China firmly holds the key to the components for producing EV batteries

This is the?fifth?of a series of reports on the electric vehicle industry in Asia and its regional and global implications.

While?Asia dominates car battery production, China takes a step further and holds the key to the important components. In the fifth note of the Asia Electric Vehicle (EV) series, we analyze how China dominates the supply chain in EV battery components.

Most EV battery components are currently produced by the three Asian battery powerhouses (China, South Korea and Japan). However, China’s leading role in the underneath components is more obvious than EV battery supply. The competition between China and Japan was neck to neck for some years, but the gap has widened in China’s favor since 2014. China’s market share of EV battery components surged from 43% in 2014 to 60% in 2020. That said, China’s dominance in this market is even higher than that of batteries with 44% market share.

China’s dominance in EV battery and its key components is related to the trend and structure of EV demand.?Before 2020, China has stronger demand of battery electric vehicles (BEV) than the world?and this has sprung up domestic battery makers, such as CATL and BYD. In contrast, Europe has opted for plug-in hybrid electric vehicle (PHEV), which can be catered by less powerful batteries.

Industrial policy was also used heavily through subsidies directed only to local players to develop the industry. Based on the “regulations on the standards of automotive power battery industry”, the Chinese government created a whitelist in effect from March 2015 to June 2019. Being on the list paved an easier way for government’s subsidies to qualified domestic battery makers and left all foreign firms out of the game. Without a doubt, the policy has also helped upstream makers of EV battery components, who are supported by domestic orders to expand capacity and achieve economies of scale.

Notwithstanding the loss in market share, Japan remains competitive in innovation as it filed 41% of International Patent Families in battery technology from 2000 to 2018 according to the European Patent Office. Still, the limited domestic EV demand is a drag for Japan versus China.

Although China may be leading in EV battery making and the related components, challenges still exist in securing supply of new materials, such as lithium, cobalt and nickel. In Asia Pacific, Australia can be the winner with large reserves to feed such demand, even though the main supply may come from other countries, such as Chile and Congo.?A detailed forecast of demand can be seen in our commodities report.

All in all, China seems to be dominating the production of EV batteries, especially related components. Given the importance of EVs in the future, they could become another bottleneck in the global supply chain, feeding geopolitical tensions. In other words, the EV sector could soon look similar to that of semiconductors.

?Full report is available for Natixis clients.