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Caixin

In Depth: CATL loses EV battery crown as foreign players muscle in

Chinese producer shocked by outside competition in vast home market

CATL began facing a real challenge after a government list of recommended battery suppliers was scrapped, paving the way for fierce competition.   © AP

Contemporary Amperex Technology has seen its spark fade this year, losing its position as the world's top electric-car battery maker after foreign rivals began to invade the country's massive market.

The luck of CATL, as the company is known, has turned amid changes to China's industrial policies, which initially helped the company's rapid rise to the top.

Founded in 2011, CATL grew into an electric-car battery giant largely by piggybacking on government policies, including a de facto ban on foreign companies selling batteries in China. It has also been one of the major beneficiaries of Beijing's decade-old subsidy program, which helped create the country's entire electric-car industry.

As both have either been canceled or are set to be phased out, the Fujian Province-based company is now facing competition from overseas on top of domestic competitors, such as BYD.

As Beijing phased out subsidies, the industry has taken a hit. In May, total sales of new-energy vehicles in China amounted to 70,200 units, representing a year-on-year drop of 25.8%, according to the China Passenger Car Association. Sales of new-energy cars will fall 14% this year to fewer than 1 million units, according to BloombergNEF.

No safety net

CATL's real challenge came in June last year when a government list of recommended battery suppliers was abolished, clearing the way for foreign companies to enter the Chinese market.

The list, which included only domestic companies, was widely criticized as protectionist when it introduced in 2015.

Without foreign competition, CATL quickly developed into the dominant battery supplier in China, where most of the world's electric cars have been sold since 2015. By 2017, CATL took the world No.1 battery-maker spot for the first time, unseating long-established rivals, including LG Chem Ltd. and Samsung SDI Co. Ltd.

Around a month after it said the recommended list would be scrapped, the Chinese government also announced it would start to significantly slash the subsidies it had offered to the sector since at least 2010, with an eye on eventually getting rid of them completely.

Though CATL, which was listed in Shenzhen since June 2018, has never revealed the contribution subsidies have made to its bottom line, analysts believe the incentives play a major role in its relatively high profit margin compared to its non-Chinese rivals.

CATL's margin has been generally over 10% in recent years, compared to around 5% for companies such as South Korea's LG Chem and Samsung SDI, and Japan's Panasonic, according to a research note from Caitong Securities.

Tesla effect

Foreign companies have anticipated these policy shifts and have invested in the Chinese market.

One of them, LG Chem, saw a major breakthrough early this year when it was selected by Tesla to supply batteries for vehicles at the U.S. company's new Shanghai factory, which began production in January.

Tesla's share of China's EV market has climbed rapidly. In May, it delivered more than 10,000 units, becoming the largest electric car seller in the country -- the second time a foreign company has achieved that spot.

The brisk sales of Tesla cars in China helped LG Chem and Panasonic quickly skyrocket. In June, both companies were among the top 10 EV battery suppliers in China for the first time. Globally, LG Chem and Panasonic surpassed CATL to become the leading sellers of the batteries, according to data from industry groups.

In the first four months, LG Chem's battery sales jumped 91% from a year ago for a global market share of 25.5%, according to data from SNE Research. Panasonic came in second at 22.9%, followed by CATL at 21%.

CATL had also been selected as Tesla's battery partner. In February, the Chinese company disclosed that it had won a two-year contract to supply batteries to Tesla. However, Caixin learned from sources familiar with the matter that LG Chem had secured a far bigger contract from Tesla than CATL.

In the February announcement, CATL said the contract -- which runs through June 2022 -- is a nonbinding "production pricing agreement," meaning it is still unclear how many batteries Tesla will buy.

New competition dynamic

Foreign rivals are not the only competitors CATL is facing. At home, a slew of domestic players have all geared up to eat into CATL's market share. One of the largest hometown rivals is BYD, one of the country's leading electric-car makers.

BYD previously produced batteries mainly for its own use, but has recently attempted to broaden sources of revenue through greater battery sales to other automakers. Such efforts accelerated in March, when it announced it would spin off its battery business with the goal of listing it in the future.

Two other smaller rivals -- Gotion High-tech and Farasis Energy Gan Zhou -- have recently ramped up their challenge. Gotion made the headlines in May when German automaker Volkswagen announced it would take a 26.5% stake in a deal worth 1.1 billion euros ($1.24 billion).

And earlier this month, Farasis Energy said it had reached a deal with German luxury carmaker Daimler AG, which would pay 510 million yuan ($72 million) for a 3% stake.

One advantage CATL still has is its long-term supply contracts with many global automakers. For example, in 2018 CATL reached a deal with BMW Brilliance Automotive, the joint venture between BMW Group and its local partner Brilliance China Automotive Holdings.

As part of the deal, BMW Brilliance agreed to procure from CATL batteries worth more than 800 million yuan. In 2019, the two sides signed another contract, agreeing to increase the value of the order to more than 56 billion yuan over 11 years.

Still, sources said such long-term contracts do not mean that CATL's partnership with automakers is secure. CATL will have to guarantee that it can control manufacturing costs, said a manager in charge of an engineering team at a foreign automaker that operates a local venture with CATL.

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Read also the original story.

Caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Nikkei recently agreed with the company to exchange articles in English.

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