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Battery wars: Japan and South Korea battle China for future of EVs

Toyota leads 'solid state' push, but next-generation batteries still a decade away

TOKYO/NAGOYA/OSAKA/ SEOUL/HUIZHOU, China -- It is 5 p.m. on a weekday in Huizhou, a lake-studded city in China's Guangdong Province, and workers are streaming out of a BYD manufacturing plant looking weary after a day's work. Many head straight for the crowded street food stalls lined up in front of the factory for after-work noodles and drinks.

"No matter how much overtime we work, we still have a manpower shortage," said one worker.

The heavy workload at BYD's Huizhou factory is just one indicator of the growing demand for the product built there: batteries for electric vehicles. BYD is one of the world's top producers of EV batteries, and the company is racing to meet an ambitious goal of expanding its battery manufacturing capacity to 60 gigawatt-hours by 2020 -- equal to half of China's total in 2017.

Founded in 1995, BYD -- whose slogan is "Build your dreams" -- is China's largest manufacturer of alternative fuel cars. In the West, the company is best known for its place in Warren Buffett's stock portfolio. But in China, it is one of the companies at the vanguard of a national push to dominate the future of automaking.

Chinese policymakers have made a big bet that electric vehicles will fundamentally disrupt the 130-year-old automotive industry, and Beijing has spent tens of billions of dollars to ensure that the country emerges as the undisputed global leader.

BYD workers in Huizhou, Guangdong Province, head home after a busy day at the battery plant. (Photo by Takashi Kawakami)

So far, the push has been effective: Last year Chinese makers claimed seven of the top 10 slots on the list of the world's largest suppliers of lithium-ion batteries for EVs, according to Chinese research company Gaogong Industry Research Institute. BYD ranked third globally, after Panasonic -- which produces batteries for Tesla -- and China's Contemporary Amperex Technology Ltd., or CATL, the world's top EV battery manufacturer.

According to projections by Bloomberg New Energy Finance, China will produce 70% of the world's electric-vehicle batteries by 2021. The potential rewards are huge: Goldman Sachs estimates that sales of batteries to power cars will rise from under $10 billion to $60 billion by 2030, driven by a global push to reduce greenhouse gases.

China is already the world's largest market for electric vehicles, and its leap to the top of EV battery manufacturing has sent shock waves to rivals around the world. The Japanese and South Korean companies that took an early lead in the development of EV battery technology are scrambling to ramp up production. The Europeans are belatedly trying to get into the game, launching the European Battery Alliance only last year.

And industry analysts warn that China's dominance of the EV battery business could place established automakers at a disadvantage as they seek a foothold in the still-nascent market for electric cars.

Workers produce lithium batteries at a CATL factory in Ningde, China. The battery maker has big plans to ramp up production.   © AP

"A situation where Chinese battery manufacturers dominate the market is not good for carmakers from Japan, the U.S., Europe and South Korea," said Takaki Nakanishi, CEO of the Nakanishi Research Institute. "Generally speaking, there is a risk if carmakers depend too much on any single market for procuring components."

To some industry observers, what is happening in the EV battery market appears to be a replay of China's use of fat subsidies to push foreign competitors out of the markets for solar panels and consumer IT products.

There is little doubt that the breakneck growth of Chinese battery makers like BYD and CATL has been powered by the government's vigorous policy support. Beijing kept the Chinese market closed to foreign companies while promoting EVs with massive state subsidies to buyers.

"The Chinese government installed a controversial 'whitelist,' which encourages carmakers to procure batteries from the Chinese makers on the list," Nakanishi said.

But the government's efforts have also led to a proliferation of battery manufacturers and a glut of production capacity.

In response, the Chinese government is taking steps to thin out the overcrowded industry by shifting the focus from quantity to quality. Earlier this year, the government started tightening the criteria for state subsidies to promote EV sales. It has stopped providing financial support for purchases of low-performance EVs with short ranges. And it is also easing the restrictions on market access by foreign makers.

Tang Jin, a senior researcher following China's auto market for Mizuho Bank, predicts that stiffer competition in the country's EV battery market will trigger a major shakeout among local makers. "There are some 60 Chinese makers of lithium-ion batteries now, but only about 20 of them will still be around five years down the road," Tang says.

As the Chinese industry shakes out, other manufacturers -- including Toyota Motor and Panasonic of Japan -- are hoping to leap ahead by developing new EV batteries that can outperform the lithium-ion packs. But Chinese companies, including CATL, are also investing in new battery technology.

Toyota Executive Vice President Shigeki Terashi, who is in charge of the company's battery business, laid out the stakes as the company discussed its EV strategy in December.

"The one who conquers batteries will conquer the electrification of cars," Terashi said.

The next phase of the global battery war is on.

The race to innovate

Japanese automakers were early to the EV party, setting up joint ventures to manufacture lithium-ion batteries with domestic electronics companies. Toyota paired with Panasonic, while Nissan Motor set up a joint venture with NEC called Automotive Energy Supply Corp., or AESC.

The Japanese ventures tried to control big shares of the EV market through exclusive use of sophisticated domestic battery technology. But their early advantage eroded amid fierce competition, first from South Korean rivals and, later, the Chinese upstarts.

The Nissan Leaf is the best-selling electric vehicle of all time. (Photo by Tomoki Mera)

Nissan became the leader in the global EV market in 2010 by launching the Leaf, the world's all-time best-selling EV. As new competitors entered the market, AESC found itself on the losing end of a price war and Nissan was forced to sell the battery venture to a Chinese renewable energy company.

Now Japanese companies are trying to get out in front of their rivals once again, with Toyota leading research on so-called solid-state battery technology. Toyota plans to spend 1.5 trillion yen ($13.2 billion) by 2030 on research and development programs for next-generation batteries, including solid state.

Toyota is also leading a 10 billion yen national project launched by the New Energy and Industrial Technology Development Organization to develop basic technologies for solid-state batteries. With 23 manufacturers participating -- including Panasonic, Nissan and Honda Motor -- the "all Japan" development project is set to accelerate under Toyota's leadership.

"The one who conquers batteries will conquer the electrification of cars"

Toyota Executive Vice President Shigeki Terashi

"We want to achieve big breakthroughs and make them viable at any cost," said Hideki Iba, head of Toyota's battery material division, at a press conference for the project in June.

Toyota has 200 engineers working on solid-state technology. They split their time between the city of Toyota, in Aichi Prefecture -- known as the Detroit of Japan -- and the city of Susono at the foot of Mount Fuji.

The promise of solid state is clear. Compared with today's lithium-ion cells, solid-state batteries offer higher energy density -- which translates into higher power capacity -- and maintain better stability at high voltages. They also run cooler and are less likely to catch fire.

But the most important advantage of solid-state batteries is their ability to increase the driving range of EVs. Because of their higher energy density, solid-state batteries can boost the distances EVs can cover without charging by about 40%. That means EVs powered by solid-state batteries can drive 700-800 km on one charge, roughly on par with gasoline engine cars.

"We believe our solid-state battery technology can be a game-changer with the potential to dramatically improve driving range," said Toyota Executive Vice President Didier Leroy during the Tokyo Motor Show in October 2017.

Toyota has successfully driven a one-seater electric vehicle equipped with a solid-state battery on a test course and is continuing experiments to make the batteries mountable on EVs in the first half of the 2020s.

But Toyota officials admit they do not see widespread commercial use of solid-state EV batteries before 2030.

German automaker Volkswagen and some American companies are also promoting the development of solid-state batteries. Chinese companies, including CATL, have also joined the development race.

CATL founder Zeng Yuqun said in May that the company had "achieved some positive results" in its solid-state research, but commercialization would take time.

Koichi Sato, chief professional engineer at Toyota's Battery Material Engineering & Research Division, insists that Japan remains ahead of the pack.

"Japanese companies are still in a superior position in the development of all-solid-state batteries," Sato said.

Demand for "10 Gigafactories"

Until solid-state technology becomes a reality, however, the battery war is being fought on the production line. Sales of battery electric cars were relatively tiny in 2017 -- only 668,000 battery-powered cars were sold worldwide, compared to roughly 82 million passenger cars, according to JATO Dynamics -- but growth was strong at 78%.

Few companies know the demands of producing large volumes of EV batteries better than Panasonic, which built the $5 billion Gigafactory lithium-ion battery factory with Tesla in Nevada.

A woman charges her Tesla at a dealership in Beijing. The U.S. automaker competes in the higher end of the EV market. (Photo by Akira Kodaka)

Though it is the near-exclusive battery supplier to Tesla, the world's biggest EV manufacturer, Panasonic has lost market share to CATL. The company has also been under strain this year as Tesla founder and chief executive Elon Musk pushed to produce its new Model 3 sedans.

This has led Panasonic to hire extra engineers to meet the rapid increase of production needs, resulting in two straight quarters of losses. Panasonic expects its fortunes to improve as Model 3 sales accelerate, however.

Kazuhiro Tsuga, president of Panasonic, takes the long view, saying demand will rise exponentially once electric vehicles go mainstream. "When ... we have a real outburst of demand in electric vehicles, we will need a capacity of something like 10 Gigafactories in the U.S. That's the real contest," Tsuga said. "We want to win that contest."

Like Panasonic, South Korea's battery manufacturers have lost ground to Chinese makers. LG Chem is adding new production capacity in China, breaking ground last month for its second electric-vehicle battery plant in Nanjing. By the end of 2019, LG Chem expects the factory to be able to produce 500,000 batteries a year to supply electric-vehicle makers in China and other Asian markets. It plans to invest 2.1 trillion won ($1.8 billion) at the site by 2023.

"We will make our second factory in Nanjing the best in the world by investing in state-of-art technology and facilities," said Park Jin-soo, vice chairman and CEO of LG Chem. "The new factory is given a mission to cope with quickly growing EV battery demand around the world."

With the second Chinese plant, LG Chem will have five production lines for EV batteries around the world -- two in China and one each in South Korea, the U.S. and Poland.

"We remain positive on LG Chem owing to an improving outlook for EV battery revenue and profitability," said Cindy Park, an analyst at Nomura.

Samsung SDI has little presence in the Chinese market, the world's largest for EVs. But analysts say that the company's sales in EV batteries will continue to grow thanks to rising demand from European carmakers. Samsung SDI supplies EV batteries for the BMW i3 and BMW i8 as well as the Fiat 500e.

The rise and rise of Chinese expansion

In June, CATL cemented its status as the world's top EV battery maker by raising nearly $1 billion in a public offering, which it will use to continue a blistering pace of expansion. CATL was created in 2011 as a spinoff of TDK's cellphone battery unit, which supplied Apple and other makers of mobile devices and has moved quickly since then.

CATL took advantage of the government-backed Thousand Talents Plan to recruit top-notch experts from around the world, including Bob Galyen, a world-renowned expert in battery technology, from the U.S. as its chief technology officer. Engineers also came from Bosch and Continental of Germany and Valeo of France.

The company's overall battery shipments came to 11.8 GWh in 2017, up from 6.8 GWh the year before. It is building a new 24 GWh plant in Ningde and plans to build its first overseas plant in Germany.

The rapid rise of CATL has overshadowed China's longtime battery king, BYD, which has seen its share price cool off this year. But the company is not slowing down. In June, BYD's new 24 GWh plant came onstream in Xining, the capital of Qinghai Province -- 2,000 km away from BYD's headquarters in Shenzhen.

Lithium recovered from China's Chaerhan Salt Lake is used to make electric vehicle batteries. (Photo by Yu Nakamura)

The new $1.5 billion plant is considered to be BYD's core facility for its battery operations because the region is home to the largest saltwater lake in China -- and accounts for 80% of the country's known lithium reserves. This gives the company access to a stable supply of the most important raw material for making batteries -- and saves money on transportation.

BYD plans to build more plants in Xining as part of its capacity expansion drive. Wang Chuanfu -- the company's chairman, who is known as China's "battery king" -- is spending about $3 billion on the effort, which will nearly quadruple its capacity. He hopes it will also allow BYD to catch up with CATL.

Yet even as competition heats up in China's EV battery market, Wang can take heart that Beijing is doing its part to stimulate demand. Next year, new rules will take effect setting quotas for Chinese production and sales of electric vehicles.

"New-energy vehicles are an important strategic industry for China, and batteries form their heart," Wang said as he opened the Xining plant.

Nikkei staff writers Daishi Chiba in Osaka, Akihide Anzai in Tokyo and Kim Jaewon in Seoul and Nikkei deputy editor Yu Nakamura contributed to this report.

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