The battle for power batteries has entered the second stage, and the era of making quick money is over

2019 is destined to be an unforgettable year for the Chinese power battery market:

From January to December 2019, the cumulative installed capacity of power batteries in China was 62.2GWh, a year-on-year increase of 9.2%. Although the industry is still in a slight growth trend throughout the year, the situation in the second half of the year is not so optimistic.

Under the influence of multiple factors such as the country's vigorous deleveraging, subsidy reduction and pressure on the auto market, China's installed capacity of power batteries has experienced a significant slowdown in growth since July 2019. In August, installed capacity began to show negative year-on-year growth, and in December, installed capacity fell by as much as 27.4% year-on-year.

Will this downward trend continue into 2020? This is probably a high probability event.

Comparison of monthly installed capacity of power batteries in China from 2017 to 2019 (data for December 2019 is not available yet)

Such a trend will inevitably bring a completely different competitive situation to the industry than in previous years. Large players with strong foundations and strong confidence will find it relatively easy to deal with; growing players with strong technology and steady progress will face huge challenges in breakthroughs and even survival; while ordinary companies with average R&D, quality, production, and organizational management levels are facing huge survival pressure.

Specifically, what are the characteristics of China's power battery industry in 2019? What trends will it have in 2020?

There are more than 70 power battery companies, too many and too few.

In 2019, the power battery industry is gradually transitioning from the incremental mode of "working hard and fast" in the past few years to the stock competition mode. At the same time, the head concentration effect begins to appear at this stage: as an industry continues to develop and mature, companies with stronger competitiveness and more standardized operating models will have stronger competitive advantages and occupy a higher market share, while weaker companies will gradually withdraw from the competition, and there will be fewer competing companies in the market.

Referring to the stock market and market operation of relatively mature industries in China in recent years (such as real estate, automobiles, chemicals, home appliances, consumption, etc.), it is not difficult to find that leading enterprises/white horses are defeating their competitors with stronger market performance, and are constantly consolidating their leading position. Correspondingly, they have received more and more attention in the financial market (higher valuations) and policies (some support from the state), and have gradually grown into the backbone of China's economy and the main force of the country competing on the world economic stage.

As for China's power battery market, there are still about 70 companies in 2019. In fact, this number is both too many and too few:

· More: For an industry, sixty or seventy companies is far from the time when the head effect is truly formed. Considering the continued decline and the unchanged trend of transformation and upgrading of the manufacturing industry, the central government has even issued a document (see the figure below) directly stating the expectation of increasing industry concentration. More and more brutal competition in the power battery industry can be expected in the next few years.

· Few: CATL alone accounts for >50% of the market share, and together with BYD's power batteries, it accounts for about 70% in total, which means that in fact most companies are not of the same magnitude as the top two, and the competition in the market is not complete and sufficient. Therefore, if more new companies with real strength to challenge the current top companies emerge and allow them to stand out in the competition, this is what the industry really hopes for.

On December 3, the Ministry of Industry and Information Technology issued the "New Energy Vehicle Industry Development Plan (2021-2035)" (Draft for Comments).

Competition, reshuffle, bankruptcy, survival, progress and transformation will most likely be the key words for the development of this industry in the next few years. As for who will stand out in the upcoming competition, it naturally depends on the companies' own strength, determination and grasp of market opportunities.

From protection to encouraging open competition, China's power battery industry has entered the second stage

Whether industrial policy is useful or not is a long-standing debate in academia. However, whether we look at how late-developing countries have caught up with the industrial systems of advanced countries throughout history (Germany vs. the United Kingdom, the United States vs. the United Kingdom, Japan and South Korea vs. the West, Singapore vs. ?), or look at the current economic policy landscape in the world (the United States and Germany both have policies to support emerging advanced industries), it is actually normal to promote industry development through industrial policies.

As for the development of the electric vehicle industry, the question is not whether industrial policies should be used, but how to use industrial policies to enable the industry to develop better.

A review of South Korea’s industrial policy, excerpted from a report by Changjiang Securities Research Institute

Singapore's "RIE2020" plan: The government will invest US$19 billion in four strategic areas, including advanced manufacturing, biomedical sciences, urban solutions and sustainable development, services and digital economy, and is committed to building Singapore into a world R&D center

A few years ago, Japanese and Korean power battery companies had an almost overwhelming advantage over Chinese companies. If the industrial policy at that time was to open the door to welcome foreign guests, I am afraid that Chinese power battery industry enterprises would not be able to develop. However, relying on a series of "combination punch" policies such as white list + subsidies, China's power battery industry has flourished in the past few years. Many companies have emerged, a complete industrial chain and talent pool have been built, and there have been more than 100 lithium battery companies, as well as first-class companies such as CATL and BYD that can compete on the world stage. From the overall situation of the industry, it is not an exaggeration to say that great progress has been made.

Some people may say that after spending so much money and creating so much excess capacity, the results are not good. However, looking at the development of many other fields in China and other countries in the world, in many cases, a lot of investment is often made, but in the end, there is not even a splash. In comparison, the development of China's power battery industry at this stage is very successful. Here, I would like to define the past few years of China's power battery industry as the "first stage" of industrial development, that is, the stage of using certain industrial policies to protect and support domestic enterprises so that they can compete with international enterprises.

Phase 1: Domestic power battery sales gradually surpass those of Japan and South Korea

However, in 2019, the industry and the world have undergone many changes, especially the trade war has affected almost all industries in China. Looking at the friction and negotiations between the two sides, although there are many different views and interests, on one hand, the two countries have almost quickly reached a consensus, at least in principle: China should further open up and improve its internationalization.

In this context, many policies in the power battery industry have naturally changed in 2019: the whitelist was discontinued, and the domestically produced Tesla MODEL 3 equipped with Panasonic and LG batteries entered the subsidy catalogue of the Ministry of Industry and Information Technology.

The signal behind this is actually very clear: China's local power companies have grown up, and the general trend requires further opening up. The policy will switch from the first stage focusing on protection to the second stage encouraging openness and competition.

In fact, entering the second stage is inevitable. China's power battery industry has developed to this day, and the scale has been achieved. The quality is also good, but not high enough. Therefore, the power battery industry at this time needs to be open to the outside world (China's economic openness), and it also needs to reduce industry leverage (de-capacity), fiscal burden (de-subsidy), and improve the quality of industry development. In this context, the central government's policy of "increasing industry concentration" seems to be a natural thing.

At this stage, the leading local companies just need to continue to make steady progress. However, many second- and third-tier companies will face a test of life and death: if they seize the opportunity and improve their strength, they may enter the first echelon, become the survivors and winners of the second stage, and continue to grow into real high-quality suppliers. However, if these power battery companies are still satisfied with the previous level of research and development, quality, production, and organizational management that they felt was "acceptable", their chances of survival in the future may be small.

12.6 Road Motor Vehicle Manufacturing Enterprises and Products (326th Batch)

The Ministry of Industry's 326th batch of road motor vehicle manufacturers and product catalogs in 2019, Tesla Model 3 is among them

Here, the author cannot help but say one more thing. A few days ago, there was an article saying that Tesla’s factory in Shanghai was built very quickly with the green light. Many domestic emerging forces expressed dissatisfaction with this, believing that the government is biased or even siding with “outsiders”.