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A great ‘power’ struggle

CATL in $2.8 billion shopping spree as Tesla burnishes new battery plan

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On a buying spree: CATL’s chairman Zeng Yuqun

What happens when the lodestar in your industry says that it has a plan to make the products that it currently buys from you? Asia’s biggest battery suppliers for electric vehicles found out this week when Tesla confirmed that it intends to make its own batteries as part of a bid to drive down the purchase prices for its cars.

After Elon Musk made the announcement during Tesla’s Battery Day on Wednesday, shares in South Korea’s LG Chem fell as much as 5.5%, while Panasonic’s dropped more than 4%. China’s Contemporary Amperex Technology (CATL) also saw a share price decline of more than 4% at one point.

Many analysts are sceptical that Tesla will be able to mass-produce its own batteries in the way that Musk hopes. He admits that the prototypes of the new product aren’t 100%-reliable yet and that it will be “insanely difficult” to scale up to full production. And for the foreseeable future, at least, Tesla will still be dependent on the three main battery suppliers to feed its Gigafactories in Nevada and Shanghai.

Yet Musk has a history of achieving goals that leave others gawping. And awareness that the sector could be set for an overhaul also helps to explain recent moves by CATL, China’s largest manufacturer of batteries for electric vehicles, to invest Rmb19 billion ($2.8 billion) in new assets across the supply chain of EV battery production.

Kicking off the shopping spree was a deal with Wuxi Lead Intelligent Equipment, the world’s largest manufacturer of lithium-ion rechargeable battery equipment, on September 14. To finance five new projects – including a new facility in southern China – Wuxi Lead Intelligent issued Rmb2.5 billion of new equity, or about 7.3% of its enlarged share capital, to CATL, its biggest customer.

The five-year partnership will see the two companies collaborate on technological development and product design, and share more of their procurement process. Significantly, it should give CATL additional exposure to lithium-ion battery equipment at a time when battery makers are looking to expand production capacity to a total of 875 gigawatt hours from 263 GWhs by 2023, predicts Gaogong Lithium Battery, a Shenzhen-based research firm. HSBC analysts estimate a surging need for more batteries too, putting global penetration of electric vehicles as a percentage of total annual car sales at 15% by 2025.

Three days after the deal with Wuxi Lead Intelligent, CATL also purchased an 8% stake in Canada’s Neo Lithium for C$8.5 million ($6.4 million), becoming its third largest shareholder. That gives it better access to Tres Quebradas, a salt flat in Argentina that could produce at least 20,000 tonnes of battery-quality lithium carbonate a year.

The quest to secure a reliable supply of lithium – a key raw material (see WiC456) – also saw CATL ink a pact last Saturday with the Sichuan government to build a lithium battery industry cluster, according to Red Star News, a Chengdu-based media source. The southwestern province accounts for 57% of China’s supply of lithium, and roughly 6% of the global total. Since 2018 CATL has established three ventures in the region: two for battery assembly and one that specialises in producing lithium hydroxide.

Further downstream in the supply chain CATL is setting up battery-swapping stations in a bid to promote its ‘battery-as-a-service’ model. The goal is to unbundle the component that typically accounts for 40% of the cost of an EV, shifting some of the purchase price into a battery-leasing plan.

The initiative was introduced in a joint venture with US-listed Chinese EV maker Nio last month, with Hozon Auto (we first mentioned the Zhejiang-based EV maker in WiC503) poised to become CATL’s next partner, according to Gasgoo, a trade publication.

CATL’s deluge of dealmaking was also spurred by a more immediate sense of crisis, reckons Sina, an online news portal. Shipping 26% fewer batteries in the first seven months compared to a year ago, the Chinese company has lost sales leadership to South Korea’s LG Chem, which recorded 97% growth in installed capacity to 13.4 GWh in the same period, according to SNE Research.

It doesn’t help that some of CATL’s batteries have been mired in product safety speculation after nearly two dozen EVs suffered from “spontaneous combustion” in August. They were all equipped with a ternary lithium battery, CATL’s main product type. These power longer driving ranges but suffer from weaker thermal stability than batteries using lithium iron phosphate as cathode material (see WiC499 for more detail on the differences).

The flame-outs have fuelled talk that CATL might abandon the NCM811 battery (80% nickel, 10% cobalt and 10% manganese) that it typically delivers for higher-end EV models, with producers such as GAC New Energy switching to new suppliers after cars using CATL’s format caught fire.

Meanwhile Musk says he is “confident” that Tesla will be able to manufacture a $25,000 car in “about three years from now” – presumably with its own cheaper batteries. This gives a timeline for the upheaval that could be ahead for its current suppliers. However, another part of the rationale for the plan is that Tesla doubts that existing production capacity will be enough to meet surging demand for EVs in the years ahead. That implies a situation in which the third-party battery makers could still have plenty of business from carmaking customers, just not necessarily from Tesla.

CATL’s plan to beef up its investment portfolio – now consisting of nearly 50 holdings – will be supported by ongoing bond sales of up to Rmb10 billion in China and another $3 billion to offshore investors. Its first US dollar issue, a dual-tranche deal worth $1.5 billion was nine times oversubscribed in early September. The allocation suggests CATL is eyeing future sales in foreign markets, especially in Europe, where EV sales are expected to eclipse China for the first time by the end of this year, according to Zeng Yuqun, CATL’s founder and chairman.

Similar forecasts have already prompted CATL to expand capacity at its first overseas plant – still under construction in Germany – by seven times to 100GWhs.


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