China's Plan to Dominate the Global Electric Vehicle Supply Chain

Since the emergence of the electronics industry in the 1980s, companies in South Korea and Japan have dominated the production of rechargeable batteries for portable electronic devices. Some of these companies have gained worldwide recognition, such as LG, Samsung, SKI, and Panasonic. But China has been catching up. In 2013, China overtook Korea to become the world’s largest manufacturer of lithium-ion batteries for electronic devices. More recently, Chinese battery manufactures have also capitalized on the rapid growth in demand for electric vehicles (EV). Within the past five years Chinese EV battery producers have become major battery suppliers in the global EV industry supply chain (see Figure 1).

The growth of the EV battery industry has followed in the wake of overseas acquisitions of natural resources by Chinese firms. China is not only motivated by securing access to resources, but also by improving its position global supply chains. Dominating the global supply of rare earth minerals such as cobalt is key to Beijing’s ambitious plan to reshape the global battery market, ensuring that China is well situated to benefit from rising global demand for electric vehicles. Under the leadership of President Xi Jinping, China plans to become an indispensable component of the world's electric vehicle supply chain.

Figure 1: Global EV production by battery cell suppliers

Source: “Power Play: How Governments are Spurring the Electric Vehicle Industry”

A Highly Competitive Domestic Market

China’s EV battery market has recently undergone a rapid consolidation. Two major producers, Ningde-based Contemporary Amperex Technology (CATL) and Shenzhen-based Build Your Dream (BYD) have emerged as the dominant manufactures in China. In 2017, five firms controlled 62% of the domestic Chinese market, led by BYD and CATL (29% and 16% respectively, see Figure 2). By the first half of 2018, CATL grew to 42% with the top five producers controlling 77% market share (see Figure 3). This consolidation trend is likely to continue in the coming years, and the winners—the dominant Chinese EV battery manufacturers—may soon expand overseas.

Figure 2: China EV Battery Producer's Market Structure (2017）

Source: 真锂研究

Figure 3: China EV Battery Producer's Market Structure (July 2018)

Source: 中国储能网新闻中心

CATL is one such example. Founded in December 2011, CATL was listed on the Shenzhen Stock Exchange in June 2018 in an IPO valued at $12.3 billion. In 2017, CATL surpassed Panasonic as the world’s largest supplier of EV batteries by sales, with shipments of 12 gigawatt hours (GWh) in battery capacity. One gigawatt will power about 100 million LED lights. While CATL is the largest manufacturer of batteries for all electric-vehicle types, Panasonic is still the leader in batteries for a narrower category of regular-sized electric cars, also known as highway capable passenger electric vehicles, according to Bloomberg New Energy Finance.

CATL established its first overseas branch in Germany in 2014 and expanded into France, the US, Canada, and Japan in 2017. In July 2018, CATL made its first step towards production in Europe. During a visit to Germany, Chinese Premier Li Keqiang signed a contract to build a new CATL plant in Germany’s Thüringen. The CATL factory will create about 600 jobs and produce about 14 gigawatt hours (GWh) of battery capacity by 2022.

CATL has become the unicorn of China’s EV battery market. Its customers include not only domestic Chinese automobile companies such as Yutong (宇通客车), the world’s largest electric bus manufacturer, but also global automobile brands such as Volkswagen, BMW, Nissan Motor, Hyundai Motor and BMW. CATL may be the first Chinese EV battery manufacturer to establish an overseas factory but it will likely not be the last. Domestic competitors BYD, Lishen, and others have announced similar plans.

Control Cobalt, Control the Supply Chain

It is not news that Chinese firms have been aggressively securing overseas resources. However, when it comes to cobalt, Chinese companies do not control it solely for the purpose of reversing their position as price-taker, but rather in order to control the global supply chain of a state-chosen industry. In the case of China’s rapidly growing EV battery industry, Chinese firms’ control of global cobalt supplies is a sign that China is on pace to dominate the global EV supply chain.

Cobalt, sometimes called the “blood diamond” of batteries, is a rare-earth mineral and an essential input for the production of high-energy density, low-weight lithium-ion batteries. Today, most cobalt is used to produce batteries for portable electronic devices, like smartphones. In the near future, greater adoption of electric vehicles and the batteries to power them will drive even greater demand for this scarce resource. EV batteries require nearly 1,000 times more cobalt than a battery for a typical smartphone. By 2030, global demand for cobalt is estimated to be 47 times greater than in 2017, according to Bloomberg New Energy Finance.

China has the largest cobalt refining business in the world with half of global refined cobalt coming from China. However, China does not have rich reserves of cobalt itself and has been a price-taker on the global import market. As China’s cobalt reserves make up only about 1% of the global total, about 90% of cobalt used in China today must be imported. Such a high rate of import dependence has driven Chinese firms to secure overseas cobalt resources.

In 2016, China Molybdenum bought a 56% equity stake in Tenke Fungurume Mining (TFM), one of the Democratic Republic of the Congo’s (DRC) largest mines, for $2.65 billion. This deal would give China access to about 16% of global cobalt reserves. According to a Wall Street Journal report, Chinese companies control a network of brokers who purchase cobalt from freelance miners in the DRC, the country that provides about 54% of the global supply. Chinese companies produce about 77% of refined cobalt, a key ingredient in the first step of the lithium-ion battery production process.

Industrial sector adjustment and structural changes to its economy will continue to drive changes to China’s demand for commodities. The key to satisfying that demand will be large overseas acquisitions of strategic resources. The rise of China’s EV battery industry alongside an increasing number of acquisitions aimed at securing access to cobalt shows that China is making steady progress towards control over the global battery supply chain, and therefore potential influence over the entire global electric vehicle market.

A Matter of Industrial Policy and More

The rapid development of the EV battery industry is closely linked to China’s state’s industrial policy. Promoting the development of the EV industry is one of the ten strategic industrial goals in an industrial strategy that the government has dubbed “Made in China 2025.” It aims to transform China from a low value-added manufacturer to a high value-added product developer. If China is to achieve this in the electric vehicles market, then the development of EV battery technology will play a critical role. Increasing R&D spending on EV batteries and lowering the unit production cost of EV batteries are key objectives listed in the EV Battery Industrial Development Action Plan (促进汽车动力电池产业发展行动方案). This plan, published in February 2017, is the product of collaboration between four government agencies: the National Development and Reform Commission (NDRC), the Ministry of Finance, the Ministry of Industry and Information Technology, and the Ministry of Science and Technology. The plan sets a target of EV battery production totaling 100 gigawatt hours (GWh) of capacity by 2020 while reducing costs to under one RMB per watt/hour, improving the overall quality and competitiveness of the industry.

The sense of urgency the Chinese government has demonstrated in the development of electric vehicles and batteries is more than just a matter of swift policy execution. A key motivating concern of China’s policymakers has been how electric vehicles and batteries can contribute to the country’s broader plan to reduce air pollution and fight climate change. Promoting the development of EV battery technology in order to support the electric vehicle industry is a critical first implementation step in President Xi Jinping’s new energy strategy, which prioritizes reducing hydrocarbon consumption. China’s 13th Five-Year Plan (2016-2020), released in March 2016, sets a goal to achieve a 15% reduction in energy intensity and an 18% reduction in carbon intensity compared to 2015 levels.

Conclusion

China’s industrial policy, including financial support and subsidies, has fostered a flourishing domestic EV battery market. Fierce domestic competition has resulted in market consolidation. The large manufacturers that have emerged are poised to seize not only a significant share of the global EV battery market but also are preparing to expand production overseas. In light of the growing strength of Chinese manufactures, the government has removed restrictions on foreign battery producers supplying the domestic Chinese market. In another sign of growing confidence, the government has laid out a schedule to gradually remove state subsidies to the electric vehicles industry. Both changes are aimed at encouraging further competition and greater efficiency among Chinese battery makers.

China’s approach to promoting the development of its domestic EV battery industry mirrors the approach it took a decade ago in developing its solar panel industry into the global leader. Chinese solar panel manufacturers came to dominate the global market by lowering production costs—the cost of solar power today is about one-eighth as much as a decade ago. The solar panel industry has developed a mature supply chain with China at its center. The Chinese government hopes it can repeat this success by applying a similar strategy to the EV battery industry.

The development of the EV battery industry is essential if the Chinese government is to realize its stated goals of reducing hydrocarbon intensity, fighting air pollution, and improving the quality of the environment. This is perhaps the most important reason that the government has decided that electric vehicles and EV batteries are strategic industries with great potential to impact domestic society. As the Chinese economy enters a “new norm” of slower, steadier growth, the Party can no longer rely upon breakneck economic growth as the source of its political legitimacy and authority. Instead, the way for the Party to continue to demonstrate its strong leadership is to solve the serious environmental problems facing China through revolutionizing China’s energy consumption structure.