The Disruptive Potential of the Chinese Battery Value Chain: a Comparison of BEV and PHEV Developments

29th International Colloquium of GERPISA The Transformation of the Global Auto Industry 14-18 June 2021

Stephane HEIM*, Kyoto University, [email protected] KAKITANI Kosuke, Toyota Motor Corporation LEE Jaeho*, Hiroshima City Univeristy, [email protected] SHIOJI Hiromi, Kagoshima Prefectural College

*corresponding authors Disruptive potential: the research agenda • Our Question: Are Chinese battery makers on the way to gain control over the Li-ion industry’s technologies, and the market?

• Our assumptions: – The race is accelerating and expanding to new entrants (tech giants) – Incumbent carmakers (& suppliers) with several partnerships with battery makers, start gaining control over new technologies (solid-state battery) – Chinese battery makers benefit from an intense competitive environment, control a wide spectrum of the value chain (especially cells pack & BMS) & have customized strategies – New environmental standards in China create a stimulus for upgrading in the coming decade Outline

• Where are the competitive advantages?

• The rapid acceleration & evolution of the industry

• Case study of Chinese battery supply chain in Huizhou

• Conclusions & perspectives Battery industry & its (de)regulation 2020 (Nov.): NEV Introduction NEV Introduction CALCP 3500 incentive scheme Ind. Dev. Plan 100 （百万） 2021-2035 （％） 87 86 86 90 White List Regulation 84 84 3000 80 81 2888 78 2803 2808 75 76 80 72 72 72 69 2460 2438 2472 2500 2371 65 2349 70 Made in China 20252198 2115 60 1931 1970 2000 1851 CATL establishment 1806 1790 46 50 1550 1447 1500 1379 1376 Denza (BYD & Daimler) 40 BYD acquisition of 34 30 1038 Ningbo Zhongwei 30 1000 888 934 727 638 673 571 20 507 523 13.3 444 11.8 500 394 10.3 325 328 7.8 9.0 234 5.6 6.6 10 206 3.6 4.6 4.5 109 1.6 2.0 2.4 2.9 1.8 2.7 70 1.1 1.3 0.3 1.3 0.8 0.9 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

自動車販売台数 乗用車販売台数 新エネ車販売台数 乗用車販売の比率 新エネ車販売の比率 乗用車保有率 Source: Heim, 2020 Chinese NEV battery market - 2020 2020 China Battery Shipment (GWh) REPT Lishen 0.95 0.85 Farasis EVE 0.92 Panasonic 1.18

Guoxuan 2.24

3.32

CALB 3.55 CATL LG Chem 4.13 31.79

BYD

9.48

Source: Authors based on CAPBIIA data CATL dominates the market: - Large spec of NEV makers - Energy density Porter’s Diamond of Nat’l Comp. Advantage • Factor Conditions Firm Strategy, – “The nation’s position in Structure & factors of production, rivalry such as skilled labor or infrastructures” Factor Demand • Demand Conditions Conditions Conditions – “The nature of home- market demand for the Related & industry’s product or Supporting services” Industries Disruptive forces & weaknesses of incumbents (Christensen, 2000): 1) Biased management practices that give the primacy to customers - “Inv. aggressively in technologies that give those customers what they say they want - “Targeting larger markets rather than smaller ones”

Porter’s Diamond of Nat’l Comp. Advantage • Related Industries Firm Strategy, – “The presence or absence in Structure & the nation of supplier ind. rivalry internationally competitive” • Firm Strategy Factor Demand

– “Conditions in the nation Conditions Conditions governing how companies are created, organized, & Related & managed, as well as nature Supporting of domestic rivalry” Industries Disruptive forces in China to be inquired in this presentation: 1) Availability of resources, skills & information to deploy them 2) The organization of 2nd-tier suppliers & the nature of domestic competition 3) The role of central & local Govts

China’s competitive (dis)advantages:

1) Full integration of the supply chain: BMS & customization 2) Chinese materials lower costs: a true advantage or a barrier to innovation? 3) A fiercer domestic & international competition: Over 90% of battery- car makers JVs were established in the last 3 years. 4) Policies to encourage the envi. footprint of Li-ion battery prod. 5) Carmakers strategies: are they able to invest in backward technologies? 6) SPAC’s acquisitions of li-ion battery makers 7) China’s EV strategy turns to be global? Costs reductions & economies of scales exist, but battery performance & security are 2 major concerns

Source: Adler et al., 2019 Main disruptive forces in Li-ion battery supply chain

Costs is at stake, but also the capability of establishing & controlling the technical standards: - Chinese battery makers’ main advantage - Role of high tech firms & car makers in

Source: Nikkei Asia rebalancing the transaction relations Beyond the concerns about raw materials,

- that of BMS,

- battery packs,

- semiconductors & softwares

Source: qnovo.com The three uncertainties • BMS as a key component: - A Core element for future battery progress - A highly competitive industry - BEV/PHEV: hardware are quite similar but software differ strongly

• Battery packs: control by most of Chinese battery makers

• Semiconductors dilemma: - Lack of domestic technologies: “trails in the production of advanced components like chips and software that are crucial for modern vehicles” (Zhang Yongwei, vice president of China EV 100, automotive news) - Semiconductor-based components costs may raise heavily in the coming decade Alternative technologies

• The race to solid-state batteries & carmakers’ repositioning

Source: Nikkei Asia • Investment in alternatives such as zinc ion and sodium ion batteries is also underway But, carmakers show a “less aggressive approach” • Setting residual values: expectations of EV market growth stress the role of financialization (captive structures) • Leasing plans in order to decrease costs & risks • Avoidance of establishing new spin-offs “This isn’t an industry where you have to be the first- mover to win” (Huawei Deputy Chairman Eric Xu) One of the biggest challenges for new entrants to the automotive sector is how capital and resource intensive it is to make cars.

Source: Automotive News China, 2021 New Challenges • Consumer patterns without incentives (“When the typhoon comes, can pigs really fly?” Zeng Yuqun, CATL CEO) Where is the market potential? 300 - Market signal

250 - Used EV market 北京 浙江

- (De)regulation of 200 江蘇 山東 内モンゴル number plates 河北 天津 150 寧夏 広東 山西 遼寧 青海 上海 1400 新疆ウイグル自治陝西 1200 吉林 福建 千台 区 河南 1000 雲南 重慶 800 100 貴州 湖北 甘粛 湖南 600 広西チワン江西 400 チベット 200 0 50 2014 2015 2016 2017 2018 2019 年 年 年 年 年 年 PHEV 29.7 83.6 98 125 271 232 0 BEV 45 247.5 409 652 984 972 0 10 20 30 40 50 60 70 Source: Heim, 2020 • Risks: the EVs recall cases are perhaps far more dangerous than for ICE cars. Carbon footprint of Li-ion battery prod.

Source: BloombergNEF, 2020 Enforcement of new environmental standards (Lifecycle Assessment, LCA Report July 2020) LCA Target Input of Energy, resources Fuel Economy Reductions Targets Fuel Cons.

Raw Materials Materials Cars Final Vehicle Recycle & Acquisition Processing Assembly Travel Scrapping

Cars Maintenance

GHG Emissions Incidences on Policy Evolution (from quant. to qual. approach): Li-ion battery 1) Total GHG Emissions & not only Cars Emissions competitive 2) But extension of the final consumer incentives … advantages? A new political agenda: Steel 2.4 Beyond the cars, Cast iron 1.8 the industry’s emissions Aluminum alloy 16.4 Magnesium alloy 36.7 GHG emissions’ split (PC, 2019) 100% Cooper & copper alloy 4.2

90% 21% 19% Polypropylene (PP) 2.6 31% 30% 80% Nylon resin (PA) 9.2 45% 70% Polyethylene (PE) 2.5 60% Polyvinyl chloride (PVC) 6.1 50% Polyurethane (PU) 4.4 40% 79% 81% Glass 1.0 69% 70% 30% 55% Refrigerant 96.7 20% Tires 2.1 10% Lead storage battery 2.0 0% Diesel Gasoline PHEV HEV BEV NMC lithium battery 95.0 Production emissions Lithium-ion iron phosphate battery 85.0 Car emissions Lithium manganese battery 67.9 Source: Authors, based on CATRAC, FOURIN Total 550.0 Total emissions footprint by car models in 2019

Emissions Segment Carmaker Model Emissions (gCO2e/km) Segment Carmaker Model (gCO2e/km) GAC Honda Crider 168.8 SAIC-GM-Wuling Baojun E100 107.1 Dongfeng Honda SAIC-GM-Wuling Wuling E200 108.3 Envix 168.8 A00 BEV Beijing Hyundai JMC JMC E200 115.8 Motor Chery K3 170.1 eQ1 116.3 Great Wall GAC Honda ORA R1 118.2 City 175.4 Average Beijing Benz 121.5 A Class 178.9 GAC Toyota GAC Honda YARiS L 167.8 Gasoline Civic 179.6 SAIC Tianjin Faw Toyota Roewe i5 180.8 Vios 167.8 SAIC Volkswagen Beijing Hyundai Motor Skoda 181.8 Reina 168.3 Dongfeng Nissan Beijing Hyundai Motor Verna 169.8 Tiida 183.2 GAC Toyota YARiS L 致炫 170.6 SAIC Volkswagen Lamando 183.2 Gasoline Tianjin Faw Toyota Average Vios FS 170.6 211.5 GAC Honda A Fit 172.6 SAIC Volkswagen Dongfeng Yueda Kia Lavida 151 Pegas 177.4 FAW Besturn B30 152.8 Dongfeng Nissan A0 Kicks 182 Dongfeng Nissan Sylphy 153.1 SAIC Volkswagen Great Wall Polo 183.6 ORA iQ 153.3 Average 197.7 FAW- Volkswagen Bora 153.6 BEV FAW- Volkswagen Zhejiang Hozon New Golf 154.1 Energy Automobile SAIC Roewe Ei5 158 (Hozon Auto) NETA N01 133.7 BYD BEV BYD E2 148.3 Dongfeng Venucia BYD Venucia D60 158.9 BYD S2 149 JAC SAIC-GM (Buick) iEV7 150.6 Velite 6 159.6 FAW- Volkswagen Audi Q2L 156.7 Dongfeng Skio Skio E11K 160.7 Average Average 161.5 163.6 Source: Authors, based on CATRAC, FOURIN Huizhou cluster • 9 battery makers: 2 for buses & trucks, 7 for PC • Historical development: - Car electronics component suppliers, 3C Li battery cell/BMS makers, car part suppliers, electronics subcontract manufacturers - Many firms originate from Shenzhen, but land cost is lower - The battery value chain is complete in Huizhou: 3 “systems integrators” (BYD, EVE, Sunwoda), 1 niche maker for trucks & buses (Highpower)1 BMS specialized maker (Desay Blue), 1 Li-ion battery precision components maker (Kedali), & 1 specialized equipment supplier (Yinghe): interviews and monographic research in August 2019 • Lower labor costs but capital dependence to Shenzhen EVE historical trajectory: diversification process • 2001: establishment • 2009: Listed on the GEM in Shenzhen Stock Exchange • 2012 - EVE Li-ion battery plant expansion - Spin-off Guangdong EVCENS (bus market) • 2014: manufactures batteries for Nanjing Golden Dragon Car Manufacturing • 2015 - partnership with Samsung SDI - establishment EVE New Energy Source Research Institute • 2016 - List for companies which comply with Automotive Power Battery Industry Standard Conditions - High performance lithium-ion power battery project started - Hubei Jinquan New Material Energy Storage Battery Production Base • 2017: - Strategic Cooperation Framework Agreement Signed Between EVE Energy and LINYANG Energy - EVE and BNET Sign a Strategic Cooperation Agreement - EVE Energy Purchased 100% Shares of TCL HUIZHOU HYPERPOWER BATTERIES INC., Strengthen in CE Lithium Field. • 2020 - EVE Power received designated letter from BMW Brilliance Automotive Co., Ltd. - EVE and Alibaba signed annual cooperation agreement Sunwoda historical trajectory: early integration road • 1997: establishment in Shenzhen • 2000: partnerships with KONKA, Philips, NEC & Haier • 2003: Lenovo & ATL’s key supplier qualification • 2008: - launch electric battery business (Li-ion) - Samsung, OPPO & ZTE qualification • 2010: Amazon qualification • 2011: - listed on the GEM in Shenzhen Stock Exchange (first R&D manufacture and sale of Li-ion battery module company) - Huawei & Xiaomi qualification • 2014 - spin-off Sunwoda Electric Vehicle Battery - acquisition DongGuan Liwinon technology • 2016: spin-off Sunwoda Energy Solution • 2017 - establishment power cell subsidiary - Sunwoda India Electronic Co., Ltd. Desay historical trajectory: Knowledge transfer from Siemens-VDO • 1983: establishment • First developments in GPS navigation, DVD players & electric vehicle battery management system • 2010: Certification by Guangdong Provincial Department of Science and Technology—“Electric vehicle battery thermal management system & electronic control compressor energy saving technology” and “High performance voice recognition touch screen in-vehicle navigation technology”. • 2012: The industry standard QC-T897-2011 " technical conditions of electric vehicle battery management system” • Spin-offs - 2002: Huizhou Blueway Electronics - 2006: Huizhou E-power Electronics - 2010: Acquisition of Desay Huizhou SV Automotive (established in 1986) 1st-tier battery makers as local system integrators? Market entry EV Companies & rules shaping c E MIIT u n s t t i o r m e Desay Corp. i NDRC -Desay SV auto. z m -Huizhou EPower a o t d Industry i u technological o l e framing n Promote Local champions BYD, EVE,

Desay Blue Sunwoda & clusters Highpower Local system Request visibility & financial integrators Local Govt. Yinghe resources Kedali Indus. transfer platform Concluding Remarks • The li-ion battery industry became more competitive and diverse… source of competitive advantage!

• CATL grew as a central player with many different customers & a tech leadership • The Central Gov’t moves away from a pull policy to a push policy • Investments by high tech firms such as Huawei (BAIC, Changan, GAC) & Baidu (EV startup WM Motors, smrt-car tech Jidu Auto Division), Xiaomi • Carmakers have different approaches: Ford is hugely investing in the manufacturing of cells, VW seeks to shift away from pouch batteries invested hugely in QuantumScape & Guoxuan , GM has close ties with LG Chem, Nissan relies on Sunwoda to lower the costs of its e-Power models & Venucia brand, & Toyota is about to leapfrog the current technology • Results from our empirical case in Huizhou show that Chinese battery makers can disrupt the value chain by integrating the whole R&D & manufacturing process