Shock and Awe... and Conquer ?

Shock and Awe... and Conquer ?

by Pininvest Analysis

Cobalt demand 2020 – 2025 on pininvest.com

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Pin-insights

The reading of a November '18 study by DW, the German information site, is clear-eyed

To say that Asian countries dominate the production of electric car battery cells is an understatement. According to a 2014 European Commission report, Asian companies have achieved an insurmountable 88 percent share of global Lithium-ion manufacturing capacity — with more than 50 percent belonging to China alone

A dynamic home-grown car industry, with a focus on the future of electric vehicles, is truly a fair national goal, in China and elsewhere

On the other hand, by leveraging the strength of its home-grown battery industry and the control over the basic materials (cobalt essentially), China's policies are dangerously close to deadlock, making interference by the national governements ever more probable

 

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So, the matter is settled ...

  • the car manufacturers, after a few tentative approaches of in-house battery production, have thrown in the towel
  • non-Asian battery production is truly elusive, either in Europe or in the US
  • China, on the strength of its home market, has become the leading battery producer worldwide in less than 8 years

Whether China's EV industrial policy is a 'winner-take-all' strategy or a reflection of the country's advance in new mobility, deepened by the overwhelming size ot its market, needs to be settled to underpin sensible trade terms, for America as well as for Europe

 

Shock and Awe

With the use of textbook 'overwhelming force', China may have overplayed its hand as Western pushback is taking shape

Poorly coordinated, bringing together reluctant partners with contradictory interests, the consistency of the Western stand - and its enduring strength - could easily be underestimated

In the long term, China's strategy will be perceived as overbearing, reflecting poorly on trading partners who must attend to their own industries

In the short- and medium-term, China's industrial policy - meshing the State's regulatory power, deep financial backing and technological maturity - is living up to expectations

  • having excluded foreign (South Korean and Japanese) competitors until 2017 (for dubious 'security reasons'), the domestic battery manufacturers (BYD and especially CATL)  gained market dominance
  • the State-financed incentives for the acquisition of electrical vehicles, equipped with domestic batteries, gave Chinese car makers a valuable 6-year headstart. It is estimated that 50% of the EVs currently on the roads worldwide are Chinese as of Dec. '18
  • as EV sales continue to grow, reaching approx. 1 to 1.2 million cars in 2018 in China, Chinese manufacturers will undoubtedly remain in pole position, exposing the  2d and 3d mid-tier Western competitors in the 'value' segment to painful market share losses
BYD - 2019 Tang Plug-In Hybrid top seller by former Audi designer W.Egger

A dynamic home-grown car industry is truly a fair national goal, in China and elsewhere

On the other hand, by leveraging the strength of its home-grown battery industry and the control over the basic materials (cobalt essentially), China's policies are dangerously close to deadlock

Foreign OEMs are bound to enter close agreements with battery specialists in China to honor the EV sales required by the 'new rules'

But the reach of Chinese battery manufacturers in the home markets of Western manufacturers, by striking volume-based deals, possibly accounting for the commitments of these car makers in China as well, has darker undertones

  • with the logistics issues of batteries, and especially explosion risks during their transportation, battery plants will be located close to EV assembly lines
  • when ultimate control over the base materials skews the bidding process, the free market conditions are upended and the Western car industry comes to depend for a key component on a small number of Asian suppliers
  • if demand for EVs were to take off, competition for scarce natural resources might have unwanted consequences, between growing requirements of the vast Chinese market and Western ambitions

Conflicted, Western car industries have chosen to tie their fate with Asian battery providers - in the short and medium term

 

Going with the flow... for now

Germany's large automotive parts manufacturers Bosch and ZF Friederichshafen,  have remained cautious, concentrating on the supply of EV parts and engines, not batteries....

Quoted by DW, the German news site - Germany's biggest automotive supplier, Bosch, dropped plans to produce battery cells, saying the investment required would be too risky

  • calculating it would have to invest €20 billion to secure a market share of 20 percent, the firm stated that "given dynamic external market forces that can only be predicted with difficulty, it's unclear whether this investment would pay off," 

The trend appears to be set :

  • all car manufacturers stick to their expertise rather than attempt to develop battery expertise in-house and attempt to secure the cobalt and lithium on the commodity market ...
  • the major OEMs in Europe are willing to commit volume orders well in advance of delivery as they prepare for mass production of hybrids and electric vehicles

 

With reliance on batteries from Japanese Panasonic, South-Korean LG Chem and  Samsung SDI and ... China, Asian firms dominate

  • LG Chem announced production output in Poland will increase from 10 GWh - at a facility near Wroclaw - to 30 GWh (for some 300 00 electric cars annually), following additional Volkswagen contracts
  • Samsung SDI is expanding its Göd (Hungary) facility as of 2018
  • SK Innovation, also of South Korea, has announced $3 billion investments  on  plants in China, Hungary and the US (Atlanta region), with production planned for 2020
  • Japan's GS Yuasa broke ground in March '18 for a factory in Hungary assembling automotive lithium ion batteries
  • Panasonic, which used to dominate the industry and partners with Tesla in the US, is evalutating a UK battery plant location, in partnership with BYD of China

 

Various Chinese firms have been announcing additional plans :

  • BYD
  • GSR Capital which bought Nissan's battery unit AESC in 2018
  • Lishen co-owned by a Chinese State enteprise
  • and  China's CITIC in JV with Continental

Largest of all, the controversial July '18 CATL investment in Germany is  a 14 GWh factory near Erfurt (Thuringia, Germany) contracted to deliver batteries for BMW, Daimler and Volkswagen (total CATL sales were 11.84 GWh in 2017 and 6.8 GWh in 2016)

ilView of the CATL plant in Thuringia (Germany)

In a sunny take on the industry, it is another example of cross-border globalization marching forward 

But it could well be a look in a rear-view mirror at a quickly fading past...

We hope to discuss these developments for Western car makers in 'Battery Illusions' shortly