Electrification Business Models and Investment Strategies in the Automobile and Battery Industries

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1 Technical Report Electrification Business Models and Investment Strategies in the Automobile and Battery Industries Dr. Noboru Sato, Executive Adviser, ESPEC CORP. Visiting Professor, Green Mobility Collaborative Research Center, Nagoya University Abstract The electrification of automobiles is progressing at an ever more rapid pace in the current global market. European manufacturers who came late to the field are now also developing products such as plug-in hybrids and electric vehicles and bringing them to the market. The Chinese market has become lively in recent years, in part due to expanded government subsidies. As automakers are pushing ahead with electrification strategies, they also are increasing their investments in China. Among battery manufacturers, both Samsung SDI and LG Chem of South Korea were quick to establish production bases for lithium-ion batteries in China. Panasonic has finally also decided to build a plant there. In areas where competition is heating up, both offensive and defensive strategies on the Chinese market will play a major role in determining the future landscape of the industry. 1. Battery Competition Scenarios Unfolding on the Chinese Market Panasonic is planning to establish a battery plant in Dalian in Northeast China with an annual production capacity that translates into 200,000 electric vehicles (EVs), and a sales target on the order of 100 billion yen per year. This scenario is strongly driven by the product strategies of the various Japanese auto manufacturers. Toyota has already announced that it will cease production of combustion-engine-only vehicles by 2050, meaning that the shift to cars that are in some way electrified will be 100% completed by then. Honda in turn has said that in 2020, its domestic production of plug-in hybrid vehicles (PHVs), electric vehicles, and fuel cell vehicles (FCVs) will amount to at least 35,000 units per year. This is a strategic move to adapt to the ZEV (zero emission vehicles) regulations in the U.S. which stipulate an electrification ratio of 22% by However, Honda had one concern, namely its supply chain of lithium-ion batteries (LIBs) for automotive use. LIB procurement was limited to a single company, Blue Energy (BEC), a joint venture of Honda with GS Yuasa (GSY). Test Navi Report No. 19 (Vol. 86) 1

2 Furthermore, Honda was not happy with the fact that there was no battery manufacturer with LIB production capability in China. Because BEC's parent GSY was not in a position to expand its investments in China, Honda last year chose Panasonic as a second vendor. It is believed that Honda promoted their China investment, which may even have been a precondition for their selection as a second vendor. Unless such measures were taken, Honda would have had to import the LIBs for its impending China-based production of hybrid vehicles (HVs) from Japan. This would have resulted in having to supply less price-competitive vehicles to the Chinese market. Of course, procuring LIBs from Samsung SDI or LG Chem with plants in Xian and Nanjing respectively could be considered another possible approach. But the LIBs from LG Chem are laminated types which are not compatible with prismatic type LIBs used by Honda. Samsung on the other hand does develop and manufacture prismatic LIBs, but their development philosophy and development process are not a good fit for Honda. With the advance of Panasonic into the Chinese market, procurement by Toyota is also becoming more feasible. The Toyota subsidiary Primearth EV Energy (PEVE) is building a plant for nickel-metal hydride battery production, but there was no Japan-affiliated manufacturer of LIBs. Panasonic's China investment into the Chinese market will therefore enable Toyota to procure LIBs locally as well. Panasonic also gains the opportunity to partner with various European and American automakers who are speeding up the process of electrification in China. Volkswagen AG (VW) with its strong presence in China has made it clear that they are pushing for faster electrification. Considering the fact that VW had close ties to former Sanyo Electric in the area of nickel-metal hydride batteries, it seems likely that they will look towards Panasonic when it comes to the production of various types of hybrids and electric vehicles (xevs). Nissan on the other hand imports laminated cell structure batteries from Automotive Energy Supply Corporation (AESC). However, the parent companies of AESC, namely NEC and Nissan, do not seem to have plans for expanding their Chinese investments. LG Chem, like AESC, supplies laminated type LIBs to Renault, General Motors (GM), and Hyundai. A business model whereby the LIB plant constructed by LG Chem in Nanjing supplies products to Nissan is therefore is by no means far-fetched. This could also result in a synergy effect with Renault, making the scenario all the more likely. Test Navi Report No. 19 (Vol. 86) 2

3 According to news reported in January 2016, LG Chem has plans to take a stake in AESC, which is another indication that the above scenario is indeed unfolding. Panasonic's new venture will also send a strong signal to the two South Korean companies. Because Samsung SDI sees LG Chem and Panasonic as its rivals, the conditions are ripe for the start of a new market battle between Japanese and Korean battery manufacturers. As we move into 2016, future developments will certainly bear watching. 2. The Actual Situation on the Chinese Market Battleground From January 7 to 9, 2016, an Asian international conference on the battery business and technology related to electric-powered cars was held in Shenzhen, China. The first day featured a symposium for foreign companies with speakers from Japan and South Korea, while the second and third days were devoted to presentations by speakers from China. Participants could select the respective days for which to register, with all seats having to be reserved in advance. I was surprised by the orderly and effective organization of the event in a country where things do not always proceed in such a fashion. The organizers even gave each participant a seating plan that showed exactly where who from which company was seated. The Chinese part of this event is now already in its fifth year, and is well regarded among Chinese businesses as providing good content. Many topics are covered, and the quality of speakers is high. I also attended the symposium of the second day, which had plenty of lively presentations by Chinese materials and equipment manufacturers. venture businesses, and others. With 600 participants, the high attendance count also demonstrates the popularity of the event. The growth of automotive lithium-ion batteries (LIBs) in the Chinese market is illustrated by the following total production volume data: 6.7 GWh in 2014, 17.9 GWh in 2015, projected to reach 30.6 GWh in 2016 (in terms of a 20 kwh LIB-equipped vehicle, this is approximately 150 million units). Given such a rapid pace of growth, it is no wonder that participant numbers are high. By contrast, the number of participants in the overseas symposium on the first day was 170. Organized by the Japanese Yano Research Institute, this was the first time that such an event was held in conjunction with the Chinese symposium. As the first presenter of the day, I reported on "Trends of Lithium ion Battery for xev and Future Direction" 1) from an objective standpoint. In my talk, I also touched upon Japanese competitiveness and challenges, and I introduced the ESPEC approach as illustrated in Figure 1. The company aims to provide highly reliable evaluation equipment meeting the requirements of electrification, through a Test Navi Report No. 19 (Vol. 86) 3

4 battery safety certification center that provides one-stop certification functionality compliant with the ECE-R100 Part II regulations for automotive battery systems. Figure 1 ESPEC evaluation testing equipment and battery safety certification center Among the questions from the floor, a highly pertinent one was: "We have heard that there is a gap between Japanese/South Korean batteries and Chinese batteries. Is this true, and if so, where are the differences and what is your advice to China in this regard?" I responded as follows: "First of all, there is a large difference in the stance towards specifications, especially safety related specifications, for automotive batteries. The safety standards of Japanese automakers are high, and battery development is also influenced by this. In order for China to increase reliability, I believe it would do well in trying to learn from Japanese evaluation standards and systems. Seeking an exchange of opinions with the various Japanese battery manufacturers and adopting highly reliable evaluation equipment and materials are also important." Subsequent presenters from the Japanese side included members of the Yano Research Institute who gave a lecture about battery industry trends in the global market and the shift in market shares and competitiveness of various types of component systems. The Hitachi Chemical presentation, given from the viewpoint of a materials manufacturer, dealt with a negative electrode material and Test Navi Report No. 19 (Vol. 86) 4

5 W-SCOPE made a presentation on separator. The topic of a presentation by Toyo System was battery aging evaluation and mechanisms. On behalf of South Korea, an acquaintance of mine, Mr. Kim, a Fellow of LG Chem took the podium and gave a presentation that was a great finale to the symposium. Reflecting the company's recent business expansion in the automotive LIB sector, a lot of interesting content was covered in this lecture which showed the extent of the company's self-confidence. Members of Samsung SDI's marketing department were also in attendance, and I am sure they were greatly inspired by the presentation. Although the Chinese economy in general is still in a serious slump, the mood at the Shenzhen conference did not seem to be affected by this at all. I believe that this shows that there are large differences among various industry sectors. For example, ATL (Amperex Technology Limited), a battery manufacturer belonging to the Japanese TDK Group and headquartered in Hong Kong, with a production base in Fujian, is doing very well in business dealings with Apple Corporation. Another ATL group affiliate, CATL, also is a company to be watched. Managed separately from ATL, CATL is engaged in the development and commercialization of LIBs designed specifically for automotive applications. Recently, a lot of human resources are being mobilized and major development investments are being made towards this goal. While the company lags behind Samsung SDI and LG Chem in global market share of LIBs for mobile devices, the relationship with Apple is providing a serious boost to their business. With the ATL Group now steadily working on the commercialization of products for the automotive sector as well, LG Chem clearly seems to be worried. 3. Business models of Japanese materials manufacturers As the pulling power exerted by Japanese battery manufacturers upon its parts suppliers declined, the general stance of these suppliers also changed notably. While the Japanese manufacturers had formerly been given priority by default, suppliers now increasingly give top priority to Samsung SDI or LG Chem. This is a development that cannot changed by force. Until about ten years ago, the Japanese battery manufacturers had such strong clout that South Korean companies in the same field had to wait a year or more until they could use the advanced materials from Japanese suppliers. But nowadays, the situation is completely different. Test Navi Report No. 19 (Vol. 86) 5

6 As the Japanese materials industry has evolved into a global business, suppliers naturally go where the action is. A scenario whereby South Korean battery manufacturers are the first to implement new or advanced materials from Japan is already emerging, and this trend is likely to continue and expand even further. The idea of trying to bolster Japanese competitiveness by preventing Japanese advanced materials from reaching overseas clients is not a proper business model and will not work. It might be a different story if Japanese battery manufacturers were to speed up their game and secure proper procurement channels, but as it is, South Korean companies have overtaken their Japanese counterparts in the market, and the power relationships in the industry have changed. If this situation continues, the market share of Japanese battery manufacturers will drop further, while South Korean and Chinese companies increase theirs. An almost identical scenario as in the LCD industry can easily be foreseen. Looking at the growth in China, as demonstrated at the recent Asian international conference, a close three-way struggle between Japan, South Korea and China is already well under way in the sector of LIBs for mobile devices. While competition between Japan and South Korea has intensified, China was able to make inroads. A similar situation will develop sooner or later in the automotive LIB field as well. Like others, I am also of the opinion that Chinese growth will still require a few years, but the writing undoubtedly is on the wall. The strategic skill of Japan and South Korea in countering the serious Chinese challenge will certainly be put to the test. For Japanese battery manufacturers, there are only a few options left if they want to keep their business strong. First of all, it will be necessary to reestablish the close partnership with the materials and components industry, which is a strong point of Japan. This means that joint development by Japanese battery manufacturers and materials manufacturers must blaze new trails. Especially in the field of advanced materials, battery manufacturers must make swift decisions and establish solid procurement channels. Alternatively, battery manufacturers could also develop and commercialize new materials in house. The key lies in strengthening their pulling power and in expanding their exclusive and strategic offensives. 4. Business models of technical cooperation in the automotive sector Japan is the forerunner in advanced xev technology, but I believe the time has come for Japan to contribute to the world through global technology alliances. With regard to Japan's cutting edge xev Test Navi Report No. 19 (Vol. 86) 6

7 and battery technology, an open & closed strategy business model is even more necessary. In this field, where developments were pioneered in Japan, there are many aspects where companies should have been able to leverage their intellectual property advantage into business expansion. Japan created a dominant position in hybrid vehicles. A tight lid was kept on intellectual property, and Toyota and Honda erected formidable technical barriers. This caused Nissan as well as automakers in Europe, the U.S, and South Korea to greatly lag behind in this field. Figures 2 to 4 show the electrification policy and automotive battery choices of Japanese manufacturers. Among these, Toyota has adopted an open strategy by actively licensing technology so far to Ford in the U.S. as well as Nissan and Mazda in Japan. Honda on the other hand has opted for a closed strategy with regard to its proprietary IMA (Integrated Motor Assist) system, providing no licenses to other companies. Figure 2 Electrification policy and battery choices of Toyota Test Navi Report No. 19 (Vol. 86) 7

8 Figure 3 Electrification policy and battery choices of Honda Figure 4 Electrification policy and battery choices of Nissan Test Navi Report No. 19 (Vol. 86) 8

9 What kind of stance will be desirable for the future? The U.S. ZEV regulations, rather than simply imposing numeric targets such as 4.5% by 2018 and 22% by 2025, should also provide for a relaxation through significant credit given to automakers for the licensing of technology. This could be expected to create a framework that contributes to active technical assistance among automotive companies in the world. It is hoped that the California Air Resources Board (CARB) will adopt a more broadminded perspective in this regard, something that automakers should try to promote through lobbying efforts. Similarly, when automobile companies and battery companies develop state-of-the-art technology and systems and provide these from a dominant position to competitors, the originating company will receive the benefit of intellectual property, and from a global perspective, the electrification of the automobile will be accelerated. Business models that realize this kind of scenario are likely to be put to the test on a global scale 2). Reference 1) N. Sato: Trends of Lithium ion Battery for xev and Future Direction, International Lithium-Ion Battery and Applications Seminar, Shenzhen, January 7, ) Noboru Sato: writer for Nikkei Business Online, Technical Management "Japan's Strengths, South Korea's Strengths", from April 2013 to present Test Navi Report No. 19 (Vol. 86) 9