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Price war wipes out half of China's EV battery makers

Automakers turn in-house, while Japan and South Korean rivals rise

The number of EV battery makers in China halved by June 2019, down from 200 three years ago.   © Reuters

BEIJING -- China's electric-vehicle battery industry slowed in 2019 as the country's automakers remain mired in the doldrums.

The industry has been realigning since the beginning of last year, with smaller players gradually being edged out. This comes against a backdrop of heavy borrowing throughout the auto industry supply chain as EV sales stall and suppliers suffer delays in collecting on deliveries.

To add to the sector's woes, automakers have been starting their own in-house battery production. Moreover, leading Japanese and South Korean battery makers -- which have a cost and technological edge -- have rushed to enter the Chinese market.

These and other headwinds are expected to intensify in 2020.

While orders from automakers soared as electrics first began to roll off assembly lines, battery unit prices declined. In 2010, prices stood at $1,000 per 1 kilowatt-hour, but plunged to around $150 in 2019 and are expected to hit $60 by 2030.

Although prices are dropping, battery makers can hardly afford to cut costs as 80% of their manufacturing expenses are material-related. As a result, profit margins fell 15% to 20% from a year earlier.

A cash crunch is also hammering the industry. Automakers usually pay battery producers about three months after taking delivery. But because government subsidies for automakers usually take longer to pay out, if vehicle inventory piles up, the makers cannot receive subsidies in a timely manner. Hence, they are forced to cut costs, which includes delayed payments to not just battery makers but other suppliers, triggering a cash squeeze throughout the industry.

As a result, the number of electric-vehicle battery makers in China halved by June last year from 200 three years ago.

Despite an overall slump in the new-energy vehicle sector, some companies are bucking the trend. Tesla's Model 3 released in 2019 was a success worldwide. Global sales of all vehicles from the U.S. maker in the first 10 months of the year totaled 270,000 units, with deliveries in the second and third quarters reaching record levels.

Tesla is switching to local procurement for parts used in cars made at its Chinese plant, which has just gone online. Data from CITIC Securities, a major Chinese investment bank, indicated that Tesla will require 6.6 gigawatt-hours of batteries in 2020, increasing to 13 GWh in 2021, 20 GWh in 2022 and 27 GWh in 2023.

Most luxury car manufacturers, including BMW, Audi and Mercedes-Benz, have also rolled out their own EVs.

The changing landscape has driven smaller battery makers with low production capacity and no core technologies from the market, allowing large makers to further elbow in.

Tesla is sourcing batteries from LG Chem, but the South Korean company is not its only supplier. This is by design, as Tesla was burned by an exclusive deal with Japan's Panasonic, which struggled to meet its promised production yields.

Tesla is negotiating with a number of battery makers, among them China's CATL, Lishen and SVOLT, according to sources. While this strategy gives it the upper hand in price negotiations and ensures a steady supply of batteries, it will likely intensify price competition among battery makers.

The focus now is on whether battery makers can endure further price cuts.

In May 2019, South Korean conglomerate SK Group announced that it will build its second Chinese plant for EV batteries at a cost of 3.35 billion yuan ($4.79 million). In June, LG Chem invested $200 million in Geely of China to set up a joint venture to construct a plant in Nanjing, which has already been completed. And South Korea's Samsung SDI said in July 2019 that it will launch a project to enhance production capacity in Shaanxi Province led by an investment of 460 million yuan.

Meanwhile, Panasonic added two production lines at its Dalian plant, spending several hundred million dollars. The Japanese company has also continued investing in Chinese EV battery makers.

Japanese and South Korean battery makers are better than their Chinese peers in controlling costs. According to SNE Research, LG Chem and SKI, another South Korean battery maker, produce 1 kWh of square-type batteries for between 900 yuan and 1,000 yuan -- lower than 1,000 yuan to 1,100 yuan incurred by CATL.

Except for CATL and BYD, Chinese battery makers are also far behind Japanese and South Korean rivals in terms of technology.

Foreign manufacturers are continuing to look for chances to jump into the Chinese electric-vehicle battery market.

36Kr, a Chinese tech news portal founded in Beijing in 2010, has more than 150 million readers worldwide. Nikkei announced a partnership with 36Kr on May 22, 2019.

For the Japanese version of this story, click here.

For the Chinese version, click here.

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