An electrifying future

An electrifying future

by Pininvest Analysis

Electric Vehicles in China on

  • 10 constituents
  • 156.0% 1y performance
  • 46.7% volatility
Check the investment theme exit_to_app

In China master of the (car) universe, we argued that because of the sheer size of the domestic market, Chinese regulations were leading the way for the car industry worldwide, by accelerating the transition to electrical power

Broadly inspired by the Californian rule, Chinese regulators are pressuring all car manufacturers to include a growing percentage of ‘new energy vehicles’ (NEVs) in their sales (not simply in the line-up). Public subsidies to NEVs are falling in conjunction with the regulation, effectively transferring the payload of subsidies to the manufacturers

The regulatory impulse given by China is transformative in the context of the global trade and technology transfer and every Western car manufacturer operating in China is planning to produce electrical vehicles as early as 2019

By conforming to local regulation, the manufacturers prioritize effectively their Chinese operations over legacy plants in Europe or the US



On the forefront of electrification and connectivity

The Chinese government has set a target of 2 million electric cars sold in China a year by 2020

As aggressive as that goal may be, it still represents less than 10% of the total Chinese new car market and manufacturers are determined to sell more electric cars in China, to stay in line with the regulatory credit targets

Electric cars are given the highest number of credits under that system. Plug-in hybrids get the next highest number of credits and conventional hybrids the lowest credits

Conventional motoring will be facing a double whammy

  • with the low-priced EVs to generate sales, the companies may attempt to rebalance their cost base by raising prices on the conventional line-up 
  • regulation and costly bidding  for the car-plate allocation in the major Chinese cities will discourage conventional car ownership, which is likely to weigh on sales

Taking a step back, electrification is a model case of long-term industrial planning  because the advance of Chinese facilities in EV production  will be boosted by the industrial strategy favoring domestic battery manufacturers


Bolstering domestic battery production

Putting wind in the sails of domestic battery manufacturers, the regulatory push would be enough to secure a vast domestic market as a sizable share of personal vehicles shifts to EVs and hybrids

The electrical cars produced in China will be sold – possibly loss-making – to fill the mandated quota, securing distribution rights of the standard line-up

Because target sales of EVs can be precisely estimated on basis of current volumes, for 2019, 2020 and beyond, battery manufacturers have very probably secured long term contracts to equip the new models as they enter production

But from a global perspective, the Chinese strategists will take even better advantage of their freshly minted frontrunner status in electrification

  • Both because foreign markets (especially the US) remain less receptive to EVs, and because Chinese production lines have the required expertise for electrical powertrains, the first tentative steps of Chinese manufacturing for export markets are being taken
Cadillac CT6 Plug-in - Made in China

The Cadillac CT6 plug-in is a case in point and many more will undoubtedly follow, feeding into new export markets

  • By contributing willfully to China's production targets, Western manufacturers are launching full line-ups of EVs in their Chinese factories, 12 to 18 months before European or American production is likely to be in full flow. Expertise acquired on the production line could be transferred from China, establishing Chinese factories as reference production centers


Tactics and strategy

Sun Tzu (born in 545 BC) reminds us that what appears to be a strategy is simply a tactic, part of a grand plan we have not fathomed

All men can see the tactics whereby I conquer but what none can see is the strategy out of which victory evolves


This is why we should attempt to view the well-known stages of China’s expansion in the car industry, one of the top action plans singled-out in ‘Made in China 2025’, in a broader context and on a much longer horizon

Indeed, what appear to be broad-based, well-financed and mostly successful strategies are better understood as tactics, in a grand scheme we need to divine

Because they have been deployed very openly and rationally, the tactics are well understood as separate entities

  • Stimulate demand by all available regulatory tools (city access, free or fast car plate attribution, subsidies)
  • Force a realignment of car prices by dictating a minimum % of electric vehicles
  • Establish a domestic battery industry with temporary protectionist measures, by subsidizing LFP batteries that are produced locally and not the NMC/NCA batteries of foreign competitors
  • Encourage the Chinese battery manufacturers to sign long term contracts with the car manufacturers, local as well as foreign, which is facilitated by the dictated % of EVs in car sales, and which also secures bank finance for the battery manufacturers
  • Rely on a competitive market to sharpen the expertise of Chinese EV manufacturing, either in partnership with foreign manufacturers or on their own strength

Implemented with speed since 2015, these tactics must – with some envy – be qualified by outsiders as a truly remarkable industrial success

CATL, BYD and Tianjin Lishen Battery are leading the battery revolution and CATL's shipments are indicative of this 'lightning' growth


  • 2,19     (2015)
  • 6,8       (2016)
  • 11,84   (2017)
  • 7,3       (2018-6months)
  • 17.5    (2018 production capacity)
  • 24        (2020 target -  the biggest li-ion battery production capacity in the world)


Ready to take on the world

On the world market, Japan lost its dominant 50% share - China leads today with a 60% share, Japan follows with 20% and South Korea with 15%

World Production GWh 1-18 Q1-18 : Q1-17 MktShare 2017 Ranking MktShare 2018 Ranking
Panasonic (4m) 3,33 21,5% 31,4% 1 21,1% 1
CATL 2,274 261,1%       2
BYD 1,735 180,6%   5   3
LG Chem 1,671 38,9% 13,8% 2 10,6% 4
Samsung SDI (4m) 0,879 47,1% 6,8% 7 5,6% 6
AESC           5?

China’s premier goal of establishing a leading presence on the strength of the domestic market, both in EVs and in batteries powering the vehicles, will be achieved by 2019

Because foreign companies and their Chinese partners dominate in China (with 19 out of the 20 bestsellers, representing 50% of total sales), they were  bound to establish a mutually beneficial – and obligatory – contractual relation with Chinese battery manufacturers

Such has been the case for Daimler, Volkswagen and most recently Renault-Nissan, which have all turned to CATL in order to secure their supply for their upcoming electric cars and plug-in hybrid vehicles

With confidence, backed up by a dominant market position, the Chinese regulators announced a gradual dismantling of subsidies from September 2017 through 2020, and proceeded with the inclusion of foreign battery manufacturers on the lists of recommended top quality certified companies

Furthermore, Korean Samsung SDI, LG Chem and SK Innovation were subject to retaliation against Seoul's deployment of a U.S. Terminal High Altitude Area Defense (THAAD) system in March 2017. As a result, production at battery plants of LG Chem and Samsung SDI in China was minimal (reported to operate at 10%)

With the easing of constraints, Panasonic of Japan in March ’18 announced the first shipment of  battery cells from a factory located in Dalian (planned capacity for 200 000 vehicles), LG Chem announced plans for a second $1.77bn plant in Nanjing (capacity 500 000 vehicles – in operation by 2023) and SK Innovation started construction of a plant in Changzhou (planned capacity of 150 000 vehicles)


Sun Tzu encourages us to think of the tactics we see and understand as nothing more than the obvious benefit, or the harsh backlash, of a much vaster plan

If the industrial roll-out of electrical vehicles and lithium-ion batteries in China are the tactics of a broader strategy, any forward looking assumptions may, almost certainly, turn out to be mistaken, but the issues we try to anticipate will sharpen our perception of future developments as they occur

In plain terms, this is our intent with our follow-up notes putting new facts in context, revealing the outline of broader strategies