Low-carbon technology power play by China’s CATL
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It would be a stretch to describe Zeng Yuqun as China’s answer to Elon Musk. While the latter is one of the world’s best-known entrepreneurs, as famous for his ambitions in space travel as for founding Tesla, the electric carmaker, the other does not even have his own Wikipedia entry.
Yet, in the race for leadership of the battery technology that is forecast to transform the worlds of automotives and energy, Zeng could have as big a role as his better-known American rival.
In just seven years since founding Contemporary Amperex Technology, or CATL, the media-shy Zeng has turned the company into one of China’s biggest battery producers, with aggressive plans for further expansion which would see it surpass Tesla’s giant “gigafactory” in the US.
“They are China’s champion,” says Simon Moores, managing director of Benchmark Mineral Intelligence, a London-based research firm that tracks the battery market. “They are the company which has been given the licence to expand and become the number one provider.”
The rise of CATL is an important part of China’s strategy to seize global leadership of the battery industry in anticipation of a long-term shift from polluting internal combustion engines to electric vehicles (EVs). China is the world’s biggest and fast-growing market for EVs and the batteries that power them, spurred by hefty government subsidies intended to encourage car manufacturers and consumers to embrace the technology. By 2020, China is aiming to have 5m EVs on its roads, up from about 1m today.
Beijing’s motivation is at least threefold. First, it wants EVs to help reduce the severe smog — much of it caused by vehicle fumes — that undermines quality of life in Chinese cities. Second, it sees the shift as a way to reduce dependence on oil imports and, third, as an opportunity to challenge US, European and Japanese dominance of the car market.
China hopes its support for batteries will follow the same pattern as its past backing for solar panel manufacturing. This sector is dominated by Chinese companies, whose rising volumes and falling costs have accelerated uptake of solar power around the world. Similar improvements in battery economics are needed to increase the competitiveness of EVs versus petrol and diesel vehicles, and CATL is critical to China’s push towards that goal.
“China needs one or two big battery producers,” says Moores. “If they don’t increase their battery capacity, the whole EV strategy will fall apart.”
CATL’s short corporate history reflects the widening horizons of an industry hitherto focused on churning out cheap batteries for consumer electronics but now seen as a pivotal enabler of efforts to tackle climate change and air pollution. CATL, based in the city of Ningde, south-east China, originated as a spin-off from Amperex Technology, a company previously led by Zeng, which makes batteries for digital gadgets, including the Apple iPhone.
The two companies split in 2015 and Zeng last year cut his remaining ties to Amperex, a subsidiary of Japan’s TDK. Analysts say these were important moves to ensure CATL’s eligibility for battery subsidies, which Chinese authorities have so far granted only to domestic manufacturers. They represented a gamble by Zeng that the nascent EV supply chain offered greater long-term opportunity than the proven market for iPhone batteries.
Mark Newman, an analyst at Bernstein in Hong Kong, says an “electric revolution” is poised to redistribute value away from traditional manufacturers in the $1.8tn global car market. “Battery systems and the battery supply chain, the key enabler of electrification, offer arguably the most dramatic growth,” he adds.
CATL is among the “clear scale leaders in batteries”, Newman says, alongside its Chinese rival BYD, South Korea’s LG Chem and Samsung SDI, and Panasonic of Japan, which is developing a $5bn production facility with Tesla in the US.
If all goes to plan, CATL will push in front of rivals as it expands manufacturing capacity at least fivefold from 7.5 gigawatt hours of battery cells last year. An extra 10GWh is under construction with a further 24GWh to follow. Together, these facilities would far outstrip the 35GWh gigafactory being opened in phases by Tesla and Panasonic in the Nevada desert.
CATL plans to finance its expansion by selling 10 per cent of the company for Rmb13.12bn ($2.1bn) in an initial public offering this year, implying a valuation of about $20bn.
Unlike BYD and Tesla, CATL does not make its own EVs. Its biggest customer is the Chinese carmaker Geely. Several international marques, including BMW and Daimler of Germany, use CATL batteries in the Chinese market.
More than 98 per cent of the company’s income is generated in China. This is not something for CATL to be ashamed of, according to Menahem Anderman, president of Total Battery Consulting, based in California. “China is more than 50 per cent of the global market and it is growing at about 50 per cent a year, compared with about 35 per cent for the rest of the world,” he says. “Why focus anywhere else?”
CATL is laying the foundations for international expansion. Last year, it invested €30m in a 22 per cent stake in Valmet Automotive, a Finnish engineering company that assembles cars for Mercedes-Benz. Analysts say the tie-up could give CATL an entry point to the European market and help it meet the exacting standards demanded by western manufacturers.
“Western manufacturers are focused on quality of batteries, not only in length of life but also safety,” says Moores. “Panasonic, LG and Samsung still lead on quality, but CATL will be the top volume producer and then, over time, their quality will increase. My expectation is that they will end up in western vehicles.”
Zeng last year declared himself less focused on competition with rival manufacturers than with rival sources of energy. “We are competing with gasoline cars,” he said. “If we can’t win against gasoline cars, there’s no place for us in the market.”
On that measure, there remains some way to go. A battery pack with a 500km range costs about $14,000, compared with $5,000 for a petrol engine, according to Bernstein. “But battery costs are falling fast and even more rapidly than our earlier estimates,” says Newman. “The long-term economics looks increasingly good for EVs and better than [internal combustion engines], thus powering mass adoption.”
One key risk is the scarcity of raw materials used in making batteries, especially lithium, cobalt and nickel. Cobalt prices doubled last year in response to rising battery demand. CATL has said it is looking for potential investments in upstream mineral assets to secure supplies. A majority of the world’s cobalt comes from the Democratic Republic of Congo, where Chinese companies are prominent.
Sceptics have questioned how environmentally friendly EVs are when they rely on energy-intensive mining in far-flung parts of the world. Moreover, batteries will only help reduce carbon emissions and air pollution if charged using low-carbon power. Today that would not necessarily be the case, considering that coal accounts for about 60 per cent of China’s energy mix. But renewables, nuclear and gas, which emits half the carbon of coal, are all growing strongly.
As well as powering vehicles, battery technology is expected to play an important role in mitigating the main drawback of wind and solar power: its intermittency. Batteries are being integrated into electricity systems to absorb excess supplies and dispatch the power when needed later. These can be large-scale industrial batteries integrated into power grids or small-scale batteries used in conjunction with rooftop solar panels and EVs to allow consumers to generate and store their electricity.
Tesla last year installed the world’s largest lithium ion battery in South Australia, aimed at helping smooth out renewable power supplies. Anderman says that while EV batteries accounted for 85 per cent of CATL’s business in the past three years, there will be new opportunities ahead in the wider energy system. “Utilities do not yet have the market knowledge about batteries that carmakers have,” he says. “It is a more complex business to develop, but it will happen as energy storage economics improve.”
Critics note that battery storage remains far too expensive to cover extended periods when wind or sun is lacking. Advocates of green energy point out that the cost of solar power fell more quickly than expected after China threw its weight behind the technology and they hope the same will happen with batteries.
While the pace and extent of uptake remains uncertain, there is broad agreement that batteries will have a central role in the future low-carbon energy system.
Moores says CATL is in a prime position to take advantage. “Do they have government backing? Yes. Do they have a market? Yes. Do international companies want to work with them? Yes. They are going to be needed.”
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