China is kicking America's ass in the EV battery race and it's going to define the 21st century
In recent years, the relationship between the US and China — the world's economic superpowers — has devolved into an unwieldy tug-of-war between economic interdependence and deep-seated distrust. On one hand, diplomats are trying furiously to maintain a stable world and keep money flowing between the two countries. But at the same time, one of the relationship's most salient features is that it is a contest for control over the technology that will define the 21st century.
In the latter battle there is one area where the US has fallen woefully behind: batteries. China's state-supported enterprises — let's call them China Inc. — dominate in every aspect of the development of batteries for electric vehicles, from the mining and refining of raw materials to the manufacture of the batteries themselves.
"The danger is that we won't have a domestic battery sector and we will totally in perpetuity rely on China to build cells for us," Tu Le, the founder of the consultancy Sino Auto Insights, told me. And without cheap batteries to power fleets of cheap electric vehicles, he argued, companies like GM and Ford "run the risk of becoming regional players and losing their international status."
Until US automakers can source batteries domestically, or from friendly nations, they will depend on maintaining good relations with Beijing. It is an increasingly fraught partnership, even setting geopolitics aside. For the past 40 years China needed foreign automakers to help develop its own car industry through joint ventures. But as China's domestic electric-vehicle market takes off, the tables have turned. Beijing is boosting its homegrown products, and foreign automakers — which already need China Inc.'s batteries to build more EVs — are losing market share.
The winner of the battery war will not only control the electric-vehicle market but also produce thousands of jobs, control the future of mobility, and dictate the West's ability to transition to greener forms of energy.
Beijing's battery plan
China has been working to dominate the battery space since at least 2015, when the leadership of the Chinese Communist Party crafted the National Key Research and Development Program New Energy Vehicle Key Special Implementation Plan. Despite its long, formal-sounding name, the document sets out a clear goal: to corner the market for key materials like lithium, cobalt, and nickel; invest in their extraction; and build factories for battery manufacturing.
The plan starts at the most basic level of battery production: raw materials like cobalt, lithium, manganese, and nickel. Most of these minerals lie outside China — in countries such as Chile, Australia, Bolivia, and the Democratic Republic of Congo. But China Inc. has negotiated ownership stakes and partnerships with mines all over the world. From 2018 to the first half of 2021, China Inc. invested about $4.3 billion in lithium mines internationally, according to the research firm S&P Capital IQ. And once these minerals are pulled out of the ground, they are shipped to Chinese-owned refineries that transform the metals for use in the final product. By 2019, Chinese companies made up 80% of the world's output for battery materials. This would not have been possible without Beijing's willingness to pay whatever price and withstand whatever losses it took to build the industry.
"At the end of the day even if DC or Brussels or Tokyo manages to support competing suppliers of minerals and companies that can turn minerals and metals into components, the mineral commodity markets are hard to predict," Jane Nakano, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies, told me. "It's very difficult for private-sector non-state-supported entities to plan ahead."
In the past, this is where the Chinese value chain would end. The refined materials would get shipped out to the US or Europe where they would then be transformed into batteries. Not anymore: Beijing is trying to do that work in-house.
"In the 1970s and '80s China was exporting minerals to us to make higher-value goods," Nakano explained. "That's precisely the situation the Chinese wanted to get out of. That's why they came up with their tech strategy."
Nowadays when Beijing wants to develop technology, it sprays money at any companies that want to give it a shot and watches them duke it out until a few come out on top. Once the dominant parties have revealed themselves, everyone else is cut off and left to wither.
The undisputed champion of the Chinese battery-manufacturing battle is Contemporary Amperex Technology Co. Limited. The company, first called Amperex Technology Limited, was founded in Hong Kong in 1999. Using patented technology licensed from the US's Bell Labs it became a battery supplier for companies including Apple and Samsung. But by 2008 it wanted to manufacture in China for easier access to its market and to take advantage of government incentives. To do that, though, it had to move its headquarters from Hong Kong, which was (and technically still is) politically separate from Beijing. Eventually the company set up shop in a county in northeastern China that was once governed by a young Communist Party secretary named Xi Jinping. And so ATL became CATL. By 2022 it controlled about 32% of the world's market share for electric-vehicle batteries, and about half of China's domestic market. As of now, CATL has 13 factories worldwide that supply batteries for Tesla, Toyota, and Daimler. Earlier this month, Ford announced plans to build a $3.5 billion battery plant in Michigan with technology licensed from CATL.
Coming in a not-so-close second is China's BYD. Within China, it's a top-selling car company that makes its own batteries. Thanks to that inherent demand, it has taken just over 13% of global market share for EV batteries. And thanks to its ownership of its battery supply chain, it's able to make cars cheaply. Its BYD Song Plus — the best-selling car in China in the first quarter of this year — comes in both electric and combustion-engine versions and sells for under $30,000.
As Chinese companies have started to dominate the battery space, the US is trying to avoid a role reversal of past decades in which it would depend on China for higher-value batteries.
To prevent this outcome, the US needs to start investing in every part of the value chain for batteries. And it starts with the country's vast resources of "white gold," the name for lithium used among those who believe its large deposits can be exploited to create the country's next great source of energy. As of now, the US has only one open lithium mine in Nevada. Lithium extraction and refining are messy, and environmental concerns have kept US output limited to about 1% of the world's supply.
"We really haven't gotten our heads in the game in terms of resource extraction," Nakano said.
To boost this output, companies are rushing to extract lithium deposits from California's Salton Sea, a dry region east of San Diego. Geologists estimate that the region could supply enough lithium to support the manufacturing of 7.5 million car batteries a year. US companies like BHE Renewables, backed by Warren Buffett's conglomerate Berkshire Hathaway, and EnergySource Minerals are looking to advance technology that will extract lithium using clean energy and while doing as little environmental damage as possible. President Joe Biden's 2022 Inflation Reduction Act legislation set aside $200 million, through the Department of Defense, to establish an end-to-end American supply chain of rare-earth metals, lithium, and nickel that can be used in domestic battery efforts.
America is also lacking capacity further down the manufacturing chain. The US is home to only two processing plants that produce lithium hydroxide, a more lightweight, concentrated version of the metal used for batteries. This month, Tesla broke ground on a third facility in Texas. The Inflation Reduction Act set a goal of refining enough lithium domestically to supply 2 million electric vehicles annually. The Biden administration hopes to accomplish this in two ways — one carrot and one stick. To try to lure companies, the law provides subsidies for companies that invest in that refining process, but it also sets stringent requirements for how much of an EV battery's components must be sourced in the US — or from countries with which we have free-trade agreements — to be considered domestically produced and avoid tariffs. But all of this planning and incentivizing this will take time to kick into gear. For example, EnergySource Minerals has said its mine could be operational by 2025.
A time to squeeze
While the US has a long way to go to catch up to China, there are some analysts who see Beijing's hand in the market as more clumsy than capitalist, and who say the CCP's ambitions will actually make it easier for American firms to catch up. Anne Stevenson-Yang, the research director of J Capital Research, predicted in a recent note to clients that Beijing's push to increase the supply of materials required for battery manufacturing will ultimately make it dramatically cheaper to enter the battery market over the next few years. Yang's research indicates the price of lithium carbonate — another critical chemical for batteries — has been sliced in half since November and will drop by another two-thirds this year.
"That is because of massive new Chinese capacity," she wrote. "If all goes as planned, lithium will be in global surplus as 2024 rolls around."
We've seen this dynamic when China enters a market before. Beijing throws a staggering amount of cash at an industrial product or late-stage technology until there's so much domestic supply that a capacity glut ensues. China then dumps that excess capacity into foreign markets, depressing prices globally. Stevenson-Yang sees parts of China's battery supply chain as the next glut it will need to dump.
"There are certain issues around security and having a manufacturing base in the US that makes sense, but we don't have to worry about the tech war," she said by phone. "China is like the Russian army in the 18th century. Everyone feared the 'Great Bear to the North,' but they eventually found out that size doesn't mean quality — size means size."
But the potential of a battery supply glut tomorrow doesn't help carmakers meet their needs today. Until the US and its friends can offer them another supply of electric batteries, auto manufacturers all need China Inc., especially as they ramp up their EV ambitions.
"We don't have a major player in the battery cell space, full stop. US battery makers will not likely be able to make a profitable battery until at least 2030," Sino Auto Insights' Le said. "The reality is GM and Ford can't build a $40,000 EV that will help their bottom line for the foreseeable future without BYD and CATL batteries."
And then there's Tesla. Elon Musk has said the company's goal is to manufacture 20 million cars annually by 2030. To put that in perspective, Toyota — the world's biggest carmaker — sold just over 10 million cars last year, while Tesla sold just over 1 million. If Musk wants to reach his goal, Tesla not only needs Chinese consumers to keep buying his cars, but he also needs China's cheap batteries and manufacturing infrastructure to make a car cheap enough to sell to markets like Latin America, Southeast Asia and India.
"Musk can continue to be very effusive of the Chinese government and their support of the EV sector in China," Le said. "But if the US-China relationship continues to deteriorate, it's inevitable that it's going to be much tougher for any US company to do business in China."
And of course, Le pointed out, wherever Tesla goes in the world BYD will be there to compete on price.
"The IRA will create opportunities in the mobility space," Le said of the Inflation Reduction Act. "But if we're looking at evolutionary improvements, China Battery Inc. will still dominate. If we're looking at revolutionary developments over the next five to seven years, though, they'll be over here in the US. Of course, this is in the backdrop of BYD and CATL continuing to lower prices on current tech making transitioning to new technology a tougher decision for OEMs."
It's a complicated race, one of sometimes conflicting incentives and allegiances. The Inflation Reduction Act has upset the US's European allies while at the same time establishing protocols for cooperation to wrest the battery supply chain from China. US car manufacturers can't make cheap electric vehicles for the US market without China Inc., while at the same time the US government is creating policy to push back against China's ambition to dominate the EV market entirely, not just domestically. We cannot make clean energy without making a mess environmentally and geopolitically. For now China is winning the battery contest, but that doesn't mean the US or its allies should give in. There's always time to catch up in a race with no end.
Linette Lopez is a senior correspondent at Insider.
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