Analysis of China's New Energy Vehicle Battery Industry



Analysis of China's New Energy Vehicle Battery Industry

As a strategic emerging industry, the new energy vehicle industry has been a key industry in China in recent years and has great significance for China to realize industrial transformation and upgrading, and seize the commanding heights of international competition. In particular, the industry has been vigorously boosted by the introduction of the subsidy policy in 2014 and has achieved faster development. Today, China's new energy vehicle industry has successfully built a complete industrial chain from the supply of raw materials, the R&D and production of power batteries, vehicle controllers and other key components, to vehicle design and manufacture, and the construction of charging infrastructure. From a long-term perspective, the new energy vehicle industry is in the initial stage of industrial development, and has enormous development potential. According to relevant national plans, new energy vehicle production and sales are expected to reach 2 million and 7 million units by 2020 and 2025 respectively.

As power batteries are the core of new energy vehicles, their technological progress affects the development of the entire electric vehicle industry. With the sales of new energy vehicles increasing year by year, China's power batteries have made a significant progress in its Industrialization and their core position has become increasingly prominent. By the end of 2016, the energy density per power battery in China had reached 220 kWh / kg and its price had been as low as RMB 1.5 / kWh, up by 1.7 times and down by 60% respectively compared with 2002. In addition, four major battery industry clusters - Pearl River Delta, Yangtze River Delta, Beijing-Tianjin-Hebei and the central Plains had been established. China has become the world's largest producer of power batteries. It is estimated that the power battery demand will reach 52.89GWh, 74.97GWh and 120.85GWh in 2018, 2019 and 2020 respectively, with an annual compound growth rate as high as 32%.

1. Industry overview:

1.1 Power battery

As the global energy crisis and environmental pollution problems have become increasingly prominent, the development of energy conservation and environmental protection-related industries are highly valued, and developing new energy vehicles has become a global consensus. In this context, the global sales of new energy vehicles have grown rapidly from 51,000 units in 2011 to 914,000 units in 2016, up by 16.9 times in 5 years. And this figure is expected to reach 6 million units in 2022, up by 5.6 times than 2016.

Thanks to the sales growth of new energy vehicles, as well as the high attention and support from the governments all over the world, the lithium-ion battery industry has been developing rapidly. Lithium-ion batteries have entered the large-scale application stage, and are gradually replacing traditional batteries such as lead-acid batteries. In 2016, 48.5GWh power batteries were used in electric vehicles on a global scale and power batteries recorded the highest growth among consumer electronics, power and energy storage batteries sectors. GGII predicted that by 2022, the world's demand for lithium batteries for electric vehicles will exceed 340GWh, which is 7 times that of 2016.

China's new energy vehicle sales were 507,000 units in 2016, up by 53.13% year-on-year, making China the world's largest producer and consumer of new energy vehicles for two consecutive years. Among them, new energy passenger vehicle sales were 336,000 units, up by 62.02% than 2015, and new energy commercial vehicle sales were 171,000 units, up by 38.23% than 2015.

Driven by the growth of domestic new energy vehicle production and sales, China's power battery production has also achieved tremendous growth. In 2016, China's automotive power lithium battery production was 30.8GWh, up by 82.2% year-on-year. With the gradual implementation of national policies, future improvement of lithium battery production technology, cost reduction and increased popularity of new energy vehicles and supporting facilities, the future power battery demand of new energy vehicles will maintain growth for the next 3 years and China's automotive power lithium battery production is expected to reach 215GWh by 2022, up by nearly 6 times than 2016.

In addition to the growing demand for power lithium batteries, there have been new requirements for the characteristics of batteries. In December 2016, the Ministry of Finance, Ministry of Science and Technology, Ministry of Industry and Information Technology, and National Development and Reform Commission issued the Notice on the Adjustment of Fiscal Subsidy Policy for the Popularization and Application of New Energy Vehicles, which made a major adjustment to the subsidy mode of new energy vehicles. As the new subsidy standards are connected with the energy density and mileage of power batteries, high energy density power batteries have become the focus of enterprises. Therefore, the proportion of new energy passenger vehicles using high energy density power batteries will increase year by year, and the industry's pursuit of high energy density power batteries will become more apparent.

1.2 Energy storage battery

In 2016, the global energy storage lithium battery market size was RMB 10.1 billion, up by 8.6% from the same period in 2015, and the top 10 enterprises accounted for 42.6% of the market share. In 2016, the output value of China's energy storage batteries was RMB 5.2 billion, up by 13% year-on-year, and the growth was still attributed to household energy storage batteries, power grids and communications base stations.

In the emerging energy Internet, renewable energy and distributed energy are massively connected with large power grids and combined with the popularization and application of micro power grids and electric vehicles, energy storage technology will become a crucial link that coordinates these applications and a key part of the entire energy Internet. Meanwhile, the rise of the energy Internet will promote strong demand for energy storage batteries. The rapid progress of lithium battery production technology has resulted in cost reduction of lithium batteries and will enhance the competitiveness of energy storage lithium batteries compared with other energy storage technology. The growing market penetration of lithium batteries in the energy storage sector will further promote the growth of the corresponding application market. It is foreseeable that China's energy storage lithium battery industry will enter a growth period with an expected compound growth rate of more than 15% in the next 5 years and will also show a big market potential.

1.3 Battery recycling

With the continuous demand growth of the power battery industry, the market demand for domestic lithium-ion battery cathode materials will continue to increase. Therefore, increasing the utilization efficiency of renewable resources by recycling the valuable metals such as nickel, cobalt, manganese and lithium in waste lithium-ion batteries will effectively solve the industry's pain point. In this context, the battery recycling industry emerges.

At present, the battery recycling industry is still in the initial stage. In the future, with the expansion of the power battery market, the number of scrap batteries will increase rapidly. The power battery market grew rapidly during 2014 and 2015 and is expected to gradually enter the recycling period after 2018. With the continuous growth of electric vehicle ownership, the number of scrap power batteries will increase year by year, and the battery recycling industry is expected to usher in growth.

2. Industry development trends

2.1 Industry consensus on the high energy density technology roadmap

From the technical point of view, the current power battery development roadmap has been basically determined. Guided by the policy, efficiency-driven battery manufacturers' pursuit of high energy density power batteries has become an industry consensus. Cathode materials for lithium ion batteries mainly include ternary materials (NCM/NCA), lithium iron phosphate, lithium cobaltate and lithium manganate. Among them, ternary materials have a theoretical specific capacity of up to 300mAh/g and are gradually replacing lithium iron phosphate as the mainstream cathode materials for power batteries due to their high specific capacity and stable chemical properties. In the first half of 2017, the proportion of ternary materials was further increased. With the release of huge market potential of electric passenger vehicles in the future, the demand for energy density power batteries will be improved accordingly, the capacity of ternary materials will be effectively released, and the proportion of ternary materials will be probably further increased.

2.2 The overall trend of structural overcapacity in the industry

As the sales of new energy vehicles soar, power battery industry profits have increased substantially. Due to the continuous high growth of the new energy vehicle market, the upstream power battery capacity has been insufficient and there was even a phenomenon where the sales of new energy vehicle enterprises are determined by the output of battery enterprises. In this situation, domestic power battery enterprises made continued investments and expanded capacity in 2015 and 2016. By the end of 2016, the new capacity of the domestic power battery industry was increased by 42GWh compared with the same period last year and the total capacity was nearly 3 times the annual shipment of 2015. In the meantime, the prosperity of the power battery industry has not only stimulated the continued dramatic expansion of original participants, but attracted a large number of no-battery companies to enter the industry through mergers, acquisitions and integration, etc.

However, with its rapid expansion, the entire industry now faces the embarrassment of structural overcapacity. The power battery market is severely polarized where low-level redundant construction is a prominent problem. Due to rapid market expansion and low access threshold, a large number of small and medium-sized enterprises with low R&D capabilities have begun to enter the power battery industry. Despite rapid expansion of industry capacity, the hidden danger of insufficient high-end technology and excess low-end technology has become increasingly apparent. From the perspective of market concentration, in 2015, less than 20 out of 121 power battery enterprises truly entered the vehicle supply system. In the long run, the insufficient high-end capacity and excess low-end capacity will cause fierce competition in the years to come and market clearing is expected to be realized.

2.3 Growing concentration of the battery industry

From the perspective of market concentration, before 2016, the shipments of the top ten power battery enterprises reached 23.8Gwh, accounting for up to 78% of total shipments and the shipments of the top three enterprises amounted to 17.0Gwh, accounting for 55.8%. Before the first quarter of 2017, the shipments of the top ten power battery enterprises were about 1.1Gwh, accounting for an astounding 89.4% of total shipments and the shipments of the top three enterprises were about 0.725 Gwh, accounting for 59%. With adjustments and changes to the production and sales structure of new energy vehicles in China, the competition pattern of power battery enterprises is gradually changing, and the trend of concentration towards leading enterprises is becoming increasingly evident.

3. Industry barriers

3.1 Technical barriers

The power battery industry has high technical barriers. The development of power batteries requires long-term technical accumulation. The experience accumulated from the pilot operation of electric vehicles has played an important role in guiding the production and design of batteries and battery pack systems. There are higher technical requirements for the R & D and production of materials, electric cores, modules, battery packs and battery management systems. If enterprises lack the corresponding core technology, it will be difficult for them to maintain sustainable competitiveness of their products. Therefore, it's often difficult for new enterprises to achieve high manufacturing standards in a short time. And the lack of technical standards will make it hard for them to survive in the industry.

3.2 Brand barriers

The power battery industry has high brand barriers. On the one hand, the safety, stability, consistency and quick response ability of lithium-ion batteries are the main factors customers consider when choosing manufacturers. In the industry, getting products certified by downstream enterprises and tested by the market often requires a certain period. Lithium-ion battery manufacturers need to have excellent comprehensive strength and a good brand in order to obtain the trust of customers. On the other hand, vehicle enterprises often adopt the model of sentinel procurement from qualified suppliers. Battery manufacturers will only establish a sentinel procurement relationship with downstream policy enterprises after confirming that their production equipment, process flow, management ability and product quality meet the requirements through assessment and evaluation. As the power battery system is one of the important components of vehicles and continuous supply is often required throughout the life cycle of vehicle models, vehicle enterprises generally will not easily replace battery suppliers. Therefore, the brand and customer loyalty of lithium-ion battery enterprises have a strong influence on whether they can enter the supply chain of vehicle enterprises.

3.3 Scale barriers

The power battery industry has high scale barriers. As power battery production has the characteristics of scale economy, enterprises with large production capacity and abundant capital have considerable scale advantages in terms of the procurement of raw materials, production and operations. Meanwhile, power battery R&D requires continued investments, so only large-scale enterprises can maintain a leading position. In addition, the government has put forward higher requirements for the production capacity of power batteries at the policy level. The government stipulates that the annual capacity of a lithium-ion power battery enterprise shall not be lower than 8 billion Wh and encourages power battery enterprise to become bigger and stronger. The government plans to cultivate internationally competitive, leading enterprises with an annual production and sales capacity of more than 40 billion Wh by 2020.

4. Industry competition pattern

At present, the global power battery market is dominated by China, Japan and South Korea. In 2016, 2 out of the world's top ten lithium battery companies were from Japan, Panasonic and Sony, 2 from South Korea, Samsung and LG, and the rest were all Chinese enterprises. Relatively speaking, Japanese and South Korean enterprises boast considerable technical advantages due to technical accumulation, while Chinese enterprises have gradually caught up with them thanks to a complete industry chain and achieved rapid growth. By country, China accounted for 60% of the world's sales, Japan 17% and South Korea about 23%. And Chinese manufacturers are growing faster than Japanese and South Korean counterparts. It's foreseeable that China's global share will continue to rise. In the next few years, we'll usher in an era where Chinese lithium battery manufacturers will fully overtake Japanese and South Korean counterparts in terms of market share, revenues and profits.

In 2016, the top ten domestic power battery manufacturers accounted for 83.9% of the country's total output value, showing high industry concentration. CATL, BYD, Guoxuan High-Tech and OptimumNano have become the industry's tier 1 enterprises and hold a solid industry position. Enterprises such as Lishen, EVE Energy, Farasis Energy and National Battery are the industry's tier 2 enterprises. They have developed downstream customers and offer cost-effective batteries. Domestic mainstream power battery manufacturers have their own advantages and have developed downstream customers in different directions. The tier 1 enterprises have a full range of stable large customers. At the current time, the tier 2 enterprises should focus more on customers that share the same technical direction and strategic planning as themselves.

At this stage, although domestic manufacturers can meet the current domestic demand for technology, they are at a disadvantage compared with foreign competitors in terms of technical accumulation. Due to the government's support for domestic power batteries, foreign outstanding battery manufacturers have not yet entered the battery subsidy catalog. But currently, among the suppliers of new energy vehicle enterprises, there are foreign battery companies such as Boston and LG Chemical. With the opening of the battery subsidy catalog and its unbinding with the recommended catalog of new energy vehicles, it's possible that Samsung SDI, Panasonic and other international battery giants may enter the supply chain of domestic vehicle enterprises, forcing domestic enterprises to accelerate technical innovation. At that time, a head-on confrontation between domestic and foreign enterprises will be inevitable and international competition will be further intensified. In the future global market, manufacturers will face more fierce competition.

5. Key enterprises

CATL:

CATL has an absolute advantage in the industry in terms of the gross margin of power lithium batteries. From 2015 to 2017H1, CATL's gross margin of main business was 38.72%, 44.05% and 36.56% respectively, its gross margin of power lithium batteries reached 42%, 45% and 37% respectively, much higher than the industry average of 30.36%, 34.32% and 29.35%, reflecting strong profitability. Despite a decline in its gross margin in the first half of 2017, it was mainly attributed to the price reduction of the whole battery industry early this year. In addition, from 2015 to 2017H1, CATL's expense to sales ratio was 5.80%, 4.22% and 4.28% respectively, while the industry average was 5.44%, 5.44% and 5.40% respectively. It shows that the company's expense management has been continuously improved and its expense to sales ratio is lower the industry average. Overall, the data indicates that the company has excellent bargaining power and cost control ability, and that the company's scale effect has been gradually reflected due to the improvement of its shipments and market share.

CATL has strong customer strength and a high market share. It has taken the lead in entering the supply chain system of international big brands and has maintained long-term strategic cooperation with the downstream leading vehicle enterprises. It has a growing customer base and an optimized customer mix. In 2012, the company established cooperation with BMW Brilliance on a battery project, thus becoming BMW Group's only battery supplier in Greater China and the first domestic power battery enterprise that has successfully entered the supply chain system of an international vehicle enterprise. Through this cooperation, the company has not only improved its technical level, but also has taken a successful step in launching its international program. Since then, CATL has established close cooperation with Mercedes Benz, Volkswagen and other companies. As for domestic brand customers, CATL has maintained long-term strategic cooperation with the industry's leading vehicle enterprises (including Internet vehicle enterprises and smart vehicle enterprises) such as Yutong Group, SAIC, BAIC, Geely Group, Fujian Motor Industry Group, CRRC, Dongfeng Group and Chang'an Group. In addition, the company has established cooperation with emerging vehicle enterprises (including Internet vehicle enterprises and smart vehicle enterprises) such as NextEV and actively form its deployment in the smart vehicle sector. The company has also established a supply partnership with basically all of the tier 1 domestic new energy vehicle companies and those latecomers with potential, achieving in-depth channel binding to downstream vehicle enterprises.

As the concentration of CATL's core customers has gradually reduced from more than 90% to 60%, the company's customer mix has been further improved and its reliance on a single large customer has been greatly decreased. The company now serves more customers, showing that it has made significant achievements in expanding the downstream supply channels. Thanks to this, the company's performance stability and downstream supply chain penetration have also been greatly improved.

Due to long certification time of lithium batteries, downstream vehicle enterprises will hardly replace lithium battery suppliers during the life cycle of vehicle models. Therefore, binding to the downstream leading vehicle enterprises will significantly enhance CATL's supply stability and long-term supply brand effect. CATL' effective binding to downstream leading enterprises and expansion of downstream channels has effectively strengthened the company's reach to downstream vehicle enterprises both in breadth and depth and will most likely enable the company to create a stronger brand effect.

CATL has made continued investments in R&D. CATL has 3,628 R&D personnel. By comparison, Guoxuan High-Tech, also a tier 1 enterprise in the power battery industry, only has 1,114 R&D personnel and a tier 2 battery enterprise generally has 600-700 R&D personnel. Taking into account that CATL's main business is more concentrated, the actual difference between the numbers of R&D personnel in the battery business may be greater. Meanwhile, the company has 2 experts listed in the Recruitment Program of Global Experts, 6 talents listed in the Fujian 100 Plan and a number of innovative talents, who have promoted the improvement of the company's overall scientific research level. As for R&D expenses, the R&D expenses of Guoxuan High-Tech were RMB 330 million in 2016, J&R Optimum RMB 170 million, EVE Energy RMB 120 million, and CATL more than 1.08 billion, gaining absolute advantage. In the first half of 2017, CATL's R&D expenses accounted for more than 10%, a figure higher than that of most industry counterparts. The proportion of CATL's R&D expenses to its main business has continuously increased with the growth of the total volume. It shows that the company hasn't relaxed its pursuit of technology R&D because of its leading position in the industry. Given the technical barriers of the power battery industry, CATL's increased efforts in technological development will greatly contribute to its goal of becoming a leading power battery enterprise in the world.

CATL has undertaken a number of major projects and mastered core technologies. Since its inception, the company has participated in and undertaken a number of ministerial and provincial research projects, covering materials, electric core design, device and process, battery, electronic and electrical, battery pack, energy storage system, and mobile power supply fields. The government has planned to reach 350wh/kg energy density of lithium battery systems by 2020; the achievement of this goal inevitably mainly relies on leading enterprises spearheaded by CATL.

By September 30, 2017, the company and its subsidiaries had a total of 813 domestic patents and 13 overseas patents, covering materials, electric core design, battery, battery pack and energy storage system fields. The development of power batteries requires long-term technical accumulation, so the industry is evidently characterized by technical barriers. With core technologies and excellent R&D ability, CATL will stand out from the competitors for its technical accumulation and gain a leading position in the fierce competition.

CATL has established a strong strategic deployment. The battery recycling field it has entered is expected to become the next growth point. Power batteries entered the explosive growth period in 2015, and these batteries will begin to enter the retirement period in 2018. As the number of scrap power batteries increases gradually, power battery recycling rules are further specified, recycling channels are standardized, power battery dismantling and recycling technology progresses, and the number of reused and recycled lithium batteries grows annually, the battery recycling industry will show explosive growth in the next few years.

The company carries out lithium-ion battery materials business through Guangdong Brunp, which produces ternary precursors (nickel cobalt manganese hydroxides) for lithium-ion batteries through processing, purification and synthesis of valuable metals such as nickel, cobalt, manganese and lithium in waste lithium-ion batteries, achieving recycling of these resources in the battery industry. Currently, Guangdong Brunp has become the country's leading supplier of ternary precursors for lithium batteries. Through Guangdong Brunp, CATL has created a closed loop from lithium battery manufacturing to recycling. With the release of potential transactions in the battery recycling market, the company is expected to seize the next growth point.。

The company has achieved high performance growth. The company's revenue grew by 557.93% and 160.90% in 2015 and 2016 respectively and by 33.00% during January and June 2017 compared with the same period of 2016. This is mainly attributed to the rapid development of the new energy vehicle industry and growing demand of the domestic power battery market. As the industry's technology-leading supplier of power batteries, the company boasts strong competitive advantages and has seen continuous production and sales growth with the gradual release of capacity. The company ranks first in the industry both by revenue and net profit and has lived up to its role as the industry's top leader. Meanwhile, the company has achieved high profitability and growth on a large scale, with an ROE as high as 73.8%. The company's valuation is at the industry's medium level.