Chinese revolution in battery industry

M Rokonuzzaman | Published: January 07, 2019 20:49:17

China greets 2019 with stringent vehicle emission regulations, increasing the demand for the lithium-ion battery to power green vehicles.  In 1991, Japanese electronics maker Sony unveiled Lithium-ion battery to accelerate the diffusion of portable digital imaging innovations-compact video and digital cameras. The emergence of cell phone started demanding increasingly compact, lower cost, higher energy density and quick charging batteries. To meet the growing appetite of portable energy storage, lithium-ion battery kept improving. With the continued progression, at the dawn of the 21st century, innovators spotted the possibility of electric vehicles, replacing the polluting gasoline engines with lithium-ion batteries. Most importantly, the Chinese leadership with the ambition of developing technology edge of the economy, envisioned great prospect in the battery. This is about the prospect of taking the advantage of technology discontinuity in the mighty automobile industry. It's about creating the window of opportunity to lead the next generation automobile industry-by substituting polluting gasoline engines with electric batteries. To turn the vision into the reality, Chinese leadership crafted a smart strategy, coupled with a set of policies for implementation. Here are a few of the strategies and policies being pursued by China to succeed in battery technology, to power green innovation economy.

LEAD USER OF ELECTRIC VEHICLES: Among all the countries in the world, China has been pursuing the most ambitious plan for electric vehicle (EV) adoption. According to a Bloomberg intelligence report, more than 200k EVs rolled out in China in the first quarter of 2018, which is almost 50 per cent of the consumption of EVs by the rest of the world. By 2025, China's leaders want 7 million cars to be sold every year, or 20 per cent of the total, to be plug-in hybrid or battery powered. Starting from January 2019, complex Chinese government equation requires that a sizable portion of the production or import of major automobile manufacturers in China must be green, with escalating goals thereafter. Although Chinese leaders were citing electric vehicle as a means to address the grave concern of air pollution, they also perceived it as an opportunity to craft a strategy to capture a major share of the lucrative global automotive industry.  Through this strategy, China has targeted to address two important issues. The first one is about the growing air pollution and greenhouse gas emission. The other one, more important for Chinese economy, is to create a large domestic market of the electric battery, thereby opening the opportunity for Chinese manufacturers to lead next generation automobile industry run by batteries.

SUPPORTING DOMESTIC ELECTRIC BATTERY PRODUCERS: For capturing a significant market share of the global electric battery market, China started supporting the growth of Chinese battery producers. Within just seven years of formation, China's Contemporary AmperexTechnology Ltd., or CATL, has become the world's top EV battery manufacturer. Another Chinese heavyweight BYD -- ranked third globally, after Panasonic -- produces batteries for Tesla. With the prediction that China will produce 70 per cent of the world's electric-vehicle batteries by 2021, the potential rewards for Chinese battery producers appear to be huge. As reported by Nikkei, "according to projections by Bloomberg New Energy Finance, China will produce 70 percent of the world's electric-vehicle batteries by 2021. The potential rewards are huge: Goldman Sachs estimates that sales of batteries to power cars will rise from under $10 billion to $60 billion by 2030, driven by a global push to reduce greenhouse gases." To solidify the position in global electric battery market, China has acquired 7 top ten mines of cobalt-a key ingredient in building the lithium-ion battery. 

ADOPTING LOCAL CONTENT POLICY TO SUPPORT DOMESTIC PRODUCERS: To capitalise on the large domestic market for supporting the growth of local battery producers, China has been aggressively applying local content policy. EV makers are given incentives for sourcing batteries from local companies like CATL and BYD. It's being reported that the government's vigorous policies are supporting the rapid growth of Chinese battery producers. Beijing kept the Chinese market closed to foreign companies while promoting EVs with massive state subsidies to buyers. To precisely direct subsidies towards Chinese companies, even foreign battery producing firms such as LG and Samsung having local plants are not qualifying for local content incentives.

FOCUS ON ABSORPTION AND IMPROVEMENT OF BATTERY TECHNOLOGIES: In comparison to the long history of lithium-ion battery, Chinese entry is rather recent. In the beginning, Chinese producers focused on replication. As the underlying technology has been constantly improving, replication capacity is not enough to remain competitive. Through R&D incentives, Chine has been encouraging local producers to absorb the underlying science and technology and improve them further to acquire a sustainable competitive edge. For example, CATL, created in 2011 as a spin off of TDK's cellphone battery unit, has been continuously increasing R&D investment-resulting in the growth of R&D investment from less than 5 per cent of revenue in 2015 to above 8 percent in 2018. During the same period, the patent application filing has jumped from 226 to 849-almost 400 per cent growth over 3 years, placing CATL just behind Panasonic in battery patent race. BMW's recent announcement that it would buy 4 billion Euro worth of batteries from CATL for use in the electric Mini and iNext vehicles is a strong evidence of CATL battery's key performances such as range, charging time, and energy density.  

LEVERAGING SCALE OF DOMESTIC MARKET TO PENETRATE FOREIGN MARKET: So far, Chinese battery makers' success is in the domestic market generating almost 99 per cent revenue. Major automakers, both foreign and local, in China are sourcing battery from local suppliers. Both subsidy and newly acquired technology edge are supporting such monopolistic market power accumulation in the local market. The huge domestic market, likely to grow 70 per cent of global electric vehicle consumption by 2021, is offering substantial scale advantage to Chinese battery makers. By capitalising on the scale benefit and newly acquired technology edge, major Chinese battery makers like CATL are expanding footprints in the foreign markets. For example, CATL has already set up an R&D center in Germany. In 2017, CATL established subsidiaries in Japan, France and the USA. Like CATL, BYD and other Chinese major battery makers have also acquired a similar edge.

PROMOTING LOCAL AUTOMOBILE MAKERS BY LEVERAGING BATTERY EDGE: Industry experts believe that edge in battery technology will significantly enhance China's capability to capture substantial market share of the next-generation automobile industry-powered by battery as opposed to gasoline. Diverse incentives are already in place to capitalise on this opportunity.

Chinese expansion in the battery industry to capture market share of the global automobile industry appears to be an application of textbook examples of strategy and policy. Michael Porter's suggestion of using the domestic market as a springboard seems to have been precisely applied. On the other hand, supporting R&D to develop a sustainable edge in the global race is another example of the smart strategy. Instead of using conventional import substitution strategy through protection, China has been intelligently directing incentives and regulation to compel domestic producers to focus on R&D to acquire technology edge for succeeding in global competition. China's progress in battery and electric vehicle industry conveys many lessons not only to China to replicate the similar model in other industries, but it also shows the path to other developing countries having the aspiration of developing innovation economy. 

M Rokonuzzaman PhD is academic and researcher on technology, innovation and policy.




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