China’s global battery ram will be hard to stop

Samsung SDI

06/09/2024 12:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
    By Katrina Hamlin
       HONG KONG, Sept 6 (Reuters Breakingviews) - China’s
electric cars have zoomed into a new era of battery-powered
driving. Now models such as BYD’s  002594.SZ  Seal and Great
Wall Motor’s  601633.SS  Funky Cat face an international
backlash. The U.S. is quadrupling duties on imports of electric
vehicles from the People’s Republic to more than 100%, while the
European Union is lifting total tariffs close to 50% for some
marques. The Chinese-made batteries that power the vehicles are
an obvious next target for trade restrictions. But that battle
will be even harder for the West to win.
    China is a battery powerhouse. The $115 billion Contemporary
Amperex Technology  300750.SZ  and its smaller compatriots
accounted for two-thirds of the global market for power cells
used in electric cars in the first half of 2024, Bernstein
analysts reckon. Companies from the People’s Republic are also
growing faster: installations by SVOLT Energy Technology more
than doubled in the period from January to June, while those
from rivals CALB  3931.HK , Guoxuan  002074.SZ , CATL and BYD
all grew by more than a fifth compared to 2023. They’re
profitable too, with CATL raking in more than 40 billion yuan
($5.6 billion) in earnings last year.
    Much of that output is exported: the total volume of lithium
battery units leaving China roughly doubled between 2015 and
2023, according to the International Trade Centre. The U.S. and
Europe have become major buyers of Chinese cells, squeezing
local operators like Sweden’s Northvolt.

    THE BACKLASH
  
    Now Western policymakers are pushing back. President Joe
Biden in May laid out plans to hike tariffs on imports of
batteries and their parts to 25%, from the previous 7.5%. His
flagship Inflation Reduction Act, which subsidises electric cars
by up to $7,500, from 2025 explicitly excludes vehicles for
which battery materials were extracted, processed or recycled by
a "Foreign Entity Of Concern". That term covers companies
headquartered or incorporated in China, and firms where the
government holds 25% or more of its equity, voting rights or
board seats. Chinese manufacturers are also excluded from the
Bipartisan Infrastructure Law’s $6 billion of credits for
batteries and the critical minerals required to make them.
    EU policymakers in Brussels are erecting similar barriers
for Chinese-made batteries. They have not introduced additional
tariffs, but a slew of guidelines on local and responsible
sourcing makes trade increasingly costly and complex. So will
the EU’s proposed carbon border tax, which will impose levies on
emissions-intensive imports, including cars and related parts
from 2030.
    These efforts are likely to intensify as political
relationships become testier. U.S. efforts to minimise the
country’s dependence on its main strategic rival have broad
bipartisan support. Officials are also anxious about the
presence of Chinese tech in so-called dual-use products that
have military applications. Batteries are crucial for submarines
and drones.
    And although the IRA is one of Biden’s signature policies,
Donald Trump would probably hesitate to reverse it wholesale if
he returns to the White House. Battery-related investments
spurred by the tax credit scheme are concentrated in
Republican-leaning states, UBS analyst Tim Bush points out.

    LEAP OF FAITH
  
    To successfully unplug from Chinese suppliers, however,
Western countries will need to develop alternatives. Korean
battery giants such as LG Energy Solution  373220.KS , SK On and
Samsung SDI  006400.KS , which account for a combined global
market share of 23.5%, are expanding in the U.S. and the
European Union. However, relying on this trio has downsides,
because they lag larger Chinese rivals’ technical prowess. None
have so far managed to ramp up mass production of increasingly
popular lithium-iron phosphate cells, for instance.
    Developments in battery technology may allow upstarts to
leapfrog established leaders. The most promising prospect is
solid-state batteries, which use a lithium-metal layer in place
of a conventional anode - the part of the device to which
current travels during charging. This offers higher energy
density so that the pack powering a car can be safer, smaller,
and lighter without sacrificing range.
    Pioneers are jostling to bring the science out of the lab,
and no one has a clear lead. Benchmark Minerals predicts that by
2030 the U.S. and China could each account for around a third of
the market for this chemistry. Chinese leaders including CATL
and BYD are exploring solid-state batteries. The world’s largest
carmaker, Toyota Motor  7203.T , says it could be as little as
three years away from putting vehicles using those products on
the road. Volkswagen  VOWG_p.DE  is partnering with New
York-listed QuantumScape  QS.N  to do the same.
    
    BRAWN AND BRAINS
  
    Yet overtaking Chinese battery makers is a tricky
proposition. Solid-state products still use lithium, and some
versions also require graphite, nickel and cobalt. Although
China holds only around 7% of the world’s lithium reserves, it
controls around 80% of lithium chemical production, according to
the Organisation for Research on China and Asia, as well
dominating in nickel and cobalt. The People’s Republic has such
a tight grip on graphite that the United States recently had to
push back restrictions on overseas supplies. Battery makers
including Ford Motor  F.N  are urging the U.S. Trade
Representative's Office to ease proposed duties on imports of
the material, Reuters reported last week.
    If engineers concoct new recipes for cathodes and anodes,
processing the necessary materials would probably still be less
costly in China. The country currently churns out batteries at
about three-quarters of the price of those made elsewhere.
Research and development are more affordable in the People’s
Republic, too. Researchers accounted for 80% of BYD’s record
recruitment last year.
    A large domestic customer base offers Chinese companies a
vast testing ground that allows them to scale and commercialise
new ideas quickly and cheaply. Nearly two-fifths of global
patent applications relating to solid-state batteries come from
China, according to local media.
    State support further defrays costs. Last year, CATL was the
top corporate recipient of government grants, the Nikkei
reported. The company pocketed more than $800 million in 2023,
double the 2022 figure, according to the Center for Strategic &
International Studies.

    NO ROOM FOR COMPLACENCY
  
    Chinese stakeholders are not taking the status quo for
granted. In January, a Tsinghua University professor warned
China could lose its lead in batteries if it was not prepared
for the risks posed by the rise of new technology. The state is
coordinating a project involving six companies and investments
of more than 6 billion yuan to incubate solid-state technology,
Reuters reported in May, citing sources.
    It’s too soon to declare victory in the war for the next
generation of battery technology. However, it is currently hard
to imagine China losing its edge in both mass production and
innovation. Opting out of those products will make electric cars
more expensive and less sophisticated. Beijing’s global battery
ram looks very hard to stop.

    Follow @KatrinaHamlin on X

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic 1: China's total battery exports have grown quickly    https://reut.rs/4ga0j6L
Graphic 2: Chinese companies dominate global battery sales    https://reut.rs/3XdYQ6D
Graphic 3: China controls much of the battery supply chain    https://reut.rs/4gfFAOI
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Peter Thal Larsen and Ujjaini Dutta)
 ((For previous columns by the author, Reuters customers can
click on  HAMLIN/ 
katrina.hamlin@thomsonreuters.com; Reuters Messaging:
katrina.hamlin.thomsonreuters.com@reuters.net))