Prior to the invention of USB chargers, the swapping of dry cell batteries was a significant business opportunity. The US government’s post-war influence in setting global standards, including its collaboration with Japanese electronic makers, spurred the growth of the American battery makers and allowed US standards in battery sizes – notably AA and AAA – to become international ones.
A new standards war has shaped up in the battery world more recently for electric vehicles (EV) and the infrastructure used to recharge them. With supremacy in the ‘mobility market’ at stake, attention has shifted to companies like CATL, a Chinese firm that has emerged as the leader in EV battery production.
CATL’s combination of rapid growth, global reach and strategic importance has seen it compared with Huawei, a Chinese telecoms and tech giant from which CATL is said to have copied its management style. This begs important questions, such as whether CATL’s size and influence could grow to match that of Huawei, which has found itself on Washington’s sanctions list. Could CATL be destined for similar treatment?
How big has CATL become?
For some time the top 10 most valuable A-shares trading on Chinese bourses typically comprised of Moutai, China’s most popular booze maker, and nine state-backed financial heavyweights.
That picture has altered quite markedly in recent months with the return of China Mobile to the Shanghai stock exchange, as well as a notable rebound in PetroChina’s fortunes thanks to surging oil prices. Then, of course, there is the addition of CATL, which only listed in Shenzhen in June 2018.
As of this week, the battery firm was worth about Rmb880 billion ($130 billion), just behind PetroChina’s Rmb900 billion (Moutai retains the top stop at Rmb2.2 trillion).
When CATL’s market value surpassed that of PetroChina, China’s biggest oil producer, for the first time in late 2020, Chinese investors were already talking up the prospect of a new era in which consumers power their cars with CATL’s batteries instead of the fossil fuel from PetroChina’s pumps.
Commentators were even ruminating on the prospects of CATL becoming the most valuable Chinese firm when its market capitalisation reached a historical high of about Rmb1.5 trillion in November last year.
That discussion now looks to have been a tad premature, given the 11 year-old company’s share price has retreated more than 40% since then (more on the reasons for this later).
Still, CATL stands out among the largest A-shares in at least one significant respect: it’s the only private-sector firm in the top 10. It is also the only industrial manufacturing play to be considered a ‘high tech’ stock and one that reflects positively on the Chinese government’s strategic push for advances in technology (baijiu maker Moutai hardly falls into the same ‘priority category’ for Beijing).
According to Seoul-based research firm SNE, CATL maintained its position as the world’s biggest EV battery maker in the first quarter with close to a 35% market share. South Korea’s LG Energy Solution came second on 16%. BYD, an EV and battery maker backed by Warren Buffett and Samsung, was third at 11% (see separate story on page 7 for more on the environmental setback at a BYD factory in Changsha that made headlines this week).
CATL is still expanding quickly. Having received regulatory approval to raise Rmb45 billion earlier this year, the company plans to unveil new production plants in four Chinese cities. By the end of 2021, its existing and planned capacity stood at 310 gigawatt hours (GWh), a preferred metric in the sector. LG Energy Solution, which has vowed to overtake CATL’s leading position, had 155GWh of installed capacity by the first quarter of last year and expects to double that next year following the South Korean firm’s IPO in January.
Who is behind CATL?
The company’s Chinese name Ningde Shidai translates into ‘the era of Ningde’. This is a tribute to the city in Fujian province where CATL is based and where its founder Zeng Yuqun was born.
In English CATL stands for Contemporary Amperex Technology Limited. The ‘C’ in that acronym denotes the entrepreneurial gamble Zeng took when he set it up. He did so after selling his first battery venture ATL (short for Amperex Technology Limited) to Japan’s TDK, his former employer. To distinguish his new venture from the old, he added the word ‘Contemporary’.
Throughout the Chinese media it is broadly agreed that Zeng is one of the most low-key of the country’s billionaires. Public information about his early life is hard to find. According to Founder, a magazine, Zeng was born in 1968 to a rural family in Ningde, a smallish coastal city (its population is just 620,000). He was assigned to work in a state-owned factory in Fuzhou after graduating from the shipbuilding engineering faculty of Shanghai Jiaotong University. But he resigned after three months and joined an electronics maker in Dongguan, where he was quickly promoted, and soon became the foreign firm’s technical director.
Zeng’s educational background appears to have been geared towards scientific study, with some reports also suggesting that he earned a doctorate in condensed matter physics from the Chinese Academy of Sciences (CAS).
What is more certain is that Zeng has spent much of his professional career in the research and development of batteries and chemicals, especially after 1999 when he founded ATL, a maker of the type of lithium-ion batteries that powered portable devices such as MP3 players.
Initially ATL relied on designs and technologies acquired under licencing from American firms, Founder reported. However, all the battery makers – including Sony at the time – suffered the same problem: the batteries started to swell after repeated charging cycles. Zeng and his team successfully solved the problem after experimenting with several dozen chemicals. That made ATL’s name and it was included in Apple’s supply chain after Zeng sold his firm to TDK. The sale made him a fortune and he initially stayed on as general manager at ATL.
But he was not satisfied in staying put. So he made a bold gamble: moving away from consumer electronics and starting a new venture that designed batteries for electric vehicles in his hometown in 2008. This entity later became CATL. Tokyo-based TDK retained a 15% stake in the spin-off (though it divested that holding in 2015) and the Japanese electronic giant still collects royalty payments from CATL, Founder claims.
How does CATL compare with Huawei – and compete with BYD?
Zeng must have learned a few lessons about running a multinational business during his time with TDK. But he is said to be a bigger fan of Ren Zhengfei – to the extent that he has tried to model some of CATL’s operations on those of Huawei.
As such there is an emphasis on prioritising R&D and there is also a demanding work culture (slackers need not apply). Like Huawei, CATL is ready to employ foreign talent where essential. Take Bob Galyen, a battery expert and longtime executive at General Motors before becoming CATL’s chief technology officer. According to the Wall Street Journal, Zeng approached the American after hearing him speak at a conference and invited him to dinner in Ningde. Galyen was taken aback when he arrived at the restaurant: Zeng and 60 of his senior managers were already there waiting for him.
CATL’s rivalry with BYD, now China’s biggest local brand of electric cars, might help investors better understand the country’s leading EV battery maker as well. BYD’s founder Wang Chuanfu is only two years older than Zeng. Both have deep backgrounds in battery engineering. Indeed, Zeng returned to Ningde and started his second venture in 2008 – the same year that BYD made international headlines when Warren Buffett’s Berkshire Hathaway bought a stake in Wang’s company.
“Zeng Yuqun has long hidden his determination to surpass Wang Chuanfu,” Founder suggested. “The rivalry between the duo will decide their destiny.”
One of the biggest differences between the pair, of course, is that BYD produces EVs under its own brand and it has never been too keen on supplying its batteries to rival carmakers. This strategic difference paved the way for CATL to ink partnerships with international and Chinese carmakers based on a shared interest in improving battery reliability and driving range.
CATL has been willing to work hand-in-hand with each partner to provide customised batteries for different models of vehicle. Its work with the likes of BMW has added experience of German engineering excellence to its strengths, observed Quartz, a news portal, in an article from 2019 that listed three more of CATL’s strengths: Chinese entrepreneurship, state support and (thanks to some early DNA imported from the TDK connection) a Japanese sense of discipline.
Has CATL been receiving much help from the government?
Similar to the rapid rise of BYD and Huawei, CATL owes some of its spectacular success to strong state support for ‘new energy industries’.
In a similar playbook to that used by Wuxi-based Suntech, once the world’s biggest solar panel maker before its bankruptcy, Zeng benefited from strong backing from the local government of his hometown when he decided to create a ‘new ATL’ in Fujian province’s Ningde.
Indeed, CATL has now become the city’s ‘namecard enterprise’ and a key force in its growth drive (Ningde was previously better known for its tea than tech).
More importantly, the macro policy environment has favoured the development of new energy and technology firms such as CATL. Just as improvements to the design of combustion engines boosted the Germany economy from the turn of the nineteenth century, Beijing has identified the EV sector as a key contributor to the leapfrogging of legacy carmaker technology (foreign auto firms hold almost all of the most valuable patents for vehicles powered by fossil fuels).
The Chinese government has been pushing for the wider adoption of EVs for more than a decade. Companies in the sector have generally received support in the form of cheaper land for factories, tax breaks and subsidies towards the purchase prices of their products. Barriers have also been erected to make it harder for foreign firms such as LG to get too much of a hold on the local market. In 2016, EV makers were required to use batteries from a list of approved suppliers. That so-called ‘white list’ almost completely excluded foreign firms (a decision that triggered an investment by Samsung in BYD, see WiC334).
Although this policy was relaxed three years later, it gifted CATL with a precious opportunity to grow in its domestic market. The company then went public in Shenzhen four years ago. In another sign of its preferential status, approval of its IPO application took 29 days – a record pace at the time for stock market regulators.
Investment in the sector since then has also been spurred by Chinese leader Xi Jinping’s pledge that China will achieve carbon-zero status before 2060. CATL’s near perfect alignment with that bigger policy goal isn’t lost on the fund management community, which sees the company as a quasi-national champion. The sentiment helped CATL’s share price jump nearly 10 times within its first three years of listing. However, it has undergone a sharp correction in recent months.
What are the biggest risks for CATL?
CATL was trading at nearly Rmb700 a share by the end of last year. It had fallen to about Rmb400 as of this week. Broader market sentiment has been awful this year but CATL has underperformed the benchmark, with a slide exacerbated by a flurry of negative reports.
Some of the allegations were completely unfounded, such as the possibility that it would be dropped from ChiNext’s key stock indices. Others underscored concerns shared by a wider group of analysts. For instance, there were rumours that CATL was on the verge of being targeted by US sanctions similar to those suffered by Huawei. There have also been questions about the state of CATL’s relationships with its major clients, including Tesla and China’s key EV makers. One speculated that talks between CATL and Tesla for a new deal had collapsed. The American carmaker soon denied the report, Shanghai Securities News reported. In a statement published in February, CATL also insisted that the “malicious rumours” were untrue and that it had reported the “rumour-mongers” to the police.
The company’s share price has also come under renewed pressure this month as the Covid lockdown in Shanghai threatened to derail car production in other parts of the country. The low-profile Zeng made a rare public appearance during an earnings call, in which he insisted that a 23% decline in first-quarter earnings was a short-term blip because of surging raw material costs.
That said, CATL has long been aware of the industry’s supply chain constraints and has been acquiring upstream resources for several years: primarily lithium (see WiC512) and cobalt (see WiC537) mines. As it attempts to control more of these raw materials in places like the Democratic Republic of Congo, it will be forced out of its China comfort zone in looking for an edge over rival battery firms.
Indeed in a world where EV makers are scurrying to source sufficient battery supply to meet their targeted increases in car production (Volkswagen is a good example in expressing its concerns on this front), there are indications that CATL’s vision of vertically integrated battery production will emerge as a winning strategy. Its alignment of tech R&D with its calculus of commodity scarcity could leave it better positioned to scale up, as rivals struggle with weaker access to vital raw materials like lithium.
In this market dynamic CATL could increasingly set standards – in areas such as recharging station technology or formats for battery swapping – simply because more of the cars on roads are relying on its battery IP.
The challenge for Zeng and his management team could then be to figure out an optimal level of market dominance that gives CATL enough clout to set the pace commercially without triggering antitrust investigations or geopolitical backlashes in markets around the world. For similar reasons, long term investors might end up seeing CATL as a decent future prospect for the title of the world’s most valuable company, taking the mantle from more established contenders like Saudi Aramco as the fossil fuel era finally comes to an end.
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