Preface
China contributed nearly 50 percent of the global growth in new energy vehicle (NEV) sales last year. However, the market is still in its early stages, and many trends and dynamics are still changing the industry, including the choice of battery materials, the design of battery pack structures, changes in the industry landscape, and policy shifts. This article introduces the main trends in China's new energy auto market in 2022 from the above-mentioned four perspectives.
Paradigm shift
The first issue we spotlight is that the EV industry has been paying closer attention to the core elements of "safety, cost, recyclability and sustainability," which will be the core factors to determine the scale of the industry and the status of enterprises.
The shift in focus dates back a few years when the incipient EV makers were compelled to address consumers' concerns about the drawbacks of electric cars. Defects such as a short driving range and bad performance in a low-temperature environment pushed EV manufacturers to make improvements, but only in areas such as the volume density and energy density of their products. But in more recent times, practitioners have changed their views vis-à-vis the following issues:
• Vehicle batteries catch fire more frequently. From 2020 to 2022, Tesla, GM, XPeng, NIO had many battery-induced fire accidents. The cars in question are high-performance models and a battery’s performance usually comes at the expense of safety. Safety is the top concern now.
• The rising costs of raw materials make EV battery manufacturing more expensive. The price of compounds like lithium carbonate has risen fivefold, cobalt up 50%, and nickel up 30% in the last twelve months.
• It's hard for battery makers to acquire enough materials: Lithium and cobalt are unevenly distributed and mined worldwide. Primary new energy vehicle markets such as China, Europe and the United States lack such resources and rely on imports. Growing geopolitical crises are also affecting supply in radical ways and with increased intensity. Recycling the lithium could offer a way out but the industry is yet to set a standard, making the overall collection process inefficient.
All these issues are galvanizing experts to think comprehensively about how to design an EV. Safety, cost, battery life and sustainability are the key factors in judging whether a car can succeed.
The heart of an EV
The second topic is the technology roadmap—battery makers design batteries in various forms and build them with multiple materials, which means that no industry consensus is available, posing hurdles for industry concentration.
There are three primary battery designs: cylindrical, prismatic, and pouch battery cells. The three formats have their pros and cons. Most lithium iron phosphate batteries (LFP) are prismatic. The ternary lithium battery, a secondary lithium battery made of three transition metal oxides of nickel, cobalt, and manganese, is generally pouch cells. Tesla is the most fervent advocate of cylindrical battery cells. Its success earned the cylindrical battery a lot of enthusiasts. Some Chinese battery makers are among them.
When Tesla, the world's most valuable EV company, chose to use 2170 battery, some Chinese battery makers started making similar ones. The imitation has continued to this day, so much so that when Tesla announced the debut of the newest 4680 battery, Chinese battery manufacturers such as CATL and EVE followed suit with similar launches at once. But imitation cannot necessarily lead to success. For instance, BYD has devoted itself to prismatic battery cells, a move that propelled its market share to balloon.
Apart from battery shape, materials also have increasingly come under the spotlight.
The anode materials of the lithium-ion battery pack are metal oxides such as nickel, cobalt, and manganese. The ternary lithium battery is made of expensive metals and has the best power performance, enabling a more extended driving range in different temperatures. Thus, it's often used in performance models. At the same time, it is not as safe as LFP battery, which is favored because of the lower cost and the relative ease with which to acquire most raw materials.
Other than lithium batteries, research work is also being carried out on sodium cells and solid-state batteries but they have yet to reach mass production.
In short, batteries built with different anode materials are accepted by OEMs. Tesla and BYD are installing more LFP batteries on their cars, making them a star moving along a “hyper-growth trajectory” in the passenger EV space.
Incentives
Various incentives support the rapid development of batteries. China is using a panoply of subsidies to encourage consumers to buy EVs. Although the subsidies for EV purchase on the whole are dwindling, the benefits of EVs are still attractive to buyers. The overall privileges consumers can get are numerous, including national subsidy, tax exemption, free number plate, OEMs’ subsidy, and various local subsidies.
The national subsidy is set to end by the end of 2022, but before it does, it has led to drastic cuts in final prices. Take an EV with a 500-kilometer driving range as an example. Assuming the car is worth CNY 200,000, the CNY 4,000 subsidy accounts for 1.5% of the total value including other expenses.
By comparison, Huachuang Securities estimated that buyers of an EV are eligible for benefits worth CNY 85,000 on average. Specifically, the benefits include a license plate in some cities. An internal combustion engine car plate could be worth CNY 90,000 in Shanghai and eligible EV purchasers can get one free. Beijing, Guangzhou, Shenzhen and other cities have deployed similar policies.
Other subsidies include purchase tax exemption, which starts in 2014 and expires in 2022. Some expect it to last a couple more years. Take a new energy vehicle priced at CNY 100,000 as an example. Assuming that the purchase tax rate is 10%, a consumer can reduce his or her cost by about CNY 9,000 (calculated by CNY 100,000 divided by the sum of 100% and 13% which equals 8,800).
Last but not least, many EV brands themselves offer buyers non-cash subsidies, including free use of the charging network, coupons for merchandise and aftermarket services. All of these combine to increase the allure of EVs in the eyes of the average consumer. For example, XPeng used to supply free charging service to customers based on battery capacity. This value-added service started at 3000 kW and is now extended to 1000 kW batteries, in a gesture to woo consumers.
Industry landscape
All forms of subsidies, cash or not, encourage consumers to buy EVs and amplify competition among OEMs. OEMs are very likely to integrate upstream to address the issue of cost control, driven by the fact that battery now accounts for 30% of the total material cost.
Statistics show that the gross margin of CATL reached 23% for the first half of 2021. Since 2017, its power battery gross margin has dropped from 35.3% to 23%. CATL claimed its gross profit margin might decline if raw material prices increase due to factors such as intensified market competition in the future. The expansion of OEMs into upstream industry is such that BYD and Great Wall Motor have incorporated their battery affiliates Fudi battery and Svolt, respectively. Meanwhile Volkswagen has become the biggest shareholder of Gotion High-tech Co Ltd, a major battery supplier Going forward, the battery market will be categorized into battery makers backed by auto companies and large battery manufacturers.