CALB vs CATL: Can Two Battery Pigs Both Fly?
In the Chinese startup ecosystem, no advice is more viral than this line: “if you stand where the wind blows, even a pig can fly.” It was coined by Lei Jun, the founder and CEO of Xiaomi, chairman of Kingsoft, and a prolific angel investor.
Amidst the wind of electric vehicle (EV) adoption that’s blowing across the world, there appears to be not one, but two “pigs”, that may be flying: CATL and CALB.
CATL is currently the world's largest battery maker by installed production capacity, already well-known in the EV industry, and well-covered by mainstream media outlets. It supplies major EV makers from Tesla and Honda, to Hyundai and Volkswagen. Its lesser-known rival, CALB, is actually an older company, suffered some setbacks, and is just starting to catch the EV wind again.
We briefly mentioned CALB in last week’s post, when discussing the potential opening of the Hong Kong Stock Exchange IPO window. Given the strategic importance of electrification not just to the technology and automotive sectors, but also many governments’ innovation agenda and in dealing with climate change, CALB deserves its own deep dive.
That’s what we will do today.
(Note: because the two companies' acronyms look almost identical and can be confusing, we are bolding the last two letters of CALB and CATL throughout this post, so readers can hopefully have an easier time seeing the two companies apart.)
First Mover (Dis)Advantage
CALB was conceived in 2007, predating CATL’s founding by four years. CALB was a venture within the Aviation Industry Corporation of China (AVIC), a state-owned enterprise in aerospace and defense, that was spun out later. It enjoyed a first mover advantage, focused on commercial EVs (because that was where government subsidies were going to), and became a market leader. In the 2012 Ministry of Industry and Information Technology’s public report on electric vehicles, CALB was ranked #1 in the number of EV models that use its batteries.
As it turns out, being first mover turned out to be more of a disadvantage – for two reasons.
The Government Gives and the Government Takes Away: in 2017, subsidies for commercial EVs ran out. This policy change spelled trouble for CALB and a whole host of other battery producers, whose business was primarily supplying that segment of the market. It ushered in a so-called “new energy winter” that lasted two years and almost killed CALB.
As the market began shifting towards consumer passenger EVs, CALB struggled to adjust while CATL took off. Why? Because of poor chemistry, not the human-kind, but the periodic-table-kind.
Poor Chemistry: broadly speaking, there are two types of lithium-ion batteries being used in EVs. One type is the lithium-iron-phosphate type, or LFP. The other category includes two subtypes: nickel-cobalt-aluminum (NCA) and nickel-manganese-cobalt (NMC), where nickel and cobalt are the new, key ingredients. I’ve circled (in red) the LFP elements and squared (in blue) the NCA and NMC elements in the periodic table below. (Lithium is, of course, in both types.)
The key tradeoff between LFP and NCA/NMC is that LFP has lower energy density than NCA/NMC, but better thermal stability. In more plain language: EVs that have LFP batteries cannot go as far as EVs with NCA/NMC batteries before needing to recharge, but NCA/NMC heat up faster (so can cause fire) than LFP.
Want to go farther per charge? You might cause a fire. Don’t want to risk a fire? Then you would have to charge more often.
CALB began its journey with developing LFP batteries. As government subsidies waned and more passenger EVs needed longer distance between each recharge to be attractive to consumers, its batteries became less suited to the market’s direction. Meanwhile, CATL, which started developing NCA/NMC batteries early, took over! Additionally, CATL has been effective in vertically integrating its raw materials acquisition and manufacturing plants to keep the cost of production low, propelling it to the top of the list in both its China and global market share.
By 2020, only one battery “pig” was flying and that was CATL.
(Note: I have purposely not mentioned BYD in this post, even though it is also a big battery producer, because its batteries mostly supply BYD’s own EVs, thus quite different from pure play battery makers, like CATL and CALB.)
In July 2018, with CALB in dire state, a new boss was brought in to turn things around, Liu Jingyu.
A rare female executive in China’s high-tech sector, Liu already had a reputation for being a strong leader and effective “turnaround artist”. In 2013, she took over another struggling company that was affiliated with the Aviation Industry Corporation of China and steered it from massive losses to profitability in 10 months.
Two major reasons contributed to CALB’s turnaround. One has to do with Liu’s leadership. The other, ironically, has to do with its rival’s runaway growth.
All-in on NCA/NCM: with the market’s preference shifting, Liu wasted no time re-focusing the company’s overall strategy to be “all-in” on developing NCA/NCM batteries. In terms of go-to-market, it shifted direction to serving the consumer EVs market, not its original commercial customers.
CALB’s production of NCA/NCM batteries soon ramped up. And to recapture market share, it aggressively priced its products 20-30% lower than its competitors’. But where would it find customers in a new, somewhat unfamiliar consumer EVs market?
Answer: CATL’s customers
Be the cheaper backup supplier: perhaps a victim of its own success, CATL started having trouble supplying its larger customers, right around the time that CALB was going through its corporate restructuring. The first automaker that switched from CATL to CALB was Chang’an Automobile, one of the “Big Four” car manufacturers in China (albeit the smallest of the four).
The second, arguably more strategic, customer was Guangzhou Automobile Group (or GAC Group), China’s 5th largest automaker. In 2017, due to supply delays caused by CATL, GAC could not meet the delivery target of its new EV model, GE3. As GAC was looking for a backup option to CATL, either by working with another supplier or building its own battery, the newly-reformed CALB swooped in. Aftering locking in GAC, CALB’s prospects began to improve, as larger (and cooler) automakers, like Dongfeng, Geely, and XPeng, started using CALB in the same way.
On the back of this new “wind”, CALB’s installed production capacity doubled in each of the last three years – 2019: 107%, 2020: 128%, 2021: 132% – an unprecedented growth rate that would make even a high-flying SaaS company jealous.
Thanks to a strategic shift towards NCA/NCM batteries and willingness to be a cheap, reliable backup to the market leader, an old “pig” is flying again!
Global Top 3 and the Return of LFP?
GAC’s strategic logic for using CALB is quite similar to any large enterprise’s reasoning for adopting “multi-cloud” for its IT infrastructure. No large enterprise wants to be locked-in to Amazon’s AWS or Alphabet’s GCP forever. It would rather have options, redundancy, and a credible way to play one vendor off the other to negotiate better prices.
So far, this logic has helped CALB become a market leader in China. According to research done by the China Industry Technology Innovation Strategic Alliance for Electric Vehicle (an industry group and a mouthful), during the first half of 2022, CALB’s domestic market share is #3 at 7.58%, behind CATL’s 47.67% and BYD’s 21.59% (see chart in Chinese below).
To be clear, CALB still lags CATL by many many miles (or kilometers), but its incredible growth rate in the last three years makes it a noteworthy contender.
Also, being China’s #3 is not where CALB’s ambition lies. On the first day of its HKEX IPO, Liu proclaimed that her goal is to build CALB into a top-3 battery maker, globally. To reach that scale, CALB will have to become more than just a cheaper option and a negotiation chip for when customers want to haggle with CATL. CLAB will need to compete with Korean giants, like LG Energy and Samsung, Japanese conglomerates, like Panasonic, and CATL itself, who is taking serious note of its small domestic rival (and suing it for IP infringement).
If there is one wind blowing in CALB’s favor, it is the return of LFP – the type of lithium-ion battery that fell out of favor but is making a comeback. Due to the soaring prices of nickel and cobalt, and the unfortunate fact the vast majority of EV fires involve NCA/NCM batteries, more automakers now want LFP batteries – to reduce cost and improve safety.
Tesla has committed to building many of its entry-level Model 3’s with LFP. Volkswagen and Ford have announced similar commitments to LFP. CATL is pouring R&D dollars into its cell-to-pack technology to improve its LFP battery density without compromising on thermal stability (or safety), to keep customers like Tesla and others happy.
And which other Chinese battery maker actually started its journey with LFP? CALB!
LFP’s return to relevance is certainly an interesting turn of event, if not a historical opportunity, for CALB. How CALB will turn its lineage with LFP into a competitive advantage, if at all, remains to be seen.
As China’s own new energy agenda progresses, where hard requirements for using domestic suppliers will no doubt continue, CALB should sit comfortably near the top of its domestic market, as long as it does not screw up. Globally, more countries are also “domesticating” the supply and manufacturing chain of EVs to boost homegrown companies. A good recent example is the way President Biden’s Inflation Reduction Act works, where the new tax credit for EVs only applies to vehicles that are assembled domestically and their batteries are sourced and made domestically.
For a pig to fly, it needs to catch a wind that’s both blowing in the right direction and for a long time. While the LFP wind is blowing one way, the policy winds seem to be blowing in a different way. That makes “flying” for both CALB and CATL hopeful but complicated.
p.s. the bilingual (English/Chinese) version of this post is published on interconnected.blog