Who can replace the rules of the game defined in the Ningde era?

Car companies have lost their first hand in the game with the Ningde era.

Source: ichuangyebang

Author: Pan Lei

Edit: Zi Yu

Source: Ningde Times official website, Weibo

In early April 2021, Zeng Yuqun, chairman of CATL, who rarely appeared in public events, participated in the 125th anniversary celebration of his alma mater, Shanghai Jiao Tong University, and also accepted an in-depth "exclusive interview" with Shen Nanpeng, an alumnus and managing partner of Sequoia China.

Prior to this, apart from a few small interviews at the national "two sessions", almost no media could "interview" Zeng Yuqun — more often, he saw himself as an engineer rather than an ambassador for the company.

But in the dialogue between his alma mater and Shen Nanpeng, he systematically described the energy transformation trend currently being staged in the automotive industry, and the huge opportunities that this wave of trend brings to the Ningde era and China's auto industry, including even some details of the cooperation between the NINGDE era and car companies that have never been publicly reported.

He talked about the purchase of power batteries by car companies generally through two forms, one is the medium and long-term "buy production line or package production line", the other is the "lock volume", that is, if the demand of car companies fluctuates between 15% up and down, both sides can accept, but if the demand is lower than the agreed range, then it is necessary to spend money to make up for the insufficient amount.

In other words, if the car company wants to purchase batteries from the Ningde era, it needs sufficient financial protection, because once the actual procurement volume does not reach the agreed supply, it is necessary to spend money to make up for the insufficient procurement.

"Promises without money are not serious". Zeng Yuqun said so.

Privately, this may have triggered some car companies to be unhappy, but this unhappiness in the new energy era, especially in the Ningde era in the face of the market position of the power battery industry, does not have much significance - Zeng Yuqun just said a reality of the power battery industry, that is, car companies in the business negotiations with the Ningde era, in fact, there is not much room for negotiation.

Xu Lide, former assistant to the president of Bo County Automobile and a senior industry insider, told Chuangbang that the Ningde era is a typical reflection of the "Porter Five Forces Model" in the power battery industry, and is becoming an industrial chain giant similar to Samsung and TSMC.

The rules of the game are changing.

The rules of the game delineated in the Ningde era

The Porter Five Forces Model analyzes the competitive situation of an industry through a simple model form, mainly including five power models, namely the bargaining power of suppliers and buyers, the power of potential entrants, the threat of substitutes, and competition between companies in the same industry.

In other words, upstream integration of the supply chain can form a relative advantage over the downstream, and if there is a strong downstream player like Apple, it will form an advantage in the upstream.

Specific to the Ningde era, the battery giant has established a threshold in the power battery industry through product quality and stable production capacity.

According to data released by SNE Research, a South Korean market research institute at the end of December 2021, as of November 2021, CATL's global shipments reached 79.8GWh, and ranked first with a market share of 31.8% (24.1% in 2020), and annual shipments will become the world's first for the fifth consecutive year.

The list of customers in the CATL era includes not only Tesla, which represents the transformation trend of the industry, but also traditional automobile head enterprises at home and abroad such as Great Wall Motors, Daimler, BMW, Volkswagen, Jaguar Land Rover, and Honda.

It is worth mentioning that South Korea has global battery giants including LG Chem, Samsung SDI, and SK Innovation, but Hyundai Group, the largest car company in South Korea, has also cooperated with CATL.

Behind this is the daunting huge production capacity of the CATL era – it currently has 10 production bases around the world, and the planned production capacity by 2025 is as high as 670GWh.

But that's not all.

Zeng Yuqun has proposed on many occasions that the power battery industry has entered the "TWh era".

Xu Lide also believes that the most difficult thing in the battery industry is to be able to continuously output stable production capacity under the background of the rapid expansion of sales of new energy vehicles. "Because even if the battery factory is completed and put into operation, it still needs to carry out various debugging, quality testing, etc., and the capacity climb also needs a process, and it is not possible to reach the level of stable supply for several years."

He also reminded that in this era of great change, car companies need to pay attention to product reputation when launching new energy vehicles, and most of this reputation so far comes from the endurance of batteries, "the result is that under the nearly overwhelming advantage of production capacity and technical indicators in the Ningde era, car companies dare not easily use the products of other battery companies."

Under a variety of factors, downstream car companies have to follow the rules of the game delineated by the Ningde era to obtain battery supply, including what Zeng Yuqun called the "cash commitment", that is, car companies need to share risks with the Ningde era in terms of production line construction and capacity guarantee in the form of advance payment.

"But this is not the problem of the Ningde era", Xu Lide said, this is the inevitable result of the upstream integration represented by the Ningde era after the Porter Five Forces model is difficult to form a strong downstream integration, "the market position determines whether a company is strong in the supply chain or not."

He believes that if the second supplier can provide even one-third of the same quality of products, the market strategy of the CATL era is bound to adjust accordingly."

But so far, such a supplier has not emerged.

Therefore, in order to obtain sufficient battery supply, car companies have begun to appear after encountering a strong market position in the Ningde era.

"Sadness" OEMs

The news that CATL is "strong" in the supply chain appeared as early as mid-July 2021, and it is said that He Xiaopeng, chairman and CEO of Xiaopeng Automobile, personally "squatted for a week" in the NINGDE era in order to be able to smoothly obtain enough batteries.

Later, the story was further detailed, that is, He Xiaopeng and Zeng Yuqun, chairman of ningde times, even had a "quarrel" in the cooperation negotiations, which was caused by the news that Xiaopeng Automobile wanted to introduce a second supplier, which made Zeng Yuqun "withdraw from the conference room for ten minutes".

However, He Xiaopeng himself and Xiaopeng Automobile have successively debunked the rumors.

The Ningde era did not publicly respond.

Similarly, GAC.

This local state-owned enterprise was once a partner of the NINGDE era, but now that the supplier switch has been completed, the role of the NINGDE era has been replaced by the battery cutting-edge Zhongxin Airlines (that is, AVIC lithium batteries).

Another "new car-making force" Weilai Automobile was also involved in the storm.

At the beginning of 2021, NIO released a 150kWh, energy density of 360Wh/kg "solid-state battery pack", which is planned to be installed on the newly released ET7 model to achieve a long endurance of up to 1000 kilometers, which will be delivered in the fourth quarter of 2022.

The news caused a huge stir – solid-state batteries are considered to have significant advantages in terms of energy density and safety performance, and are somewhat "future batteries".

Regarding the supplier of this battery, Weilai Automobile has not officially announced. However, according to The statement of Li Bin, CEO of Weilai Automobile, that the battery supplier is "definitely the leading company in the industry", most people default to the Ningde era.

But the result is that the platform "Weilan New Energy" under the Chinese Academy of Sciences has become the supplier of This battery of Weilai, and the relevant expression has become a "semi-solid-state battery".

In this regard, Li Jing, an insider who understands the battery industry, believes that in terms of the state of technology at that time, the so-called "solid-state battery" is more of a concept, or even just a marketing gimmick, so the Ningde era has different views on this and gives professional opinions, including manufacturability.

From the perspective of car companies, this will produce an impression that the Ningde era has not kept pace with customers in terms of technological innovation, and at the same time looks "fungible", after all, GAC has done this.

As far as the current situation is concerned, car companies are looking for "two supplies" or "three supplies" in terms of battery suppliers, which are more related to production capacity - the capacity utilization rate of the Ningde era in the first half of 2021 exceeded 92%, which has almost reached the upper limit, while the demand side of new energy vehicles is still continuing to erupt, and in the context of supply cannot meet the needs of car companies, car companies can only choose to solve it through supplier diversification.

However, in the eyes of the outside world, factors related to production capacity have been ignored, and the heat is often triggered by car companies' complaints about the Ningde era.

Brands alone cannot elevate supply chain positions

"(For car companies) there is no point in fighting a war of words," Xu Lide said, if car companies do not have sales, that is to say, if the demand is not enough, it is unrealistic to rely on brands to enhance their position in the supply chain.

In his view, the supply chain position of the automotive industry mainly depends on two factors - one is cash flow, and the other is demand.

For supply chain giants like catheters, car companies are either as demanding as Tesla or are talking with money, which is what Zeng Yuqun said: "The promise of no money is not serious."

But the actual situation is that most of the car companies that have made trouble with the Ningde era have neither money (most of the new car-making forces are in a state of loss), nor much demand, "In this case, the Ningde era, in which products are in short supply, of course, fully grasps the initiative, and will definitely choose to give money to car companies that are more painful to cooperate."

Therefore, those car companies look more demanding, and even called "domineering and strong" business policies, in the Ningde era seem to be a normal transaction.

Li Jing also said that the production of vehicle batteries is a heavy asset industry, the investment in a production line in the Ningde era may be as high as 400-500 million, and there are a large number of technical and equipment debugging and other preliminary work, these investments need money, if the car companies in the procurement only verbally promised a procurement volume, the risk will all fall to the Ningde era.

"Similar incidents have indeed occurred in the industry before, where car companies verbally promised a demand, but the final purchase volume did not reach the agreed amount between the two sides." Li Jing said.

Therefore, although there have been complaints about the business policies of the Ningde era, and there have also been phenomena similar to the phenomenon of car companies such as GAC looking for other suppliers, Xu Lide believes that the battery giant will not change its business policies.

This is even a process of active selection, "NINGDE era through harsh payment terms and the objective fact of insufficient production capacity to select quality customers."

In his view, all business terms are determined according to their position in the upstream and downstream of the industrial chain, not based on so-called experience or industry practices. These conventions refer to the fact that car companies have profit margins as low as single digits, so they need to make their financial statements look better in the form of arrears.

The reason why car companies are in a disadvantageous position in negotiations is also related to the anxiety of their continuous loss of core technology discourse power in the era of intelligent vehicles.

The secret weapon of the Ningde era

Since entering 2021, major car companies around the world have been plagued by the lack of chips - compared with traditional cars, smart cars need more chips, which directly leads to a reduction of more than 10 million cars.

To some extent, this means that the intelligent wave of the automotive industry is accelerating the continuous loss of technical sovereignty of car companies.

Because for most car companies, software technology comes from suppliers, which makes car companies in a disadvantageous position in the supplier negotiation process.

Specific to the Ningde era, it not only provides batteries for car companies, but also provides core software such as BMS (battery management system), and even includes an integrated chassis to ensure that car companies can manufacture smart cars in a simple way as possible and maximize the safety performance of batteries.

In the era of "software-defined cars", the competitiveness of this integration of software and hardware demonstrated by the Ningde era has made car companies quite anxious about their own technical control.

A similar situation has occurred in the cooperation between Huawei and SAIC - in the middle of last year, SAIC motor said that the deep cooperation with Huawei in autonomous driving will turn itself into a "shell", and Huawei will become a "soul".

In addition, CATL is also changing its own business model - in addition to providing batteries and other products to B-end customers such as car companies, it is also preparing to launch replaceable electricity products to C-end users through "vehicle-electricity separation".

If this replaceable power product is launched, for the users of electric vehicles, they can freely choose the battery brand carried by the vehicle, and the industrial policy is also separate, such as when purchasing insurance, the body and battery have their own insurance.

This will further highlight the scale effect and the quality advantages brought by extreme manufacturing on its large-scale manufacturing - users will obviously choose battery products with strong endurance and high safety performance.

Power battery production capacity "gamble"

The industry itself is also changing dramatically, such as the expansion of industry-wide capacity.

From the current planning point of view, 2025 will become the capacity release node of major power battery manufacturers - its China Xuan Gaoke 300GWh, Hive Energy 600GWh, Zhongxin Airlines 500GWh and so on. According to incomplete statistics, the capacity planning of several head power battery companies will exceed 3TWh.

This has led some car companies to have an expectation - when these production capacities are released in 2025, the market position of the Ningde era will be weakened, and the bargaining space will become larger.

But Xu Lide believes that the capacity expansion of battery factories may have its own logic, which is more like a gamble from the perspective of the industry.

According to the data of China Automotive Power Battery Industry Innovation Alliance, from January to November 2021, China's power battery production accumulated 188.1GWh, an increase of 175.5% year-on-year.

Among the world's top 10 power battery manufacturers, Chinese manufacturers reached 6, accounting for 48.1% of the market share.

Among them, the installed capacity of one in the Ningde era exceeds the sum of LG Chem, Samsung SDI, and SK Innovation, and the market demand is still growing at a high speed, and the lack of production capacity is considered to be one of the biggest obstacles to battery companies.

EV Volumes predicts that in 2025, the global sales of new energy passenger cars will be 18 million units, and the demand for power batteries will be 919.4GWh, which may even exceed 1TWh.

This also allowed a number of second-tier new players such as Zhongxin Airlines to see the opportunity to start by piling up production capacity, intending to expand market share.

In addition to production capacity, the weapons of these battery suppliers are to come up with relatively mild business policies to obtain new orders from car companies.

On the other hand, if the accumulated capacity of these battery factories cannot form a differentiated competitive advantage, it is difficult to obtain enough orders, and in fact it is likely to become ineffective production capacity.

In other words, battery factories may be dragged down by the irresponsible demand promises of some car companies.

Xu Lide stressed that battery factories are certainly aware of this risk, but they are still desperately pushing up production capacity because they need a large number of "orders" and use this to take money from investors – the overlooked point is that calculating potential battery orders as the market share to be occupied is likely to face a dangerous gamble.

Even LG Chem, the world's second-ranked chem, holds this idea. The South Korean battery supplier, which will soon be listed on the capital market, believes that the backlog of battery orders in its hands can help it surpass the NINGD era in terms of market share.

But in fact, just one year has passed, and the gap has become wider and wider.

From January to November 2020, the gap between LG and CATL was only 1.4GWh, but by the same period of 2021, this data has become 28.3GWh.

Under the scale effect of the Ningde era, no battery factory can grab away high-quality customers like Tesla, then the best customers are actually some traditional car companies in the transition period, as well as new car-making forces such as Weilai and Xiaopeng, "One of the characteristics of these car companies is to sell cars and lose money, but they have no choice but to eat their orders, so in the end this has become a game of drumming and passing flowers."

An investor in the new energy industry also believes that many domestic industries are easy to roll in, and the same is true for the power battery industry.

What is certain is that by 2025, there will definitely be overcapacity, and many companies will have large losses or even collapse. "But now in order to bind customers, battery companies have to expand production, which is a bit difficult to ride."

Car companies want to get rid of the Ningde era at this node in 2025, the idea is too optimistic, "the first thing that automakers have to consider is whether they can live to 2025", Xu Lide said.

Correspondingly, the CATL era knows best which brand has the ability to survive until 2025, "because they have been dealing with the bosses and technicians of major car companies for many years, and even through changes in order volume, they can predict changes in the operating conditions of car companies."

Next Super Supplier?

Xu Lide believes that the Ningde era is becoming the next super supplier similar to Samsung and TSMC, and the accounting period play of car companies is constantly being challenged.

In fact, the influence of the Ningde era still has room to rise.

CATL can choose to maintain cooperation with mainstream high-quality customers through capacity exchange, and then select 3-5 potential partners for equity cooperation, form an industrial cooperation platform through battery integration downstream, and finally realize upstream integration and downstream integration.

"This will reduce the cost of downstream car companies, so that Chinese car companies have global competitiveness, and at the same time, cataline era can also share the profits and equity gains at the sales end."

In fact, the Ningde era has almost done so.

In addition to Nezha Automobile, CATL has also invested in Extreme Kr Automobile and Avita, an electric brand owned by Changan Automobile.

But there are also some different views, mainly focusing on the fact that battery technology is still evolving, which will provide opportunities for other battery suppliers to subvert the market position of the Ningde era.

Xu Lide believes that in an absolute sense, the technical threshold of the battery industry is not the most difficult, and the most difficult thing is to be able to continuously output stable production capacity.

That is to say, the ability of large-scale manufacturing in this power battery industry may be the real threshold.

If it does not reach a very high order of magnitude, then the cost is an unsolvable problem, and if it reaches the order of magnitude, quality control is even more difficult. Car companies do not dare to take risks with this quality.

A senior person from a multinational car company said that it is too early to say that the Ningde era has become an industrial chain giant similar to Samsung, after all, the power battery industry has only risen in the past four or five years, but there is no doubt that the Ningde era is in a very good position, if the Ningde era falls, the supply vacuum left behind cannot be repaired at all, and the entire industrial chain will collapse.

So far, as the most capable player in the power battery industry, CATL has reached a height in the industrial chain that chinese suppliers have never reached before.

But there is also pressure – not only from the fierce competition in China, the world's largest auto market, but also from established car markets such as Europe, which have been afraid of relying too much on Asian suppliers, including CATL, in terms of battery supply, and have also supported local battery alliances to achieve the check and balance effect of "not putting eggs in one basket".

So for the NINGDE era, now is the best time, but probably also the most dangerous time - although it is currently ahead of several positions, but this competition has actually just begun, whether it is the NINGDE era or other players, to prepare for the sudden emergence of "disruptive technology".

Note: Li Jing is a pseudonym in the text.