Original by Qiu Kaijun and Wang Lingfang

As the most expensive component in pure electric vehicles, the power battery has always been the “delicious meat” in the eyes of whole vehicle enterprises. Obtaining profits from the battery part has been the desire of whole vehicle enterprises.

Among these, Tesla is undoubtedly the most well-known one with its ambitious plan: In September 2020, Tesla officially announced its battery production plan on Battery Day, striving to achieve an annual battery production capacity of 10 GWh by the end of 2021, and 100 GWh by 2022.

However, even with such ambition, Tesla is still heavily relying on external battery procurement.

On the evening of June 28th, 2021, CATL announced that it had signed an agreement with Tesla based on the agreement signed in February 2020. According to the agreement, CATL will supply lithium-ion power batteries to Tesla from January 2022 to December 2025.

Volkswagen is similar to Tesla in this regard. Although Volkswagen announced its plan to produce its own batteries on Power Day, it also signed huge orders with suppliers such as CATL, LG Chem, and SKI.

How to interpret this situation, where self-research and external procurement are both heavily relied upon? Looking back at Tesla, even with such ambition, it has not been able to achieve battery self-sufficiency. Then, can automakers still go down the road of self-produced batteries?

Diverse technical routes, large R&D investment

Power batteries are typical capital and technology-intensive industries.

According to data from Eastmoney.com, the construction cost of power battery production capacity is about 400 million RMB/GWh. With an investment of 4 billion RMB, the construction of a capacity of 10 GWh can only meet the demand of 200,000 A-grade vehicles with a range of 500 km. From the data, the construction cost of power battery production capacity is the same as that of whole vehicle production capacity.

In addition to the investment in production line construction, there is also R&D investment. According to the annual report, in 2020, CATL’s R&D investment was 3.569 billion RMB, accounting for 7.09% of operating income, and Guoxuan High-tech’s R&D expenditure was 696 million RMB, accounting for 10.35% of the reported operating income.

The R&D investment of mainstream battery companies is generally around 10%. This money is mainly used for technical research and development and reserve, which is mainly determined by the characteristics of the high-tech, complex and multiple technical routes of power battery.

(1) High technical difficulty

Battery is a technology-intensive product, which needs to be based on a large investment in research and development, and whole vehicle enterprises generally do not have the electrochemistry capabilities.

R&D is mainly divided into basic research and project research. Basic research refers to fundamental research on materials, to batteries, and to the system, especially in terms of batteries, requiring a deep understanding of raw materials. Project research refers to matching development research specifically for customer-defined projects, requiring the provision of solutions based on customer needs.As both battery cell and battery manufacturing processes are critical links connecting materials and applications, continuous collaboration with upstream and downstream partners is required to explore new technologies, while guarding against disruptive innovations brought about by technological advancements. All of this requires a significant investment of funds.

(2) Multiple technical routes

Another challenge is that there are multiple technical routes.

Currently, the mainstream technical routes in the market are ternary and lithium-iron-phosphate batteries. The pursuit of safety and energy density in vehicles has driven battery enterprises to continuously develop new technologies. Currently, the most promising next-generation battery is the solid-state battery, while semi-solid-state batteries have the opportunity to be first applied in electric vehicles. Additionally, there are other technical routes such as lithium-air batteries and lithium-sulfur batteries.

In July, CATL will also release sodium-ion batteries.

Among these technical routes, which one will be the market mainstream in the next 5-10 years? This tests the ability of power battery enterprises to judge technical routes.

The construction cost of power battery production capacity is extremely high, and once the technical route selection is erroneous, the enterprise is likely to disappear.

In the history of China’s electric vehicle development, there has been one important technical route shifting.

In 2009, when new energy vehicles were first promoted, lithium-iron-phosphate batteries were the main technical route, as this technology was relatively safe and had a low cost, making it the mainstream choice for auto enterprises.

Starting in 2012, with the continuous improvement of the national subsidy policy for battery energy density requirements, the demand for ternary batteries gradually increased among auto enterprises. In the second half of 2014, the ternary battery route led by CATL began to rise, and mainstream passenger car enterprises began to try it out.

In 2017, even the hardcore supporter of lithium-iron-phosphate — BYD — began to shift to ternary batteries on a large scale. In the field of passenger cars, ternary battery route was highly successful.

At this point, most battery enterprises that mainly focused on lithium-iron-phosphate technology route have withdrawn from the passenger car market.

However, with the withdrawal of subsidies, lithium-iron-phosphate batteries have made a comeback, accounting for nearly half of passenger car sales. Even high-end electric vehicles such as Tesla have begun to use CATL lithium-iron-phosphate batteries. At the same time, the ternary force is still strong, and the news of cobalt-free and semi-solid-state batteries being used on vehicles is becoming more and more frequent. The choice of technological route is a matter of life and death.

To judge the technical route well, entire vehicle enterprises must have the ability to comprehensively evaluate different technical routes, which means heavy capital investment and research and development input. This is a prerequisite for auto enterprises to produce their own batteries.

High precision production with difficult cost control

If battery technology is mastered, can good batteries be produced?

As for the production process of battery cells, the difficulties have not decreased either. The production process of battery cells is complicated and precise, with mixing and segmentation as the front section, winding and electrolyte injection as the middle section, and formation and packaging as the rear section.## Front-end process affects battery core performance

The front-end process of polar plate manufacturing is crucial to the core performance of the battery. The middle and back-end processes also play an equally important role in the overall performance of battery formation and activation testing.

Power batteries require high production efficiency and product consistency

To achieve high production efficiency and product consistency for power batteries, every step of the manufacturing process must be continuously improved, and the level of automation must be continuously upgraded. At present, companies like CATL have proposed the concept of “ultimate manufacturing”, aiming to reduce single cell failure rate from PPM to PPB level. The difficulty of achieving this goal can be imagined.

Vehicle manufacturers demand high-quality batteries

Vehicle manufacturers hope that batteries can also reach the level of car-level quality. However, for the emerging power battery industry, this is not an easy task. At present, there are not many power battery manufacturers who have truly reached the level of car-level battery suppliers, such as CATL, LG Chem, Samsung SDI, AESC, SKI, Panasonic-Tesla.

“Single combat” is hard to guarantee the scale

After crossing the technological and production barriers, vehicle manufacturers still need to pass the scale barrier when producing their own batteries.

In 2008, Daimler and Evonik Industries AG established the “Battery Alliance” and acquired a 49.9% stake in Li-Tec, a manufacturer of lithium-ion batteries established by Evonik in 2006. In 2009, Li-Tec planned to produce 300,000 battery cells per year. However, Li-Tec soon brought troubles to Daimler and Evonik. The production and manufacturing of battery cells requires extremely efficient scale, but at that time, the European electric vehicle market was very small, and most automakers did not have a plan to mass-produce electric vehicles. Therefore, the market was not enough to support Li-Tec to expand its production capacity, and the cost was extremely high, making it difficult to find a market.

Bosch abandons self-made battery cells

Bosch, a former giant in the automotive parts industry, also abandoned self-made battery cells. In February 2018, Bosch announced that it would give up self-made battery cells and concentrate on BMS (battery management technology) and PACK (battery pack technology). Bosch believes that it is more cost-effective to purchase battery cells. If it insists on self-production, it will not be able to compete with large battery cell companies in Asia. Moreover, battery technology is still rapidly evolving, and investing heavily in it now may become a burden.

In summary, the power battery industry still faces many challenges and obstacles, including the pursuit of high production efficiency, large-scale production and the rapid evolution of technology.Smart Winner Chuang took the lead in selling all shares of Li-Tec and ACCUmotive to Daimler, making Daimler the sole owner of the two companies. In order to reduce losses, Daimler had to stop Li-Tec production in 2015. Currently, Li-Tec only exists as a research company for battery technology.

The failure of Daimler Li-Tec can be largely attributed to its small scale. Although the world has ushered in a wave of new energy vehicle development, the actual production and sales of electric vehicles, allocated to each brand, are not very large.

In 2020, the annual sales of the top ten electric vehicle (including plug-in hybrid) brands in the world only just exceeded 100,000 vehicles. Calculated by an average of 50 kWh per car, a car company with a production capacity of 100,000 vehicles would only need 5 GWh of batteries. Such a scale, if undertaken by a single company alone, could also rank among the top ten global battery suppliers, but its competitiveness and position compared to the top few in terms of research and development coordination, raw materials, equipment bargaining, and standardized mass production, are not in the same level.

Even large car companies still find it difficult to control the cost of making their own batteries.

Nissan, which was the first to explore electric vehicles globally, initially produced its own batteries. However, in 2018, Nissan announced that it would transfer the controlling rights of its power battery company AESC to China’s Envision Group.

AESC has been unable to reduce the cost of battery manufacturing by increasing production capacity. Nissan believes that increasing the option to purchase batteries from third-party suppliers is more conducive to open-source cost savings.

In fact, by 2015, the global cumulative sales of the Nissan LEAF had reached 200,000 vehicles, firmly in the top spot in terms of sales, but even this level of sales was not enough to support a reduction in AESC costs.

Similar situations also exist for BYD and Great Wall. Both companies have significant sales of electric vehicles, but they have spun off their battery businesses for separate development in the hope of achieving greater scale.

Geely is also one of the few vehicle manufacturers involved in the field of battery cells, but it still relies mainly on external procurement. Its own battery company, Hengyuan New Energy, has a minimal output and thus its competitiveness is naturally not worth mentioning. In May, Hengyuan New Energy also announced the public sale tender for about 300,000 30Ah ternary lithium-ion cells produced by the company. Originally, these cells were prepared for their own new energy vehicles, but due to poor vehicle sales, the batteries had to be sold off.Actually, whether car companies should produce batteries or not is a classic issue regarding corporate boundaries: when should a corporation choose to purchase a material from the market and when should they choose to produce it themselves? The classic answer from Nobel laureate economist Coase is that corporations and markets are “alternative ways of coordinating production”, and the answer depends on which behavior’s transaction cost is lower.

The experiences of several car companies producing their own batteries have fully demonstrated that car companies can produce batteries themselves, but the cost is not low. Compared to these two solutions – corporation and market – the transaction cost of market is lower.

It can be seen that car companies still need to weigh the pros and cons when building their own battery factories. Tesla has prospects and Volkswagen has a strong foundation, but they are still choosing to outsource, and they claim to want to build their own, but there is no sign of progress yet. If they cannot ensure the market scale, it is better to leave the battery factory to the professionals. After all, it is not profitable and dangerous – it could even bring the whole company down – so it is not worth it.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.