2020 is shaping up to be the year Chinese EV batteries broke through, despite the effects of the Covid-19 pandemic.
Global automakers have not always cared for Chinese-made batteries. Japan and South Korea took an early lead in electric vehicle battery technology. LG Chem and Panasonic currently hold more than half of the global market share.
But things are changing. In the battle for electric vehicle supremacy, global OEMs are turning to Chinese-made alternatives as they localize their supply chains to gain first-mover advantages in the world’s biggest EV market.
US EV giant Tesla has deepened its ties with China’s biggest battery maker to launch a locally-built Model 3 with an expected 20% reduction in battery cost. German automaker Volkswagen, poised to compete with Tesla in EVs, recently became the first global carmaker to invest in a Chinese battery supplier. Meanwhile, several auto majors have their eyes set on BYD’s new fire-resistant “blade battery.”
Meet the battery makers
Contemporary Amperex Technology Co Ltd (CATL): The Fujian-based company unseated Panasonic as the world’s largest battery supplier by sales volume in 2017 and maintained its lead until China’s EV sales were hit by the Covid-19 outbreak. The company is now the third-largest manufacturer by market share. Its clients range from Geely to BMW. However, their partnership with Nio resulted in several car fires, causing the EV maker to recall 5,000 of its SUVs last year.
Build Your Dreams (BYD): Founded in 1995 by Wang Chuanfu, a former government chemist, BYD is often seen as the poster child of China’s electric vehicle industry for its dominant position in the market and reputation as an industry pioneer. It is the world’s second-largest EV maker by sales volume, the sixth-ranked player in the global EV battery market, and the leader in commercial EVs. The company has delivered more than 50,000 e-buses globally, including China.
Gotion/Guoxuan: Based in Hefei, the capital of eastern China’s Anhui province and new home of EV maker Nio, Gotion is a distant third in China’s battery market, coming in after CATL and BYD. The company shipped the equivalent of 3.43 gigawatt-hours (GWh) of lithium-ion batteries last year, around one-tenth of what CATL produced. Chinese automakers Chery and JAC Motors are among its clients.
In these partnerships, lithium iron phosphate (LFP) batteries, which Tesla and its challengers once shunned for their low energy density, are gaining favor for their low price and improved performance.
Batteries are key to the figures that matter in EV competition: price and range. The price tag and energy density of an EV battery largely determines whether or not a vehicle will succeed. Automakers have realized that forging alliances with battery makers ensures they have a consistent supply of a core component at a favorable price.
Chinese battery makers will be a vital ally for global automakers in their pursuit of EV dominance.
Key battery types
Nickel-manganese-cobalt (NMC): NMC batteries are currently the most popular type of battery for electric vehicles due to high cell energy density. These batteries made up 62% of the total market in China last year, according to an industry report from JPMorgan.
However, NMC batteries are prone to combusting, an issue that has gained widespread attention in China. These incidents are usually caused by overcharging, physical damage to the battery, a hot environment, or a combination of the above.
Nickel-cobalt-aluminum (NCA): NCA batteries have been widely used in Tesla’s “S3XY” vehicle lineup, but have not been mass-produced in China, nor have they been adopted en masse. A new NCA battery pack recently launched by Tesla and Panasonic has broken performance records. The battery features a cell energy density of close to 300 Wh/kg, the highest among any type of lithium-ion battery.
NCA, along with NMC, accounted for 90% market share in passenger EV batteries last year, as figures from Adamas Intelligence show.
Lithium iron phosphate (LFP): Accidental fires are much less common for LFP batteries because they don’t require cobalt. LFP has a longer life cycle but lower performance, usually resulting in EVs with a shorter driving range.
Market share for the LFP battery in all-electric vehicles fell to a mere 4% in 2019, but the investment bank China International Capital Corporation (CICC) expects a strong rebound of up to 20% this year.
The cost of CATL’s LFP battery packs has fallen below USD 80 per kilowatt-hour (kWh). CATL’s NMC battery packs are close to USD 100/kWh, according to a Reuters report. USD 100/kWh for a battery pack is the level at which EVs reach parity with traditional vehicles.
Volkswagen’s deal with Chinese battery manufacturer Gotion recently made history. Signed in May, it will be the first time in Beijing’s decade-long EV push that a global automaker has taken a controlling stake in a Chinese battery supplier.
VW is known for its ambition to become a world leader in EVs, aiming to leapfrog Tesla by making 1 million electrified cars annually by the end of 2022. More than half of these vehicles are expected to be produced in China.
However, its supply chain has been largely dependent on battery giants. Early last year, South Korea’s LG Chem reportedly threatened to cut off VW from its battery supply after the German automaker sought to partner with LG rival SK Innovation to build a gigafactory in Europe.
Consequently, establishing a supply chain from battery to chargers has become a matter of urgency for VW.
Gotion is China’s third-largest battery supplier. The company is based in Anhui province, where JAC Motors, one of VW’s manufacturing partners, is also located.
- VW will pay RMB 8.7 billion (USD 1.2 billion) for a 26.47% stake in Gotion, and will become its biggest shareholder when the transaction is completed later this year, the two companies announced in late May.
- Gotion will be a certified battery supplier to VW in China, “actively responding to the demands from VW” [our translation], including supplies for its all-electric vehicles built on MEB, the German auto giant’s first high-volume EV architecture, according to a filing.
- VW’s voting rights will be at least 5% less than those of the founding shareholders for a minimum of three years, during which time Gotion founder and president Li Zhen will remain in control of the company. VW will take the helm after that.
- Gotion mainly supplies LFP batteries.
- Gotion is currently investing RMB 540 million to expand its production capacity. The company expects that it will reach cell production of 16 GWh annually, around half of that of Tesla’s joint battery plant with Panasonic.
Batteries used to be a soft spot in Tesla’s empire.
The company’s Shanghai Gigafactory has rescued it from years of bleeding cash and doubts on Wall Street. After only a few months of operation, the factory now contributes to more than half of Tesla’s global sales.
Now, a deal with CATL is aimed at further reducing costs.
In July, Elon Musk’s electric car company dethroned Toyota as the world’s biggest automaker by market value, and its locally built Model 3 is already the most popular EV model in China. However, the RMB 355,800 purchasing threshold is still too high for most Chinese customers.
Sourcing local parts will be essential for the company to slash prices without sacrificing profits. Analysts expect the Tesla-CATL deal will help expand the American automaker’s lead in the Chinese market.
- In February, Shenzhen-listed CATL said it had signed a deal for an undisclosed amount to supply batteries to Tesla in China for a two-year period starting this month.
- This was followed by Tesla receiving government approval to make Model 3 cars in China equipped with LFP batteries, according to the Ministry of Industry and Information Technology.
- Given that battery packs currently comprise around 40% of a vehicle’s cost, the move is a critical step in Tesla’s efforts to localize its entire supply chain in China by the end of this year.
- If Tesla is able to source all of its parts—including CATL’s LFP batteries—in China, the automaker could see a 20% drop in production costs and a leap in its vehicle margins from 20% to 53%, analysts from Chinese equity firm Bohai Securities said in a report released earlier this year.
- Previously, the automaker had sourced NMC and NCA batteries from LG Chem and Panasonic due to higher energy density, a critical factor in determining an EV’s range.
- Tesla will continue using NMC and NCA batteries in its long-range Model 3 vehicles. Still, as LFP battery performance catches up, a standard range plus version with LFP batteries will be soon available to Chinese customers.
- Meanwhile, a price war is looming for local EV makers. Tesla will retain a remarkable gross margin of 35%, even if it cuts the starting price of Model 3 to RMB 230,000, Bohai analysts added. The vehicle is currently priced at RMB 271,550.
While Tesla and VW attempt to secure their supply of batteries, one Chinese automaker has been producing them in-house all along.
BYD, once the colossus of the EV battery market, lost its crown to CATL in 2017 due to its slow move into the NMC battery segment. The company chose to stick with the cheaper and safer—but less energy dense—LFP batteries.
BYD produces batteries for its own vehicles but also sells them to other automakers. Approximately 10% of its revenue comes from battery sales.
The company is now attempting to make up lost ground with the launch of its “blade battery,” an LFP battery boasting a 50% improvement in energy density and 30% cost reduction over conventional alternatives. These batteries could take a significant share of the market in the short term, but still come off second-best compared to NCM and NCA batteries.
BYD claims that these batteries are already gaining traction. “Today, almost all vehicle brands that you may know are in discussion with us for future cooperation based on blade battery technology,” said He Long, vice president of BYD, during a press event in March. TechNode was unable to independently verify He’s claims.
- Currently, only one vehicle uses the blade battery: BYD’s own premium sedan, the Han. The vehicle has a range of 605 km (376 miles) and is 25% cheaper than the starting price of the Tesla Model 3. The Han is scheduled for delivery in mid-July.
- The company claims the blade battery is fire- and explosion-proof.
- Credit Suisse analysts expect BYD’s profitability to improve in the coming quarters. The blade battery could contribute by reducing costs while boosting an EV’s driving range. BYD plans to double its production capacity for blade batteries by the end of the year.
- A major reason for BYD’s focus on LFP batteries was Beijing’s support for these energy sources in commercial EVs. In the electric bus segment, where BYD has been recognized as a global leader, LFP batteries currently make up more than 90% of the market.
- Conversely, NCM and NCA accounted for 90% of the market for passenger EV batteries last year, according to figures from research firm Adamas Intelligence. Market tracker SNE Research said BYD only ranked sixth with a mere 4.9% share in the global EV battery market in the first quarter of this year, compared with the CATL’s 17.4%.
The rise of China’s batteries
Chinese battery makers are now catching up with their overseas rivals. BYD is aiming to increase the energy density of its blade battery to 180 Wh/kg in two years, while Gotion has said it will produce LFP cells with an energy density of 200 Wh/kg by 2021. This is only 30% less capacity than the NCA battery Panasonic currently builds for Tesla. The two Chinese companies are expected to make EVs with driving ranges on par with Tesla cars by improving the organization of cells within a battery pack.
Years of EV subsidies are also finally paying off, according to UBS analyst Paul Gong. An industrial supply chain—from battery materials to charging piles—is emerging after a decade of government support for EV purchases, giving China an early advantage in the global competition, Gong said in a media briefing earlier this year. To pool resources and ensure profits, overseas automakers consider China to be an ideal production base for their global EV businesses, he added.
Chinese battery makers peddling LFPs still have big hurdles to overcome. LFPs still lag behind NMC batteries in energy density. JPMorgan analyst Nick Lai estimates NMC will remain the dominant type of battery in the Chinese passenger vehicles sector, extending its growth “at a solid rate.” In the near- to medium-term, analysts expect automakers to switch to high-performance LFP batteries that also offer the advantage of lower costs.
These battery makers realize that their futures depend on their ability to innovate. Failing to continuously improve technologies could hurt competitiveness given the rapid development of lithium-ion battery technology, CATL wrote in its first-quarter financial report in April. The company has no alternative but to increase investment in R&D of battery technology.
The biggest challenges are yet to come.