Entry of Ningde Times in Sichuan Boosts Upstream Industry Integration
Author: Wen Yehao
Editor: Wu Xianzhi
Three years ago, CATL (Contemporary Amperex Technology Co., Ltd) established a wholly-owned subsidiary in Sichuan named Sichuan Times, which marked the beginning of its foray into the southwest region of China.
Since then, CATL has never stopped its advance into the Sichuan region, continuously increasing its investment and transferring talent from its headquarters in Ningde to Sichuan. Do you still remember that when the Phase 1 project of Sichuan Times was put into operation, Zeng Yuqun, the chairman of CATL, boasted that “Sichuan Times will surely become the Times of the world.”
Although it will take some time to fulfill such a bold statement, even the “Ningde King” cannot sit back and relax in the context of the crazily rising prices of lithium battery raw materials worldwide.
In the process of new energy revolution, Sichuan is not an unknown place. Since 2015, the lithium carbonate leader in Sichuan, Tianqi Lithium, has been sprinting along with Jiangxi Ganfeng Lithium, extending its reach overseas through a series of aggressive tactics. However, Tianqi Lithium suffered a major setback in its investment in the lithium lake in Chile and has yet to recover.
The competition in the lithium battery industry has already become overheated, and the entry of CATL into Sichuan is essentially an acceleration of upstream industry integration.
Sweet First Love
The relationship between Sichuan and CATL is a mutually supporting one.
When Sichuan Times was established, the local leaders even personally received Zeng Yuqun, which shows how high the standards are. In addition, when Ningde Times was building its base in Yibin, a city in Sichuan, it pledged to level 1000 acres of land within three months and mobilized thousands of machines around the clock to work, ultimately fulfilling its commitment in only 81 days.
The logic behind this is simple: Sichuan and CATL need each other. In 2018, Sichuan proposed to “encourage and support the central cities of the regions with conditions to strive for the vice-center of the province’s economy.” Meanwhile, the new energy sector is still rising, and as a leading power battery supplier, the entry of CATL will undoubtedly bring a wave of talent and supporting companies into Sichuan, thereby helping to adjust the industrial structure of the region.
For power battery suppliers, site selection for capacity expansion generally follows two principles: one is to be closer to the upstream, and the other is to be closer to the market. CATL emphasizes the former. Currently, CATL has 10 self-built bases and five joint ventures with automakers. Among them, its bases in Yibin, Yichun, and Qinghai correspond to lithium resources in Sichuan, Jiangxi, and Qinghai, respectively.
Although Yibin is not the main lithium producing region, in order to attract CATL, the local government has provided full support, and actively and efficiently promoted the landing and production of Tianyi Lithium. As an upstream lithium resource company established by CATL, Tianyi Lithium, together with Tianhua Ultra-Clean Technology and Changjiang Dawn, once solely supplied CATL in order to offset the weakness of Yibin’s lithium battery industry.And at the confluence of the three rivers in Yibin lies Xiangjiaba Dam, the third largest hydroelectric power station in China. For Ningde Times, a player in the remanufacturing industry, cheap hydroelectric resources help reduce production costs. Moreover, overseas new energy vehicle companies often require the use of green electricity in supplier assessments, and hydropower, as a renewable energy source, meets relevant standards.
Based on this, Ningde Times has signed a series of power battery expansion projects with Yibin since 2019. It is reported that more than 80% of the energy at the Yibin base comes from hydropower, and based on hydropower, Ningde Times’ first “zero-carbon factory” was also established in Yibin. Up to now, the local project has been planned for ten phases, with a planned production capacity of up to 180GWh.
Ningde Times’ entry into Sichuan has also brought immediate effects to the local community. In 2021, Yibin led the province with a GDP growth rate of 8.9%, and “working in Times of Sichuan” has even become a new employment trend in the local area. Times of Sichuan has contributed to the “Ningde King” with a production capacity second only to local bases in Ningde.
However, at the time of its entry into Sichuan, it was just as the “Ningde King” was in its prime, and the players were unable to assert themselves. Nowadays, the power battery race sees competition from LG Energy Solution, BYD, CATL, and others accelerating their external layouts. Companies like EVE Energy Technology and Xinwanda are eager to take a slice of the consumer battery race. While LG Energy Solution, with an overall second-place market share, is oriented towards overseas customers, unable to swallow up the domestic market of Ningde Times, BYD, which stopped producing fuel vehicles last month, has shaken the reign of the Ningde King.
Ningde Times is still the leader, but its reign is in jeopardy
According to data from the China Automotive Power Battery Industry Innovation Alliance in February of this year, Ningde Times still firmly holds the industry’s top spot, with global shipments increasing by 192% YoY. However, the same number for BYD is 411%, more than twice that of Ningde Times.
Reflecting on the market share, from December last year to March of this year, Ningde Times’ domestic installed capacity ratio respectively dropped to 55.6%, 50.24%, 48%, and 49.75%, showing a downward trend.
Capacity was once Ningde Times’ proud card, but it is now approaching a threshold. According to data from Startline Lithium Battery Big Data, BYD, Honeycomb Energy, and CATL all have production capacity targets of over 500GWh by 2025. In comparison, Ningde Times’ target production capacity of 670GWh is not significantly advantageous. The entire race is working hard to expand production, and Ningde Times’ so-called large-scale manufacturing capabilities will inevitably be diluted. Once the supply-demand relationship changes, expansion will become a burden.The prevalence of “secondary supply” is the most convincing interpretation. In 2021, XPeng Motors introduced Zhongchuang Innovation Flight, and BMW signed a contract with Yiwei Lithium Energy. Some are looking for “spare tires”, while others are directly “defecting”. Guangzhou Automobile New Energy has switched its first supplier to Zhongchuang Innovation Flight.
Among all competitors, BYD is a competitive one.
On the one hand, BYD has its own downstream car-making business. In March of this year, BYD’s new energy vehicle production and sales exceeded 100,000 units, a year-on-year increase of 333%. The acquisition of its own battery is a piece of cake. On the other hand, BYD seems to no longer be satisfied with self-production and sales. It uses the name of its subsidiary “Fudi” to move towards external supply. In the future, “Fudi” may be split into an independent power battery company, and there will be another bloody battle in the racetrack by then.
In addition, the ternary lithium battery that helped Ningshi to conquer the world seems no longer so miraculous.
With the rise in raw material prices and the decline in subsidy policies, lithium iron phosphate batteries have shown a high cost-performance advantage. In addition, companies such as BYD and Zhongchuang Innovation Flight, which focus on lithium iron phosphate batteries, have raised their energy density, and the balance has shifted to lithium iron phosphate.
As of March, the total output of power batteries in China reached 39.2 GWh, of which the proportion of ternary batteries was 39.7%, a year-on-year increase of 167.3%, and the proportion of lithium iron phosphate batteries was 60.2%, a year-on-year increase of 332.9%.
In order to regain lost ground, Ningshi era needs deeper moats, but there are only two shovels left for Ningshi King. One is to promote technological innovation and hope to hit the next jackpot, but it will take time to lay out energy storage and develop sodium-ion batteries. The other one is to accelerate the integration of the industrial chain and raise profit margins, such as entering Sichuan.
Regaining the Market, or Relying on Sichuan
As the gradually released production capacity of the power battery raceway expands wildly, the growth of the new energy vehicle market may not keep up with the expansion rate. By then, supply and demand will be adjusted, and surplus production capacity will no longer be convincing.
Although Ningshi era has many downstream customers, the risks of the aforementioned “secondary supply” and “defection” have always existed. Therefore, “Ningwang” launched battery swapping services and fully opened up, and of course, it is to extend downstream car companies to the service binding and prepare for future production capacity overflow.
However, at that time, manufacturers with only production capacity are likely to lower prices to ensure shipments and fall into a vicious cycle of price wars. Therefore, only by improving profit margins at present can we ensure that we can stand firm in price wars in the future.
From 2019 to 2021, the gross profit margins of Zhongchuang Innovation Flight, which shared Ningshi era, were 4.8%, 13.6%, and 5.5%, respectively. Although Ningshi era’s gross profit margin has declined during the same period, its gross profit margin can still be maintained at around 25%.
This is largely due to Ningshi era’s layout in the industry chain. For power battery companies in the midstream, integrating the upstream and downstream industry chains is the way to reduce costs and increase profits.According to incomplete statistics, in the past few years, CATL has participated in the investment of 10 battery material-related enterprises, covering raw material suppliers such as lithium mines and iron phosphate mines, as well as cathode material and electrolyte manufacturers. Most of the investments occurred in the past two years, during which expansion was rapid and characterized by slogans.
In the past year, affected by the rise of raw material prices, power battery manufacturers have increased their prices. Among the many raw materials that have risen in price, lithium resources are the most prominent. Data show that the price of battery-grade lithium carbonate skyrocketed by 480% in the past year and has risen by 80% since the beginning of this year. The soaring price of raw materials will naturally squeeze battery manufacturers’ profits.
Frankly speaking, lithium resources are not scarce in themselves, and costs often concentrate on mining and refining. Before the soaring of upstream raw material prices, the quotation for lithium carbonate was not even enough to support the mining cost, which made the supply side lack elasticity. Faced with the demand generated by the surge in sales of new energy vehicles, upstream enterprises are difficult to fully undertake it in the short term, which naturally contributes to the skyrocketing of raw material prices.
As the core raw material of power batteries, lithium resources are generally divided into two types: one comes from lithium salt lakes, and the other is hard rock lithium mines represented by spodumene. According to data from CITIC Securities, spodumene accounted for more than half of the global lithium salt production in 2020. Domestic spodumene deposits are mainly distributed in Sichuan, and the resource reserves are as high as 760,000 tons, accounting for more than 50% of the country’s lithium mines.
From investment and expansion to the cooperation of government and enterprise to obtain upstream raw material resources, CATL’s pace conveys a clear theme, which is to build a regional closed loop around upstream lithium resources, midstream battery bases, and downstream local car manufacturing industry, in order to widen the gap with competitors.
Interestingly, second-tier manufacturers such as Guoxuan High-tech and Zhong Chuang Xin Hang have also gone to Yichun and Meishan to obtain land and lithium, while CATL has also bought mines to defend its territory in Yichun. The upstream competition in new energy is no less fierce than the downstream.
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.