The hidden worries behind CATL's halo

In just nine years, CATL has firmly established itself as the leader in the domestic power battery industry.

In 2019, the domestic installed capacity of power batteries was about 62.2 GWh, and CATL's installed capacity was 31.71 GWh, accounting for 51.01%. Thanks to the huge scale of new energy vehicles in China, CATL has ranked first in the world in terms of installed capacity of power batteries for three consecutive years.

Among them, the partners include world-renowned car companies such as BMW, Mercedes-Benz, Tesla, and Honda.

As of September 4, Beijing time, CATL's market value was approximately RMB 475.818 billion, making it the undisputed leader in the ChiNext.

CATL, a dark horse that won large orders for power batteries from top automakers from international oligarchs such as LG Chem and Panasonic, did not have a satisfactory first half of 2020.

The best description of CATL is to be defined as "a firm practitioner in the new energy battery industry."

Why has CATL developed so fast? It can be summarized into four points: seizing the industry trend, energy and environmental issues, competitors’ disdain, and technology first.

Among them, seizing the industry trend is the main reason for rapid development. We are currently in a period of transformation in automobile power mode, and the development wave of new energy vehicles has pushed CATL to the position of power battery overlord.

In addition to CATL's rapid success, the most successful example of an industry boom is Tesla. Tesla's current market value has surpassed the combined market values ​​of Toyota, Volkswagen and Honda, reaching US$464.339 billion.

Tesla's success, in addition to its own innovation and breakthroughs in new energy vehicle technologies such as batteries, electronic control, and autonomous driving, is also due to its extremely high market value, which is not proportional to its sales volume (about 360,000 units sold in 2019), indicating that pure electric vehicles are in line with the general trend of automobile power transformation. CATL occupies the most important part of the power transformation, and success is inevitable.

Second, energy and environmental issues have driven the industry. Although energy and environmental issues are old-fashioned topics, it is undeniable that this issue is still one of the key factors affecting new energy vehicles. The reason why CATL has developed so fast is precisely due to the combination of energy and environmental factors, which has driven CATL's rapid expansion.

Third, competitors’ underestimation. The competitor that CATL is most grateful to is none other than BYD, because it was BYD that “underestimated the enemy” and handed over the market to CATL, which was in its growth stage.

Before its rise, BYD was the absolute leader in domestic power batteries. As a battery giant at that time, BYD's corporate strategy was to make batteries for its own use and not sell them to third-party car companies.

Although this integrated model seems to have mixed reviews today, it is right from the perspective of cost control for the company itself, but it is also an indisputable fact that it has handed over the market to others. Perhaps because the market share was lost too quickly, BYD also announced earlier this year that it would gradually supply power batteries to third-party car companies.

The last point can be summarized as technology first. Technology first is the best definition of CATL. Looking at its founding team, they all started with technology. Including the ATL experience, CEO Zeng Yuqun has been rooted in the lithium battery industry for more than 20 years. CATL is a company that has grown up relying on technology.

In particular, CTP technology simplifies the battery module structure and optimizes the battery pack structure. Through hierarchical segmentation in the vertical or horizontal arrangement, the volume utilization of the battery pack is increased by 15%-20%, the number of parts is reduced by 40%, and the production efficiency is increased by 50%, achieving a significant cost reduction.

Whether in terms of production capacity or battery technology, CATL has already reached the same level or surpassed similar competitors at home and abroad.

To sum up, these four key factors have prompted CATL to develop rapidly and become the biggest dark horse in the power battery industry.

After nine consecutive years of success, CATL felt the pressure from other battery oligarchs for the first time.

In the first quarter of 2020, thanks to the strong sales growth of pure electric vehicles such as Tesla Model 3, Renault Zoe, and Audi e-tron, LG Chem's power battery installed capacity in the first quarter of this year increased from 2.5GWh in the same period last year to 5.5 GWh, a year-on-year increase of 120%. The global market share also increased from 10.7% in the same period last year to 27.1%, making it the power battery manufacturer with the largest global market share in the first half of the year.

Panasonic ranked second with a market share of 26%. CATL, which ranked first in installed capacity for three consecutive years, only had an installed capacity of 3.5GWh and accounted for 17% of the market share, ranking third.

In the first half of the year, CATL's total revenue was 18.829 billion yuan, operating costs were 13.717 billion yuan, gross profit was 5.112 billion yuan, and gross profit margin was 27.15%.

By comparing 2017, 2018, 2019 and the first half of 2020, CATL's gross profit margins were 36.29%, 32.79%, 29.06% and 27.15% respectively. The data show that the gross profit margin in the first half of 2020 has fallen by 9.14 percentage points compared with 2017.

The situation where one company dominates the power battery market may be gone forever.

In the past, in the field of internal combustion engine vehicles, in order to reduce costs, all auto parts could be obtained through procurement, but the three major parts of a car: engine, gearbox, and chassis, especially the engine is known as the "heart of the car", and powerful car companies often master engine technology through self-research.

On the contrary, in the era of pure electric vehicles, electric drive, battery, and electronic control system are called the three-electric system. The power battery has the same function as the engine. Car companies themselves also want to get rid of their dependence on third-party battery suppliers for this key technology and take battery production and technology into their own hands. It should be noted that currently batteries alone account for 40% of the cost of new energy vehicles. Cost compression is also one of the factors that force car companies to join the research on power batteries.

Volkswagen has already taken action, investing 1.1 billion euros in Guoxuan High-tech. Daimler (parent company of Mercedes-Benz) followed closely behind, acquiring a 904.5 million yuan stake in Farasis Energy. It can be seen that car companies are eager to take control of the core technology and production links of power batteries in their own hands, which will also become one of the hidden concerns that will prevent CATL from continuing to expand its battery share.

For a long time in the future, the situation among power battery suppliers will be "whoever controls Tesla controls the world."

The best-selling pure electric car on the market is Tesla, and it is difficult for it to have a competitor in the short term. Taking the domestic market as an example, according to data released by the China Passenger Car Association, Tesla Model 3 sold 11,014 units in China in July, and has been the sales champion of new energy single models for two consecutive years.

The China Association of Automobile Manufacturers previously estimated that Tesla's sales in China in 2020 will be approximately 100,000 vehicles, accounting for more than 12% of the new energy vehicle market.

It is no exaggeration to say that whoever of CATL, LG, and Panasonic can obtain more battery orders from Tesla will be able to rank first in battery installed capacity.

What is in CATL's favor is that Tesla has adopted a diversified approach in selecting battery suppliers. Panasonic and Tesla have had different conflicts over battery production capacity and price issues. At the same time, Tesla also announced that the localization rate will reach 100% by the end of 2020. In other words, these are opportunities for CATL to return to its peak in the future.

For CATL, it is currently facing at least four potential risks of devaluation: shrinking market share, declining gross profit margin, car companies' involvement in battery research, and fluctuations in the new energy industry.

As mentioned earlier, the lifting of restrictions on supply to third-party automakers by its "old rival" BYD will also become a stumbling block on its road to expansion.

Since China's new energy vehicles surpassed the United States in 2015, the country has been the sales champion for four consecutive years.

However, this year, the number of new energy vehicle registrations in Europe from January to July reached 500,000, including 269,000 pure electric vehicles and 231,000 plug-in hybrid vehicles. According to data released by the China Association of Automobile Manufacturers, the sales volume of new energy vehicles in China from January to July was 486,000, including 378,000 pure electric vehicles and 108,000 plug-in hybrid vehicles.

486,000 vs 500,000, China's electric vehicle sales have been surpassed by Europe. The decline in sales in the domestic new energy vehicle market had already shown signs last year.

In 2019, affected by multiple factors such as the price reduction of National V fuel vehicles and the decline of new energy subsidy policies, the production and sales of new energy vehicles began to decline. The annual production and sales were about 1.2 million vehicles, a decrease of nearly 4% compared with the production and sales of 1.27 million vehicles in 2018.

What is even more worrying is that domestic sales of new energy vehicles are expected to decline further this year. According to the China Association of Automobile Manufacturers, China's new energy vehicle sales will reach 1.1 million units in 2020, a decrease of nearly 100,000 units compared to the 1.2 million sales in 2019.

The reason is the impact of the epidemic and the frequent vehicle fires, which have also intensified consumers' doubts about the safety of new energy vehicles.

Regarding the decline in domestic sales, Zeng Yuqun, founder of CATL, recently said: "For China's new energy, don't get up early and catch up late."

Zeng Yuqun's concerns are not unreasonable. The domestic government, enterprises and consumers are all positive about new energy vehicles. The relevant infrastructure in the country is also the most complete, and sales should continue to rank first.

A phased downturn in the new energy vehicle market is inevitable, and it is crucial to explore external markets. If Chinese battery companies such as CATL stop at a single domestic market, their installed capacity may decline.

Compared with car companies, how battery companies go global is more worthy of attention.

Objectively speaking, as the birthplace of automobiles, Europe has a very mature automobile market and consumers have a strong brand awareness. It is very difficult for independent car companies, including new car manufacturers, to open up the market in the short term. However, the power battery industry is different. This is an emerging field with latecomer advantages and is relatively easy to enter.

LG Chem has done the best and most balanced job in developing overseas power battery markets. It entered the European and American markets very early, and many car models have been equipped with its batteries since the beginning of research and development. This is also the reason for its success in achieving the highest installed capacity. Currently, LG Chem has established its own battery production plants in Asia, America and Europe.

There is also a dangerous signal for Chinese battery companies. In addition to the Chinese market, the global new energy market has a very high usage rate of LG Chem in pure electric models with high reputation and sales, which is one of the reasons why its installed capacity has risen to the first place.

Judging from the key point of losing the first place in market share, most of CATL's share depends on the domestic market, and CATL is too dependent on the domestic market.

According to data, 95% of CATL's current battery production is supplied to domestic independent or joint venture car companies. In 2019, CATL's revenue was 45.546 billion yuan, while the export value of lithium-ion power batteries was only 2.56 billion yuan, accounting for about 5.6% of its revenue, which means "CATL will prosper if the domestic market prospers", and it is overly affected by domestic market fluctuations.

How several technologically advanced battery companies such as CATL, Guoxuan High-tech, and BYD open up markets outside of China will directly affect their future development.

Three years ago, CATL won the global power battery installed capacity championship for the first time. This was due to the lack of power battery technology and manufacturing in the early stages of new energy vehicle manufacturing. At that time, CATL was a panacea for car companies on the road to new energy.

As the popularity of new energy vehicles accelerates, CATL, which has absolute control over batteries, is also seen by automobile companies as an "obstacle" on the road to development.

Cost advantage, technological leadership, and production capacity are CATL's advantages at the moment, but they do not mean it can sit back and relax. Mainstream automakers such as GM, Volkswagen, and Toyota are all going all out to develop power batteries, striving to take the initiative in power battery technology and supply chain, thereby gaining greater voice.

Affected by the decline in market share, if CATL wants to regain its leading position in the global power battery market, the global market including Europe will become its next arena . Only by going global and achieving success can CATL eliminate more hidden dangers in its own development.

Domestic policies are firm on the concept of new energy. At the same time, the global trend of pure electric vehicles replacing traditional vehicles is irreversible. Europe also plans to gradually phase out and ban the sale of fuel vehicles after 2030.

Faced with a huge market, CATL has not only developed rapidly in the past nine years, but also has huge room for improvement in the future. The electrification of automobiles has just begun, and the scale has not yet been established. After the scale is established, the demand for batteries will continue to increase. This is an opportunity for CATL, which is worried about the decline in market share. It depends on how to grasp it.