Tesla's Domestic Supply Chain Investment Guide

Tesla is really a little devil. American stockholders bought Tesla stocks and made a lot of money. Chinese stockholders bought Tesla industry chain stocks and made a lot of money. But car owners who bought Tesla cars suffered a huge loss. Car prices have been falling continuously. If you bought a BMW 5 Series a year ago, you would have bought a Honda Accord a year later. The wait-and-see party wanted to buy at the bottom, but they also fell halfway.

The reason that drives Tesla's continuous price cuts is naturally inseparable from the Chinese supply chain behind it. Since the construction of Tesla's Shanghai Lingang factory started in 2019, Tesla's localization rate has continued to rise, from 0 to 70%. Among them, the supply chain has also evolved into two development models: the "Ningde phenomenon" and the "Top phenomenon".

This is the direction of future supply chain division, and also the two cognitive thresholds that industrial chain investment must overcome.

When talking about the domestic industrial chain, the first thing that cannot be avoided is CATL (hereinafter referred to as "CATL"), the leading domestic new energy power battery company, with a market value of 600 billion yuan. From the beginning of 2020 to now, its growth has exceeded 100%, and it has earned the reputation of "Electric Mao".

The rise of CATL has several typical characteristics: a specialized company focusing on high-quality tracks, leading technology, and horizontal expansion into multiple customers.

Ningde started from a high point, born out of ATL, a well-known company in the field of 3C consumer lithium-ion batteries. ATL was founded in 1999, and then ushered in the golden period of the explosion of computers and mobile phones. In 2007, it became an Apple supplier. In 2011, ATL's power battery department independently established CATL, namely Ningde. The three core senior executives of Ningde, Chairman Zeng Yuqun, Vice Chairman Huang Shilin, and Deputy General Manager Wu Kai, all previously held important positions in ATL's R&D department.

After that, CATL made great strides in the field of technology and took the lead in achieving mass production of 811 battery cells, with energy density superior to other ternary manufacturers. It competed with Panasonic and LG and became the first echelon of global power batteries. At an industry conference in 2019, an ATL engineer was praised by people, saying that CATL was awesome. CATL set an example of a student who surpassed his teacher.

CATL’s technological development was not achieved overnight. In its history of “starting – growing – rising”, batteries have always been its core business, and through cooperation with vehicle manufacturers, it has continuously iterated its technology development and production capabilities.

In 2012, BMW Brilliance submitted an 800-page battery requirement specification. CATL accepted the challenge and successfully completed the development, becoming the only Chinese company to enter the power battery supply chain of multinational companies at that time.

With a good background, strong technology and low cost, Ningde has entered a positive cycle of "strong technology - many customers - stronger technology - more customers" after seizing the golden track of power batteries: it became a supplier of Yutong Bus in 2013 and won the Volkswagen MEB in 2018. From July 2020, Tesla's domestically produced Model 3 with lithium iron phosphate will be supplied by Ningde. In addition, domestic new car manufacturers basically also use Ningde 811 batteries as standard.

The "Ningde phenomenon" is not unique. Leaders with segmentation, focus, and technology verticalization strategies have also emerged in other fields. For example, Sanhua Intelligent Control, which is engaged in thermal management, and Hongfa Co., Ltd., which is engaged in the field of high-voltage DC relays, etc. Sanhua has been focusing on thermal management for more than 20 years, focusing on the field of electronic expansion valves for air conditioners and automobiles.

Other companies of this type include: Yinlun Holdings, Xinquan Holdings, Fuyao Glass, Desay SV Automotive, which has the potential to enter the central control and domain controller fields, and Zhongding Holdings, which has the potential to enter the air suspension field[1]. In short, companies that have deep roots in niche areas are worth a look.

In addition to the Ningde phenomenon, a "Topo phenomenon" has also emerged in Tesla's industrial chain. In the first half of 2020, Topo Group's growth rate also exceeded 100%, and many securities firms believe that it will be a Tier 0.5 supplier with integrated supply capabilities in the future.

Founded in 1983, Top Group started out as a provider of NVH (vibration and noise reduction and comfort control) products. It has now gradually expanded into the fields of automotive electronics and intelligent driving, evolving from a single-type component supplier to a platform-based company with multi-business collaboration.

NVH is the cornerstone business of Top, which is mainly divided into two categories: shock absorption and noise reduction products. A major feature of the NVH business is that it is widely distributed in the whole vehicle and has many partners. For example, shock absorption products are widely used in powertrain, body, chassis and other fields. At the same time, the company has early layout in the fields of lightweight, intelligent driving and other fields.

In 2002, it began to expand into the field of chassis lightweighting. In 2015, it mass-produced forged aluminum control arms. At the end of 2017, it acquired Fudona (a Zhejiang FAW parts manufacturer) and others [2]. Currently, Top has successfully expanded into five product lines: shock absorption, automotive decoration, chassis, electronic products, and lightweighting, with a total of more than 5,000 products. In 2016, it finally entered Tesla's supply chain.

Other companies with similar Top phenomenon include Joyson Electronics, Huayu Automotive, Xusheng Shares, etc. Xusheng started out with die-castings (such as cleaning machine accessories, etc.), and gradually developed various die-castings suitable for new energy vehicles during its development. While expanding and strengthening the die-casting category, it also expanded its business to gearbox bodies, suspension parts, electric drive systems, motor housings, etc.

From the perspective of industrial strategy, the Ningde phenomenon and the Top phenomenon are like: one is to raise good fish and eat multiple meals from one fish; the other is to raise many fish and cast a wide net. Each has its own unique approach.

Why do these two phenomena in the industrial chain appear? Are they short-lived or will they flourish forever? How long can they last in the future? This requires looking back at the historical process of the Apple industrial chain in China, the object from which Tesla "stole" its skills.

The Ningde phenomenon and the Top Group phenomenon can both be found in the Apple industry chain. For example, the development path of Top Group is very similar to that of Luxshare Precision. The characteristics of these two companies are to dig deep into customer needs vertically, expand business boundaries horizontally, and build high-quality platforms.

The CATL phenomenon also has a counterpart, such as OFILM and Largan Precision in the optical track of Apple's industrial chain. Largan Precision has provided lenses for the first generation of iPhone since 2007, and then relied on its continuous leading technical strength to iterate to meet Apple's iteration needs. Its customers have also extended to other mobile phone manufacturers, becoming the global leader in mobile phone lenses. Its gross profit margin in 2019 was 69%, higher than TSMC, and it is known as the stock king of Taiwan.

Single technology depth is king and horizontal multiple businesses are king. These two phenomena have appeared successively in the industrial chains of Apple and Tesla. There are certain internal industrial laws to follow behind them.

First, in a track where single technology depth is king, core technologies have a certain degree of inheritance and ductility, which means that if latecomers want to make a breakthrough, they must first go through a long learning curve, and the development of new technologies also requires accumulation over time. It is unlikely that a shocking reversal will occur with a single trick that dominates the market. For example, the technological iteration behind mobile phone lenses and the evolution of power battery technology paths have all shown an iterative path of incremental innovation.

Largan has been focusing on plastic lens research since 1991, and Ningde's battery research and development has a 20-year history based on ATL. If companies with first-mover technology advantages are equipped with excellent management and are willing to invest in research and development for a long time, they will have the opportunity to breed many small Huaweis in the segmented golden track.

In 2020, Wang Xing, the founder of Meituan, who is also from Fujian, publicly stated that Zeng Yuqun of Ningde will be an entrepreneur on par with Ren Zhengfei in the future.
Secondly, the horizontal multi-business track can also form a platform with the following prerequisites: the process on the track must be universal, and the product must be extensible to facilitate horizontal expansion. At the same time, the track space is broad, can be explored, and can be extended. In addition, it is necessary to have an excellent management mechanism, such as whether the management is capable of managing multiple businesses, integrating mergers and acquisitions, etc.

For example, Luxshare Precision's original business, the connector production process SMT (surface assembly technology), has a certain universality. At the same time, its acquisition operations are also textbooks in the industry, claiming to "acquire a company and enter an industry", and its mergers and acquisitions integration are almost error-free.