The current EV battery industry, with a few big companies, is very much an oligopoly. And the major ones all come from Asia, Korea, Japan and of course, China.
Chinese CATL (Contemporary Amperex Technology Limited, or in Chinese 宁德时代 – Níngdé shídài) has got the spot as the largest EV battery manufacturer in the world for a while now. Already in 2018, CATL signed deals with VW who has a major presence in China which is also its major market, but also BMW and Nissan. It raised RMB 5.46 billion (£623 million) becoming the leader over Panasonic, which is famously in partnership with Tesla for the EV batteries production. At the end of the year, it posted a 48 per cent year-on-year revenue growth, reaching RMB 29.61 billion (£3,2 billion).
This huge success has been initially driven by subsidies of the Chinese government directed at creating the optimal conditions. At the beginning of 2017, Beijing released a list of EV battery manufacturers eligible for incentives and all the foreign manufacturers were excluded from it. This decision created a strong conflict with the two major companies already present in the Chinese market, LG Chem and Samsung SDI. The restriction has later been eased but under its duration has probably given the edge to CATL over its competitors in the domestic market.
CATL, which according to Reuters is still the largest EV battery manufacturer, has in the meantime added to its customers Daimler, Volvo, Toyota, and Honda. The Chinese company after its big expansion in China is also building its first plant in Germany and looking at the US as well. For CATL this could be an opportunity to leverage its position in the largest automotive market in the world to extend its partnerships with European manufacturers even outside the domestic market. Panasonic still follows, then come Chinese BYD and the South Koreans LG Chem and Samsung.
Having secured deals with big groups like VW, BMW and Daimler could give CATL access to luxury performance brands under large group umbrellas too (Bentley, Bugatti, Lamborghini, Rolls-Royce).
The current expansion in the Chinese domestic market and the numerous partnerships make CATL prospects really strong for the future and its shares appreciation shows the trust of its investors. Since its IPO in mid-2018 on the Shenzhen stock exchange, its shares have more than tripled their value from RMB 53 each to over 169. There has naturally been a slight decrease in the last two weeks caused by the current coronavirus outbreak emergency.
Despite this last slump, from which the company will arguably recover once the situation is stabilised, CATL has experienced a continued and stable growth. Its appreciation started accelerating in November 2019 when talks with Tesla began. But over a week at the beginning of February, the stock experienced a big jump upwards as it is clearly visible in the graph. Once again, as it often happens these days in the electric segment of the automotive industry, this sudden appreciation has its roots in a big announcement that involved Tesla.
Rumours about a deal between the battery maker and the American car manufacturer, which have been later confirmed, started to spread at the beginning of last month and the market was quick to react. Tesla will use CATL batteries for its China-produced EVs in the new Gigafactory built near Shanghai. The deal is expected to produce important results as Tesla looks to strengthen its unique presence in China, without forgetting that it is already the first automotive company to access the Chinese domestic market without the obligation of establishing a 50-50 Joint Venture with a Chinese partner.
And China to become a global leader in the sector through another partnership with the firm producing the best-selling electric car in the world, the Tesla Model 3.
More importantly, according to a CATL announcement, the company is going to provide Tesla with Lithium Iron Phosphate batteries (LFP). Despite having an inferior energy density compared to those using lithium cobalt oxide, LFP batteries should have a higher specific capacity, lower cost, and toxicity and be more sustainable. It avoids, in fact, the use of cobalt, a rare mineral whose mining, mainly happening in Africa, has caused numerous discussions around ethical and environmental issues, which I have also analysed in a previous article.
On Tesla’s side, the move makes sense not only to have access to a potentially crucial technology but also as a point of contact with the Chinese market. If it is true that not being forced to form a JV in China grants Tesla a stricter control over its technology and know-how, having a partner in such an important foreign market has been also key to the success of many other companies before. This will also mean avoiding import tariffs and other costs connected with imports. Arguably, apart for its most obvious reasons, the deal is also beneficial from a strategic point of view for both parties. Tesla has a reliable partner with insidership network advantages, CATL gains a huge exposure and more investments along with an important partner.
To strengthen even more the Chinese company’s position, there seem to be troubles on the horizon for its main competitor and Tesla’s first partner, Panasonic. Tensions between the two began in 2019 when Elon Musk blamed the Japanese batteries manufacturer for constraints in the production of the Model 3. News started to spread regarding Tesla vertically integrating the batteries production to reduce its dependence on Panasonic. As for 2020 though, the JV between the two turned profits for the first time, following the strongest financial year yet for Tesla, which I also discussed here. On the automotive side then, things seem to be improving, but last month it was also announced that Panasonic and Tesla would end their collaboration on solar cells. Once again, due to tensions over production issues and differing objectives. Tesla turned once again to China for the solar cell supplies. If such an important partnership was interrupted this would bring further advantage to CATL, especially as it moves in Europe and potentially in the US.
Along with the results of this partnership in the Chinese domestic market, a key role to lead the industry will be played by expansion and exclusive deals in Europe and the US, as well as technological advancements toward better environmental and production sustainability.
As of now CATL seems a strong investment option. With profits doubled year-on-year in H1 to RMB 2.1 billion (£232 million), a portfolio of deals with the most important car manufacturers in the automotive industry, and a partnership with great potential and ongoing expansion plans in the other two major continents.
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