Electric Vehicles are on an inevitable trajectory to dominate our roads, leading to a reduced reliance on petrol stations and a greater reliance on charging stations. In a sense, batteries have become the new equivalent of oil.
However, it would be premature to completely dismiss our dependence on crude oil, as it continues to be a reliable source for fulfilling a significant portion of our energy requirements for the foreseeable future. Nevertheless, there will be a notable shift in energy generation infrastructure towards renewable sources such as solar and wind power.
Major oil companies have held considerable influence over drivers' pockets. However, this dynamic is gradually shifting towards battery manufacturers. This shift arises from the fact that the battery is the primary power source that propels an Electric Vehicle, making it the most expensive component.
The cost of batteries has experienced a substantial decline over the last decade, which has contributed to the increasing adoption of Electric Vehicles as prices become more affordable. However, it's worth noting that batteries still carry a price tag of $10,000 or more. The size and cost of the battery tend to increase with higher mileage requirements. Moreover, there is a concern regarding maintenance, as a defective battery can result in an expensive replacement.
China has maintained its dominant position in the Electric Vehicle (EV) battery industry, led by Contemporary Amperex Technology (CATL) as the market leader. However, there have been recent developments in the rankings. In the first four months of 2023, BYD has surged to the second spot, surpassing LG Energy Solution. Collectively, these top two players now command over half, or 52 percent, of the EV battery market share.
It is noteworthy that six out of the world's top ten battery manufacturers are based in China. In addition to CATL and BYD, CALB secures the sixth position with a 4.6 percent market share, while Gotion High-Tech ranks eighth with a 2.4 percent share. Eve Energy occupies the ninth position with a 1.8 percent share, and Sunwoda claims the tenth spot with a market share of 1.5 percent.
In the first four months of 2023, these six Chinese companies collectively controlled 62.5 percent of the global EV battery market, indicating a slight increase from their 2022 share of 60.4 percent.
China's stronghold in the Electric Vehicle (EV) battery sector is projected to persist and even expand, particularly when compared to their South Korean counterparts. Chinese EV battery providers have experienced an impressive average growth of 68% compared to the previous year. In contrast, Korean manufacturers have only achieved an average growth rate of 28%.
CATL serves as a battery supplier not only for Tesla in China but also for domestic brands like Aion and NIO. Furthermore, CATL is expanding its operations. In February, Ford Motor announced a partnership with CATL to establish a $3.5 billion EV battery factory in Michigan.
CATL's significance to Tesla is evident by the fact that Elon Musk, during his tight 44-hour visit to China, made time for a lunch meeting with the CEO of CATL. It is highly likely that they discussed plans for establishing a new battery plant in the United States.
On the other hand, BYD has emerged as the top-selling EV brand globally in 2022. This success has not only benefited BYD's own battery production since BYD vehicles utilize their own batteries, but it has also led to BYD supplying batteries to Tesla's factory in Berlin.
In my view, investing in battery makers seems to be the most favorable choice, given that it resembles more of an oligopoly compared to the Electric Vehicle (EV) market, which operates under intense competition akin to a perfect market. It becomes apparent to investors that a market with fewer competitors tends to be more advantageous.
While EV brands have to contend with numerous other brands in the market, battery manufacturers like CATL have the opportunity to supply batteries to multiple brands, thereby capturing a larger share of the market. This situation can be likened to selling shovels (batteries) to gold diggers (EV brands), where the battery makers stand to benefit from the success and growth of various EV brands.
My preference would always lean towards the market leader, which, in this case, is CATL. The company has demonstrated respectable margins, with a net profit margin of 11% and a solid return on equity (ROE) of 29%. However, it's important to note that, currently, foreign investors are unable to directly purchase CATL shares due to its exclusion from the Stock Connect program.
As an alternative, gaining access to CATL can be achieved through an ETF. One such option is the Global X China Electric Vehicle and Battery ETF (SEHK:2845 HKD / 9845 USD). This ETF has a significant allocation of more than 10% to CATL and also includes other battery manufacturers such as BYD and Eve Energy. Additionally, it features holdings in lithium players like Ganfeng Lithium, a crucial material in battery manufacturing.
China's remarkable dominance in the Electric Vehicle (EV) battery sector cannot be underestimated, and it is highly probable that the future of mobility will be greatly influenced by battery advancements originating from China. In contrast, South Korean and Japanese companies are trailing behind in this crucial area, which suggests that investors may find it more advantageous to focus on investing in battery manufacturers in China rather than EV brands.