HONG KONG, 13 May 2020. Pengyuan International has today published an automobile sector research report, in which we highlight a key message that with a relatively strong manufacturing base in battery and battery component – the core parts used for electric vehicles (EV), China is capable of winning the global competition towards electrification that will reshape the future of the global automobile manufacturing industry.
In our view, having built solid accumulation of technology related to producing core components used for EV, such as battery and battery components, China has evolved to be sufficiently competitive in the global battery manufacturing battleground against Korea and Japan. Noticeably, Contemporary Amperex Technology Co. Limited (CATL) - the No.1 motive-battery manufacturer in China - has also topped the global ranking of battery suppliers for three straight years since 2017, followed by Panasonic and LG Chem. The company has extended its well-known footprint in the local market to overseas as it has become one of the key battery suppliers to BMW and Volkswagen, as well as other automakers around the world.
We believe developing EV sector is strategically vital for China as it helps the country reverse the currently lagging position in the global automobile industry. Traditional fuel-engine cars are endangered by the substitution from EV in the future: many countries around the world have devised a timetable for eventually prohibiting ICE cars and unveiled several incentives for encouraging more EV production. Moreover, electrification will lead to a radical change in the cost structure for conventional vehicles. Batteries – a less important component in ICE vehicle – will become one of the most crucial components in EV, making up about 43% of total manufacturing cost for EV. With such a profound change, together with Tesla’s rising level of domestically souring their components used for the made-in-China Model 3, China can further leverage its accumulated knowledge in manufacturing battery and battery components to compete against Korea and Japan for a leading role in the global battery manufacturing sector, and hence redefine its role in the global automobile manufacturing industry.
We believe the investment in electrification will in the short run negatively weigh on the credit profile of companies, no matter whether in traditional auto-parts or battery and battery components manufacturing sectors, but will pay off in the long term. Conclusively, companies from global and Chinese auto-parts manufacturing industries, as well as Chinese battery and battery component manufacturing industries will, in our opinion, further escalate their debt level to finance the development of electrification amidst global low interest rates; Corporate profitability in the Chinese auto-parts manufacturing, and battery and battery component manufacturing industries will face a high pressure in near terms thanks to rising competition within the industry. In the longer term, we expect companies in Chinese battery and battery components manufacturing industries will stand out with a higher ROIC as they are more valued-added in the EV supply chain. Given the fact that some of the Chinese large-scale battery manufacturers have accelerated their global expansion, taping the cheaper money via debt creation from offshore market, in our view, could be a feasible way for them to acquire funding for this move.
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