Picture the scenario: you have just started an exciting new job in a cutting-edge industry and want to promote the fact on LinkedIn. It’s a feeling that many of us can relate to.
Charles Huang clearly felt the same when, in April 2021, he announced his departure as the CFO of a porcelain tile manufacturing business to join the world’s largest electric battery manufacturer, Contemporary Amperex Technology (CATL). Huang went on to explain that he had been hired to establish a corporate structure and strategy for the Chinese battery giant in North America from his new base in Kentucky.
That is according to Bloomberg, whose journalists came across his post. Last week, they cited it as evidence that CATL is not only at an advanced stage of establishing its first battery plant on US soil, but has also plumped for Kentucky. In signalling his job description, Huang unwittingly stepped right into the thick of Sino-American geopolitics. His LinkedIn profile has now disappeared.
As for CATL, while it had purchased an old printing plant in Glasgow, Kentucky back in 2020, there have been no announcements since then as it weighed up the pros and cons of a key business decision fraught with risk.
Its desire to be close to some of its largest customers is tempered by the knowledge that it will not be wholly welcomed on American soil by all quarters. As we reported back in WiC574, some Chinese media outlets believe that Washington may place CATL on its sanctions ‘entity list’ to try and stifle its business in the same way it has attempted with Huawei.
The US government is certainly clear about the need to make up for lost time in establishing a secure supply chain for the electric vehicle (EV) industry, ideally on home soil. Simon Moores, the founder of EV supply chain agency Benchmark Mineral Intelligence, recently highlighted just how far behind the US is. He noted that 92% of the world’s cathode capacity is currently located in China, as is 91% of its anode capacity.
Over the past year, he added that China has announced 76 gigafactories capable of producing 2,024 GWh (giga-watt hours). During the first six months of 2022 alone, CATL installed a further 78 GWh of capacity (up 110% year-on-year).
Companies in the US, meanwhile, have announced nine gigafactory projects with projected capacity of 316 GWh. Moores argues that the US needs to triple its efforts and secure at least three terawatts of capacity within the coming decade.
State legislatures have been stepping up their efforts to incentivise battery manufacturers through subsidies that even out the cost of setting up shop in the US. Japan’s Panasonic is on course to receive up to $1 billion from Kansas to double its US capacity, for example. It has just announced a $4 billion plant in Kentucky too that will mainly supply Tesla with its latest 4680 battery.
Ford Motor and South Korea’s SK On are also on course to receive a similar amount from Tennessee for their new joint venture battery manufacturer BlueOval SK. Ford has committed $6.6 billion to the venture over the next few years in order to source the 60 GWh capacity it needs to hit its 600,000 EV production target.
Tie-ups between American car companies and battery producers from geopolitical allies have been coming thick and fast. LG Energy Solutions (LGES) and General Motors have a JV called Ultium Cells too. Last week, US Treasury Secretary Janet Yellen visited LGES on a trip to South Korea. Officials told her of plans to spend $11 billion on the venture over the next few years.
But will any US state legislature be happy – politically – to subsidise a Chinese battery manufacturer these days (notwithstanding a jobs windfall if they decide to)? And if not, will CATL be happy to make a multi-billion dollar outlay on an unsubsidised plant that puts it at a cost disadvantage to competitors?
This may explain why the latest speculation points to a different location for CATL close to Ciudad Juarez, a city in Mexico’s Chihuahua state. This factory would manufacture the battery packs, which would then be installed at a separate plant in Kentucky.
But there has been ongoing Sino-American collaboration too. One of the main customers for CATL’s mooted Cuidad Juarez plant is likely to be Ford. It has just signed an agreement for CATL’s LFP (lithium ferrous phosphate) battery system for its Mustang Mach-E models starting next year, and for F-150 Lightnings in early 2024.
In 2021, CATL derived 21.38% of its revenues from its international operations. During the first quarter of 2022, the company shocked financial analysts and many of its equity investors when it announced a 23.6% drop in first quarter net profit to Rmb1.49 billion ($215 million). Analysts had been expecting it to report Rmb5 billion.
The main culprit was soaring raw material prices, particularly for lithium carbonate. As recently as five years ago, raw materials accounted for about 40% of a battery cell’s cost. Today it is closer to 80% according to Benchmark Intelligence.
As such, CATL’s share price almost halved, dropping from a high of around the Rmb699 level in December to Rmb368 in May. Since then, it has rebounded to around Rmb563 in late May before tailing off again to current levels around the Rmb515 mark.
One of the market’s main concerns is that CATL is not only in danger of losing market share overseas, but will also see its 50% domestic market share undercut by a host of new competitors including China Aviation Lithium Battery (CALB) and Gotion High-Tech.
Another key debate surrounds the extent to which battery companies are producing a commodity (typically marked by fierce competition and low margins), or a technologically advanced product requiring the kind of innovation that creates high entry barriers and much fatter margins. Morgan Stanley analyst Jack Lu believes it is the former. He argues that, “CATL is not TSMC,” the world’s premier semiconductor manufacturer.
He is also less impressed with CATL’s latest battery technology (Qilin) than with Tesla’s cell-to-chassis (CTC) breakthrough and BYD’s cell-to-body (CTB) upgrade. Lu says that Tesla’s CTC 4680 battery marks a cell level innovation including cell architecture and chemistry, while Qilin is a pack-level upgrade, which simply saves space.
Unsurprisingly, CATL does not see things this way. The company’s chief scientist Wu Kai recently teased that it has come up with a better chemical formulation for its next generation M3P batteries compared to the wider industry’s LFMP (lithium ferrous manganese phosphate) ones.
Chairman Zeng Yuqun also recently said that CATL is pioneering a new battery technology “that no-one has ever heard of” based on condensed matter. Chinese financial analysts also believe that CATL will increase its overall battery market share and underpin its profit margins through its market-leading development of sodium-ion batteries.
Last July, the group unveiled a first generation sodium-ion battery with an energy density of 160 Wh/kg. Sodium and lithium are alkali metals that share a number of attributes. They both hail from the same family on the periodic table, for example. One of the main challenges for sodium-ion batteries is their charging power. They are not as good at holding their charge over extended periods as lithium-ion ones and they also have a lower energy density, although this is improving.
However, there is one key difference. Sodium supplies is not only far more abundant than lithium, but is also easier and cheaper to mine and to refine.
Citic Securities analyst Zhu Yue acknowledges that there is a high degree of uncertainty because the technology is still at an early stage. But he believes that CATL could achieve a cost saving of Rmb0.1/Wh from using sodium, rising to Rmb0.4/Wh if lithium carbonate prices continue rising. Zhu predicts that Chinese companies like CATL could be producing up to 200 GWh in sodium-ion capacity by 2025 and up to 100 billion GWh by 2030.
“Sodium-ion is the rising star of battery production and will become an important technological route to help the energy revolution,” he concludes.
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