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Brutal culling awaits China’s EV battery makers as support ends

Even top players like CATL and BYD are likely to feel the pain

BYD's electric cars on display in Guangzhou. The producer of electric vehicles and batteries has led the pack of Chinese manufacturers reaping generous subsidies. (Photo by Takashi Kawakami)

GUANGZHOU -- Only top electric-vehicle battery makers like Contemporary Amperex Technology, or CATL, and BYD are expected to be left standing when the Chinese government ends in 2020 the generous subsidies that have helped foster a domestic industry and kept less nimble players afloat.

China has poured more than $10 billion into the EV battery industry since around 2012, giving rise to several hundred manufacturers. But that support is scheduled to end in 2020 as part of a phaseout that began in 2017 as Beijing seeks to encourage companies to cut costs and become more competitive. One expert says of the 90 manufacturers operating in 2018, only 20 or so will survive.

Although Beijing on Jan. 29 announced plans to shore up consumer spending by boosting electric vehicle purchase subsidies, the program applies only to some models, and the overall trend of reducing subsidies remains unchanged.

The end of the subsidies will be painful for big and small players alike. "Policies [on electric vehicles] have shifted recently to eliminate companies without technological prowess," said an alarmed manager at BYD. "We need to boost our competitiveness further before the subsidy program ends." 

The subsidies have been significant, around $10,000 per each electric vehicle produced and sold. The government also shouldered much of the cost for battery plants. Electric-car maker BYD, also a major battery producer, has benefited greatly from these programs.

BYD has good reason to fear the prospect of competing with no subsidies starting next year as it still lags foreign rivals like Japan's Panasonic and South Korea's LG Chem in technology.

BYD's heavy reliance on subsidies is reflected in its earnings fluctuations in recent years. In 2015, when the government ramped up subsidies to select Chinese battery manufacturers, BYD's net profit soared 550% on the year. In 2016, the profit rose roughly 80%. When the government started cutting back on subsidies in 2017, however, the profit shrank 20%. The downward trend probably continued last year, with net profit believed to have fallen 20%-30% after a 30% cut to subsidies.

Shenzhen-based OptimumNano Energy is another company hit hard by the cutbacks. The company, which became China's third-largest battery maker in shipment volume in 2017, halted production last July because it could not stay afloat after the subsidies were reduced.

Chinese companies made up seven of the world's top 10 auto battery makers in shipments in the January-October period of 2018, according to Realli Research. "But their dominance is impossible without government support," a source at a Japanese battery maker said.

China had about 135 homegrown auto battery makers in 2017, but their number dropped to 90 in 2018, according to Shenzhen Gaogong Industry Research, known as GGII. "Only about 20 will survive eventually," predicts Tang Jin, chief researcher at Mizuho Bank's international business relations department.

Even CATL, the top Chinese battery supplier, appears to be struggling to wean itself off state support. Chairman Robin Zeng is asking employees of late: "Can pigs lifted by a typhoon really fly?" 

Some see China's often inconsistent policies as actually hurting industry growth. Beijing often has trouble figuring out the best policies and thus end up offering scattershot measures. The government has tweaked its policies on the EV industry almost yearly, and the changes have often been difficult to comprehend, even for industry insiders.

The so-called New Energy Vehicle policy that went into effect this month requires the green vehicles to account for a portion of vehicles produced and sold by manufacturers in China. But a Japanese automaker is still trying to find out the actual quota, according to a company source.

Beijing has nurtured such industries as solar panels, liquid crystal displays and light-emitting diodes under a national strategy. But the subsidies have often led to a crowded market and excess production capacity, loosening the supply-demand balance and roiling the international market.

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