How China Emerged as a Powerhouse in Battery Manufacturing

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How China Emerged as a Powerhouse in Battery Manufacturing

Before 2010, China trailed far behind the U.S., Europe, and Japan in producing competitive gas-powered cars. Chinese automakers heavily relied on partnerships with Western companies and foreign investment to meet domestic demand. Their vehicles were often seen as inferior in quality compared to those from more established markets, with some even accused of copying popular Western models.

However, in the late 2000s, China’s passenger vehicle market experienced significant growth. As the Obama administration faced setbacks in its electric vehicle initiatives after the financial crisis, China moved forward with EVs, surpassing much of the world. Chinese cars, particularly EVs, have evolved beyond mere replicas of Western models. Models like the BYD Seal and Song now directly challenge top Western rivals and excel in various aspects.

The transition wasn’t smooth or swift. It spanned over a decade for the Chinese auto industry to undergo significant transformation.

According to Ilaria Mazzocco, Senior Fellow at the Center for Strategic and International Studies, the shift towards electric vehicles (EVs) in China gained momentum around 2009-2010. This period marked a notable push towards commercializing EVs in the country, with the introduction of consumer subsidies and the creation of a favorable business environment for EV manufacturers by the government.

Mazzocco’s remarks highlight the gradual but deliberate steps taken by China to promote the adoption and development of EVs, reflecting a strategic approach to transitioning towards cleaner transportation solutions.

Policies resembling the Inflation Reduction Act, which the U.S. implemented in 2022, were adopted in China over a decade earlier. These favorable policies empowered local governments to support indigenous companies and devise strategies to boost sales, such as electrifying taxi and bus fleets, as noted by Ilaria Mazzocco, Senior Fellow at the Center for Strategic and International Studies.

Supportive measures, including facilitating access to credit, venture capital, and private equity funds, combined with a state-owned banking sector, played a significant role in propelling the Chinese auto industry towards electric vehicles (EVs).

China’s pre-existing robust manufacturing sector, particularly in electronics and textiles, laid a solid foundation for its transition to becoming the world’s largest EV market under the leadership of Hu Jintao’s administration.

Although Japanese companies like Panasonic and Sanyo initially dominated the battery manufacturing sector, China swiftly closed the gap by leveraging factors such as inexpensive labor, relatively lower environmental standards, and the entrepreneurial spirit prevalent in its business landscape, as highlighted by Henry Sanderson, Executive Editor of Benchmark Mineral Intelligence.

Companies like BYD, which originated as a battery manufacturer for the electronics industry in the 1990s, and Contemporary Amperex Technology (CATL), capitalized significantly on the incentives provided by the Chinese government. These policies helped propel their growth and success in the EV market.

Last year, BYD surpassed Tesla to become the world’s largest battery electric vehicle (BEV) maker, while CATL overtook Japan’s Panasonic as the world’s largest battery manufacturer back in 2017.

China’s strategy also involved implementing a “whitelist” system that prioritized local suppliers, preventing foreign battery makers such as Panasonic, LG Chem, and Samsung SDI from accessing Chinese subsidies. This policy aimed to bolster the development of a self-sustaining battery industry in China. Although the “whitelist” was abolished in 2019, its echoes are seen in the Foreign Entity of Concern (FEOC) clause introduced in the updated guidelines of the Inflation Reduction Act. However, this comes a decade after China’s implementation of similar measures.

The convergence of political determination, surging demand, and substantial subsidies gave rise to China’s clean energy billionaires. Notable figures include Robin Zeng, chairperson of CATL; Wang Chuanfu, CEO of BYD; and Li Shufu, founder and chairman of Geely Group, which owns brands like Volvo, Polestar, and Zeekr, among others.

Many of these billionaires emerged from humble beginnings, having experienced poverty during the Cultural Revolution. They witnessed China’s progression from lagging behind Japan in consumer electronics batteries to becoming a global leader in clean energy technologies, as highlighted by Henry Sanderson.

The rapid growth of China’s electric vehicle (EV) industry can be attributed to a combination of substantial state-driven demand-side interventions, such as subsidies, and the entrepreneurial drive of industry leaders. This concerted effort has propelled China to become a dominant player in global lithium-ion battery production, accounting for over 80% of the market. In 2023, China saw remarkable sales figures, with over 8 million plug-in cars sold, including 5.34 million battery electric vehicles (BEVs), securing a 25% market share.

In comparison, the U.S. EV market is also expanding, with over 1.4 million plug-in cars sold in 2023, of which 1.1 million were all-electric. However, U.S. automakers face challenges in producing truly affordable EVs.

Regarding the production of cost-competitive lithium-ion batteries in the U.S., experts express skepticism due to the difficulty of establishing an alternative supply chain while maintaining competitive costs. Ilaria Mazzocco emphasizes the challenge of reinventing the wheel and competing with established battery chemistries.

Two popular EV battery chemistries, nickel-manganese-cobalt (NMC) and lithium-iron-phosphate (LFP), have their origins in the U.S. NMC batteries offer higher energy density for longer range, while LFP batteries, credited to American materials scientist John Goodenough, boast longer lifecycles and fewer safety and environmental risks. Goodenough invented the first LFP cathode at the University of Texas in the late 1990s, while early NMC cathodes emerged from the federally funded Argonne National Laboratory in Illinois.

Steve LeVine, editor of The Electric, emphasized the significant progress made by Chinese companies in commercializing battery chemistries and scaling up production. He highlighted the necessity for the U.S. to collaborate with established Chinese firms like CATL and BYD to develop its own battery industry rather than aiming for complete decoupling.

LeVine suggested that partnerships with Chinese companies could help build up the U.S. battery industry. He cited the collaboration between Ford and CATL to establish an LFP gigafactory in Michigan as an example. The $3.5 billion plant was expected to create 2,500 direct jobs and have an annual production capacity of 35 gigawatt hours (GWh). However, Ford faced criticism from U.S. lawmakers over CATL’s alleged ties to the Chinese Communist Party and alleged human rights abuses in Xinjiang.

Despite the scrutiny, construction of the Ford-CATL plant continues, albeit with scaled-back capacity due to slower-than-expected EV demand. LeVine noted that while the agreement between Ford and CATL isn’t a perfect model, it lacks provisions for knowledge transfer to Ford workers on LFP battery production.

LeVine suggested that allowing Chinese experts from companies like CATL to collaborate with American firms through joint ventures could facilitate knowledge transfer and skill development in the U.S., ultimately strengthening the country’s battery industry.

Europe has been receptive to Chinese battery manufacturers, with companies like CATL, Envision AESC, and SVolt making significant investments in the region. CATL, for instance, is constructing its largest European facility, an $8 billion plant in Hungary. Similarly, Envision AESC is establishing factories in Spain and France, while SVolt, born out of a collaboration between BMW and Great Wall Motor, plans to build five plants in Europe, two of which will be in Germany. SVolt aims to achieve a production capacity of 50 gigawatt-hours by the end of the decade, sufficient to power a million EVs.

Ilaria Mazzocco suggests that Chinese companies are expanding abroad and localizing production partly in response to concerns about the Chinese government’s influence and potential export controls. This international expansion also allows them to diversify their operations and mitigate risks.

Moreover, Chinese battery manufacturers are venturing into the Global South. Gotion High-Tech, for example, is establishing Africa’s first EV battery plant in Morocco, while BYD is constructing a $290 million cathode factory in Chile. Chile, with the world’s largest lithium deposits, serves as an attractive location due to its significant lithium production.

Mazzocco points out that Chinese battery companies are responding to incentives offered by various governments. For instance, with the Inflation Reduction Act (IRA) in the U.S., there’s a notable investment trend in countries with free trade agreements, such as Morocco and Chile. Batteries produced in these countries qualify for IRA subsidies, driving investment in these regions.

The possibility of Mexico serving as a gateway for Chinese EVs to enter the U.S. market is keeping American automakers vigilant. BYD recently confirmed its consideration of building a plant in Mexico, potentially establishing an export hub to the U.S. Under the U.S.-Mexico-Canada trade agreement (USMCA), cars manufactured in Mexico would enjoy tariff-free access to the U.S. However, experts caution against the assumption that Chinese EVs produced in Mexico would exclusively target the U.S. market.

Tu Le, managing director of Sino Auto Insights, highlights the broader market potential in Mexico, Central America, and South America for Chinese automakers. As per capita incomes rise in these regions, they represent promising growth opportunities beyond North America.

While the U.S. is expanding its EV footprint, particularly fueled by initiatives like the Inflation Reduction Act (IRA), uncertainties loom over its future, especially with the impending 2024 presidential election. The IRA has catalyzed domestic battery production through significant manufacturing and consumer subsidies. Yet, its fate remains uncertain, subject to potential shifts in political landscape and policy priorities.

Republican frontrunner Donald Trump has voiced criticism of the provisions within the Inflation Reduction Act (IRA) during his campaign, particularly targeting tax credits for what he perceives as affluent individuals purchasing luxury electric cars.

The fate of the IRA remains uncertain, with doubts looming over its survival and potential substantial revisions if it does continue. However, experts caution against repeating history, emphasizing the difficulty in severing ties with China within the supply chain.

Steve LeVine underscores the consequences of previous attempts to halt policy initiatives, such as from 2009 to 2012-2013, while China continued to progress. He warns against making the same mistake again, stressing the importance of maintaining consistent policies throughout the decade.

LeVine emphasizes that discontinuing policies supporting the EV industry would be a monumental geopolitical and economic error. It’s crucial to sustain these policies to prevent falling behind in the global EV race and to ensure the U.S. remains competitive in the long run.

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