The Rise of CATL
China’s auto market landscape and the Gigafactory in Shanghai have become important engines for Tesla’s growth, especially with the successful mass production and delivery of the made-in-China Model 3’s. Tesla is now building a Model Y production line in the Shanghai factory and has revealed that it will be introducing a new battery supplier CATL, the №1 battery-maker in China and in the world (in installed capacity), to its battery supply chain ecosystem.
CATL has a domestic market share of more than 50% in China, and has been ranked first in the world for three consecutive years, accounting for 27.87% of the global EV battery market. In 2019, CATL’s EV battery shipments totaled 32.5GWh, with lithium battery products in almost all major auto brands worldwide, including BMW, Daimler, Honda, Toyota, Volkswagen and Volvo. Starting this month, CATL will power Model 3’s manufactured in Tesla’s Shanghai Gigafactory, under a two-year deal signed with Tesla in February. In addition to the partnership at the Shanghai Gigafactory, battery supplier CATL aims to expand its relationship with Tesla into overseas markets, including Tesla’s first European factory in the suburbs of Berlin, following their recent construction of a battery factory in central Germany to supply batteries to BMW and Volkswagen.
Core Technology Strategy
Established in 2011 in Ningde, a small city in Fujian, CATL quickly became the world’s largest EV battery company in 8 years.The story starts in 2010, when BYD was still the leader of China’s EV battery industry. BYD entered the EV market with lithium iron phosphate (LFP) batteries as its core product, selected for its safety advantages. The strong P-O bonds in the LFP crystal makes them resistant to decomposition even at high temperatures or in overcharged conditions. In addition, LFP can deliver a long cycle life (>2000 cycles at 1C) at a relatively low cost (~43% cheaper than NMC811). However, one of the biggest drawbacks of conventional LFP batteries is their low energy density, which results in lower range for EV applications. In contrast, CATL’s technology strategy focused on ternary transition metal oxide systems like NCM and NCA, which have high energy density that can alleviate range anxiety in the EV market.
As China’s EV market accelerates, the government has started to decrease subsidies, shifting the market towards cars with longer range and higher energy density batteries. As a result of these policies, the high energy density NCM and NCA batteries capable of providing longer range have increased in sales, eventually dominating the EV market in China. From that point, CATL not only took the lead among battery manufacturers in China, but also began making a larger impact on the global battery market.
From the perspective of the global battery market, CATL is not the only one providing high energy density lithium battery technology. Among the industry leaders are Panasonic, which produces NCA batteries used by Tesla, as well as the Korean giants LG Chem and Samsung SDI. As a relative newcomer, CATL must deal with stiff competition from rivals in order to rise in the industry. In addition to strong R&D and the rapid growth of its manufacturing capacity, government support remains a key factor enabling CATL’s rise in the global market. In March 2015, the Ministry of Industry and Information Technology formulated and issued the “Specification Conditions for Automobile and Energy Storage Battery Industry”, and “whitelisted” companies in the industry that met this specification. EV OEM’s that wanted to receive subsidies from the government could use only batteries produced by companies on the “whitelist”, all of which were Chinese battery companies. With this national level support in preparation for the EV revolution, China’s battery companies were granted the window to develop and rapidly increase their global market share. Among those who seized this opportunity, CATL was able to grow into a unicorn in the global EV battery market.
China’s policy subsidies brought about a burst of growth in the domestic EV market. While this accelerated the development of Chinese battery manufacturers, it also brought forth several companies seeking to defraud the government of its subsidies. The government first started reducing subsidies in 2017, and subsidies were further reduced by 65% to 100% in 2019, with local government subsidies cancelled entirely. In June 2019, the Ministry of Industry and Information Technology removed the “whitelist” of EV batteries, opening the domestic EV battery market and inviting the Japanese and Korean EV battery giants back into the competition. In the past year, many Chinese battery manufacturers have lost their competitive advantage due to the disappearance of these policy advantages; however, this is not the story for CATL.
In fact, CATL had already begun to pave the way for dealing with the disappearance of policy subsidies by developing strategic alliances. CATL was not only playing the role of the supplier selling batteries, but also started to build factories with auto companies through joint ventures with OEM’s in the form of equity investment. In 2018, CATL established joint ventures with SAIC, GAC, Geely, and Dongfeng, and signed corresponding binding agreements with BAIC New Energy, Chang’an, Yutong, BMW Brilliance, Volkswagen, Daimler, and other auto OEM’s. By moving fast to develop deeper connections with car manufacturers, CATL established its closed loop manufacturing with downstream OEM’s and secured its existing market share, while increasing the migration cost of car OEM’s to other battery suppliers and effectively blunting the impact of its giant overseas competitors.
In addition, CATL prepared against future threats from new disruptive technologies such as solid-state batteries by investing upstream in mining industries to further reduce the cost of its batteries. The cost of EV’s is heavily dictated by the upstream cost of their batteries, and the cost of batteries is, in turn, determined largely by the upstream cost of their raw materials. The mining industry thus plays a critical role in the EV supply chain. The cost of lithium batteries is heavily influenced by the price of nickel, cobalt, manganese, lithium, and other minerals. The price of cobalt, in particular, has soared in past years, creating a nightmare for many battery companies. This explains, for example, Tesla‘s recent move in June 2020 to sign a long-term partnership agreement with Glencore, the world’s largest metals miner, to purchase 6,000 tonnes of cobalt a year. As early as September 2019, though, CATL had already become the largest shareholder in Pilbara, with a $55m stake in the Australian lithium company. CATL seeks to strengthen its control over both downstream OEM’s and upstream lithium supply such that, even if CATL’s battery technology is no longer the most advanced, it will still be able to dominate the market in terms of cost alone.
Despite the amount of strategic planning to secure CATL’s position in the current market, CATL never stopped iterating its battery technology and developing new breakthrough battery solutions. CATL’s R&D expenditures have risen by 50 percent to nearly 3 billion RMB (~$430 million), and the company has about 5,400 employees focused on R&D, including 143 with PhD degrees.
The latest news from CATL includes a massive round of funding of over 100 billion RMB (~$14 billion) from JP Morgan, Merrill Lynch, UBS, and other international banks and investors. Among these, Hillhouse Capital subscribed for 10 billion RMB (~$1.4 billion) as the largest investor in this round. Honda industrial (China) also invested 3.7 billion (~$530 million) or 1% of CATL, following CATL’s July announcement of future collaborations with Honda to deepen cooperation in the research and development, supply, recycling, and reuse of EV batteries. The agreement specifies that CATL will supply the batteries for pure electric vehicles (BEV) made by Honda in China, with anticipation of the product launch in the Chinese market in 2022.
Please stay tuned as this battery unicorn navigates its path through the pandemic and seeks to maintain its standing in this new era of electric vehicles.
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