Business

Tesla May Be Trampled by CATL in China

The battery maker is the stuff that technology domination dreams are made of.

Photographer: Zhang Peng/LightRocket/Getty Images

Sorry, Elon Musk. By the looks of it, every car of the future will be equipped with a powerful and cheap battery made in, and more importantly by, China.

This month, Nissan Motor Co. and Daimler AG put in orders for electric-car batteries with an emerging Chinese champion, privately held Contemporary Amperex Technology Co., or CATL. Volkswagen AG is already a customer, as is the joint venture of BMW AG and Brilliance China Automotive Holdings Ltd. That’s quite an endorsement of the battery maker’s know-how.

CATL is the stuff China’s dreams of technology domination are made of. Chinese regulators last month approved the company’s application for a $2 billion initial public offering that would value it at more than $20 billion. Funds raised will be used to double production capacity to around 36 gigawatt-hours. That exceeds the current output ceiling at Tesla Inc.’s so-called gigafactory in Nevada. Tesla founder Musk also wants to build a battery plant in China and the company has said it is “in good discussion with the government.”

All Powered Up

CATL had the biggest share of China's battery market as of 2017

Source: Nomura

*Acquired

Almost 90 percent of CATL’s revenue comes from making lithium-ion batteries. It’s moved beyond lithium iron phosphate technology to produce more advanced, higher-energy-density forms that use nickel, cobalt and manganese.

The company’s relatively quiet rise is no chance event. It’s been investing and striking deals worldwide to add customers and lock in long-term supplies. CATL has taken a strategic stake in Valmet Automotive Oy, a Finnish car supplier, to gain exposure to the European market, where there’s a greater predilection for electric vehicles. It acquired a stake in Canadian exploration company North American Nickel Inc. to secure supplies, and signed a deal with Glencore Plc, the world’s biggest commodities trader, to buy tons of cobalt. The company has invested almost $700 million in a research and development center for batteries.

Charging Ahead

CATL's capacity and sales have risen sharply over the past three years

Source: CATL Prospectus

Key to its success has been an ability to manage costs. The various parts of a CATL battery along with the equipment used in manufacturing are sourced domestically, where prices for some materials are lower.

Battery-makers with superior technology like Panasonic Corp. — a Tesla supplier — and Samsung SDI Co. have been trying to push production costs down. Tesla’s gigafactory hopes to bring the cost of a battery pack to around $100 per kilowatt-hour by 2020, at which point electric cars will become more affordable. Skyrocketing prices for inputs such as cobalt have made this a tough challenge, with Musk even talking of reducing use of the metal to “almost nothing.” Despite this, CATL was able to lower prices of its batteries by more than 30 percent last year, according to its IPO prospectus.

Cut-Price

Contemporary Amperex has pushed down the average selling price of electric vehicle batteries

Source: Nomura, CATL Prospectus

Granted, CATL’s headlong expansion risks eroding profitability. So far, it’s managed to keep Ebitda margins at a relatively fat 28 percent, though they have come down. Rapid factory growth has also reduced capacity utilization rates. Meanwhile, there’s a risk that it could be left behind by a further wave of technological innovation in lithium-ion batteries.

Still, the timing of CATL’s ramp-up is opportune. The U.S. car market is peaking, causing automakers to shift their interest to China. Meanwhile, most parts of the world — the U.S. excepted — are getting greener and focusing on fuel efficiency. 

China’s carrot-and-stick policies on electric vehicles mandate penetration of as much as 6 percent over the next two years. In the U.K., carmakers are binning diesels and offering incentives to trade in old models that run on the fuel. That’s moved demand to China, the world’s largest market for all types of cars — and so to CATL, which is a beneficiary of state subsidies for battery producers. Growing skepticism about Tesla’s capabilities may also be helping.

Chinese policy will probably support CATL for years to come. After all, the country has been trying to corner the market for batteries — almost 50 percent of the cost of an electric car — after failing to come up with a conventional or new-economy vehicle that could compete on the global stage. At the same time, Beijing has used policy barriers to shut out foreign competitors such as Panasonic and LG Chem Ltd. CATL is also expanding its recycling business as Beijing starts to craft policies to deal with the inevitable oversupply of obsolete batteries.

As CATL captures more market share, rivals — and investors — should keep their eyes on its fully charged public offering.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Anjani Trivedi at atrivedi39@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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