion.

Reportedly CATL has also invested in a battery-as-a-service (BaaS) company being established by Tencent-backed EV start-up, NIO, – enabling batteries to be swapped out once they reach their shelf life. The idea is to separate the business of selling, installing and managing electric car batteries: just as fuel retailers are distinct from the manufacturers of combustion engine-based cars.

Last week CATL also set up an investment unit that will target downstream companies so it can expand its presence across the wider energy storage sector. As Sina Finance concluded, “the route to becoming a hegemon is by splashing the cash”.

At the moment CATL is a B2B company. But the way the energy storage business is evolving, it could well end up being just as much of a B2C one too.

Over the short-term, it is likely to get a boost too from a new government initiative to promote EV ownership in rural markets, with an announcement last week that local governments would offer subsidies to promote the sales of 10 domestic EV companies.

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