The heart of electric vehicles: Asia dominates battery production despite lagging full car production

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

As electric vehicle (EV) makers ramp up supply?to?feed the growing demand, the most important component determining car performance is the battery.??Even though Asia's production of EVs has been slower than global peers, this is not the case for batteries. In the fourth report of our EV series, we analyze the heart of EVs – car batteries.

Batteries are crucial for EV production as it accounts for 40% of total cost. Lithium-ion is the mainstream type and is dominated by Asian firms. As of September 2021, China has a global market share of 44%, followed by South Korea (35%) and Japan (16%). Among all, Chinese battery maker Contemporary Amperex Technology Ltd (CATL) is the leader with a market share of 31%. Despite fast domestic growth in China, the share of overseas revenue within CATL has surged from 5% in 2019 to 30% in H1 2021, showing the sales potential beyond China.

The leading role of China comes with challenges from South Korea. LG Chem is the second largest battery maker with a global market share of 25%. In non-China market, LG Chem captures 36% of sales versus 10% by CATL. The profitability of LG Chem has also matched that of CATL, showing why South Korea is a strong competitor in car batteries.

Conversely, Japan seems to be falling behind in market share. For value added, though, Japan dominates high-end batteries while South Korea and China are in the medium to low space. Panasonic has a strong relationship with Tesla in providing the best performing battery in town, but its role is partially replaced by LG Chem and CATL. The main reason is Tesla has opted for more cost-efficient type of batteries for its affordable and mainstream car models.?In other words, the relative need for premium batteries falls. If such trend is replicated for other car makers, Japanese battery manufacturers may suffer.

In any event, innovation remains a key factor to determine evolution of the EV battery market. The composition and shape of lithium-ion batteries from car makers remain the decisive factors with challenges also from new technologies, which may outdate old forms of batteries.

To avoid concentration and geopolitical risks, EV makers and battery manufacturers will diversify their supply chain and customer base. With the ongoing supply chain disruptions, car makers may even consider securing raw materials and producing batteries themselves. As in semiconductors, the EV battery market carries the risk of balkanization.

Going forward, China is likely to dominate car battery production from both corporate and locational perspective given the heavy investment and capacity growth, but it depends on the demand from EV makers. As car battery is at the heart of EVs, it may become?the next point of geopolitical conflict and strategic competition beyond semiconductors.

Full report is available for Natixis clients.