Vertical integration and specialization of electric vehicle battery firms in China

Type de publication:

Conference Paper

Auteurs:

Wang, Xieshu

Source:

Gerpisa colloquium (2020)

Mots-clés:

China, Electric Vehicle, Industrial Policy, lithium-ion battery, value chain, Vertical integration

Résumé:

(Submission for the Young Author Prize)

More than a decade ago, China has defined the new energy vehicle industry as one of its key strategic development domains, based the future challenges of resource, energy, environment, industrial transition and urbanization. Within a relatively short period of time, China has succeeded in building a rather complete and fast growing domestic industry of electric vehicle (EV). With its domestic market accounting for about half of the global EV sales for the past three consecutive years, China is now leading the trend of electrification and mobility transformation.

Power battery is the key component of an EV and largely determines its performance and characteristics. Although Japanese and South Korean firms are initial leaders in the sector of lithium-ion battery, Chinese firms have been catching up very fast, supported by the Chinese government and the booming domestic EV market. While the subsidy scaling down in China has produced a negative impact on the EV sales in 2019, installed lithium-ion battery capacity still reached 62.2 GWh, representing a 9.2% increase compared to 2018. According to the newly adjusted target proposed by China’s Ministry of Industry and Information Technology in December 2019, by 2025 the NEVs will contribute to about 25% of annual vehicle sales in China, equivalent to about 8.75 million units, compared to only 1.2 million units in 2019. The strong growth plan is motivating many battery firms, both Chinese and foreign ones, to increase their production capacity for winning the future market, which however also led to overcapacity in recent years according to the Global EV Outlook 2019 by IEA.

In the meantime, the ecosystem and market conditions keep evolving. With the increasing subsidy cut and shrinking profit margin, OEMs are also requiring for lower battery price. The first wave of consolidation in the battery sector is already underway. The number of operative battery manufacturing firms in China reduced from around 240 in 2015 to 69 by the end of 2019, which will continue to decrease ahead. As the protectionist policy previously adopted by the Chinese government changed and the entry barrier were lifted, another big challenge for Chinese battery firms is the strong competition from foreign battery firms, which still have comparative advantages in the core technologies and quality management.

Facing this critical phase of opportunities and challenges, Chinese battery firms have to leverage their comparative advantages to build stronger competitiveness. Leading battery manufacturing and battery material firms have made a series of strategic investments to create new advantages, acquiring new resources and competences, in order to realize deeper integration of the battery value chain, forming several key industrial clusters in China.

In this paper, we will look at the recent development of the EV lithium-ion battery industry in China, the rationales of its fast growth, and what are the principle strategic decisions made by major Chinese firms in the battery value chain, to strengthen their comparative advantages and to consolidate local market. We will demonstrate that their development goes both upstream in the purpose of securing raw material supply and mitigating the risk of market volatility, and downstream towards higher value-added products and services, aiming at the vertical integration. In parallel, new business models are created and strategic alliances with OEMs are established to build a full lifecycle of material-battery-energy-recycling. We can also observe an increasing coexistence of cooperation and competition with Japanese and South Korean battery firms. Overall, Chinese battery firms have largely chosen to focus on the battery sector specialization, following the logic of Resource-Based Theory, rather than cross-sectoral development into vehicle manufacturing.

We also argue that this market opening up along with the subsidy decline, shows a typical Chinese way of industrial policy evolution aimed at producing strong local competitiveness and national champions. In China, the industry policy usually makes gradual adaptations throughout different development stages. After the first phase of protecting a nascent industry, when there is a sufficient number of established domestic players with a potential risk of overcapacity, policies will change to focus on stimulating core technology innovation and inducing consolidation among firms. Under this mechanism, firms that offer the best performance, have better innovation capacity and show higher competitiveness can achieve larger economies of scale and strengthen their position by continuing the specialized vertical integration.

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