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2 Battery Technology- The Key To An Electric Vehicle Future

Thematic (Sector/Industry) Battery Technology- The Key To An Electric Vehicle Future Aqila Ali By Aqila Ali | 06 Apr 2019

Equity Analyst

EXECUTIVE SUMMARY

This Insight has been produced jointly by William Keating at Ingenuity and Mio Kato, CFA and Aqila Ali at LightStream Research.

The Insight is structured as follows:

• A. Key Conclusions

• B. Report Highlights

• C.History of Electric Vehicles

• E. History of Rechargeable Battery Technologies And An In-Depth Analysis on Li-ion Batteries

• F. Batteries Beyond Li-ion

• G. Supply Constraints for Key Raw Materials

• H. The Competitive Landscape

A. Key Conclusions

Global sales of EV's reached 2m units in 2018. As a base case scenario, we expect a combination of improving EV battery cost-effectiveness, increasingly challenging emissions standards and ongoing incentives by various governments to propel unit sales to 8m units annually by 2025. Against this, we consider battery material price increases, a reduction of EV incentives in the US and China and political and environmental risks from the mining of metals used in batteries as downside risks which could delay the growth of the EV market.

Surprisingly, the EV battery technology that will drive us towards that 8m unit goal is still very much a work in progress. While Lithium Ion is the by far the dominant technology, there are striking differences between variants of the technology, battery pack design, battery management systems and manufacturing scale between the leading contenders. Furthermore, while there's nothing on the horizon to completely displace Lithium Ion within the

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next decade, it remains unclear whether the technology will be the one to achieve the $100/kWh price target that would make the EV cost-neutral compared to its internal combustion predecessors.

Quite apart from the technology, the EV battery segment faces other significant challenges including increasing ostsc for core materials such as Cobalt, increasing safety concerns as the mix of that very same cobalt is reduced in the cathode, the growing risk of litigation amidst a fiercely competitive environment and last but not least, the appetite of various governments to maintain a favourable subsidy framework.

DETAIL

B. Report Highlights

- Introduction

Although widely considered a recent phenomenon, largely thanks to Tesla's arrival on the scene, the first EV's made their appearance well over a century ago. According to this US Department Of Energy (DOE) report, EVs quickly became a popular alternative to their gasoline-powered competition, particularly in New York City:

By 1900, electric cars were at their heyday, accounting for around a third of all vehicles on the road. During the next 10 years, they continued to show strong sales. Over the next few years, electric vehicles from different automakers began popping up across the U.S. New York City even had a fleet of more than 60 electric taxis.

However, Henry Ford's mass production of the Model T, along with the invention of the electric starter motor both served to propel the internal combustion engine (ICE) to the forefront and EV's were all but confined to the scrapheap of history. Things started to turn in their favour once again as air pollution from ICE powered vehicles threatened to overwhelm major global cities, firstly in the US and more recently Asia, particularly China. After false dawn in the late eighties and early nineties in the US, EV's began staging a spectacular comeback in the early part of the present decade, reaching an important milestone in 2017 when unit sales surpassed 1m units for the first time ve er. That record growth continued unabated in 2018 with annual sales increasing some 72% to just over 2m units.

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By 2025, J.P. Morgan estimates that annual EV sales will reach over 8m units. We consider this forecast reasonable based on current conditions but do note that the recent period of rapid growth has been helped by strong government incentives, particularly in China. For this forecast to be achieved, governments will have to continue incentivising the development and sale of EVs. So long as that occurs, this rapidly expanding EV fleet will trigger a corresponding ramp in the manufacturing of batteries required to power them.

- EV Battery Background

Lead Acid batteries were used to power EVs in the early 1900's as well as the first generation of modern-era EVs such as the General Motors EV1 which launched in 1996 with a range of around 70 miles. However, in spite of their low cost and prevalence as the battery of choice for automotive starter motors and electronics for well over a century, Lead Acid batteries were ultimately deemed unsuitable as the source of power for modern-day EVs by virtue of their relatively low specific energy (40Wh/kg). Quite simply, lead- acid batteries are too heavy and bulky to achieve the range required for an electric vehicle to compete favourably with a gasoline-powered counterpart.

Thus, it was that the second generation of General Motors EV1, launched in 1999, switched to a NiMH battery which improved the range considerably to 100–140 miles. The Toyota RAV4 EV, launched two years earlier, also featured a NiMH battery pack with a range of 120 miles.

By the time Toyota released its second generation RAV4 EV (developed in partnership with Tesla) in 2012, the battery pack had switched to Lithium Ion (LIB). For its part, Tesla has powered its EVs with Lithium-Ion batteries from the outset. Today, EV batteries are all based on some variation of Lithium Ion technology of which there are four main variants, Lithium Manganese Oxide (LMO), Nickel Manganese Cobalt (NMC), Nickel Cobalt Aluminium (NCA) and Lithium Iron Phosphate (LFP).

- Leading LIB Manufacturers

For various reasons, the leading contenders in the EV battery segment have largely aligned themselves in three different groupings with regard to their LIB battery technology.

#1 Tesla/Panasonic

Tesla along with Panasonic, its battery producing partner of over a decade favour NCA. Their original battery cells were an off-the-shelf standard cylindrical model designated 18650 for its dimensions. Remarkably, Tesla battery packs combine thousands of these cells in varying series and parallel combinations to achieve the desired voltage and power. Coupled with an

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innovative BMS, Tesla has managed to largely silence the naysayers originally widely dismissive of the approach. Tesla's model 3 heralded a new generation of NCA cells, slightly larger in size and designated 21700, again an industry standard. In common with their competitors, successive generations of these NCA-based cells reduced the Cobalt content while increasing nickel content.

#2 CATL

Despite being a relative newcomer on the scene, China's CATL, shot to relative stardom as a leading global manufacturer of EV batteries within the space of eight years. CATL specialises in the NMC variant of LIB technology. Counting the likes of BMW, Daimler, VW, Honda and Hyundai along with a host of Chinese automakers among its customers, its technology is highly respected in the industry. Unlike Tesla, CATL customises its cells into larger "pouch" modules to its customers' specifications.

Similar to what Panasonic and Tesla have been doing with NCA, CATL has also been working to reduce the Cobalt content and increase the Nickel content in successive generations of their batteries. Their original NMC cell was designated NMC522, the numbers representing the relative amounts of Nickel, Manganese, and Cobalt. Their current generation is denoted NMC622 while their future generation NMC811 will contain 80% nickel, 10% cobalt and 10% manganese.

South Korea’s LG Chem and SK Innovation are also working on a similar NMC variant of LIB with all three competing fiercely to be the first to bring the next-generation cells to market. Samsung SDI also favours the NMC chemistry.

#3 BYD

BYD, the world's largest manufacturer of electric buses, chose an entirely different variant, the much older and more reliable LFP variant of LIB technology. Their batteries are less costly to produce as all of the key ingredients are widely available and easily obtained. Their chemistry makes them more stable than other variants, less prone to catastrophic thermal runaway in the event of an accident and less affected by extreme weather, either hot or cold. The downside is that their energy density is about 20% lower than the other leading LIB variants. However, these qualities make their battery packs ideal for electric buses and forklifts.

Unlike its peers, BYD currently manufactures batteries solely for its own internal consumption. However, with the planned spin-out and IPO of its battery division by 2022, this situation is likely to soon change.

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- Emerging Battery Technologies

Among the technologies being touted as the next generation techs to replace the current generation Li-ion batteries, solid-state batteries and silicon electrodes stand out as having the most promise. Solid state batteries have attracted significant investment from a variety of players, including most notably a Toyota-Panasonic partnership, and in total these players have invested about half a billion dollars in the development of the technology. Solid state batteries replace the liquid electrolyte with a solid electrolyte which offers advantages such as not being flammable and thus safer, as well as higher energy density and resistant to heat. While promising and a core part of most major automakers’ development roadmap, commercialisation is some way off. Even the Toyota-Panasonic partnership only expects pilot line level commercialisation in the early 2020s with mass market production some time in the 2030s.

Silicon is touted as a significant upgrade to graphite electrodes due to its ability to accept about 25 times as many lithium ions, increasing energy density significantly. To date the main drawbacks to silicon have been its tendency to expand under high temperatures potentially breaking the cell, and low rates of diffusion and conductivity. New technologies utilising nanotechnology and infusing the silicon with a material called MXene have shown extremely promising results under research conditions but as always, the major hurdle is achieving mass production cost competitively.

- Government Subsidies

The present resurgence of the EV industry is heavily dependent on the willingness of governments globally to subside the cost of the vehicles along with the build-out of charging networks. The higher cost of EVs is largely down to their battery packs. In spite of the considerable advances in battery technologies over the course of the past decade, your average EV remains 20-30% more expensive than a comparable ICE vehicle.

Government incentives have thus far played an important role in stimulating the nascent EV industry. As an example, under an extremely generous incentive scheme in Hong Kong, the purchase of a new Tesla was initially exempted from a first-time registration tax almost equal to the list price of the vehicle, some HK$716,000. Under this regime, Tesla sold 6,000 units in Hong Kong in 2017. When the subsidy was removed in April 2018, Tesla sales collapsed overnight.

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- Financial Performance of Key Players

While direct comparisons between battery makers are difficult due to differing classifications and the inclusion of non-EV batteries or other products in segments one trend is clear, CATL maintains vastly superior operating margins in the high teens compared to the other players all wallowing in the low single digits. We believe that low manufacturing costs, government subsidies and the scale offered by its large network of clients all benefit AC TL but it is difficult to assess which of this factors is driving the large discrepancy in profitability. What is clear though is that this discrepancy has helped CATL maintain a very solid balance sheet giving the company plenty of scope to invest as necessary. With CATL signing agreements with one major automaker after the other, momentum is clearly with the company and local competitor BYD appears to be trying to replicate that success by listing its battery subsidiary and courting outside customers. Panasonic continues to bet on deep relationships with key customers but appears to be shifting focus from Tesla to Toyota and Honda. Meanwhile, Samsung SDI continues its successful relationship with BMW while keeping one eye on non-EV areas to expand into. LG Chemical is perhaps in the most awkward position as its strategy of courting a wide variety of customers is likely to put it directly up against CATL.

Key Strengths and Strategies of the Key Players

Company Key Strength Key Strategy

Panasonic · Best and widely used technology · Narrow Customer base but ties · Market Leader expecting to continue with the strongest and most stable increasing capacity customers (Toyota and Honda) · Diversify from volatile businesses (Tesla)

LG Chem · First mover in Europe · Aggressive investments targeting · Support from start-ups to develop developing markets which hold revolutionary battery technologies future EV prospects (Europe) · Research and develop new battery technologies by tying up with start- ups

Samsung · Battery Expertise beyond just EVs · Operates in cost-competitive SDI · Cost Competitive to attract business markets like China from Chinese automakers · Aggressively entering niche markets like Golf cars) · Diversified customer base to support strong sales

BYD · Leader in EV Buses and thus LFP · Listing battery subsidiary and chemistry Li-ion batteries. establishing its own Chinese “Gigafactory”.

CATL · Broad range of customers based around · Leveraging extremely wide client core Chinese EV manufacturers but base to expand capacity rapidly and rapidly expanding clientele among reinvest earnings in intense R&D Japanese, European and American efforts to gain technology manufacturers. leadership.

Source: LightStream Research

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- Battery Price Trends

There is very little hard data on Li ion battery prices with the most commonly used benchmark being Bloomberg New Energy Finance (BNEF)’s survey-based index. Bloomberg uses a volume-weighted index based on surveyed prices. According to Bloomberg, prices have followed the trend below.

Date 2010 2011 2012 2013 2014 2015 2016 2017 2018

$/kWh 1,160 899 707 650 577 373 288 214 176

Bloomberg’s numbers imply a roughly -21% CAGR for battery prices. We compare this against hard numbers provided by Japan’s METI based on production and shipments of Li-ion batteries in Japan. METI provides information on volumes in terms of ah and units as well as total value. By assuming that average voltage is 3.65v we calculated the price per kWh for EV and Non-EV Li-Ion batteries in Japan.

Source: METI, LightStream Research

We would highlight two main points. Firstly, it is possible that there was something of a catch up (or catch down) effect of Li Ion battery prices for EV use to those for non-EV use, especially between 2013 and 2014. Secondly, in 2017 and 2018 prices for non-EV use batteries actually rose by about $80/ kWh. This move up coincided with the surge in prices of various Li-ion related materials during 2016-2018 when we estimate that just the nickel, lithium and cobalt content in batteries alone would likely have raised costs by about $30/kWh. EV battery prices also appear to have stopped falling between 2017 and 2018 and while the levels and trend of the METI data and the Bloomberg survey were comparable between 2013 and 2016, they have started to diverge recently.

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One possible reason is that Bloomberg’s averaging method could be exaggerating changes due to shifts in volume, especially in China where government subsidy systems can be opaque and costs may be unusually low. During 2013-2016 EV battery costs fell at roughly 20% a year according to the METI data, similar to Bloomberg’s figures. Non-EV battery prices however, only fell about 10% a year, in line with other figures ew have seen for notebook Li ion prices declines from as far back as 2000. We thus lean towards the idea that the rate of technological improvement may actually imply about a 10% annual cost decrease rather than 20%. If this is correct, and we use the METI data as a starting point, battery cell costs are only likely to dip below $100/kWh around 2026/27 with pack costs falling below $100/kWh perhaps a year or two later. This is about 3-4 years behind BNEF’s projected timeline.

As a base case, average costs are probably most important for EV diffusion and should drive vehicle volumes, so we believe BNEF’s forecasts should be considered a baseline. However, we do believe the METI data highlights risk and tend to believe that some caution is warranted in assuming an annualised 20% rate of price decline for Li Ion batteries. It is quite possible that costs could level off without continued use of silicon in electrodes and/ or breakthroughs with solid state technology.

C. History of Electric Vehicles

Given the upsurge of interest in electric vehicles in recent years, many consider the technology to be a relatively recent phenomenon. However, electric vehicles have been around for a surprisingly long time. According to this US Department Of Energy (DOE) report, the first electric vehicle in the US came on the scene around 1890:

Here in the U.S., the first successful electric car made its debut around 1890 thanks to William Morrison, a chemist who lived in Des Moines, Iowa. His six-passenger vehicle capable of a top speed of 14 miles per hour was little more than an electrified agon,w but it helped spark interest in electric vehicles.

According to that same report, electric vehicles quickly became a popular alternative to their gasoline-powered competition, particularly in New York city.

By 1900, electric cars were at their heyday, accounting for around a third of all vehicles on the road. During the next 10 years, they continued to show strong sales. Over the next few years, electric vehicles from different automakers began popping up across the U.S. New York City even had a fleet of more than 60 electric taxis.

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Those early electric vehicles proved particularly popular with women by virtue of the fact that they were simpler to operate and far cleaner and quieter than their gasoline-powered counterparts. This excellent historical perspective explains why early electric vehicles were marketed towards women for precisely these reasons.

EVs also offered female-friendly simplicity. The vehicles avoided mechanical problems “which often bewilder the owner of gasoline car who is not of a mechanical turn of mind,” noted (p. 175) one New York Times reporter in 1909, adding that the “electric [car]…is essentially a ‘woman’s car.'” Another New York Times article (pdf), this time from 1911, pointed out that EVs were preferable for women because “early gasoline cars required more strength to crank than most women possess.”

The electric vehicle caught the attention of the leading innovators and inventors of the era:

Ferdinand Porsche, founder of the sports car company by the same name, developed an electric car called the P1 in 1898. Around the same time, he created the world’s first hybrid electric arc -- a vehicle that is powered by electricity and a gas engine. Thomas Edison, one of the world’s most prolific inventors, thought electric vehicles were the superior technology and worked to build a better electric vehicle battery. Even Henry Ford, who was friends with Edison, partnered with Edison to explore options for a low-cost electric car in 1914, according to Wired.

In spite of its popularity, two important developments combined to sound the death knell for the electric vehicle. The first was Henry Ford's introduction of the mass-produced Model-T in 1908, which greatly reduced manufacturing costs. The second was the development of the electric starter around 1912 which eliminated one of the biggest drawbacks (and dangers) associated with the gasoline engine, manually turning the crankshaft. In the

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end, it was a question of economics. Gasoline powered cars were cheaper and more convenient to refuel and the electric car all but disappeared from the landscape of history for the better part of a century.

The introduction of legislation in the US, beginning with the Clean Air Act of 1963 and followed by important amendments over the following decades, was intended to address the ever-worsening plague of air pollution in major US cities, details here. Central to these pieces of legislation were aggressive auto emission reduction targets which inevitably lead to a new-found interest in electric vehicles in the US and triggered the development of models with improved speeds and range. According to this DOE report:

One of the most well-known electric cars during this time was GM’s EV1. Instead of modifying an existing vehicle, GM designed and developed the EV1 from the ground up. With a range of 80 miles and the ability to accelerate from 0 to 50 miles per hour in just seven seconds, the EV1 quickly gained a cult following. But because of high production costs, the EV1 was never commercially viable, and GM discontinued it in 2001.

That EV1 went on to become the subject of a fascinating 2006 documentary Who Killed the Electric Car? which proposes a conspiracy theory behind GM's decision to discontinue production. Just as GM was halting production of its EV1, the Toyota Prius came on the scene, effectively the world's first mass- produced hybrid electric vehicle which went on to become the best-selling hybrid over the following decade. Some years later, a California startup called Tesla Motors announced that they would start producing a luxury electric sports car with a range of over 200 miles.

The arrival of the highly successful Toyota Prius along with the Tesla promise of previously unheard-of range spurred more automakers to respond with models of their own resulting in the Chevy Volt and Nissan Leaf in 2010.

In the intervening period, most would agree that Tesla has had a significant impact on the EV industry. The launch of its latest offering, the Model 3, saw Tesla break out of the specialty market with Q4 2018 production volumes more than quadrupling YoY.

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D. Electric Vehicle (EV) Industry Overview And Key Growth Drivers

Global EV sales reached an important milestone in 2017 when they surpassed 1m units for the first time ever. That record growth continued unabated in 2018 with annual sales almost doubling to 2m units.

EV Annual Passenger Car and Light-duty Vehicle Sales in Major Regions

Even at those record levels, EV unit sales still represent just a tiny percentage of overall automobile sales, some 2.2% in 2018 in fact. According to this report, EV’s still account for just around 0.4% of the global automobile fleet.

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By the end of 2018, the plug-in vehicle population will reach around 5.4m worldwide, an increase of 64% over 2017-year end. Still, the impact on the total vehicle stock will be hardly noticeable in most countries. 5.4m plugins on a global light vehicle population of around 1.3bn, is just 0.4 %, one in 250.

Looking ahead, most industry experts expect this strong sales growth trajectory to continue. For example, Deloitte expects unit sales to hit 12m annually by 2025:

Deloitte’s latest outlook shows EV sales shifting from 2m units in 2018, to 4m in 2020, 12m in 2025, before rising to 21m in 2030 as the cost of manufacturing batteries falls significantly. As EV sales grow, the penetration of ICE vehicles will start to decline with sales beginning to fall from 2024 onwards

Outlook for Annual Global Passenger Car and Light-Duty Vehicle Sales

The market leader in 2018 was Tesla. The company’s newly launched Model 3 lead the charge with sales of 145,846 units for the year. Combined with its legacy models, Tesla had 12% of the global EV market in 2018. China’s BYD and BAIC took second and third place in the 2018 rankings with market shares of 11% and 8% respectively. BMW and Nissan completed the top 5 rankings with 6% and 5% market shares.

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The country with the largest installed fleet of EV’s is China which had some 40% of the global fleet in 2017, followed by Europe and the US. Remarkably, only three countries have greater than 1% of EV’s in their vehicle stock, Norway by far the leader with 6.4%, the Netherlands with 1.6% and Sweden at 1%.

Electric Vehicle Growth Drivers

According to a recent EPA report, transportation is responsible for some 28% of greenhouse gas emissions in the US, on par with electricity production:

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The transportation sector generates the largest share of greenhouse gas emissions at almost 28.5%. Greenhouse gas emissions from transportation primarily come from burning fossil fuel for our cars, trucks, ships, trains, and planes. Over 90 percent of the fuel used for transportation is petroleum based, which includes gasoline and diesel.

Within the transportation sector, the share of greenhouse gas emissions in the US is further broken down by that same report as follows:

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Thus, while the emissions footprints of trucks and aircraft regularly garner the lion's share of media headlines, the reality is that emissions generated by the ubiquitous family automobile dwarfs all other categories. Breaking down the Light Duty vehicles into its constituent parts reveals a surprising fact, one that is particularly relevant in Asia. It turns out that under current emissions standards, the contribution made by motorcycles is growing. The following chart, courtesy of a research report published in 2016 by Elsevier, a global information analytics business that helps institutions and professionals progress science, advance healthcare and improve performance, clearly illustrates this trend:

The following extract from this report helps to understand the reason why the emissions contribution from motorcycles is currently around 26% and expected to rise to 28% by 2030:

Fig. 3 (b) consequently shows the shift of the share of HC-emissions in 5-year steps. It becomes clear that due to the decrease in HC-emissions from passenger cars since the 1990’s the share of HC-emissions from the other vehicle categories to the total HC-emissions from road traffic changes. It turns out that by 2015 the share of HC-emissions of powered two-wheelers rises to about 26%. Ignoring the effects of new emission standards Euro 4/5 it is expected that their share to the total hydrocarbon emissions from road traffic will further rise to about 28% by 2030 in this scenario. The reason for this is not the increase in HC- emissions of powered two-wheelers as such, but the larger decrease of HC-Emissions within other vehicle categories due to stricter emission regulations and the prescribed usage of emission-reducing systems.

Furthermore, while motorcycles are more fuel-efficient and emit far less carbon dioxide than automobiles, they emit far higher percentages of other pollutants according to the report from the LA Times:

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Motorcycles and scooters are an appealing alternative to shelling out big bucks filling up the family truckster, which is one reason sales are going through the roof. But riding on two wheels may not be any more environmentally responsible than riding on four. Turns out the average motorcycle is 10 times more polluting per mile than a passenger car, light truck or SUV. It seems counter-intuitive, because motorcycles are about twice as fuel-efficient as arsc and emit a lot less C02. So, what gives? Susan Carpenter lays it all out in a Los Angeles Times column. She found that, although motorcycles and scooters comprise 3.6 percent of registered vehicles in California and 1 percent of vehicle miles traveled, they account for 10 percent of passenger vehicles' smog-forming emissions. Motorcycle engines are twice as efficient as automobile engines, she notes, so they generally emit less carbon dioxide. But they emit large amounts of nitrogen oxides, which along with hydrocarbons and carbon monoxide are measured by state and federal air quality regulators to determine whether vehicles meet emissions rules.

Therein lies the appeal of the EV, namely its potential to significantly reduce greenhouse gas emissions attributable to the transportation sector as a whole. However, that potential must be weighed against the higher cost of EVs compared to their ICE equivalent models (primarily due to battery costs). As your average consumer is generally unwilling to pay a premium for the sake of driving a low-emissions vehicle, governments worldwide have introduced subsidies of various kinds to tilt the value proposition in favour of the EV.

The impact of such government policies on promoting EV's over the past decade or has been the subject of much debate and analysis. This 2017 report by APEC provides a detailed comparison of the subsidies introduced in multiple countries across Asia. The report concludes that such government subsidies are necessary and can successfully promote the development of the nascent EV industry.

Increasing fuel prices and growing environmental concerns are two key factors enhancing the potential of the electric vehicle as a valid alternative to the internal combustion engine. However, electric vehicles must still overcome a host of barriers (both technical and economic) if they are to compete with traditional vehicles. Many APEC economies have launched promoting policies to develop the NEV industry and increase NEV purchases. Especially for the last decade, more and more attention have been paid on NEV development. As a result, the NEV industry develops fast and the sales of NEV increases continuously. It can be concluded that the policy instruments can promote the development of the NEV industry.

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Not surprisingly, China's role in generating greenhouse gas emissions is highly significant. According to this Financial Times report published in May 2018, China's carbon emissions are rising at an alarming rate:

China’s carbon emissions are on track to rise at their fastest pace in more than seven years during 2018, casting further doubt on the ability of the Paris climate change agreement to curb dangerous greenhouse gas increases, according to a Greenpeace analysis based on Beijing’s own data. Carbon emissions in the country, the world’s largest emitter of greenhouse gases, rose 4 percent in the first quarter of this year, according to calculations by the environmental group based on Chinese government statistics covering coal, cement, oil, and gas. If that pace continues it would be the fastest increase since 2011.

E. History of Rechargeable Battery Technologies And An In-Depth Analysis on Li-ion Batteries

While American scientist and inventor Benjamin Franklin is generally recognised as being the first person to use the term "battery" in 1749, credit for the invention of the first battery goes to the Italian physicist Alessandro Volta who developed his prototype, now referred to as a Voltaic Pile, in 1800. Inspired by experiments carried out by fellow countryman Luigi Galvani on making the legs of a dead frog twitch, Volta realised that the key to the underlying process was the use of two different metals. By stacking discs of copper and zinc separated by a cloth soaked in salt water and connecting wires to each end, he invented the battery.

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Source: Visual Capitalist: The Evolution Of Battery Technology

About 40 years later, British chemist John Frederic Daniell developed a much-improved version of the Voltaic Pile. Now known as the Daniell Cell, it used a copper pot filled with a copper sulphate solution. This pot was then immersed in an earthenware container filled with sulphuric acid and a zinc electrode. In later years, the electrical potential of the Daniell cell went on to become the basic unit for voltage, i.e. one volt.

The first rechargeable battery was the Lead-Acid battery, invented in 1859 by Gaston Planté. Thanks to their low cost combined with their ability to deliver large surge currents, they continue to be used to this day as the source of power for the starter motor and electronics in most gasoline and diesel engine vehicles.

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Source: Visual Capitalist: The Evolution Of Battery Technology

In 1899, Swedish scientist Waldemar Jungner patented the nickel-cadmium battery (NiCd), also rechargeable and the first to use an alkaline electrolyte. It would, however, take another forty years for its full commercialization and widespread use. The key advantage of NiCd was its superior specific energy, some two times higher than Lead Acid batteries.

Source: Visual Capitalist: The Evolution Of Battery Technology

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The alkaline battery was invented by Canadian Lewis Urry in the mid-1950s. While it used zinc and manganese dioxide in the electrodes, its name derives from the electrolyte, potassium hydroxide, an alkaline solution. This is in spite of the fact that the first battery to use an alkaline electrolyte was actually the NiCd battery. Still widely used today, alkaline batteries from the likes of Duracell and Energizer have been powering our toys, torches and gadgets for over half a century. According to Duracell, they manufacture some 15 billion alkaline battery cells annually.

Source: Visual Capitalist: The Evolution Of Battery Technology

Note: The vast majority of Alkaline batteries are not designed or intended to be recharged and most household rechargeable batteries today are of the NiMH variety. We include Alkaline batteries in our review because of the significant role they have played and continue to play in powering our everyday lives. Furthermore, technically speaking, they can be recharged, just not safely or efficiently.

Research on a variation of NiCd batteries began in the late 1960's, originally sponsored by German automakers Daimler and Volkswagen. Some two decades later, that research lead to the development of the Nickel Metal Hydride (NiMH) battery, again doubling the specific energy capacity compared to previous generation NiCd technology.

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Source: Visual Capitalist: The Evolution Of Battery Technology

While Lithium based batteries were first proposed yb British chemist Stanley Whittingham in the 1970s, the first ommercialc Lithium-Ion batteries were produced by Sony in 1991, specifically aimed at the then-emerging mobile phone market, details from Sony here:

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1991 was the year Sony lithium-ion rechargeable batteries were first used in mobile phones. By dramatically increasing the energy density from that of conventional rechargeable batteries, Sony was able to solve issues such as the inability to use devices outdoors and the short operational life of dry cell batteries. This year, in turn, served as a turning point completely redefining the history of mobile devices.

Lithium-Ion batteries went on to become the de-facto standard for a host of modern-day electronic devices, most notably smartphones and laptops. Over the course of the past decade, they have overtaken NiMH as the technology of choice for electric vehicles.

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A variation of Lithium-Ion battery technology known as Lithium Polymer (LiPo) replaces the liquid electrolyte with a gel-like electrolyte resulting in a more robust and flexible battery, albeit more costly to produce.

In summary, over the course of the past 150 years, rechargeable battery technology has evolved through four distinctly different generations (Lead Acid, NiCd, NiMh, Li-Ion) to deliver a roughly 10x improvement in energy density.

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Battery Basics

The basics of how batteries work are well described in this article by MIT School of Engineering:

There are three main components of a battery: two terminals made of different chemicals (typically metals), the anode and the cathode; and the electrolyte, which separates these terminals. The electrolyte is a chemical medium that allows the flow of electrical charge between the cathode and anode. When a device is connected to a battery — a light bulb or an electric circuit — chemical reactions occur on the electrodes that create a flow of electrical energy to the device.

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More specifically: during discharge of electricity, the chemical on the anode releases electrons to the negative terminal and ions in the electrolyte through what’s called an oxidation reaction. Meanwhile, at the positive terminal, the cathode accepts electrons, completing the circuit for the flow of electrons. The electrolyte is there to put the different chemicals of the anode and cathode into contact with one another, in a way that the chemical potential can equilibrate from one terminal to the other, converting stored chemical energy into useful electrical energy. These two reactions happen simultaneously, the ions transport current through the electrolyte while the electrons flow in the external circuit, and that’s what generates an electric current.

Energy Density, Specific Energy

Energy Density, (energy stored by unit volume), and Specific Energy (energy stored by unit mass) are key to understanding the challenges associated with the development of battery technology. According to the American Physics Society (APS), gasoline has an energy density of 4.6 MJ/litre, some one hundred times greater than that of a modern-day Lithium Ion automobile battery:

Stored energy in fuel is considerable: gasoline is the champion at 47.5 MJ/kg and 34.6 MJ/litre; the gasoline in a fully fuelled car has the same energy content as a thousand sticks of dynamite. A lithium-ion battery pack has about 0.3 MJ/kg and about 0.4 MJ/litre (Chevy VOLT). Gasoline thus has about 100 times the energy density of a lithium-ion battery.

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While that might sound like an impossible gap to overcome, it's not the full picture. Consideration also needs to be given to the relative efficiencies between gasoline engines and the motors used in electric vehicles:

This difference in energy density is partially mitigated by the very high efficiency of an electric motor in converting energy stored in the battery to making the car move: it is typically 60-80 percent efficient. The efficiency of an internal combustion engine in converting the energy stored in gasoline to making the car move is typically 15 percent (EPA 2012). With the ratio about 5, a battery with an energy storage density 1/5 of that of gasoline would have the same range as a gasoline-powered car.

In terms of Specific Energy, Lead-acid batteries deliver around 40 Wh/kg while Lithium-ion batteries weigh in at around 100 Wh/kg. In sharp contrast, gasoline has a much higher Specific Energy of around 12500 Wh/ kg of which only around 20% or about 2,000 Wh/Kg converts to useful kinetic energy.

Electric Vehicle Battery Types

Lead Acid batteries were used to power both the earliest electric vehicles in the early 1900's as well as the first generation of modern-era electric vehicles such as the General Motors EV1 which appeared on the scene in 1996 with a range of 70 to 100 miles. However, in spite of their low cost and prevalence as the battery of choice for automotive starter motors and electronics for well over a century, lead-acid batteries were ultimately deemed unsuitable as the source of power for modern-day electric vehicles by virtue of their relatively low specific energy (40Wh/kg). Quite simply, lead-acid batteries are too heavy and bulky to achieve the range required for an electric vehicle to compete favourably with a gasoline-powered counterpart.

Thus, it was that the second generation of General Motors EV1 electric cars manufactured in 1999 switched to a NiMH battery which improved the range considerably to 100–140 miles. The Toyota RAV4 EV, launched two years earlier, also featured a NiMH battery pack with a range of 120 miles. By the time Toyota released its second generation RAV4 EV (developed in partnership with Tesla) in 2012, the battery pack had switched to Lithium Ion with a range of 113 miles. For its part, Tesla has powered all of its electric vehicles with Lithium Ion batteries from the outset. Today, electric vehicle batteries are all based on some variation of Lithium Ion technology of which there are three main types, Lithium Manganese Oxide (LMO), Nickel Manganese Cobalt (NMC) and Nickel Cobalt Aluminium (NCA).

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Source: The Truth About Tesla Model 3 Batteries, Part 1

While each formulation comes with its own specific pros and ons,c most experts agree that Tesla's battery packs based on NCA are leading the industry.

Tesla's Battery Technology

Panasonic Partnership

From the outset, Tesla chose to partner with Japan's Panasonic for the manufacture of the batteries to power their electric vehicles. After informally sourcing battery cells from Panasonic at first, a more ormalf arrangement was announced in September 2010:

"Combining Tesla’s rigorous cell testing and understanding of EV “requirements with Panasonic’s cutting-edge battery technology will result in custom cells optimized for use in EVs. Panasonic’s nickel- based lithium-ion battery cells will be included in Tesla’s newest battery packs, due to their high capacity, light weight, durability and long life."

According to Panasonic, these were the highest energy density battery cells in production at that time. Initially Tesla purchased the Lithium Ion cells directly from a new facility built by Panasonic in Suminoe, Japan. In June 2010, Tesla's CTO was presented with the first production Lithium-ion cells manufactured at that new facility. According to this Tesla blog post at the time:

The Suminoe factory will start producing 3.1Ah battery cells, the “highest energy density cells available in the market. The facility will produce more than 300m cells per year. "These cutting-edge

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Panasonic batteries will combine with Tesla's battery pack technology to produce the highest-energy density EV battery packs in the world," said Straubel, Chief Technology Officer at Tesla.

The relationship between the two companies deepened further later that year when Panasonic announced that it invested $30m in Tesla through a private placement:

Panasonic Corporation and Tesla Motors today announced that Panasonic has invested $30m in Tesla. The investment was made through the purchase of Tesla common stock in a private placement at a price of $21.15 per share. The investment builds upon a multi-year collaboration of the two companies to accelerate the market expansion of the electric vehicle.

Four years later, in July 2014, Tesla unveiled a grand vision for how it would manufacture batteries on a massive scale through a further partnership with Panasonic to build a so-called Gigafactory in the US, details from Tesla here.

Panasonic Corporation and Tesla Motors, Inc. (NASDAQ: TSLA) have signed an agreement that lays out their cooperation on the construction of a large-scale battery manufacturing plant in the United States, known as the Gigafactory. According to the agreement, Tesla will prepare, provide and manage the land, buildings and utilities. Panasonic will manufacture and supply cylindrical lithium-ion cells and invest in the associated equipment, machinery, and other manufacturing tools based on their mutual approval. A network of supplier partners is planned to produce the required precursor materials. Tesla will take the cells and other components to assemble battery modules and packs. To meet the projected demand for cells, Tesla will continue to purchase battery cells produced in Panasonic's factories in Japan. Tesla and Panasonic will continue to discuss the details of implementation including sales, operations and investment.

The press release further went on to describe in detail how the partnership model between Panasonic, Tesla and their respective suppliers would work in practice:

The Gigafactory is being created to enable a continuous reduction in the cost of long-range battery packs in parallel with manufacturing at the volumes required to enable Tesla to meet its goal of advancing mass- market electric vehicles. The Gigafactory will be managed by Tesla with

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Panasonic joining as the principle partner responsible for lithium-ion battery cells and occupying approximately half of the planned manufacturing space; key suppliers combined with Tesla's module and pack assembly will comprise the other half of this fully integrated industrial complex.

The partnership between Tesla and Panasonic deepened further when in October 2016, it was announced that they intended to work together on the development of photovoltaic modules

Tesla and Panasonic have entered into a non-binding letter of intent under which they will begin collaborating on the manufacturing and production of photovoltaic (PV) cells and modules in Buffalo, New York. Under this agreement, which is contingent upon shareholders' approval of Tesla’s acquisition of SolarCity, Tesla will use the cells and modules in a solar energy system that will work seamlessly with Powerwall and Powerpack, Tesla’s energy storage products. With the aid of installation, sales and financing capabilities from SolarCity, Tesla will bring an integrated sustainable energy solution to residential, commercial, and grid-scale customers.

Later that year, Panasonic was reported to have invested some $256m in Tesla's PV manufacturing facility. In January 2017, production of Lithium Ion cells began at the Tesla Gigafactory according to this blog post from Tesla:

Today at the Gigafactory, Tesla and Panasonic begin mass production of lithium-ion battery cells, which will be used in Tesla’s energy storage products and Model 3. The high performance cylindrical “2170 cell” was jointly designed and engineered by Tesla and Panasonic to offer the best performance at the lowest production cost in an optimal form factor for both electric vehicles and energy products. Production of 2170 cells for qualification started in December and today, production begins on cells that will be used in Tesla’s Powerwall 2 and Powerpack 2 energy products. Model 3 cell production will follow in Q2 and by 2018, the Gigafactory will produce 35 GWh/year of lithium-ion battery cells, nearly as much as the rest of the entire world’s battery production combined.

In September 2018, rumours began to emerge of growing disquiet at Panasonic regarding their partnership with Tesla, their single biggest customer. Panasonic executives were said to be shocked by Elon Musk's extraordinary actions in the previous months, not least his infamous "Taking Tesla private" tweet.

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Panasonic's management is uneasy about having its vital car battery business hinge on a man widely regarded as a visionary, but who has also made a series of head-scratching moves of late. Panasonic has invested heavily in the business, which it views as the main driver of its future growth.

In an apparent nod to the importance of the partnership with Panasonic, in November 2018 Musk tweeted that they were jointly producing 60% of the global EV battery output:

In response to an article by Teslarati, Musk said, “Amazing results by “@Panasonic at Tesla Gigafactory Nevada! Very much appreciate extreme hard work it took to achieve this result. Together with Pana Japan cell plants, Tesla/Pana partnership is producing ~60% of global EV battery output!”

However, that same month Elon Musk also tweeted that he would source battery cells for his planned Gigafactory in China from several local companies including Panasonic:

Tesla will manufacture all battery modules & packs at China Giga, as “we do today in California & Nevada. Cell production will be sourced locally, most likely from several companies (incl Pana), in order to meet demand in a timely manner. 4:42 AM - Nov 3, 2018

In January 2019, Reuters issued this report in which it claimed that Tesla was in discussion with a local Chinese battery manufacturer:

Reuters reported that Tesla had an agreement “with state-owned “Lishen Battery, citing unnamed sources, but later said it was unclear what the firms had agreed. Tesla said in an email statement to Quartz that the firm had received quotes from Lishen Battery but hadn’t signed any agreement with it. Tesla declined to comment on whether it was having talks with other local battery makers.

Both companies later denied that any agreement had been signed. Meanwhile, also in January 2019, Panasonic signed a very significant Joint Venture agreement for the manufacture of EV batteries with Toyota, the culmination of a year-long joint feasibility study, details here. According to the terms of the agreement, the JV would be 51% owned by Toyota, 49% by Panasonic and would focus on:

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research, development, production engineering, manufacturing, procurement, order receipt, and management related to automotive prismatic lithium-ion batteries, solid-state batteries, and next-generation batteries.

In February 2019, Tesla made the surprise announcement that it was acquiring Maxwell Technologies in an all stock deal worth $218m. Just two months previously, the company had raised $55.1m from the sale of its high voltage product line to Renaissance Investment Foundation. Commenting on the rationale for that sale, CEO Dr. Franz Fink noted that:

"It is becoming increasingly clear that our DBE technology holds “significant advantages over currently available energy systems for electric vehicles (EV) and positions us for significant long-term aluev creation as a result. We felt the time was right to shift our focus to further develop disruptive technologies and energy systems that address burgeoning global markets, notably the dramatically expanding EV market"

The DBE technology referred to stands for Dry Battery Electrode and is likely the key reason for Tesla's acquisition. DBE holds out the prospect of significantly simplifying the Lithium Ion battery manufacturing process, something that could greatly help Tesla's bottom line in years to come.

Tesla's Unique Approach to Battery Pack Design

In sharp contrast with its peers, Tesla builds its battery packs by combining literally thousands of small, cylindrical battery cells of industry standard dimensions. All other EV manufacturers work with battery packs comprised of much larger, custom-made modules. Up until the Model 3, those cells were of a type known as "18650" which refers to the cell dimensions of 18mm by 65mm.

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Tesla combines these cells in series to reach the desired voltage and in parallel to achieve the desired current or power, which translates into range. The remarkable process by which these cells are transformed into a Tesla battery pack is documented in detail in this YouTube video. According to this video, the battery pack in a Tesla Model 3, extended range version, contains 4,146 battery cells which combine to deliver a total power rating of 80 kWh.

The success of Tesla's battery packs derives as much from the innovative ways in which it combines, cools and when necessary, heats these cells, as much as it does from the underlying NCA Lithium Ion battery technology itself. One example of such innovation can be found in the patented cooling manifold used to both contain the battery cells and channel liquid coolant around the cells:

Why did Tesla opt for building their battery packs using off-the-shelf Lithium Ion cells? In our opinion, there were a number of reasons:

• The particular cells (made by Panasonic) had industry-leading energy density ratings.

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• Tesla had no particular expertise in battery technology at that time and also lacked the manufacturing scale to justify the investment required to design and develop larger custom battery packs.

• By combining smaller, standard battery cells, Tesla is better positioned to deliver different battery pack sizes, enabling them to offer both standard and extended range options

The Evolution of Tesla's Battery Technology

Since commencing the general production of its Roadster in 2008, Tesla has evolved through three different generations of the Lithium Ion battery cells that form the basis of its battery pack. The manner in which the underlying technology has been modified provides an excellent insight into the mechanisms used by battery manufacturers to continuously improve their battery cell performance. According to this YouTube video, all three generations are based on the NCA variant of Lithium Ion technology and all are made by Panasonic.

As previously mentioned, the first generation was based on an industry standard cylindrical battery cell manufactured by Panasonic, the so-called "18650". This cell had a graphite anode and used a total of 11 kg of Cobalt in the cathode, per vehicle. These were the batteries used to power the Roadster and the first generation of the Models.

The second-generation batteries, used to power the second-generation Model S and the Model X, reduced the amount of Cobalt to 7 kg per vehicle and changed to the formulation of the anode to include 5-14% silicon oxide.

So why did Tesla/Panasonic introduce these changes? Firstly, with regard to the anode, silicon has ten times the energy capacity as graphite and would make an excellent anode material in its own right except were it not for the fact that silicon expands some 300-400% during charge. In sharp contrast, graphite expands only 7-10%. By adding relatively small amounts of silicon oxide on the graphite in the anode, the energy capacity can be improved while the impact of expansion during charging can be minimised.

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The third generation of Tesla/Panasonic Lithium Ion batteries was introduced in 2018 and used in Model 3. While maintaining the cylindrical format, it increased slightly in size measuring 21mm by 70mm, giving rise to the "21700" designation. What has been the benefit of changing the battery cell dimensions? According to this report, significantly higher energy content per cell:

The energy content per cell can be higher by ∼50% for 21700 compared to 18650. Therefore, for certain applications, less cells have to be built and used to deliver the same amount of energy. The higher energy content on cell level leads to potentially lower effort and costs in the production of 21700 compared to 18650 type cells and their packs. The benefit of lower cell hardware costs is likely to be caused mainly by less cell housings, fewer jellyroll insertions/closings/tab welding, and less cell formations per Wh. More produced Wh per existing station might also have a trickle-down effect on the cost.

Apart from changing the cell dimensions, this third generation also saw a further reduction in the cobalt content, down to ~4.5 kg per vehicle. It also features a silicon oxide combination with graphite in the anode, although specific percentages have not been reported.

Nissan Leaf Battery Technology

The Nissan Leaf first launched in 2010, used LMO battery cells manufactured by Automotive Energy Supply Corporation (AESC), a joint venture between Nissan and NEC established in 2007 specifically for the purpose of manufacturing EV batteries. Since its introduction, the Leaf has enjoyed considerable success and was crowned the best-selling EV for Europe in 2018 according to this recent company press release:

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PARIS, France (January 21, 2019) – Sales of the award-winning, all-electric Nissan LEAF are surging throughout Europe as consumer appetite for electric vehicles (EVs) continues to grow. Norway has emerged as a standout market for the LEAF, with more car buyers opting for the EV over any other car on sale. More than 12,000* LEAFs found homes in the country in 2018, with the nation’s strong focus on sustainability cited for its sales success. This success is mirrored locally as the Nissan LEAF continues to be the best-selling electric vehicle in the UK. Owing to consistent high demand, the Nissan LEAF has taken the crown as the best-selling EV overall in Europe for 2018, with more than 40,000* sold across the continent.

That success notwithstanding, the Leaf was plagued with battery issues in its early years, prompting the company to switch from its original LMO battery cells to NMC cells for its 2018 model year version. That change delivered a remarkable 67% higher capacity, all within the same battery pack footprint size.

In December 2016, CEO of the Nissan Renault Alliance, Carlos Ghosn revealed that the company was changing its strategy around manufacturing their EV batteries internally (through the AESC JV):

“Many battery suppliers have come to the market, and they are not small companies. They are powerhouses with a lot of technology, ready to invest,” Ghosn explained. “In our point of view, making our own battery is no longer as crucial as it was in 2008. As carmakers, we need to develop the technology nobody has, but when the technology is

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available outside, we should externalize. A core question for a carmaker is what the investment priorities are. If you invest everywhere, you are going to need huge amounts of money. One of the reasons for why we have suppliers is that one cannot invest in everything. You need to select where you want to invest, where is your core business, and this is an ever-changing task.”

In August 2017, Nissan announced that they had struck a deal to sell their EV battery business to a Chinese firm, GSR Capital, orf an undisclosed sum:

Nissan Motor Co said on Tuesday it has agreed to sell its electric battery business to Chinese investment firm GSR apitalC for an undisclosed sum. The business to be sold to GSR includes battery plants in Tennessee, England and Japan, the Japanese automaker said in a statement. Nissan will first take full control of the business - Automotive Energy Supply Corp - by buying the combined 49 percent minority stake held by NEC Corp and its subsidiary NEC Energy Devices. NEC Corp said it has approved the sale of its stake.

That deal fell through when GSR Capital failed to raise sufficient funds to complete the purchase, however, a new deal was announced in August 2018, this time to Chinese renewables group, Envision:

Nissan said on Friday it agreed to sell its electric car battery unit to Chinese renewable energy firm Envision Group for an undisclosed sum. Under the agreement, Nissan will retain a 25 percent share or equity interest in the entity newly formed by Envision. The deal, which covers battery plants in Tennessee and in England, is expected to close in March next year.

Some months earlier, Nissan signed a deal with Chinese EV battery giant Contemporary Amperex Technology Ltd (CATL) to supply the Lithium Ion batteries for its EV's: CATL will produce batteries for Nissan's Sylphy Zero Emission electric sedan, scheduled to hit the Chinese market in the latter half of the year. This marks the company's first deal with a Japanese automaker.

GM Chevy Volt & Bolt

After a two-year evaluation process, LG Chem was chosen as the Lithium Ion battery supplier for GM's first orayf in the EV world with its Chevy Volt PHEV which started mass production in 2011, details here. The plan was to source

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the NMC-based cells from LG Chem in Korea and assemble them into battery packs complete with electronic controls, heating, cooling and cabling at a GM owned facility in Michigan.

LG Chem remained GM's battery vendor of choice for the company's all- electric vehicle, the Chevy Volt which was unveiled in January 2016, at the Consumer Electronics Show in Las Vegas. This comparison between the Bolt and Tesla's battery packs rates the former's highly, though not as good as the latter's:

The Bolt pack is made of pouch cells, with three in parallel, and benefits from reasonably rugged and organized pack construction using base plate cooling that includes fuses, relays, and BMS. The LG Chem cells are high-performance units capable of yielding a long-range pack. Using fewer cells, cell assembly has simpler construction, and the components like BMS controller are separate, which allows access and repair. The thermally managed coolant method does not directly pass coolant past the full area of the cells, but plates are placed between the cells for heat conduction, and the pack is designed for optimally even temperature distribution. At about the same weight as the Model 3 pack, the Bolt has less energy, but is still quite capable and representative of some of the highest performance available.

Following the success of the Chevy Bolt, GM announced that LG Chem would set up a new factory in Michigan to supply battery packs to the GM assembly facility in Orion, where the Bolt is being manufactured.

BMW EV Battery Technology

BMW has a strategic relationship with Samsung SDI which dates back over a decade as the company was preparing to launch its first-ever suite of EV's. Originally, that relationship was through SB LiMotive, a 50:50 joint venture between Bosch and Samsung SDI. Sb LiMotive was chosen by BMW as the supplier battery cells for its first VE , then dubbed project Megacity Vehicle:

The BMW Group has opted for SB LiMotive as the supplier of battery cells for the future project Megacity Vehicle. This gives the company access to state-of-the-art lithium-ion storage technology. “The decision is a major milestone along the way to serial production of the Megacity Vehicle. The battery is a key component in any electric vehicle – it determines the range and performance of the car. With SB LiMotive we have selected a supplier who offers the best available technology, combining leading German automotive expertise with future-oriented Korean battery know-how.

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When that JV dissolved in 2012 with both companies choosing to independently develop their own battery technologies, BMW continued their relationship with Samsung SDI. The Lithium Ion batteries being produced by Samsung SDI at that time were of the NCM variety.

The two companies announced expanded cooperation in July 2014 under which Samsung SDI would supply the battery cells for the BMW i8 and future hybrid models over the coming years.

The BMW Group and Samsung SDI plan to expand their supply relationship for battery cells for electro-mobility. The two companies signed a memorandum of understanding (MoU) to this effect today in Seoul. Samsung SDI will supply the BMW Group with battery cells for the BMW i3, BMW i8 and additional hybrid models over the coming years. The most important elements of the agreement are the increase in quantities delivered over the medium term, in response to growing demand for electro-mobility, and further technological development of battery cells.

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CATL Battery Technology

CATL's battery technology is based on the NMC variant of Lithium-Ion cells. The following roadmap, taken from a CATL presentation dating from February 2017, shows the progressive improvements in the power ratings and energy densities of their battery cells, along with their projected future trajectory. Currently, they are producing battery cells with an energy density of 280 Wh/Kg and their target is to reach 400 Wh/Kg by 2020.

CATL research focuses on two main paths to extract more energy from their MNC cells, increasing the cell voltage and increasing their nickel content.CATL's battery cell evolution has already seen two generations, NMC532 and NMC622, where the numbers indicate the relative amounts of Nickel, Manganese and Cobalt. Their third and latest generation, NMC811 remains under development and is expected to go into volume production in 2019 according to this report.

Battery maker CATL of China rushes to gain a competitive advantage over its Korean counterparts. The firm says it will be first to launch the new low- cobalt and energy-dense NCM 811 battery cells for electric cars next year.

While this move was also planned by Korea’s SK Innovation and LG Chem, their pouch cells have recently been delayed. CATL, however, is in a greater hurry and says their NCM 811 cells shall hit the market next year. Current CATL cells are NMC 532, which means the cathode is 20 % cobalt. With the introduction of NCM 811 battery cells, the cobalt content per kWh is to halve while energy density is said to increase.

And CATL may find huge demand. The company had scored large supply agreements with mostly German carmakers recently. BMW agreed to buy cells worth over a billion euros and had recommended Erfurt as a site for CATL European battery factory reportedly. The CATL battery production in Erfurt will run at full capacity from 2022. They will also deal with clients such as Volkswagen and Daimler that set up supply contracts with the Chinese manufacturer for the I.D. series as well as the EQ brand. Furthermore, PSA and Renault-Nissan will likely be sourcing some battery cells made in Erfurt from CATL too.

BYD Battery Technology

BYD's battery technology is based on a well-established, cobalt-free, variant of Lithium Ion technology known as Lithium iron phosphate (LFP). Although they are generally held to be safer and longer-lasting than more advanced variants, they have a lower energy density according to Mitalee Gupta, energy storage analyst with GTM Research.

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According to BYD, despite having only 75% of the energy density of comparable LCO battery cells, Iron Phosphate cells have many appealing advantages.

F. Batteries Beyond Li-ion

Although Li-ion batteries have been widely used in the automotive market for the past 25 years, these batteries are beginning to show their limitations in terms of safety, performance, and cost. Battery research is seeing a shift today with a range of new batteries being developed, although commercialisation efforts for these new battery technologies are still just inching their way forward. Solid state battery technology has become the leading light amongst the new battery technologies to replace Li-ion batteries. That said, various other battery technologies such as lithium air-, zinc-nickel, and magnesium batteries are also fighting for prominence. We take a detailed look at the solid-state battery technology, its developments and its path towards successful commercialisation, while also covering a few other disruptive battery technologies that are emerging in the EV market.

Solid State Batteries- A Close Substitute for Li-ion; Still Labouring Towards Successful Commercialisation

Solid-state battery technology, as opposed to li-ion battery technology, has both solid electrodes and solid electrolytes making the battery relatively safe. Solid-state technology eliminates the use of flammable liquid electrolytes as in Li-ion batteries and replaces them with solid electrolytes. This battery technology is also capable of delivering a high power-to-weight ratio (higher than conventional Li-ion) making it ideal for EV use. According to Wood Mackenzie Power & Renewables, one of the world's leading renewable energy consultancies, more than half a billion dollars’ worth of investments have been made in solid-state technologies by automakers and battery suppliers.

Batteries with this technology can be made thinner and flexible. Moreover, researchers confirm that the non-liquid nature of electrolyte allows stacking of the battery cells in a single package without the risk of an ionic short circuit. The stacking of battery cells and the reduced size of the cells would, in turn, allow reduced dead space between single cells making the technology suitable for powering electric cars which require a high voltage with limited available space.

The materials used for this technology are also good conductors of ions, which in turn help minimise the internal resistance of the battery thereby permitting high power densities. So far there have been eight different major categories of solid-state batteries, which each use different materials for the electrolyte: Li-Halide, Perovskite, Li-Hydride, NASICON-like, Garnet, Argyrodite, LiPON, and LISICON-like. Since the technology is still emerging, the list is likely to keep changing as new technologies emerge and the

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current technologies are assessed as unviable. For now, based on commentary from researchers we believe Sulphide-based, LiPON, and Garnet cells are the most promising technologies.

• Sulphide-based - Sulphide solid electrolytes display certain relatively unique properties, such as displaying higher conductivity alongside holding mechanical properties like being able to form favourable solid- solid contact in a battery, thereby exhibiting good cycle performance. On the downside, sulphide electrolytes are reported to have low air stability (the water vapor stored in air in a battery strongly affects the electrolyte stability level in a battery) hindering the performance of the battery.

• LiPON: Lithium phosphorus oxynitride (LiPON,), is an amorphous glassy material used as an electrolyte material in thin film flexible batteries, a type of solid-state battery. Layers of LiPON are deposited over the cathode material by RF magnetron sputtering to form the solid electrolyte used for ion conduction between the anode and cathode. This type of battery is said to have a higher average output voltage and lighter weight, resulting in a higher energy density (3x), and longer cycling life (1200 cycles without degradation) while also working under a wider range of temperatures (between -20 and 60 °C) compared to Li- ion batteries. Infinite Power Solutions, Inc. (IPS) one of the leading battery developers, is currently developing and manufacturing these solid-state, rechargeable, thin-film micro-energy storage devices for a variety of micro-electronic applications. This technology might need to prove itself over a longer timespan to be adopted for EVs. Having witnessed no application of this battery technology in EVs yet, it seems that the key concern could be increasing the performance of these batteries to meet the needs of EVs while ensuring that they can scale effectively in terms of storage capacity.

• Garnet cells: Amongst all solid electrolyte materials, from sulphides to oxides and oxynitrides, cubic garnet ceramic electrolytes are considered superior because of their high ionic conductivity (10−3to 10−4 S/cm) and good stability against Li metal. However, garnet solid electrolytes are considered to have poor contact with Li metal, which causes high resistance and uneven current distribution at the interface.

Solid State vs Li-ion: Solid State Technology Is Known for Being Relatively Safe

Solid State Batteries Li-ion Batteries

Higher Energy Storage Lower energy storage

Lighter Heavier

Not flammable Flammable

Performs well at high temperatures Decreased battery life at higher temperature

Higher cost Lowering cost

Still nascent technology Proven technology- widely used

Source: IDTechEx; Industry Sources

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Solid-State Technology Has Been in the Development Phase Since the 70’s Witnessing No Major Breakthrough

Timeline Development Detail

70’s First Application- A sheet of Li metal is placed in contact with solid iodine. The Primary batteries two materials behave like a short-circuited cell and their for pacemakers reaction leads to the formation of lithium iodide (LiI) layer at their interface. After the LiI layer has formed, a very small, constant current can still flow from the lithium anode to the iodine cathode for several years.

2011 The discovery of a Researchers from Toyota and the Tokyo Institute of sulphide-based Technology claimed to have discovered this material which material that has was something unthinkable up to a decade ago. the same ionic conductivity of a liquid electrolyte

2016 Researchers from Solid-state electrolytes became more appealing for high Toyota and the power applications and fast charging. Tokyo Institute of Technology were able to double that ionic conductivity level.

Ongoing Further research and innovations are being conducted so as to develop materials used for this technology that can triple current Li-ion energy densities

Source: IDTechEx

‘Cost’ Stands as the Key Barrier to Successful Commercialisation

Although this battery technology offers a lot of promises, advancement in the technology has been quite difficult to attain with no battery supplier or automaker launching this battery technology successfully to this point, for automotive use. Start-ups like Solid Power and Volkswagen’s QuantumScape are still developing samples of these battery technologies, although no product has been launched to the market yet. The biggest challenge, to launch the product market and await its successful use lies in bringing its price down to compete with that of the incumbent technology. It took li-ion batteries about six years for prices to fall to USD273/kWh from USD1,00kWh. Thus, it could take a similar timeline for solid-state batteries to become cost-effective as well, unless the automakers or battery developers come up with a better and improved way of developing this technology. Needless to say, widespread use of this technology largely depends on its ability to be produced at a reduced cost. This, we feel could take a considerable time period, perhaps the mid to late 2020s.

Start-Ups Involved in Researching and Developing Solid-State Battery Technology

A123 Systems Invests in Solid Power and Ionic Material to Jointly Develop a Successful Solid-State Technology; Still in the Development Phase

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A123 Systems, headquartered in Livonia, Michigan, United States, is a growing world leader in starter batteries and 48V systems with excellent brake energy recuperation and increased cycle life. Its product solutions are specifically engineered orf high energy or high power to meet the needs of applications from commercial buses to modern electric and hybrid vehicles and many more.

Solid Power is a Colorado-based start-up that spun out of a battery research program at the University of Colorado Boulder, which enables breakthroughs in the energy density and safety of next-generation batteries. Solid Power’s technology of combining a high-capacity cathode with a high-capacity lithium metal anode together with a high-ionic-conductivity solid separator has been recognised as a potential game-changer in the battery field. This technology of Solid Power boasts qualitative characteristics such as: ‘battery materials being 100% inorganic possessing no flammable or olatilev components; the battery providing 2-3x higher energy than the current Li- ion designs while trying to eliminate costly safety features.’

During 2017, A123 systems invested in Solid Power to help its ongoing development of battery technologies. A123 Systems considers its investment in Solid power as its first step towards supporting a promising solid-state technology. During 2018, A123 Systems also invested in Ionic Materials (a materials technology company that has developed a unique polymer electrolyte enabling new levels of safety and performance in advanced batteries) to further enhance development of solid-state batteries. The two companies are expected to continue their respective innovation on cell design and manufacturing, and related materials. The technology of Ionic Materials has proved successful for the strategic development of solid-state batteries. Its solid polymer electrolyte has achieved significant advances in raising the viable operating temperature of solid-state batteries, a key challenge in the application of the technology to automotive programs.

Such solid polymer electrolyte batteries have also been used by the French transportation firm, Bolloré Group, indicating some ommercialc use of solid- state batteries. Although commercialisation of this battery technology is only inching forward in the automotive sectors, firms like Ilika, Front Edge Technology, and Cymbet are making small batteries using this technology in modest numbers for other power purposes. These companies have also stated that it will take some time for solid-state batteries to rise in big numbers in fields such as onsumerc electronics, phones, and cars. Thus, it is fair for us to state that although this technology is continuously developing, its use in the automotive sector (although promising), is still not proven, and commercialisation will take time.

Fisker’s Optimistic Aim to Start Mass Production of Solid-State Battery Technology This Year

Fisker Inc, reborn from previously known Fisker Automotive which went defunct in 2014, is now all set in developing solid-state batteries to power its sedan. Henry Fisker, CEO of the company, expects to use solid-state battery technologies in their electric cars. Although Fisker did not expect commercialisation of this technology until 2023, he tweeted at the

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beginning of 2018 saying: “Here’s to a “Solid” 2018, the year we decide when our solid-state battery technology goes into mass production,” Moreover, at CES 2018, Fisker showcased its flexible solid-state battery (patent is pending) which is deemed to have higher density than Li-ion batteries and as such has the potential to drive the expected growth of the EV market. Although the tweet seemed to set an extremely optimistic tone this is another example where mass production and commercialisation seems to have a long way to go.

Chinese Players Make a Start Now; Solid-State Batteries Could be Really Happening

Towards the end of 2018, Qing Tao Energy Development Co, a start-up out of the technical Tsinghua University, has deployed a solid-state battery production line in Kunshan, East China. The university is one of the highest- ranking technical universities in China. According to the news release, the company claims to have deployed a production line that has a capacity of 100MWh per year and planned to increase this to 700MWh by 2020. The company is said to have achieved an energy density of more than 400Wh/kg compared to new generation lithium-ion batteries that boast a capacity of around 250-300Wh/kg. Although clear details on how Qing Tao achieved this, or the cost related to this, or its pricing details are not available yet, what seems to be interesting is the fact that, solid-state battery technology is starting to gain a solid start with the largest EV market, China, starting to focus on production of these batteries. If the news were true, we could see other leading battery players in China like CATL and BYD also starting to produce solid-state batteries, leading to rather quick commercialisation of solid -state batteries.

Steps Taken by Some of the Leading Players to Develop Solid-State Battery Technology

The solid-state craze can be further witnessed, with leading Auto OEMs such as Toyota, BMW, Volkswagen and leading battery suppliers like Panasonic, and Samsung SDI starting to focus on this technology. Toyota seems to be leading the industry having focused on this technology for the longest. However, the company does state that even an all-solid-state battery would not be an ultimate solution for performance improvement and cost reduction to help increase the penetration of EV sales, and thus, would continue its research for next-generation battery technologies beyond solid- state. Having said that, Toyota along with its battery partner, Panasonic, is all prepared to research and develop this new technology via its soon-to-be- formed JV.

It is also interesting to note that, some of the leading players like Panasonic, Toyota, and Samsung SDI, focus on developing this new battery technology in-house, while certain other players like Volkswagen, BMW, and Hyundai are tying hands with start-ups or university spin-offs to develop the technology. For us, it seems that the companies that are developing the technology in-house could be looking to develop a viable solid-state battery technology which might be well received commercially. However, those companies that are partnering with start-ups could be either intending to

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develop a revolutionary solid-state battery technology, or simply playing catch-up to bring technology to the market around the same time companies like Toyota bring the technology to the market. Regardless, it is quite evident that developments that relate to transitioning from Li-ion batteries are in place, and solid-state batteries may be just one possible alternative.

Toyota and Panasonic Expect to Use Their JV to Research and Develop Solid-State Batteries

Early this year, Toyota Motor Corporation and Panasonic Corporation announced that the two companies will establish a joint venture next year to produce prismatic lithium-ion batteries, while also researching and developing solid-state batteries and next-generation batteries for electric vehicles. The automaker stated that they expect to bring to market the solid- state technology by 2020 at the earliest. To us, it seems that Toyota will continue its search for up-to-date battery technology to meet its aim of running its electric cars 500 km on a single charge, and solid-state technology is just the start. However, the question remains as to whether solid-state technology could make a breakthrough as early as 2020, having seen no major developments in recent times. If Toyota achieves this target, that would make a strong case for solid-state battery production as it has been one of the leading proponents of the technology. At present, Toyota appears confident about its technological progress and we believe small scale commercial production could be in the early 2020s, but as always the hurdles to mass production are the key making widespread adoption before 2030 look unlikely.

Volkswagen Confident About Solid State Batteries Backed by Its Start-up QuantumScape

Germany based Volkswagen has become one of the latest automakers to invest in solid-state batteries for electric cars. Last year, the company announced a $100m investment in its solid-state battery start-up QuantumScape, a Stanford University spinoff. Volkswagen has been working with the start-up for the past few years and is now confident and serious about bringing the start-up’s technology to the production stage. It was reported that QuantumScape and Volkswagen will work together within a newly formed joint venture with the aim to enable an industrial level of production of solid-state batteries. The two companies’ long-term target includes establishing a production line for solid-state batteries by 2025. The company also highlights that a solid-state battery potentially increases the range of the E-Golf to approximately 750 kilometres compared with the present 300 kilometres. While such claims are being made by most automakers and battery makers today, we are yet to witness a company capable of producing solid-state batteries at an affordable and attractive price. Samsung SDI Follows Suit by Unveiling a Roadmap for Solid State Batteries in the 2019 US Auto Show

At the 2019 North American International Auto Show (NAIAS 2019) held in Detroit in January, Samsung SDI unveiled its next-generation battery technologies by introducing a roadmap for solid-state batteries. The company seems to be following suit behind Toyota and Volkswagen, stating

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that it has already secured some of the core technologies for solid-state batteries and is continuing to develop the technology. Although clear details weren’t given as to how or by when exactly the company expects to achieve commercialisation of this technology, it does seem that even this key battery player considers solid state batteries to be an eventual substitute for the incumbent Li-ion technology.

BMW and Solid Power Partnership Could Support Future Commercialisation of the Technology

BMW, another major automaker to invest in bringing automotive grade solid-state batteries to a mass-producible state, partnered with US-based EV battery company, Solid Power. This has created further hopes for the commercialisation of solid-state battery technology in electric cars. Solid Power has been touted as one of the more advanced developers of solid-state technology giving BMW a potential advantage in the area of EVs, given that even the EV leader, Tesla, has not made a move towards this technology yet.

Hyundai Invests in Solid-State Battery Start-Up Company, Ionic Materials

The Korean automaker, Hyundai is getting on board by investing in a solid- state battery start-up claiming a ‘breakthrough’ for commercialisation. The company was reported to have started pilot production of next-gen solid- state batteries for electric vehicles in 2017. Moreover, last year, Hyundai through its subsidiary- Hyundai Cradle, invested in the US material start-up, Ionic Materials. The latter, as previously mentioned is developing a solid polymer electrolyte which they claim would enable low-cost and high- performance solid-state batteries. In our opinion, Hyundai joining hands with Ionic Materials, indicates some serious commitment by the automaker towards developing solid-state batteries at an attractive price leading to its successful commercialisation.

Other Upcoming ZEV Battery Technologies

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10 Disruptive Battery Technologies to Replace Li-Ion Batteries

Source: Solar Power World

Silicon-Based (Si) Batteries

Li-ion batteries use graphite anodes, which researchers are hoping to replace with silicon anodes which can bond with 25 times more lithium ions than graphite. These types of li-ion batteries have attracted a lot of interest for their ability to boost the capacity mainly for use in smartphones as well as in cars. Further, this battery technology is said to have the potential to lower costs, increasing its attractiveness.

However, the key challenges for the successful commercialisation of this technology are its propensity to expand under heat as well as slow-diffusion rate and relatively low electrical conductivity level. Nanotechnology and Carbon coating are two possible solutions that have been researched to overcome these challenges. Nanotechnology is where, Nano-sized Si anodes are used instead of normal Si anodes, reducing the particle size helping improve the cycle life and performance of the battery by avoiding damage to the anode (the bulk-Si based anode cracks during lithiation and de-lithiation process given the small surface area). Carbon coating also uses nano-sized Si along with different forms of carbon materials to reduce the volume expansion and increase the contact between Si particles and thereby provide a stable solid electrolyte interphase (SEI) structure to increase the diffusion rate. For now, start-up companies such as Sila Nanotechnologies, Enovix, Angstron Materials and Enevate are claiming commercialisation of this battery type soon mainly for electronic products such as smartphones. Sila Nano, however, has formed a partnership with BMW, and hopes to build a larger version of this battery to power EVs.

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Researchers at Drexel have also recently found that introducing a material called MXene can prevent expansion of silicon cathodes while simultaneously increasing conductivity as much as 100 to 1000 times compared to regular silicon cathodes.

Silicone Can Bind More Lithium-Ions than Graphite

Source: Solar Power World

Room-temperature sodium sulphur (RT-NaS) batteries

This kind of battery technology is seen as the most promising alternative to lithium-sulphur batteries, given their similar physical and chemical properties. These batteries, however, require higher temperature (>300°C) for operations and have attracted interests mainly in large-scale grid applications where safety is enhanced. That said, due to complex reactions within the battery, the RT-NaS batteries suffer from a lower theoretical capacity and potential safety issues. Research are being conducted on this front, to enhance the capacity of the battery and range of its use to various energy storage devices and rechargeable batteries as needed for applications such as electric cars as well.

One such approach to solving the problems of RT-NaS batteries was researched by scientists who used a multifunctional carbonate electrolyte with high electrochemical performance and increased safety. This makes the battery technology attractive for the advancement of low-cost and high-performance energy storage devices. That said, RT-NaS batteries are still in their initial development phase, with companies like Ambri, a spin- out company from MIT, working to improve the battery design.

Proton batteries (H)

Continuous research is being done to develop high-performance proton exchange membrane (PEM) fuel cell batteries, although, the cost factor and storage of hydrogen gas have remained key challenges. Recently, a team of researchers at RMIT University reported the technical feasibility of a proton battery for the first time. The proton batteries developed by the team have two parts: a carbon electrode to store hydrogen or protons from water and a reversible PEM fuel cell to generate electricity from the hydrogen, with a

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voltage of 1.8 V being achieved. This is designed innovatively to use activated carbon for the electrode, making it cheaper and abundant and structurally stable for hydrogen storage. There is a small volume of liquid acid inside the porous material that conducts protons to and from the membrane of the reversible cell. The team hopes to commercialise the battery within five to ten years. Companies like ABB Marine and Sintef Ocean are also testing a megawatt-scale propulsion plant to power commercial and passenger ships using these hydrogen fuel cells. It is stated that these batteries do not use Li-ion at all, emerging as an inexpensive challenger to the current Li-ion batteries. Hydrogen fuel cell batteries have also been a trending topic for EVs, although commercial use of such batteries is not yet evident. Perhaps, if these proton batteries enhance their capacity to meet those of EVs, they would then be a possible substitute for Li-ion EV batteries, although the time frame looks to be some way out.

Graphite Dual-ion Batteries (DIBs)

DIBs use materials other than li-ion and thus have attracted a lot of attention for use in large-scale stationary storage of electricity. Research and development is being continued to increase the energy density of the DIBs further by increasing the ionic content of the electrolyte, leading to a higher capacity for storing charge. For instance a research team, developed graphite-graphite dual-ion batteries (GGDIB) for the first time with the use of aluminium salt electrolytes making the battery inexpensive and environmentally-friendly for future energy storage applications. This, if successful could also be potentially used for electric supercars as well.

Aluminium-ion batteries (Al-ion)

Aluminium is known to be abundant, inexpensive, and readily available, thereby making them potentially cheaper replacements for Li-ion batteries. It was reported that Swiss researchers from ETH Zurich have come up with two new technologies, providing a start towards the successful commercialisation of Aluminium-ion batteries. The first technology is the use of a corrosion-resistant coating material, titanium nitride (TiN) ceramic in these batteries which provides high energy density, and high cycling ability. The excellent corrosion resistance of TiN allows it to be used as high- voltage cathode materials in Mg-, Na-, or Li-ion batteries as well. The other technology involved with this battery is the use of polypyrenes (a conductive polymer) as a high-performance cathode material instead of the usual graphite-based cathode used in Al-ion batteries. Polypyrenes store the same amount of energy as a graphite cathode, helping the electrolyte penetrate and charge the electrode material easily while being low in cost and abundant. These batteries could become commercially successful as an inexpensive storage solution for the industry, with potential application in the EV battery industry.

Nickel-Zinc batteries (NiZn)

Nickel-zinc batteries are known to be cost-effective, safe, nontoxic, and environmentally-friendly batteries that could easily replace li-ion batteries. However, their low life cycle has been the key barrier to their success, especially in the EV market. Chinese researchers from the Dalian University

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of Technology have developed a breakthrough in-situ cutting technique (a novel graphene-ZnO hybrid electrode, which can cut graphene directly into short nanoribbons) to improve the performance of Ni-Zn batteries. The excellent electrical conductivity of graphene is said to improve the speed of the charge-discharge process. With the ongoing research and approaches taken by companies, these batteries show immense potential for widespread commercial applications in electric vehicles (EVs) and energy storage.

Potassium-ion batteries (K-ion)

K-ion batteries (also abbreviated as KIB) are a type of battery that uses potassium ions for charge transfer instead of lithium ions. In 2007, Chinese company Starsway Electronics marketed the first potassium battery-powered portable media player as a high-energy device. Since then, Potassium batteries have been proposed for large-scale energy storage by aiming to improve their performance and cyclability. Some of the key research in this area includes research done by the University of Wollongong to develop a high-performance KIB with a composite of a few-layers of antimony sulphide/carbon sheet (SBS/C) for the anode, which is said to pose a higher reversible capacity, cycling stability, and rate performance.

Salt-water batteries

Salt water batteries use a concentrated saline solution as its electrolyte, making the battery non-flammable and more easily recycled when compared to batteries such as li-ion which use toxic or flammable materials. On the flip side, the chemical stability of the solution lasts only up to 2.3 V, which is around three times less than Li-ion batteries, limiting its use in applications such as EVs. However, these batteries could be suitable for stationary power- storage applications. Research is being conducted to increase the potential of these batteries such that they may be used for EVs. Promising research was conducted by the Swiss Materials Testing and Research Institute (Empa) which used a specific salt called sodium bis (fluorosulfonyl) imide (FSI), which is very soluble in water, making the saline solution display superior electrochemical stability of up to 2.6V, which is twice as high as other aqueous electrolytes. The prototype was launched successfully although, commercialisation still lags.

Paper-polymer batteries

A paper-polymer battery is an electric battery engineered to use a spacer formed largely of cellulose (the major constituent of paper). These batteries are said to be inexpensive, environmentally-friendly, and self-sustainable. They could have enormous applications in biosensors and future electronic devices, although its relatively low performance would mean irrelevance when it comes to use in EVs. However, the main limitation is the low performance. That said, recent research done by Seokheun Choi and a team of scientists resulted in a high-performance microbial battery made using a biodegradable paper-polymer substrate. The technology is still under patent application, and the team is seeking industrial investments for commercialisation and use for numerous other applications.

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Magnesium Batteries (Mg)

Batteries with Magnesium as the active element at the anode of an electrochemical cell are called Magnesium batteries. Magnesium primary cell batteries are commercialised and have found use as an energy reserve as well as in general battery use. Mg-based batteries could compete with Li-ion in theory, due to their higher energy density. However, Mg-based batteries are not rechargeable, as the reversible reaction requires a corrosive electrolyte that produces a layer on the Mg electrode, which blocks the recharging of the battery. As a solution, scientists at the National Renewable Energy Laboratory (NREL) presented a prototype of a new rechargeable non- aqueous Mg-metal battery creating an artificial Mg2+-conductive interface to protect the Mg anode surface, thereby improving the battery performance and allowing for re-charging. If the strategy turns out to be successful, then the improved performance of the batteries would indicate their possible use in electric cars and other energy storage applications.

A comparison of the Technologies

Battery Phase Cost Performance Capacity Rechargeable Commercialisation Type

Proton Initial Low Medium Low ✓ c.5-10 years Development

Silicon- Prototype Medium High High ✓ Development Based already started. Expected to be used with the consumer electronics early this year.

Paper- Prototype Low Low Low x Polymer Under patent application. Needs more innovation to witness widespread commercialisation

Graphite Initial Low Medium Low ✓ Development still Dual-Ion Development in infancy. A long way to go for testing before commercialisation

Room- Initial Medium Medium Low ✓ NaS batteries Temperature Development already being Sodium manufactured by Sulphur Japanese company, NGK. RT NaS likely to commercialise successfully soon

Aluminium- Initial Low High High ✓ Far from Ion Development commercialisation

Nickel-Zinc Prototype Low Medium High ✓ Intense research is happening. Expects widespread commercialisation in few years.

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Potassium- Prototype Low High Low ✓ Ion Have been a lot of recent breakthrough to improve these batteries. Commercial interest on these batteries are on the rise. Thus, successful commercialisation could be expected soon.

Salt-Water Prototype Medium Low Medium ✓ Application and commercialisation is limited to stationary storage systems as of now.

Mg-Metal Prototype Medium High Low ✓ Further testing and Solid-State Initial High High Low x research is needed Mg Development before rechargeable Mg batteries or Mg solid state batteries enter commercialization

Source: Solar Power World

G. Supply Constraints for Key Raw Materials

As EVs are yet to hit their mass adoption stage, they are likely to witness strong growth over the medium to long-term necessitating a look at potential bottlenecks. Consensus estimates suggest that EV production could grow around 30-40% a year through 2025, with BEVs capturing a majority share of the EV production. As detailed in the previous sections, batteries are going to be powered by Li-ion technology for a while. This brings us to a common question as to whether there would be enough lithium to meet the growing demand for Li-ion batteries to power the expected growth in EVs? However, lithium is not the only raw material necessary for Li-ion battery production. A Li-ion battery uses lithium for its cathode material and electrolyte, while its cathode material also needs other raw materials such as cobalt, nickel, magnesium, aluminium, iron, and phosphate, and its anode material is predominantly made of graphite alongside copper being used for connection purposes in a battery cell. Thus, the expected growth of EVs is likely to drive the overall battery use of these raw materials. However, as we discuss below, key raw materials used in a typical Li-ion EV battery, that are likely to see an accelerated increase in demand resulting in concerns over supply include lithium, cobalt, and nickel.

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Summary:Our stance on lithium is that the required increase in capacity in the short-medium term is unprecedented which is likely to lead to various shortfalls. Over the long term, until and unless recycling becomes commercially viable or the metal is substituted, the actual amount of lithium available could become an issue with a full switch to EVs. Nickel, in our opinion, could be the biggest bottleneck in the short term, given that more nickel will be required when improving the performance of EVs. This would mean that necessary steps for supplying the required amount of nickel will have to be taken to ensure widespread use of EVs. For Cobalt, on the other hand, we believe that the biggest concern is the concentration of supply in the DRC. Given some time, there could be potential for advancements in cathode chemistry to substitute for cobalt and recycling efforts also seem to be making some progress, which could possibly eliminate concerns over supply risks for Cobalt.

Source: Bloomberg

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Source: Bloomberg

Source: Bloomberg

Lithium: Tight Supply Situation Possible 2021E Onwards, Prices of Lithium Could Rise Further Unless Adequate Supply Comes Online Via Planned Production

Lithium Use for EV Batteries to Almost Double by 2025E on the Back of Expected Growth in EVLithium is a soft silver-grey metal which has a low density and atomic mass. Lithium is also known to have high electrochemical potential and high specific heat capacity and is therefore widely used to power electrical devices as well as EVs. Lithium in general is a key raw material that has been used in batteries in many products beyond just EVs, powering almost all devices starting from power tools, to phones and laptops. Lithium is also used for non-battery use such as glass, ceramics, and grease. Battery use of lithium currently stands at around 40% of total lithium use. This is likely to further expand to around 80% by 2025E on the back of the expected growth in EVs. EVs alone are likely to capture around 70-75% of battery use of lithium through 2025E leaving only a minute share of battery use for consumer electronics (laptops, phones) and stationary energy storage devices (renewable energy storage devices). This is based on our assumption that an 85Kwh Tesla EV uses 51kg of LCE (most investors and researchers generally note lithium production numbers in terms of lithium carbonate equivalent- LCE), while a 15Kwh PHEV uses approximately 11.8kg of LCE. This would mean that to produce around 10m EVs in 2025 c.361,851 tons of LCE will be required, capturing c.70-75% of the battery use lithium compared to their current 42% share. While these challenges are quite self-evident, we need to consider if there would be any shortfall in supply of lithium to support this expected fleet of EVs.

Deriving Lithium is a Time-Consuming Process; Supply May Not Come Online in TimeWhile there are ample lithium reserves in the ground, with a majority of lithium deposits said to be available in Australia, Argentina,

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Chile, China, and the USA, the concern is, if these reserves will be derived in time to satisfy demand. Lithium can be derived from two major sources, brines (salt lakes) and hard rock (pegmatite). Evaporating lithium from brines is the most commonly used technique, and this process takes nearly 18-24 months. Hard rock lithium mining, as opposed to brine harvesting, creates a much larger environmental footprint. Further, hard rock mining takes about eight years to begin extracting lithium starting from the exploration stage until production. As such this methodology is also expensive compared to brine harvesting methodologies. While brine harvesting takes closer to five years to commercialise, the development time is still considerable. Such facts considered it is reasonable for us to believe that it is the time-consuming nature of lithium processing and extracting which could lead to the supply constraints in the medium-term and not the lack of lithium as an element by itself. Further, history proves that leading lithium suppliers like FMC, Energi, Albermale, have all experienced delays in achieving their expected target capacity in lithium projects. However, leading companies like Soc Quimica Y Minera Chile-B, Albemarle, FMC Corp, Tianqi Lithium and Jiangxi Ganfeng Lithium Co Ltd continue to be optimistic, given the growing demand for EVs and are investing to ramp up production, though, in our opinion they may not be able to bring supply online in time to meet demand if EV growth expands as predicted.

Supply-Demand Gap Could Eventually EmergeBased on our estimated demand and given the increase in penetration of EVs and the estimates for the global projection of lithium supply over the next 5-8 years, it seems like a supply-demand gap may emerge in 2021E. This would, in turn, cause lithium prices to rise further. Pricing for lithium carbonate has almost tripled since 2003, trading at around USD 10-12K/ton in recent times. Moreover, it should be noted that, if lithium carbonate, being the first chemical in the production process is likely to face a tight supply situation, then lithium hydroxide would face an even tighter supply situation. As such prices of lithium hydroxide are likely to rise higher than that of lithium carbonate. This is a could be a concern given the current trend of a shift towards lithium hydroxide from lithium carbonate as the raw material for cathodes, due to the better power density, longer life cycle and better safety features of the batteries made from the material. EV leaders such as Tesla have selected lithium hydroxide batteries for their vehicles, with the other automakers following suit. As this trend evolves, the gap is going to only widen further causing an upward movement in price. However, we do note that although getting lithium out of the ground in time may be difficult causing supply risks in the medium term, the tight supply situation is not likely to prevail for a long time given the research into new battery technologies that are likely to eventually eliminate the use of lithium in certain types of batteries.

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Tight Supply Situation May Arise Somewhere in 2021E

Metric Note/Assumption Unit 2019 2020 2021 2022

1 Lithium Based on the Kg of 51 used on assumption that a LCE average 85kwh Tesla EV- by a BEV uses 51 kg of LCE

2 Number Forecasted based No. of 1.3 1.9 2.4 3.1 of BEV by on expected CAGR units in 2021 for BEVs millions

3 Total 3=1*2 Metric 67,994 96,638 122,995 156,540 lithium ton LCE needed for BEVs

4 Lithium Based on the Kg of 11.8 used on assumption that a LCE average 15kwh PHEV uses by a 11.8kg of LCE PHEV

5 Number Forecasted based No. of 0.7 1.0 1.2 1.5 of PHEV on expected CAGR units in by 2021 for PHEVs millions

6 Total 6=4*5 Metric 8,242 11,714 14,908 18,975 lithium ton LCE needed for PHEVs

7 Total 7=6+3 76,236 108,352 137,903 175,515 lithium demand for EVs

8 Lithium Includes battery 62,486 69,477 77,390 86,384 demand demand for: from · Consumer other electronics-LCE battery demand to grow at use a CAGR of 8-10% during 2019-24 · Stationery energy storage devices- LCE demand to grow at a CAGR of 30% during 2019-24

9 Demand Based on the 131,179 129,962 128,757 127,563 from Assumption that Non- the share of Battery demand from these Use areas is expected to (Ceramic, drop to about glass, 20-30% of total grease) demand

10 Total 10=7+8+9 269,900 307,791 344,050 389,462 Demand

11 Global Based on market 324,839 334,839 334,839 338,458 Projection estimates from of Total Stormcrow. Lithium Assessing supply of Supply lithium is usually difficult and inaccurate

12 Surplus/ 12=11-10 54,939 27,048 -9,211 -51,004 Shortfall

Sources: Company Disclosures (Albemarle), LightStream Research Estimates, Stormcrow

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Cobalt: Demand Likely to Increase; Any Supply Shortfall Is Unlikely Before 2021

Almost 80% of Battery Use of Cobalt Comes from EVsCobalt is a transition metal found between iron and nickel, which has a high melting point (1493°C) and the ability to retain its strength even in high temperatures. Similar to iron or nickel, cobalt is ferromagnetic (possesses the ability to form permanent magnets or be attracted to magnets). It can retain its magnetic properties up to 1100°C, a higher temperature than any other material. The ferromagnetism characteristic of Cobalt makes it perfect for two key high-tech purposes: superalloys and battery cathodes. The use of Cobalt in a battery cathode allows the battery to pack higher energy density, which translates into longer battery life resulting in longer driving times for EVs. According to research estimates, overall battery use drives around 49% of cobalt demand, of which, approximately 80% comes from cobalt’s usage in lithium-ion battery cathodes for EVs (approximately 22.5kg of cobalt in an EV battery). This proportion is likely to remain the same or even increase given the expected growth in EVs. Regardless, demand for cobalt used in EV batteries is going to see a steady increase over the medium term, bringing suppliers to consider if they would be able to bring production online in time.

Supply Has Been Increasing Despite Being Produced as a By-Product and the Majority of Reserves Being Found in a War-Torn CountryCobalt production has accelerated over the past few years to meet demand and has almost doubled since the 2000s. Although production has increased over the years, getting cobalt is a difficult task due to a number of reasons. Primarily, it should be noted that no native cobalt has ever been found, meaning, they cannot be obtained in their primary form although four widely-distributed ores exist for them. Thus, the element is usually derived as a by-product of copper and nickel mining, indicating that expanding production instantly or within a short period of time is close to impossible. Moreover, similar to lithium, Cobalt is also found in ample quantity in the ground. However, the majority of production is yielded from the Democratic Republic of the Congo (the DRC- alone accounts for more than 50% of world production) and Zambia. The DRC is one of the poorest, war-prone and most corrupt countries in the world, ranking extremely low in terms of the Human development index. Thus, production cannot be derived in a stable manner from such a country to meet any sudden spikes in demand.

However, mining exploration companies are already looking to regions like Ontario, Idaho, British Columbia, and the Northwest Territories to find necessary deposits. The rising demand for cobalt, alongside the difficulty of producing cobalt, has caused prices of cobalt to rise steadily, encouraging such mining companies to invest in exploration for cobalt reserves. For instance, following the surge in cobalt prices in 2017, Glencore Plc restarted their operations at their Katanga mine in December that year. This was said to add about 11k tons of supply in 2018 to 2017’s 110k tons globally, and with a further expansion of 34K tons scheduled for 2019, Glencore would double their capacity within a two-year period. Additionally, other miners

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within the DRC are also looking to generate a new output of about 20k tons by early 2020, and mining projects are being accelerated in regions outside the DRC as buyers seek supply sources with less political risk.

Supply Concerns Minimal Until Late 2021Thus, even assuming an EV penetration rate of around 10-15% within the next two years, any supply shortfall is unlikely before late 2021. This is, assuming an EV battery use of approx.22.5kg of Cobalt per battery. However, if the usage of cobalt increases, then we might face supply constraints a bit earlier. In our opinion, this is quite unlikely, even though cobalt is known as a popular cathode material, automakers like Tesla are also trying to eliminate or minimize the use of cobalt in a battery. In that case or the case of a shift to solid-state which doesn’t require cobalt, we may see a decline in cobalt prices, and not have to be concerned about supply risks involving Cobalt.

Supply Volatile but Increasing; Shortfall Likely After Late 2021E

Metric Note/Assumption Unit 2019 2020 2021 2022

1 Cobalt Assuming usage based on Kg per 22.5 22.5 22.5 22.5 used in a Tesla’s Model S and this car an EV usage to remain constant at best (although decline in usage is highly likely over the future years)

2 Expected Forecasted based on No. of 2.1 2.8 3.6 4.6 Production expected CAGR for BEVs and units in Units of PHEVs millions EVs

3 Total 3=1*2 Thousand 47.3 63.0 81.0 103.5 Cobalt Tonnes Needed for EVs

4 Global Forecasted capacity 155 175 205 225 Cobalt expansion by Glencore Plc Supply and expected supply to a certain extent from the DRC by other miners

5 Cobalt for Assuming battery use of 76 85.8 100.5 110.3 battery cobalt remains at the current use 49% [5=49%*4]

6 EV cobalt Assuming EV cobalt use in 60.8 68.6 80.4 88.2 use of total battery remains at the total current 80% level [6=80%*5] battery use

7 Supply 7= 6-3 13.6 5.6 -0.6 -15.3 Versus Demand

Sources: LightStream Research Estimates, Visual Capitalist

Nickel: Supply Risks Likely Even in the Short Term

Nickel Demand for Use in EVs Likely to Accelerate; More Nickel Higher Energy Density of an EVNickel, which is primarily used to produce stainless steel, is one of the world’s most important metal markets valued at

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over USD20bn. Nickel is also a key element used in battery production, especially EV batteries. Nickel, together with Cobalt, is often used to stabilise the structure of the Li-ion cathode and is the most important metal by mass in the lithium-ion battery cathodes used by EV manufacturers. For instance, the Lithium Nickel Cobalt Aluminium Oxide (LiNiCoAlO2)- NCA and– Lithium Nickel Cobalt Manganese Oxide (LiNiCoMnO2)- NMC (NCM) cathodes used in Tesla and Chevy Li-ion batteries are made up of around 60% nickel and this percentage is expected to increase to around 80% by 2020. This is primarily due to the fact that optimising more nickel in a cathode increases the energy density of the battery while reducing the cost, supporting the quick penetration of EV in the Auto market. Simply put, if the vehicle, for instance, needs to be able to travel 500 kilometres instead of 400, then you need to put more nickel into the battery. Thus, future EV batteries will tend to use more nickel. That said, as demand for EVs continues to grow, strong growth in demand for nickel is highly expected to emerge as a key topic for the incumbent Li-ion battery technology.

Supplying Nickel Suitable for Li-ion Batteries is a ProblemThere is a great challenge in meeting the demand for nickel to power the expected demand for Li-ion batteries due to the fact that most nickel in the global supply chain is not actually suited for battery production. Nickel can be predominantly supplied through two types of deposits: Nickel Laterites (includes low grade, bulk-tonnage deposits that make up 62.4% of current production) and Nickel Sulphides (higher grade, but rarer deposits that make up only 37.5% of current production). Nickel laterites are mainly used as inputs to make cheap Chinese stainless steel, while the sulphide deposits are used to make nickel metal, and nickel sulphate. Nickle sulphate, which represents only about 10% of nickel supply is what is used for Li-ion battery cathode materials. This kind of Nickel can be produced by using crude nickel sulphate, briquettes (a compressed block of coal dust used for fuel), mixed sulphide precipitation (a method used during the metal smelting process to derive the nickel sulphate mixed with other metals), carbonyl pellets (a chemical decomposition process) or be processed into powder. The concern is not whether the industry will run out nickel as a raw material. Instead, the pressing issue is, if the specific type of nickel that is required would come online in time to satisfy the expected acceleration in demand. Thus, deriving Nickel, similar to Cobalt and Lithium, seems to be a challenging and time- consuming process. With the growing demand, we feel that it is this key raw material that could be the most critical bottleneck, pushing its price further up. However, major mining companies are seeing this as an opportunity, investing to increase supply. For instance, during August 2017, mining giant BHP Billiton announced it would invest USD43.2m to build the world’s biggest nickel sulphate plant in Australia. However, even these aggressive investment plans do not seem to be capable of satisfying the current spike in demand for nickel in EV batteries.

Supply-Demand Gap May Prevail Even Over the Short TermEV-batteries usage of nickel stood at 2% of global supply in 2017 and should grow to reach about 4-5% of nickel supply during the next few years. Even if we consider EV batteries to use about 5% of nickel supply during the next few years, we see that the expected demand cannot be met with the potential

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supply. Thus, although using more nickel will drive the energy density of batteries up, it will create supply chain problems for battery markers over the short-medium term.

Metric Note/Assumption Unit 2019 2020 2021 2022

1 Nickel Light passenger EVs using Kg per 52 52 52 52 used in an batteries with an 8:1:1 NMC car EV battery ratio, which should become (Approx.) widely deployed over the next decade, require roughly 52 kilograms of nickel

2 Expected Forecasted based on No. of 2.1 2.8 3.6 4.6 Production expected CAGR for BEVs units in Units of and PHEVs millions EVs

3 Total 3=1*2 Thousand 109.2 145.6 187.2 239.2 Nickel Tonnes Needed for EVs

4 Global Market estimates from 2162 2197 2232 2264 Nickel Statista Until 2020 Supply

5 Nickel EV Battery demand only 108.1 109.9 111.6 113.2 Supply for accounts for 3-5% of nickel EV battery usage usage

7 Supply 7=5-3 -1.1 -35.7 -75.6 -126 Versus Demand

Sources: LightStream Research Estimates, Visual Capitalist

Is Recycling Li-ion Batteries a Solution for the Emerging Supply-side Risks for Key Raw Materials?

Battery recycling as an activity was initially developed to reduce the number of batteries that were being disposed of as waste, as they cause soil contamination and water pollution to a great extent. Around 90% of batteries which are recycled are lead-acid batteries, while rechargeable batteries such as nickel–cadmium (Ni-Cd), nickel metal hydride (Ni-MH), lithium-ion (Li-ion) and nickel–zinc (Ni-Zn) are not readily recyclable and thus are rarely recycled. It is estimated that about only 5% of Li-ion batteries are recycled. Li-ion batteries which are used in old electronic devices are usually left aside after they have been replaced. This would mean that consumers don’t actually throw these types of Li-ion batteries to waste, indicating that these batteries aren’t readily available for recycling in the first place. However, Li-ion batteries used in EVs cannot be simply kept aside at a person’s home (as they usually take up space and cannot be stored in places like drawers) and will eventually be discarded. Despite this fact, not all of these EV batteries are recycled due to a few key reasons. Primarily, if recycling was to happen, that is, through a smelting process, which despite recovering many minerals, does not recover the precious lithium completely. Lithium is derived as a by-product following the smelting process, from

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which extracting only lithium is costly. This undermines the entire purpose of recycling, as the key mineral cannot be recovered in a cost-efficient manner.

Moreover, the process of recycling is also made more difficult in the current situation where, battery makers are attempting to eliminate the use of high- cost raw materials like cobalt out of the battery technology to keep the batteries cheap. Thus, the batteries could eventually become too cheap to make recycling economical overall. This could create a catch-22 situation of lithium prices needing to be high enough to make recycling worth it, putting a floor under the potential cost reduction potential for Li-ion batteries.

However, to avoid shortages of key raw materials like lithium, cobalt and nickel, and to continue to use the li-ion battery technology for a while, developing an appropriate recycling process for these batteries becomes key. For this reason, several unit operations are being developed to make this process less complex, while also allowing high rates of recovery for the valuable materials. Moreover, the EU and China are also supporting the recycling process by already imposing regulations which make automakers responsible for recycling the batteries. Having said that, concerns still exist as to whether the automakers are ready to use recycled batteries for their vehicles. For instance, tyre manufactures are still reluctant to use recycled rubber for their tyre production.

Thus, on the one side, the process of recycling itself is quite challenging, and on the other side, the perception of using such recycled batteries in EVs remains a concern.Nevertheless, an interesting solution put forward, is the re-use of the spent EV batteries for other purposes, instead of recycling them. EV batteries that are spent, are still said to have up to 70% capacity left for good re-use prospects such as utility storage devices. This would ensure that the necessary minerals are not too used up for other purposes, instead, could be held back to satisfy the demand that arises for use in EVs. This view is attracting a lot of interest, with companies like Aceleron and Nissan supporting this view. This brings us to conclude that the difficulty of developing a cost-efficient recycling process, alongside the poor collection systems for these batteries makes the recycling li-ion batteries a difficult task to achieve, and thus, does not seem to be a very viable solution to eliminate any raw material shortages. As such, while timelines are likely to be extended, resource scarcity will not be resolved with the use of Li-ion batteries.

H. The Competitive Landscape

Key Strengths and Strategies of the Key Players

Company Key Strength Key Strategy

Panasonic · Best and widely used technology · Narrow Customer base but ties · Market Leader expecting to continue with the strongest and most stable increasing capacity customers (Toyota and Honda) · Diversify from volatile businesses (Tesla)

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LG chem · First mover in Europe · Aggressive investments targeting · Support from start-ups to develop developing markets which hold revolutionary battery technologies future EV prospects (Europe) · Research and develop new battery technologies by tying up with start- ups

Samsung · Battery Expertise beyond just EVs · Operates in cost competitive SDI · Cost Competitive to attract business markets like China from Chinese automakers · Aggressively entering niche markets like Golf cars) · Diversified customer base to support strong sales

BYD · Leader in EV Buses and thus LFP · Listing battery subsidiary and chemistry Li-ion batteries. establishing its own Chinese “Gigafactory”.

CATL · Broad range of customers based around · Leveraging extremely wide client core Chinese EV manufacturers but base to expand capacity rapidly and rapidly expanding clientele among reinvest earnings in intense R&D Japanese, European and American efforts to gain technology manufacturers. leadership.

Source: LightStream Research

Outlook for the Battery Industry’s Competitive Landscape

While Panasonic remains a and probably THE technology leader for the moment, the momentum is clearly with CATL which has announced partnerships with Hyundai, Honda, Nissan, BMW, Daimler, VW and a number of local Chinese manufacturer and is being courted by Tesla. CATL’s remarkably high level of profitability (in the high teens OPM) and capacity to spread development and investment costs over a broad customer base make the company the 300-pound gorilla in the industry despite only recently having usurped market leadership from stalwart Panasonic.

Panasonic remains a strong contender and has opted for quality over quantity, choosing to partner with Toyota for 4-wheelers and Honda for 2-wheelers. This carries on from its initial partnership with Tesla when the company was blazing the trail for the EV market as a whole. Now however, delays increasing production and question marks over Tesla’s viability cloud what was once viewed as a strong growth driver for the company. Eventually, the company’s partnerships with Toyota and Honda should help it achieve a strong market position in the industry, but if troubles at Tesla continue to worsen, Panasonic’s commitments at the Nevada Gigafactory could prove a significant drain on both finances and management resources. We would expect Panasonic to remain a technology leader, but with cost being a significant onsiderationc for automakers its near- and medium-term future is filled with uncertainty.

BYD appears to be in something of a transition phase. While the company established itself firmly in the EV Bus space and is also a leader in passenger EVs, the reduction of EV subsidies is placing significant pressure on the companies’ margins. The dependence on internal demand for its batteries is also a weakness and could handicap the company until it lists its battery subsidiary and acquires significant revenue from outside customers. Lithium Iron Phosphate technology will also not be an advantage when expanding

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passenger EV sales and since China appears to have sated its appetite for driving EV bus sales prospects for the company look somewhat murky at present.

LG Chem has its positives and negatives as we view its aggressive investment in Europe as having the potential to be highly positive if it pays off. With a wide array of clients including Hyundai, the company has a broad demand base and ordinarily we would view this as a positive. In this case however, we do have some concerns that the company could be the most vulnerable to encroachment by CATL. As Panasonic and Samsung appear to be aiming to develop deep ties with Toyota and BMW respectively, we believe both companies will have reasonable demand potential without having to face intense competition from CATL. Toyota has a large production volume of hybrids, PHEVs and will eventually scale up production of BEVs and FCVs which will all require batteries in some form. Meanwhile, BMW has quietly taken third place in terms of global share of BEV/PHEVs at about 8%, just behind Tesla and BYD’s 11% each. Hyundai is a good partner but currently only has 3% share which could leave LG Chem going up directly against CATL for customers.

As previously mentioned, Samsung has a strong relationship with BMW which should provide something of a base for expanding their business. Some concern is warranted given that BMW has also tied up with CATL but Samsung’s approach to target multiple markets beyond just EVs should give the company a variety of options and some staying power through tough periods. What remains to be seen is whether its push into China will be successful when running up against CATL and BYD.

All in all, the table appears to be laid for CATL thanks to its exceptional customer reach, industry leading margins and strong net cash position. If things had gone to plan with Tesla, we would hold a similarly positive view for Panasonic, but unfortunately, its partnership with Tesla has failed to significantly boost profits and could now become a serious headache for management. In the long term we believe that its partnership with Toyota will win through, but it is difficult to be confident about the next few years. For the remaining players the concern is ultimately margins. While headwinds from the reduction in government incentives could push out timelines a year or two in the worst case, the industry and sales should grow, but none of the players have demonstrated a clear ability to generate consistently high margins as CATL looms large in the background and the need for heavy investments lies before them we are concerned about the prospect of profitless growth.

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Company Profiles

Panasonic

Company Introduction

Source: Company Disclosures

Panasonic Operates in Four Key Business Segments

Source: Company Disclosures

Panasonic’s Battery Business: Considered A Key Growth Driver for Business Performance

The Japanese multinational electronics corporation started its battery business in 1923 with the launch of a breakthrough product- a cannonball- shaped battery-powered shell lamp for bicycles. Panasonic began development of rechargeable batteries for civil applications during 1935 and eventually started to focus on batteries for EVs in the 1990s, when it began development of the nickel-metal hybrid battery. Since then Panasonic’s EV battery business has been growing, and in 2010 with the support from its

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subsidiary SANYO which it had acquired in 2009, Panasonic started mass- production of Li-ion batteries for HEVs. This battery business of Panasonic is categorised under its Automotive & Industrial Solution (A&IS- commonly referred to as the Automotive business) segment.

The Automotive business segment which accounts for about 35% of total revenue and 22% of consolidated OP as of FY03/18, includes three main business areas: Automotive (38.1% of A&IS sales, 37.4% of A&IS OP), Energy (23.1% of A&IS sales, 13.1% of A&IS OP) and Industrial (38.8% of A&IS sales, 40% of A&IS OP). The automotive area includes automotive infotainment systems and automotive electronic systems. The Energy business (referred to as the battery business interchangeably) includes rechargeable batteries (RB) and energy devices, while the Industrial business segment includes electromechanical controls, Panasonic semiconductor solutions, and electronic materials. The A&IS business has continued to be the key growth driver for Panasonic. This segment is categorised as the high growth business segment where the company expects batteries as well as ADAS to drive sales and OP growth over the medium to long-term.

Batteries Fall under the High Growth Business Category for Panasonic

Source: Company Disclosures

Tesla- the Current Key Customer; Vulnerabilities in Tesla Likely to Pose Short-Term Risks for Panasonic

Panasonic’s Battery Business relies heavily on Tesla Motors as of now. It should be noted that it is the company’s partnership with Tesla that positioned it as one of the largest producers of EV batteries globally. Panasonic leads the global battery market in capacity (around 33% market share globally) with the majority of its capacity (around 60%) being raised for Tesla’s Gigafactory. Further, with Tesla expecting to increase capacity to around 150Gwhs of battery packs via its Gigafactory, Panasonic is likely to further strengthen its position in the global market as long as Tesla’s growth comes through. Having said that, we do note that the company’s high reliance on Tesla poses risks given the continuing vulnerabilities such as production delays and fatal accidents of the latter. Further, Panasonic should expect tough competition over the long term given that the majority of battery leaders are investing heavily in capacity expansion. Given the

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increased reliance and resultant exposure to short-term risks, Panasonic has begun to look out for other customers, which includes the likes of Toyota and Honda, hoping to diversify its customer base over the long-term.

Panasonic Looks to Diversify Its Customer Base; Relationship with Toyota Comes of Use

Panasonic and Toyota have traded with each other since 1953, as Panasonic supplies batteries for Toyota's hybrids and plug-in vehicles. Panasonic announced towards the end of 2017, that it is planning to begin making prismatic lithium-ion batteries at an existing factory in Japan by 2020E, which could have also been with Toyota in mind. We believe that this diversification will give Panasonic some steadiness in earnings, reducing exposure to Tesla’s vulnerabilities. Unlike Tesla, which often faces production delays, Toyota's massive global scale and production volumes, are likely to bring in steady and significant business orf Panasonic over the long term, securing its position in the global market. Moreover, early this year, Toyota and Panasonic reported that they are in discussion to form a JV by 2020E with the aim of mass manufacturing EV batteries with possible benefits from ostc -cutting efforts. This could have possibly been as a result of Tesla joining hands with Chinese local players to source batteries for its factory in China upon the refusal from Panasonic to join hands with them in investing in their Chinese factory. Thus, Panasonic is now focusing on building ties with Toyota, in an attempt to save on investment and related costs and to build a strong and diversified customer base. anasonicP has said it would shift its five battery plants in Japan and China to the newly formed JV company while keeping its US battery plant still dedicated for Tesla alone. This indicates that the company is shifting its focus to the Toyota group while only leaving its previously promised factory for Tesla.

Ties-up With Honda for Developing Innovative Battery Systems

Apart from its strategy for diversification with oT yota, Panasonic also announced mid last year that it has joined hands with Honda Motor to conduct a research experiment in Indonesia on battery sharing using the Honda Mobile Power Pack (which debuted at the CES this year) in electric motorcycles. The two companies expect to use their own experience in the industry to make this experiment a success. The JV will give the companies’ joint control over the Mobile Power Pack, charging stations and IT systems of the two companies. Thus, the company’s long-term growth does seem brighter as a result of forming such strategic alliances beyond Toyota to build an attractive, and steady energy business for the future.

Financial Analysis of the Battery Business

A&IS Segment Drives Overall Company Revenue; However, Earnings from the Segment is on a Downtrend on the Back of Ongoing Expansion Plans

Panasonic as of 3Q FY03/19 reported revenue growth of almost +3% YoY, but a decline in OP by almost 8% YoY. Following the quite weak earnings release, the company revised its full-year target to JPY8,100bn (down by -2%) and OP to JPY385bn (down by -9%), with already 75% of revised revenue target and 76% of revised OP target being met as of 3Q. The A&IS segment contributed

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to the highest growth at 8% YoY during 3Q. However, on OP the A&IS segment ( -3% YoY, OPM 2.5%) witnessed a decline. The A&IS segment despite contributing to high revenue, stands out as the lowest margin segment now. This supports our view of the company’s overall profitability being hurt due to the current position of its energy business.

Panasonic’s A&IS segment profitability is currently impacted by its expansion plans, especially with regard to the ramp-up expenses for automotive battery factories in North America and China. Earnings from the expansions are likely to materialise once the company delivers significant output via the expansions. This requires steady orders from Tesla unless the company starts selling BEV batteries to other automakers, which it is trying to do, with particularly proactive efforts with its JV with Toyota. While the company seems to be in two minds regarding its relationship with Tesla, it is clear that diversification is a priority.

AIS Contributes the Highest Revenue; However, Profitability of the Segment is Relatively Low

Source: Company Disclosures

High Reliance on Tesla a Short-Term Risk; Diversification Strategies Likely to Drive Growth Over Medium-Long Term

Panasonic, being Tesla’s battery partner is directly affected by any downturn in Tesla. This was quite evident when Panasonic experienced a decline in OPM during FY03/17 (to 3.8% from 5.5% in FY03/16) due to the slowdown in Tesla’s Gigafactory ramp-up, while other players in the battery market faced an improvement in OPM that year. Thus, given the fact that Panasonic is highly dependent on Tesla and its Gigafactory ramp-up, it is necessary to see how the earnings would hold up in the event of the downfall of Tesla. That said, while Tesla will have a direct impact on Panasonic’s battery business, we continue to believe that Panasonic’s non-Tesla Battery business will continue to be a key growth driver for the company in the very long-term.

However, we feel that the short-term growth of the company might not be very attractive, having witnessed the recent earnings release. We project the growth level for the company’s battery business expecting Tesla’s

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Gigafactory to have some trouble in achieving targets and the increased expenditure in expansion plans for them to affect earnings of the company over the current and next year at least. Although Tesla’s Model 3 weekly output accelerated in May 2018, to reach 5,000 units, we believe there are significant risks to Tesla’s production volume and would expect on average about 3,500 units and at best about 5,000 units could be produced over the next few years. There is a further downside risk here if the company is unable to rectify its numerous management and governance deficiencies. As such, the battery business is likely to suffer a bit in the short term but should gather some momentum over the medium term as Panasonic becomes successful with its non-Tesla customers. In our opinion, the battery business could recover by FY03/21 E, but its share of total A&IS sales is unlikely to increase drastically, given the current progress of its Battery business. The battery segment could account for around 20% of A&IS sales and around 15% of A&IS OP by 2021E, where Tesla’s share in business is likely to come to less than half the customer base and Non-Tesla business to mainly drive growth. Although, Panasonic’s battery business might not see the strongest growth over the next few years relative to its peers, we do note that the company, which is known to have the best battery technology, despite having a quite narrow customer base, is betting on the strongest of the car and motorcycle manufacturers (Toyota and Honda respectively). Thus, having received support from the US automaker and industry pioneer to become the EV battery leader, the company building ties with the strongest players in the Japanese market should help secure its market position.

LG Chem

Company Introduction

Founded in 1947, Korean-based LG Chem is one of the largest diversified chemical companies in Korea, which operates business in areas such as Petrochemicals, IT & Electronic Materials, Energy Solutions and Life Sciences. The company has managed to emerge as a leader in more than just its battery business.

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LG Chem Operates in Five Key Business Areas

Source: Company Disclosures

Automotive Battery Business- Quite Diversified Capturing a Broad Customer Base

Source: Company Disclosures

LG Chem’s Battery Business: Continuously Focused on Developing the EV Battery Chemistry

The Automotive battery business of LG Chem falls under the Energy Solutions segment of the company (23.1% of total FY18 revenue). LG Chem through this segment provides differentiated solutions in the automotive batteries sector including products such as cell modules, BMS (Battery Management Systems), and battery packs. Doing so, the company has

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managed to secure over 20 Automakers as customers globally, thereby holding a broader customer base as opposed to the battery leader, Panasonic. Some of the notable EVs and HEVs that are equipped with LG Chem’s battery are the Hyundai Sonata, GM Volt and Renault ZOE. PushEVs (a website that writes about EV and EV battery technology) after having conducted an interview with LG Chem’s CFO, stated that the company seems to have a clear roadmap towards developing its battery business. Some of the key takeaways from the interview include the fact the company is currently mass-producing batteries using the NMC (lithium nickel manganese cobalt oxide) 811 cathode material for electric buses, which is a cylindrical battery, and that LG Chem expects to mass produce NCMA batteries (adds alumina to the NMC, bringing the nickel content close to 90% and uses 10% less cobalt) by 2020. It seems that, the company is quite clear about its development path for battery chemistry and is focused on reducing cobalt content to manage raw material risks.

Aiming to Grab Opportunities Created in Europe with the Shift Towards EVs

During 2017, LG Chem reported its plan to build Europe’s largest lithium-ion battery factory in Poland, responding to the region’s shift towards EVs. Traditionally, battery components necessary for European vehicles were being imported from China and South Korea due to the country’s lack of big scale battery cell production plants. As such, LG Chem’s plan to open a battery plant (investing around $1.63bn) in Europe is a clear indicator of the company’s aim to gain first mover advantages. LG Chem expects to produce up to 100,000 EV batteries in Poland annually from 2018 onwards, planning to source raw material during the initial few years from its parent company in Korea and eventually sign deals with Polish suppliers. Although this step by LG Chem might seem that the company is likely to benefit by being a first mover, it should be noted that, the company is in a highly competitive landscape where battery suppliers are fighting to increase capacity and thus LG Chem’s battery plant may not remain the largest battery factory in Europe for long. For instance, Tesla also stated that it is planning to build a Gigafactory in Europe, which if it becomes a reality would take the crown as the largest battery plant in Europe from LG Chem. That said, we do note the fact that Tesla’s Gigafactory in the US is still in process, thus an additional Gigafactory is going to take some time to be built, indicating that LG Chem has quite a bit of time to leverage its position in Europe, by forming strategic alliances with European customers as well as suppliers. Thus, LG Chem’s plan to triple the annual production capacity of this factory to 300,000 units soon, seems quite promising and if goes as planned, means that LG Chem could stand as the largest battery supplier in Europe as well.

Holds Contests to Encourage Start-ups; An Attempt to Tie up with a Start-up to Introduce a Revolutionary Battery Technology

Towards the end of 2018, LG Chem started its first open innovation contest called The Battery Challenge, to motivate start-ups specialising in new battery technologies, which it could use to strengthen its competitiveness in the industry. LG Chem said it would offer more than $1.9m in funding to 8 selected start-up companies from the challengers and the finalists would

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enter into partnership with LG Chem to develop and commercialise the technology jointly. Thus, it seems like LG Chem is spreading its bets between trying to develop a revolutionary battery technology collaboratively while also improving the functionality and cost of the conventional li-ion battery in-house. Furthermore, during the end of 2018, LG Chem announced its investment in Enevate Corporation, a battery start-up which develops silicon-dominant composite anode material, that would enable the EVs to be charged in the same amount of time as gasoline cars. This highlights LG Chem’s openness to utilising technologies developed by start-ups rather than inhouse development.

Financial Analysis of the Battery Business

Energy Solutions Segment Drove Revenue Growth in FY12/18

LG Chem reported strong growth in revenue during FY12/18 by almost +10% YOY supported by the +42.5% YoY growth in Energy Solution’s revenue. However, OP declined by nearly -23% YoY on the back of a decline in the company’s petrochemical segment (-24% YoY). Despite the decline in the overall profitability of the company, it should be noted that the company’s Energy Solutions segment experienced a strong increase in profit, registering an OP almost five times that of FY12/17.The Energy Solutions business segment reached an OPM of 3.2% (compared to the low 0.6% experienced in FY12/17), ranking above the international battery leader, Panasonic (2.5% as 3QFY03/19).

Energy Solution Revenue Could Grow By at least 50% in FY12/19E Alongside Improving Profits

Following the +42.5% YoY segmental revenue growth and the company’s plan to capitalise on the growing EV opportunities in Europe, we believe that this segment could enjoy 50% or more revenue growth over FY12/19E, supported by the company’s target of tripling production capacity in Europe by 2020E. The strong growth in revenue experienced in FY12/18 would only be possible if the company is progressing well in its capacity expansion to satisfy the growing demand in Europe. Moreover, it should be noted that LG Chem has been enjoying accelerated growth in revenue from this segment over the past few years, where revenue from this segment has more than doubled since FY12/15. Thus, expecting the momentum to continue, alongside the fact that it is highly like for LG Chem to increase capacity as planned (supported by the beginning of widespread use of EVs in Europe and the company being a first mover, securing a steady market share in the country), we expect to see some strong growth in Energy Solutions revenue over the next three years. On the back of these strategic plans we expect the Korean battery supplier to reach revenue of around KRW15-17bn by FY12/ 21E, from KRW6.5 bn enjoyed in FY12/18 in this segment.

If LG Chem continues to enjoy the current booming stage of its business cycle (where investments in capacity expansions are materialising, supporting growth in revenue and profits) over the next two years, then the company’s profitability is likely to remain quite stable. That said, LG Chem is

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likely to maintain the margin of this business segment at the current level of 3.2% or optimistically could improve to the mid 3% level over the next three years.

Samsung SDI

Company Introduction

Samsung SDI is a Korean-based manufacturer of secondary battery cells and cutting-edge materials for various industries. Founded in 1970, Samsung SDI hopes to expand its business into a global network by focusing on two key business segments: the Energy Solution Segment (75.8% of total FY18 revenue, commonly known as the Li-ion battery segment) and Electronic Materials Segment (24.1% of total FY18 revenue). The Energy Solution Segment includes the manufacture of Mobile phone batteries, Automobile batteries, and Power storage devices while the Electronic Materials Segment involves the manufacture of Semiconductors and Display materials. The Company distributes its products within the domestic market and to overseas markets including North America, Europe, South America, China, and Southeast Asia. The company’s global footprint includes its production plants located beyond Korea, to include China, Mexico, Hungary, Vietnam, Austria, Russia, the US, Germany, India, Taiwan, Japan, and Malaysia.

Samsung SDI’s Battery Business: EV Batteries Contribute Almost 60% of Company Revenue

The Energy Solution Segment includes batteries of two main types: small sized li-ion batteries (LIBs) (c.59% of FY18 Li-ion battery revenue and c.45% of total FY18 revenue) and large sized LIBs (c.41% of FY18 Li-ion battery revenue and c.31% of total FY18 revenue). Small sized LIBs are those cylindrical, prismatic, and polymer type batteries used in applications such as mobile phones. Large sized LIBs are those Li-ion batteries developed and manufactured for two key purposes: EVs and Energy Storage Systems (ESS). The company expects its large sized LIB segment to be driven by the expected growth in EVs, alongside some steady demand for ESS by domestic firms as well as overseas business, especially from the EU and US. The company’s LIBs are already in equipped in many vehicles including the Fiat 500e (EV), BMW i3 (EV), BMW i8 (PHEV) and in many other electrified models of OEMs as well.

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Samsung SDI Expects EVs to Create the Strongest Demand for Its LIBs Over FY19

Source: Company Disclosures

Samsung Maintains Strong Ties with Luxury Automaker-BMW; BMW’s Recent Tie up with CATL is a Threat

Since 2014, Samsung SDI and BMW have maintained a steady relationship following their MOU (Memorandum of Understanding) agreement to delivery battery cells for BMW vehicles. This relationship some steady business to Samsung SDI until BMW decided to tie up with CATL in 2018 to supply batteries for its next-generation EV iNEXT (to be launched in 2021). This came as a huge blow to Samsung SDI, who had been enjoying the long- term supply contract with BMW. Although this could have an effect on the company’s sales and profits from the luxury automaker, we do believe the company’s long-term relationship with the automaker alongside its technical capacity in the industry should eliminate any likely downfall.

Supply of Cylindrical EV Batteries to JAC Motors- One of China’s Top 10 Automakers

During 2015, Samsung joined hands with JAC, by signing an MOU to supply its high-performance 18650 cylindrical battery (back then Tesla had been the only brand to use 18650 batteries) for JAC’s new electric SUV- which was known to be the first electric SUV in China to have 250 km of driving range. Samsung SDI is known to have built such strong supplier relationships keeping its customers close and continuing to provide them with batteries that meet their requirements. Thus, Samsung SDI, as a stable battery supplier who focuses on serving a wide base of automakers based on a relationship of trust, is a battery leader who is likely to witness stable business over the future years. By tying up with the Chinese Automaker, Samsung SDI not only was able to diversify its customer base but also moved

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into position to compete with battery suppliers in China (CATL and BYD) while also attracting business from other Chinese Auto OEMs that use these types of batteries (ZOTYE and Geely).

Acquisition of Magna International’s Battery Pack Business to Complete Battery System for EVs

Samsung SDI continued its focus on LIBs for EVs during 2015, by acquiring a 100% stake of MSBS (Magna Steyr Battery Systems gmbH), a battery part affiliate company of Magna Steyr. Through this acquisition, the company was able to build up a complete product and service lineup for EV batteries, from cells and modules to battery packs. MSBS, known for its world-class battery pack business, placed SDI in a competitive position in the global EV battery market, and allowed the company to satisfy the growing needs of its diversified customer base.

Samsung SDI's strategic partnership with TSV (Textron Specialized Vehicles Inc.) to Supply LIBs f or Its Golf-Car Brand

The company evolved in 2017 in an attempt to move beyond the traditional auto market, and thereby signed a strategic deal with TSV, a specialised vehicle manufacturer, to supply cylindrical batteries for its new golf car model E-Z-GO, the ELiTE Series. The golf car market has primarily been using lead-acid batteries. Samsung SDI on the other hand, since 2013, had been concentrating efforts on developing Li-ion batteries for golf cars and looking for clients. Samsung SDI’s Li-ion batteries used for these specialised vehicles are said to offer higher energy storage density and twice the lifespan of traditional lead acid batteries. Thus, following its contract for supplying Li-ion batteries for E-Z-GO golf cars, Samsung SDI is looking to expand the market of its Li-ion batteries to other specialised vehicles beyond passenger EVs. That said, if Samsung is successful in doing so, then it is likely to be the one battery supplier that has managed to diversify its battery business strategically both in terms of customers and end market.

Financial Analysis of the Battery Business

Large LIBs Segment Revenue Grew Almost Two-fold in FY12/18

During the recent FY, Li-ion battery revenue grew by almost +61% YoY, being the key contributor to the overall revenue growth of +44.3% YoY. In the LIB segment, the Large LIBs enjoyed the strongest growth, growing almost twice that of FY17. This was on the back of the rising new EV battery sales. Samsung SDI for FY18, expected the xEV LIB demand to grow by +56% YoY, while it managed to outperform the market by about +46%. This was following the previous FY’s success, where Samsung SDI outperformed the market but by only about +20%. It seems that Samsung SDI’s focus on building li-ion batteries for applications beyond just EVs has placed it in a position with some solid technical knowledge to develop the right battery chemistry for EVs, and also grab attention from the Chinese automakers. On the profitability front, the company saw an improvement during FY12/18, reaching a margin of around 4.4% from the losses made in the previous FY.

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Focus on China Could Urge Cost-Efficiency Improving the Segment’s Profitability Over the Medium-to- Long Term

We believe that with the company’s focus on China and given its trend on outperforming the industry as achieved over the past two years, the company may be able to continue its strong growth in revenue and profits over the next few years, unless the Chinese market deteriorates due to the ongoing- trade war causing some volatility in the company’s earnings. That risk aside, optimistically the company may be able to generate revenue growth of about 50-60%, with business from the Chinese players continuing to grow in the long-term despite the current weak patch, and the company’s expanded capacity helping improve per unit costs. Moreover, Samsung SDI’s shift to niche markets like the golf car market is also likely to support growth in earnings over medium term, given that the company has been researching and developing the necessary technology to serve this kind of specialised market since 2013. We believe Samsung SDI might be able to keep margins at the current 4.4% or if cost reduction efforts are followed may improve margin further towards the 5% mark, given that no major capex is expected by the company in the near future.

CATL

Company Introduction

Founded in 2011 and headquartered in Fujian, China, CATL specialises in the R&D, manufacturing and sale of Li-Ion EV battery and energy storage battery systems. According to this report, founder Robin Zeng effectively spun the business out of a company called Amperex Technology, which Zeng had previously founded to makes batteries for consumer gadgets.

CATL quickly established a partnership with Chinese automaker BAIC and, by 2013, began to appear in EV battery reviews alongside the likes of Panasonic, BYD, AESC and LG Chem. The formation of CATL was perfectly timed to coincide with the release of China's 12'th National Five-Year Plan launched in 2011. According to company records, CATL was awarded funding under that plan's New Energy Vehicle Technology Innovation program in 2013. The Company moved quickly and by the end of 2014 had established new branches both domestically (in Beijing and Shanghai) and overseas (Munich, Germany).

In September 2016, CATL made its global debut at the Battery Show North America. A press release issued by the company to mark the occasion summarises the remarkable progress they had achieved in a few short years:

"CATL has seen incredible growth since launching in 2011. We “recorded a shipment of 2.43 gigawatt-hours in 2015, and have plans to as much as triple that this year," said Galyen. "Our upcoming IPO means we are forecasting a 10-fold increase in sales to 50 billion Yuan ($7.5 billion), or even as much as 100 billion Yuan by 2020. The market for electric vehicles is growing, and so is the demand for

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efficient and powerful battery systems. CATL owns the core technology of our battery development, including materials, cells, battery systems and battery recycling. This allows us to bring our innovative products and techniques to market faster, safer and more efficientlyo t compete with the growing demand."

CATL completed major funding round in October 2016 after which the company’s value quadrupled to 80 billion yuan ($11.5 billion) according to CEO Huang Shilin, details here:

CATL has already overtaken LG Chem in lithium-ion car battery output, and is chasing down Panasonic and Warren Buffett-backed BYD Co Ltd. CATL plans to grow its battery capacity six fold by 2020 to 50 gigawatt hours, which could put it ahead of Tesla Motor Inc’s Gigafactory in Nevada. “We continue to walk where the country guides us,” Huang said. “We hope by 2020 we can achieve performance and price that lead the world.”

According to this report, CATL was by then one of three Chinese government nominated EV battery champions and was chasing aggressive cost and performance goals in return for government funding of $15m:

CATL has been nominated as one of three battery makers - with Guoxuan and Lishen - for incentives under China’s 13th Five-Year Plan, promising around $15m if it can meet targets, Yang said. He noted, though, that a single production line costs $40m. Among national 2020 targets: to halve battery costs to below 1 yuan ($0.144) per kilowatt hour, and improve energy density by two-thirds.

By the end of 2016, CATL had risen to become the #3 EV battery manufacturer globally according to this report:

In May 2017, Hyundai selected CATL to supply the batteries for its upcoming range of Sonata plug-in sedans, a move that was widely viewed as a major coup for the company at the time: SEOUL, May 1 (Xinhua) -- Hyundai Motor, South Korea's biggest automaker, has selected Contemporary Amperex Technology Co. Limited (CATL) as its first battery supplier in China to enhance cooperation in new energy vehicles. “We selected CATL as our first Chinese battery partner as Hyundai seeks to diversify its supplier base," a Hyundai official who declined to be identified told Xinhua Monday. The official said AC TL was widely recognized for its competitiveness in the automobile battery market. The Fujian

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Province-based company will provide batteries for Hyundai's plug-in Sonata sedans that are expected to hit the Chinese market in the first half of 2018.

The following month saw another major announcement from CATL, a new partnership with Chinese automotive giant SAIC to manufacture EV batteries:

A ground-breaking ceremony for the new-energy battery project between SAIC Motor Corporation Limited and Contemporary Amperex Technology Co Ltd (CATL) took place in Liyang city, Jiangsu province, on June 19. The project establishes production bases for batteries and battery systems, which are expected to promote the further transformation and upgrading of China’s automobile industry. Occupying 133 hectares, the facilities are designed to produce a total power battery capacity of 36GWh. Costing approximately 10 billion yuan ($1.54 billion) in its first phase and occupying 53 hectares, the bases will start operations by the end of 2018 with a production capacity of 18GWh.

By the end of 2017, CATL had overtaken Panasonic to become the world's largest supplier of EV batteries and in April the following year, the company received approval for an almost $2 billion IPO from the Chinese regulators:

SHANGHAI (Reuters) - China’s securities regulator has approved the 13.1 billion yuan ($1.97 billion) initial public offering of Chinese battery giant Contemporary Amperex Technology Co Ltd (CATL), the official Xinhua news agency said on Thursday.

However, changes in the local IPO regulatory framework along with falling profit xpece tations as a result of changes in government subsidies forced CATL to more than halve its own initial valuation, details here:

Established only seven years ago, CATL. was originally looking to go public with a 10 percent stake that would have valued the company at 20 billion US dollars. However, on Monday, the company announced that while it was going ahead with an IPO in Shenzhen, it was cutting its offered share price to 25.14 yuan, effectively valuing the company at 8.5 billion US dollars.

Nonetheless the IPO was highly successful, being many times oversubscribed and rising 44% by the end of trading on launch day on June 11, 2018, according to this Forbes report:

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CATL’s shares climbed by their 44% exchange-imposed upper limit, ending at 36.2 yuan. Chairman Robin Zeng and vice chairman Huang Shilin own 26% and 12% of the company after the IPO, stakes currently worth $3.2 billion and $1.5 billion. Zeng and Huang made the 2018 Forbes Billionaires List in March with estimated wealth of $1.9 billion and $1.1 billion.

CATL, founded in 2011, supplies batteries to China’s booming electric vehicle market; it also provides energy storage battery systems. Its IPO raised 5.5 billion yuan, or $852m, from the sale of 217m new shares at 25 yuan each to support a Huxi battery production base and research spending. CATL’s revenue and net profit in 2017 were $3.1 billion and $606m, up 34% and 36% from a year earlier.

Around the same time as CATL's IPO, there were also significant announcements regarding partnerships and contracts with German automakers. In May 2018, it was revealed that Daimler had placed an EV battery order with the company:

STUTTGART -- Daimler has awarded a contract for supplying electric car battery cells to China's Contemporary Amperex Technology (CATL). Daimler procurement executive Sabine Angermann announced the contract at a press conference here to discuss sourcing of raw materials for electric car batteries but declined to disclose further details about the volume of the supply contract and whether it goes beyond supplying battery cells for Mercedes-Benz cars built outside of China.

This was followed on June 29, 2018 by an even more significant announcement, that of a contract to supply over $1.16 billion worth of batteries to BMW, as well as a commitment to establish manufacturing facilities in Germany:

BMW has awarded a contract worth just over a billion euros ($1.16 billion) to China's lithium battery maker Contemporary Amperex Technology Ltd (CATL). The deal will allow China's biggest lithium battery maker to build a factory to produce cells for electric cars in Europe, BMW spokesman Glenn Schmidt said.

The following month, further details of the proposed new plant in Germany emerged as its location was confirmed as the state of Thuringia:

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The new factory will have capacity of 14 GWh annually, which is more than the 11.84 GWh that CATL sold in 2017. Full-scale production could suffice for some quarter of a million of long-range electric cars. The investment through 2022 is to be €240m ($281m). It’s expected that besides BMW, CATL will supply batteries for Daimler and Volkswagen. The list of customers in China is much longer:

“Europe is one of CATL’s key regions for its strategic growth. With the “opening of the production facility in Germany, the company underlines the importance of the German market. The decision for Germany fell, among other things, to:

• Proximity to the customer, to understand local market requirements and to respond more quickly to customer needs;

• Offering BMW, Daimler and VW locally produced solutions; and

• European knowledge in battery manufacturing.

The plant in Thuringia is planned as an independent company with production, research and development as well as logistics.”

There was further good news for CATL on the domestic front that same month when the company announced a $419m prepayment from BMW Brilliance to lock in future battery supplies:

SHANGHAI (Reuters) - China’s Contemporary Amperex Technology Ltd (300750.SZ) said on Tuesday it will receive a 2.8 billion yuan ($419.29m) prepayment from a long-term contract to supply batteries to BMW Brilliance, a joint venture between Germany’s BMW (BMWG.DE) and Brilliance China Automotive Holdings (1114.HK). As part of the deal, BMW-Brilliance will buy 815m yuan worth of battery related products, China’s biggest lithium battery maker said. The joint venture will have the right to participate in CATL’s future fundraising plans, it added. CATL floated on the Shenzhen stock exchange last month with the aim of using the proceeds to fund its 24 gigawatt-hour (GWh) capacity expansion.

Exciting as last year was for CATL, 2019 is shaping up to be even more so. The year kicked off with the announcement on Feb 5'th of an agreement to co-operate on battery development with Honda Motors:

TOKYO (Reuters) - Contemporary Amperex Technology Ltd and Honda Motor have signed an agreement to co-operate on jointly developing lithium-ion batteries for electric vehicles, as China’s top

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EV battery maker expands its tie-ups with Japanese automakers. CATL said on Tuesday it had signed a memorandum of understanding with Honda under which it would guarantee supply of lithium-ion EV batteries with storage capacity of around 56 gigawatt hours (GWh) to the automaker by 2027, and set up an office near Honda’s research unit in Tochigi Prefecture, outside Tokyo.

There was also the announcement of further, deeper co-operating with domestic partners BAIC and Pride Power:

Chinese EV battery provider Contemporary Amperex Technology Limited (CATL) announced on February 25 that it has signed a five- year agreement to deepen the cooperation with BAIC BJEV and Beijing Pride Power System Technology Limited (Pride Power). According to the announcement, CATL and Pride Power will provide BAIC BJEV with power battery systems in the next five years.

Later that month, this report claimed that CATL was already considering doubling the size of its production facility in Germany:

BOCHUM — Contemporary Amperex Technology, one of China's largest suppliers of battery cells, is considering expanding its German plant to make it one of the largest in the world, amid higher expected demand for electric vehicles. CATL is openly discussing whether to nearly double the size of its upcoming factory in Erfurt to provide 100 gigawatt hours (GWh) of cell supply. This would dwarf anything currently under discussion in Europe, and potentially in the rest of the world. The EU's target for 2030 to cut CO2 fleet emissions from new cars by 37.5 percent by 2030 compared to 2021 and other factors that prompted automakers to plan for a higher, more aggressive, ramp-up of electric vehicles," said Matthias Zentgraf, President of CATL Europe.

In early March 2019, rumours began to circulate that Tesla Inc. was in talks with CATL:

Tesla is in talks with top Chinese battery producer Contemporary Amperex Technology Co. Ltd. about supplying cells for the Model 3 cars it will assemble at a new factory near Shanghai, people familiar with the matter said. CATL’s stock jumped. CATL has been discussing the required specifications orf the batteries with Tesla officials, the

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people said, asking not to be named because the talks are private. There’s no guarantee that an agreement will be reached, according to the people.

There was also good news in March regarding CATL's financial performance in the prior year. According to preliminary filings with the Shenzhen Stock Exchange, revenues rose by 48% in 2018:

SHENZHEN - China's largest lithium battery producer Contemporary Amperex Technology Co Limited (CATL) posted a 48.1 percent revenue growth in 2018, as a booming new energy vehicle (NEV) market drove up demand for its products. Revenues totalled 29.6 billion yuan ($4.4 billion) last year, CATL said in its preliminary financial results orf 2018 filed to the Shenzhen Stock Exchange Thursday.

On March 20, 2019 CATL announced a breakthrough with the development of a battery cell reaching an energy level of 304 Wh/kg:

FUZHOU -- China's largest lithium battery producer, Contemporary Amperex Technology Co Ltd (CATL), has announced that it has created a lithium-ion sample battery cell with an energy level of 304Wh/kg. CATL batteries are primarily focused on prismatic cell formats using NMC (lithium nickel manganese cobalt oxide) chemistries, which have found massive application in China's booming electric vehicles (EV) market. Energy density, or energy per unit mass, presents a bottleneck for lithium-ion batteries and the EV industry, said Wu Kai, chief scientist with CATL. Wu said the company had developed a high-performance anode cobalt material to improve battery capacity, and managed to extend battery life with a new coating method in the cathode.

Financial Analysis of the Battery Business

Battery Business Acts a Key Earnings Growth Driver For CATL; Top Line Set to Grow Strongly

CATL’s battery business makes up almost 88% of the company’s revenue, contributing almost 90% of the company’s gross profit while also delivering the highest GPM at almost 35%, as of 2017. Thus, the profitability of CATL is driven by its key business segment: Li-ion battery systems. As CATL moves towards achieving its capacity expansion aims while securing strategic deals with global automakers, alongside the steady development of EVs in China, the company is likely to experience strong growth in its top line over the medium to long-term. However, for the immediate financial eary , we believe

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that the company’s aggressive expansion plans together with its aim to cut prices could continue to weaken its profitability, especially in light of the current weak momentum in China.

Expansion Plans and Price Cut Targets Could Pressure Profitability Levels

CATL might be able to manage a 50% reduction in price over the next three years nearing Tesla’s target price and taking an optimistic view, perhaps the company could reduce its price by about 60% by 2020 or 2021. If CATL is able to achieve this, then it is likely to stand out as the lowest cost battery maker. However, our concern is its increasing investment costs for capacity expansions and the price-cut effects on its profits.

While we expect capacity expansion and its strong customer based to support revenue which could grow by about 30% YoY in FY12/18E, we expect the company’s OPM to decline to about 15-16% for FY12/18E (from 18% in FY12/17 and 23% in FY12/16. Having said this, we are also aware that any further decline in profitability is likely to hurt the company’s earnings over the medium term, and indirectly its growth prospects. Nevertheless, the longer-term growth prospects of CATL are what makes it attractive and we believe the company will initially prioritise market share expansion given its relatively high profitability (currently) compared to international peers.

BYD

Company Introduction

Headquartered in Shenzhen, China, BYD was founded in February 1995 by Wang Chuan-Fu and initially focused on the manufacturing of rechargeable batteries. By the year 2000, BYD had become Motorola's first Chinese supplier of Lithium Ion batteries and two years later they landed Nokia as a customer. BYD grew rapidly from its humble origins according to this report:

Wang Chuan-Fu started BYD (the letters are the initials of the company's Chinese name) in 1995 in Shenzhen, China. A chemist and government researcher, Wang raised some $300,000 from relatives, rented about 2,000 square meters of space, and set out to manufacture rechargeable batteries to compete with imports from Sony and Sanyo. By about 2000, BYD had become one of the world's largest manufacturers of cell phone batteries. In 2003, BYD diversified into the automobile business with the purchase of a Chinese state-owned automobile company that had seen better days.BYD launched its first automobile two years later, and it turned out to be a winner:

In October 2005 a BYD sedan called the F3 became the best-selling sedan in China, topping well-known brands like the Volkswagen Jetta and Toyota Corolla

Warren Buffet famously invested in BYD in 2009, purchasing 10% of the company for some $230m:

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In acquiring a stake in BYD, Buffett broke a couple of his own rules. “"I don't know a thing about cell phones or batteries," he admits. "And I don't know how cars work." But, he adds, "Charlie Munger and Dave Sokol are smart guys, and they do understand it. And there's no question that what's been accomplished since 1995 at BYD is extraordinary."

In December 2008, BYD launched the world's first Plug-In Hybrid automobile, the F3DM:

The F3DM was a commercial failure, selling only 48 units in its first year and a total of just 3.248 units before it was discontinued in 2013. That same year, BYD launched its second-generation hybrid plug-in, the Qin Sedan which went on to lead NEV sales in China for 20 consecutive months putting it in the top three bestselling hybrids NEVs worldwide at the time.

In August 2015, BYD won a contract to supply electric buses in London, details here:

The new deal, worth £19m, includes a full on-site repair and maintenance program for the term of the contract and combines the strengths of ADL’s Enviro200 12m single deck (with 18,000 units sold worldwide) and BYD ’s own design of Iron-Phosphate Battery technology and drivetrain system. The latter has been proven to deliver outstanding range and reliability in multiple international markets, covering millions of kilometres of passenger-carrying service.

The decision by the two manufacturers to collaborate on this first fleet is a significant step. It brings together the proven, safe and long-range capabilities of BYD’s pure electric buses (the company has 3,500 in service worldwide) with the outstanding and high-quality vehicle design and UK build the capability of ADL. The resulting vehicles, capable of carrying up to 90 passengers, will offer Londoners some of the most advanced zero emission buses in the world and provide opportunities for the two partner bus builders to work together in the future for the benefit of other bus operators, their passengers, and the wider community.

Some months later, BYD made headlines again when the London Bus contracts were drastically increased to the value £660m contract and expanded to include double-decker buses:

Three years later, the initial fleet of 5 double-decker buses was deemed successful, clearing the way for a further thirty-seven buses, now due to enter service in the second quarter of 2019, details here:

In October 2015 BYD supplied Metroline with five Chinese-built double deckers – the first in the world. These pilot vehicles have performed well on TfL’s Route 98 which spans the length of Oxford Street. They are estimated to have clocked up over 100,000 miles of trouble-free service, saving 140 tonnes of harmful emissions.

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The winning team of BYD and Alexander Dennis Limited (ADL) has scooped the largest part of London’s first order for fully electric double deckers. Thirty-seven BYD ADL Enviro400EV buses will enter service with Transport for London (TfL) operator Metroline in the second quarter of 2019.

Using the proven combination of BYD electric technology and batteries and stylish bodywork and passenger-centric interior by ADL, the UK’s double deck market leader, the BYD ADL Enviro400EV is a brand-new concept, designed at ADL’s facility in Scotland and BYD’s R&D Centre in Shenzhen, China. The finished buses will be assembled in Britain by ADL as are all BYD ADL joint products.

Meanwhile, BYD launched its first all-electric automobile, the Qin EV300, with a range of 300km in March 2016:

On March 31, 2016, BYD Company Ltd. launched two new Pure Electric Sedans to boost its already broad range of EVs, and provide consumers with even more options to suit their needs: the Qin EV300, coming in four versions with prices ranging from 259,800 to 309,800 Chinese Yuan; and the e5, coming in three versions with prices ranging from 229,800 to 249,800 Chinese Yuan. The company based the recent rollouts on a thorough assessment of what EV potential users value the most, and after finding out that range anxiety is still a major factor in purchase decisions, it provided both models with a 300km driving range, although a potential customer, upon testing the Qin EV300, managed to drive 349.5 km on a single charge.

While the London bus contract was a significant win for BYD, the company was enjoying success on a far larger scale closer to home in its Shenzhen headquarters. A government-sponsored initiative to replace the city's entire bus fleet with electric models was accomplished by the end of 2017. All told, some 13,000 buses were replaced with BYD supplying around 80% of them, details here:

In China’s accelerated drive to replace petrol-engined cars with battery-powered vehicles, Shenzhen has secured not just a front seat in the mainland, but also a world’s first as the only city with an entire bus fleet that runs on electricity. At the end of 2017, the city operated more than 16,000 electric buses and by the end of this year, all 13,000 taxis would be electric vehicles (EV). Shenzhen’s claim to fame is a result of heavy Chinese government policy and funding support –namely subsidies to public transport companies. Its success bodes well for Beijing’s “Made in China 2025” industrial strategy in which new-energy vehicles and EVs – passenger cars, SUVs and commercial vehicles – are a key area of focus, with the ambition to produce 3m cars by 2025 among other targets.

Shenzhen's electrification of its public transport infrastructure didn't stop with its buses, it was extended to cover its entire taxi fleet. This feat was accomplished by the end of 2018 according to this report, with BYD again supplying the lion's share of the vehicles:

The city of Shenzhen, China announced nearly 95% of the city’s taxi cabs run on electric batteries, according to a report in TechCrunch, citing the city's Transportation Commission website. More than 21,000 of the city’s taxis are battery-powered, with another 1,350 waiting to be put into operation once they

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are charged. Shenzhen, which hosts the headquarters of electric car company BYD, was one of China’s 13 electric vehicles pilot cities and has been promoting electric cars since 2010. The city also boasts an electric bus fleet. The use of the battery-powered taxis is estimated to cut 856,000 metric tons of carbon emissions per year.

In March 2018, it was reported that BYD was mulling plans to spin out its battery unit as a separate entity with a view to an IPO by 2022:

“BYD intends to spin off its battery and photovoltaic unit and further promote the separated unit to be listed on a stock exchange, aiming to rival with CATL and trying to seize the to-be-lost strategic opportunities in battery industry. Currently, BYD had contacted with Great Wall Motor, BAIC and GAC in terms of power battery area.”

“Once BYD successfully spins off its battery unit and enable it be listed on a stock exchange, it is considered that BYD will commence a new business with a total market value of RMB 100 billion. Moreover, the battery business will help improve BYD’s valuation.”

Some months later, in June 2018, BYD announced the opening of a new battery "Gigafactory" in the western province of Qinghai:

BYD, China’s largest EV manufacturer, is seeing demand for its electric vehicles increase and wants to secure more battery supply to respond to the demand. The automaker is now opening a new battery factory and it claims the plant will be the “largest in the world.” The factory is located in the western province of Qinghai and while it was “opened” this week, it is still under construction and BYD aims to complete it by the end of next year. With a capacity of 24 GWh, this new battery factory should enable them to significantly increase production with a total battery production capacity of 60 GWh.

In January 2019, BYD announced that they had achieved a significant

milestone with the delivery of their 50,000th electric bus:

On January 18, new energy technology company BYD proudly announced the production of its 50,000th pure electric bus, nine years since production began. BYD boasts the world's largest selection of battery electric buses, and a clientele that spans across 300 cities around the world. In 2010, in order to ease environmental pollution, BYD proposed its “Public Transportation

Electrification” strategy. With Shenzhen's hosting of the 26th Summer Universiade in 2011 came a turning point, as 200 BYD K9 pure electric buses entered operations in the city. That event saw BYD become the world's first company to commercialize new energy buses.

Today, BYD pure electric buses have not only become commonplace in major Chinese cities like Beijing, Guangzhou, Shenzhen, Tianjin, Hangzhou, Nanjing, Changsha and Xian, but also spread to other medium- to small- sized cities in the country. In addition, BYD has also gradually grown its international customer base for pure electric buses since the first batch of 35 electric buses was exported to Amsterdam Schiphol airport in 2013. These include Transport for London, Los Angeles Public Transport Co., Sydney Airport, Stanford University and Facebook.

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The following month, BYD announced it was opening yet another battery factory, this time in Chongqing:

BYD wants to support its ambitious electric vehicle plans in China with a new battery Gigafactory that will be able to produce 20 GWh of battery cells for its electric vehicles. The Chinese electric vehicle company is investing 10 billion yuan (~$1.49 billion USD) in the facility located in southwest China’s Chongqing Municipality. They announced that have broken ground on the new factory last week and they plan to be done within a year.

“With an investment of 10 billion yuan (about 1.49 billion U. S. dollars), “the power battery factory under construction will have an annual output capacity of 20 gigawatt hours (GWh) and will become a major battery production base for new energy vehicles in the country.”

At an output 20 GWh, it would make BYD’s new factory one of the largest battery factories in the world.

Financial Analysis of the Battery Business

Internal Demand is its Main Customer, External Customers Support Further Growth; However, Unfavourable Macro Economic Conditions are hurting Profitability

During 1H FY12/18 (latest results released), BYD’s total revenue grew by +19.0% YoY, while the Automobile segment and the Battery and Other Parts segment both grew at a higher rate at nearly +25% and +22% YoY supporting the overall growth in revenue. However, the company’s profitability continued to decline by -14.6% YoY due to a decline in its Auto segment (by nearly -43%) and Battery segment (-11% YOY). It should be noted that the company’s overall revenue and profitability are highly influenced by the performance of these two business segments. For instance, the company’s shift in focus to produce new energy vehicles and build EV batteries in 2015, resulted in a 40.2% YoY increase in revenue during that year. Since then, the company’s focus on EV’s has helped BYD enjoy strong growth in revenue and profitability. However, in 2017, the cut in subsidies in China and the slow sales of petrol vehicles resulted in BYD experiencing slow sales growth and a decline in profitability. Profitability for the company has been declining since then hurting the company’s overall profitability level.

Further, these two key segments drive the performance of the company’s battery business. According to the company, if a battery is used in their automobiles then sales and profits generated by the battery are included in the Automobiles Segment (54% of total revenue as of 1H FY18) and if the battery is sold to an external automaker/customer, then the relevant earnings are recorded in the Battery and Other Products Segment (8% of total revenue). Although we are unable to arrive at the exact margin the battery business delivers, having looked at the Battery and Other Products segment for external market, it is evident that this segment makes the highest margin (although it has been declining since 2017), indicating that the battery business (both internal and external) is a key driver of the

Aqila Ali 88 Battery Technology- The Key To An Electric Vehicle Future

company’s overall profitability. In our opinion, if the company is unable to rise above the cut in subsidies effect, then its profitability is likely to be hurt over the medium term, considering the fact the company needs to be competitive in its pricing as well.

We expect marginal revenue growth in the Auto segment for FY12/18 and this raises the question of whether being vertically integrated will be a strategic advantage given that the company itself is a major customer for their own battery products. (BYD is one of the leading Chinese automakers). Given the frequent conflicts of interest between divisions when such a relationship exists, it is possible that in an environment that is getting harsher due to the withdrawal of subsidies could lead to poor outcomes and/ or the stronger division being used to prop up the weaker one. We expect the profitability of the battery segment and the company to remain under pressure, given the cost competitive environment, BYD operates in, alongside its stated plans to increase capacity through 2023, in the face of market headwinds.

Disclosure & Certification

• I/We have no position(s) in the any of securities referenced in this insight

• Views expressed in this insight accurately reflects my/our personal opinion(s) about the referenced securities and issuers and/or other subject matter as appropriate.

• This insight does not contain and is not based on any non-public, material information.

• To the best of my/our knowledge, the views expressed in this insight comply with Singapore law as well as applicable law in the country from which it is posted

• I/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced therein

• I/We have signed the Insight Provider Agreement and this insight does not violate any of the terms specified therein.

— Aqila Ali (04 Apr 2019)

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