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How China's Car Batteries Conquered the World

How China's Car Batteries Conquered the World

Friday, 3 December, 2021 - 05:30

When General Motors Co.’s $27 billion EV program went up in flames in August, it also singed EV enthusiasts’ high hopes for a new generation of long-lasting batteries that could take cars farther while keeping costs low. The storied American car company was forced to recall the 140,000 electric Chevy Bolts made since 2017. Turns out that the car’s expensive nickel-cobalt-manganese batteries, which promised a range of more than 250 miles and greater energy density, carried the risk of catching fire. The company has since said it’s found a fix, with the recall’s $1.8 billion cost to be mostly covered by the battery’s maker, South Korea’s LG Chem Ltd.

You can’t blame GM for trying. Driven by a blinding urge to be market leaders as they invest billions of dollars to meet tough emissions regulations, GM and many of its peers have found themselves backing unproven technologies. Countries, in turn, are caught in an arms race to lead the world’s electric future.

Yet there is one hopeful outlier: China. As the world’s biggest source of new carbon emissions, the country has taken deliberate and difficult steps to push toward electrification. In doing so, China is showing how an older, stable battery technology — paired with effective industrial policy — could be the way forward.

To be sure, the history of Beijing’s industrial policy is checkered. Decades of misguided and unfocused cash-slinging by state-owned enterprises pushed industries as varied as rubber, cotton and chemicals into overcapacity, as the country tried to be the biggest manufacturer and exporter of all goods.

In contrast, China’s relentless fine-tuning of its electric vehicle and battery policy blueprint has put in place smart incentives and penalties, helping companies to navigate complicated technologies and make efficient batteries that can be safely deployed. It built a deeply integrated supply chain for electric-car parts, with a focus on cornering the production of batteries and cutting costs, well before the rest of the world. Beijing has also incentivized consumers to go electric, creating demand alongside supply.

Now, global carmakers including the likes of Tesla Inc. are using a technology that China’s biggest battery manufacturers have on offer: a refined version of the decades-old lithium iron phosphate, or LFP-based, powertrains that will propel hundreds of thousands — and eventually millions — of electric cars, including those from Volkswagen AG and Hyundai Motor Co.

Whether this approach will lead to a technological revolution for electric vehicles born in China is still hard to say. Beijing’s blueprint wasn’t explicitly mapped out years ago; there were no definite targets or distinct paths to follow. Instead, its industrial policies governing EVs and the batteries that power them have been more trial and error. But unlike with past endeavors, the successes have outweighed the failures and put China in pole position.

Beijing didn’t take on the cutting-edge technology of batteries. Instead, it focused on an iterative approach to solving the Rubik’s Cube-like puzzle that has bedeviled battery makers: Make a battery safer and it won’t take your car as far; give a battery more range by making it more energy-dense and it becomes more combustible.

Technocrats were quick to realize that chemistry mattered. The forefront of lithium-ion battery technology, where the South Koreans led the way, included nickel, cobalt and manganese in varying proportions. But these batteries were less safe, prone to combusting more quickly and burning hotter. In addition, materials such as cobalt were expensive and difficult to procure, making them unsustainable in the long run. The other, older formulation was lithium, iron and phosphate. These batteries were bulky and large but safe.

More than a decade ago, analysts forecast the demise of LFP batteries. They may have been cheaper and safer than other alternatives, but they were big, low-voltage and couldn’t meet consumers’ hunger for greater range. Nickel, cobalt and manganese batteries would theoretically solve these problems. Manufacturers strove to increase the nickel content to achieve greater distance and density. Their enthusiasm prompted rosy predictions that by 2018, over three-quarters of battery demand would be for the NCM type.

That didn’t happen. Instead, the chemistry and efforts to bring down costs have proven challenging. Expensive, more energy-dense, nickel-rich power packs have been catching on fire from overcharging, overuse or while being parked.

Yet large manufacturers have been reluctant to acknowledge that the technology just isn’t there yet. Desperate to get ahead and find the next-best way to power cars of the future, global firms have forged ahead without fully assessing how they could channel their money, research and development, especially how different materials and processes could improve batteries. For their part, national policy makers have pushed regulation, but they haven’t focused as much on the need for hefty targeted subsidies to jump-start the industry.

China’s initial foray into electric vehicles was marked by its own form of desperation: The country’s quest to build out automobile manufacturing and other heavy industries had spawned a huge pollution problem without many good cars to show for it. Shortly after becoming the world’s largest car market in 2009, Beijing began pushing aggressive programs to cut emissions. Local mayors hunted down older, dirtier vehicles and removed them.

Leading this effort was Wan Gang, a former Audi engineer and non-Communist Party member appointed China’s minister of science and technology in 2007 by Premier Wen Jiabao. Now known as China’s father of electric cars, Wan pushed engineers to take on such challenges as building a fleet of electric buses for the 2008 Summer Olympics in Beijing. In 2012, China’s State Council designated the sector as a key strategic industry. In some cities, including Hangzhou, home to tech giant Alibaba Group Holding Ltd., consumers could receive as much as $20,000 to buy battery-powered cars.

By 2015, however, real progress was stalling. The industry was churning out subpar batteries and electric vehicles that could only go a few hundred kilometers at best. Subsidy fraud was rampant: By 2016, China’s state planners had spent at least 12.6 billion yuan (about $2 billion in today’s dollars on subsidies for new energy vehicles, with billions more in matching funding from city and provincial governments. Battery makers were trying to climb the technology ladder, but in so doing, their margins were shrinking as raw materials and new technology became more expensive. Getting consumers to pay for these vehicles was even tougher.

State planners took to using carrot-and-stick regulation. Battery subsidies were targeted to boost the range of electric vehicles and cull low-quality ones. Every year, regulators got tougher. The market took a hit. But battery firms and their auto-making clients began looking harder for ways to improve their existing LFP batteries, playing with either the material of the battery to boost the energy density of power packs or with the architecture of the battery to make it lighter.

It’s not as if Chinese manufacturers weren’t making progress with other chemistries; they were among the first to introduce advanced NCM technologies at home. But this variety commanded a far higher price relative to their raw materials, according to a McKinsey & Co. analysis. The almost 80% premium was attributed to higher production costs, as the batteries require highly controlled manufacturing conditions.

Despite some success with the NCM type, which was rapidly accounting for more batteries in passenger cars, firms started focusing on other technologies they had on hand for which they could bring down the premium over raw materials. Companies such as China’s Yutong Bus Co. Ltd., which makes electric buses for the home market and exports them across Europe, were having luck with LFP batteries, so other firms turned to making these more usable in smaller vehicles. Led by Contemporary Amperex Technology Co. Ltd., or CATL, the largest manufacturer of batteries in the world, and the Warren Buffett-backed BYD Co. Ltd., manufacturers were able to drive down costs by around 20% using LFP technology.

The LFP batteries also had a critical safety advantage: If one of their cells failed, it generated far less heat than an NCM battery. The lithium iron phosphate variety will only smoke without actually catching fire in most thermal runaway scenarios (when the temperature within a cell starts accelerating) because they’re more stable.

In March 2020, BYD introduced its Blade battery. Its slim cells are packed together to make it thinner and lighter. The energy density of these is around 140 watt-hour per kilogram, compared with 100 watt-hour per kilogram for older LFPs and more than 200 watt-hour kilograms for nickel-rich packs.

At the time, safety was also top of mind. BYD said carmakers were competing for “ever-greater cruising range,” noting that this “unpractical focus on energy density” meant “safety has been sidelined from power battery development.” The Blade, the company boasted, passed “extreme test conditions, such as being crushed, bent, being heated in a furnace to 300°C and overcharged by 260%,” without resulting in “a fire or explosion.” CATL has focused its efforts on safety, too, working with aviation-grade materials, developing high-stability batteries that are more resistant to short circuits.

As forward-looking as BYD and CATL’s endeavors were, Beijing’s policy direction gave them a strong steer, too. In 2016, China had revised subsidy rules on safety grounds, effectively penalizing South Korean makers of NCM batteries such as Samsung SDI Co. and LG Chem. Between 2018 and 2020, NCM and LFP batteries accounted for approximately 60% and 11% of lithium-ion-based electric vehicles’ total safety accidents, respectively.

Over this period, battery technology improved as detailed policy requirements were put in place. Manufacturers managed to boost the range of Chinese EVs by almost 60%, with some models going as far as 370 miles on one charge. In 2019, the government did away with subsidies for vehicles that couldn’t travel more than 90 miles. This year, for the first time since 2019, the market share of LFP batteries outpaced that of the NCM type, according to Bloomberg New Energy Finance. Tesla’s Model 3 in most parts of the world will house LFP batteries, too. Other carmakers are following suit.

To be sure, Beijing’s regulatory interventions haven’t always been welcomed. As analysts from UBS Group AG noted, “carmakers, especially global ones, often view them as unpredictable and at short notice for them to make long-term plans, even though the policy tweaks make sense from an engineering angle.” Still, this approach has kept the country and its manufacturers disciplined and ahead of their peers.

Beijing’s policies have enabled a supply chain around this industry, too. According to UBS, the country now accounts for up to 85% of the global market for anodes, cathodes, separators and electrolytes; together, these four components account for around 60% of a battery cell’s cost. That grip on the global battery supply chain — so early in the game — has set China apart and will also allow manufacturers operating there to bring down their costs. Tesla, for instance, was able to cut the purchase price of its cars by over 30% by operating in China.

Elsewhere in the world, policy makers have focused their subsidies mostly on drivers, without getting into the details of encouraging manufacturers to address consumers’ anxieties. They pressure carmakers through regulatory deadlines for emissions compliance, with few financial incentives. But they aren’t prioritizing key issues such as safety and battery standards, leaving it to free-market innovation to solve these problems.

Consider what’s happened across Europe. Purchase incentives have built momentum for the region’s effort to become the largest EV market. But only in 2019 did the European Union’s executive commission approve €3.2 billion of state aid to support research and development, followed by €2.9 ($3.3 billion) earlier this year. Some funds come with conditions: If a project generates revenues beyond original projections, the companies must return part of the taxpayer money to the European member state that provided it. These amounts fall short of the billions needed to boost adoption. In addition, such policies fail to incentivize manufacturers, incumbents and startups trying to develop technologies to make electric vehicles a reality. They focus on the amount of capital instead of the type of technology or project they are funding.

Such an approach also ignores the vast supply chain and manufacturing facilities needed to create scale. Just having the technology won’t be enough; companies need the parts to bring it to life. Countries such as the US and South Korea are vying to build their own battery supply chains, a process that will take years. But car companies that are intent on winning the EV race can’t afford to wait. Toyota Motor Corp., long a skeptic of automakers’ ability to go fully electric, recently announced a $13.7 billion investment in batteries. It isn’t going it alone, having previously made commitments to CATL and Panasonic Corp. Facing pressure from environmental activists, Volkswagen’s top boss said in September that it would be “impossible” to accelerate his company’s transition to electric vehicles, noting that the shift is “so complicated” and citing such constraints as building up capacity for battery cells and plants. BMW AG is boosting orders for battery cells to more than €20 billion ($22.6 billion).

Global battery makers haven’t been able to keep up. Some remain in the startup phase, looking for the next-best technology. Others, including the South Korean and Japanese, that initially had a technological lead haven’t been able to ramp up cost-effectively. Many have become highly dependent on the Chinese battery supply chain and are now leaning on LFPs. Disappointed investors and stakeholders with a more realistic assessment of the market will inevitably turn to China, unless North American supply-chain development accelerates in a more streamlined way.

While China isn’t a technology trailblazer and has yet to come up with the world’s best electric vehicle, or even a brand with international recognition, it has made steady progress. Notwithstanding Western fears of forced technology transfer, and the ham-handedness of China’s government and its struggles with innovation, Beijing’s quest to dominate electric vehicles and its commitment to large-scale industrial manufacturing will keep it ahead over the next decade. Moreover, despite the statist impulses of policy planners to control economic activity, they are now willing to work hand in hand with private industrial champions to make the world’s best EV batteries.

Meanwhile, the battery beat goes on. Last year, China’s ministry of industry and information technology set safety standards for used power packs. This year, it moved on to regulating the recycling of batteries. As the number of power packs rise, an estimated 420,000 tons will need to be recycled in 2022 — a reality that many outside China still aren’t thinking about. Once again, advantage: Beijing.


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