In an industry scrambling to cut costs, Contemporary Amperex Technology (CATL) continues to boast substantial profits.
On the evening of July 26, CATL released its first-half 2024 results, revealing that in the first half of this year, the company achieved total revenue of RMB 166.77 billion (USD 23.03 billion), a year-on-year decrease of 11.88%. However, its net profit attributable to shareholders reached RMB 22.87 billion (USD 3.16 billion), a year-on-year increase of 10.37%.
Since the beginning of this year, BYD’s claim that “electric is cheaper than oil” has triggered a price war, which escalated with the launch of the fifth-generation DM. This price war inevitably affected the battery segment, leading to unavoidable price cuts for CATL, which has passed on much of the cost pressure to upstream suppliers.
Due to its large procurement volume, CATL can secure lower procurement prices. According to 36Kr, CATL’s purchase price for lithium iron phosphate (LFP) materials is about 10% lower than the industry average.
The cost pressure on battery companies has significantly reduced profits along the supply chain. In the first quarter of this year, the profit margin of separator, electrolyte, anode, and cathode companies have dropped to 10%, 5%, 0%, and -6%, respectively.
Anomalies in material costs have also emerged. Industry insiders told 36Kr that the most resilient price is that of copper foil, which used to account for about 8% of battery costs but now accounts for nearly 20%, the highest after cathode materials. Copper prices are said to not follow the price trends of the battery supply chain.
Although the power battery market is still in a growth phase, the competition is so fierce that low prices have become the norm, leading companies to cut back on investments in innovation and new technologies struggling to gain market acceptance.
Reflecting this in its financial report, CATL’s R&D investment in the first half of the year was RMB 8.59 billion (USD 1.19 billion), down from RMB 9.85 billion (USD 1.36 billion) in the same period last year. The number of R&D personnel also decreased by 846 people.
In the heat of market competition, maintaining market share and profitability has become the top priority. The once aggressive global power battery leader has entered a conservative phase.
CATL’s profit strategy: Reduce upstream costs and expenses
CATL’s industry dominance lets it navigate price fluctuations with ease, maintaining its profit margins. When lithium carbonate prices soared in the first half of 2022, CATL quickly adjusted prices for automakers, sparking claims that “car manufacturers are working for CATL.” Now, amid an automaker price war, the pressure to cut costs on power batteries—the most expensive component—has intensified, prompting CATL to shift these costs upstream.
In the first half of the year, CATL’s battery product prices fell, leading to increased shipments but only RMB 166.77 billion in revenue, a year-on-year decrease of 11.88%. However, costs fell more sharply, with operating costs dropping to RMB 122.518 billion (USD 16.92 billion), a year-on-year decrease of 17.39%. As a result, net profit reached RMB 22.87 billion, a year-on-year increase of 10.37%.
In the first half of the year, CATL’s gross profit margin for power battery systems was 26.90%, and for energy storage battery systems, it was 28.87%, both well above the industry average.
CATL’s business also includes battery materials and recycling, and battery mineral resources. Similar to BYD’s vertically integrated supply chain, Guangdong Brunp, focused on recycling, has become one of CATL’s main suppliers of cathode materials. Upstream, CATL’s lithium mining operations span North America, Australia, Africa, and South America, and it holds stakes in nickel mines in Indonesia and copper-cobalt mines in Africa.
The benefits of vertical integration are not only in self-supply but also in understanding the cost structure of the supply chain, enhancing bargaining power upstream. This bargaining power is especially evident now, with the entire supply chain under pressure to cut costs.
CATL stated in its earnings call that the company’s unit profitability remained stable in the second quarter. With the prices of resources and raw materials like lithium carbonate falling, this linked to a decrease in the unit sales price of products, thereby increasing the gross profit margin.
Of course, CATL’s profits come not only from reduced raw material costs but also from reduced expenses. During a business upswing, leading companies usually hide profits and lower market expectations, but once the business stabilizes, they release profits.
BYD, with its rapidly increasing car sales, represents the former, with revenues exceeding RMB 600 billion (USD 82.85 billion) in 2023 but a net profit of only RMB 30 billion (USD 4.14 billion), hiring many new employees and investing RMB 39.9 billion (USD 5.51 billion) in R&D.
In contrast, CATL’s battery business has stabilized, ensuring profitability despite declining revenues. Amid the price war, CATL has started to cut expenses and release profits to stabilize its stock market price.
In the first half of this year, CATL’s R&D expenses were RMB 8.59 billion, down from RMB 9.85 billion in the same period last year. As of the end of the reporting period, the company had 19,758 R&D personnel, down from 20,604 at the end of 2023, a reduction of 846 people.
R&D expenses and personnel numbers reflect CATL’s shift toward conservatism, reducing expenses and slowing the pace of R&D. The current car market is also less receptive to new technologies, preferring mature, low-cost technologies.
In product development, CATL mentioned in its earnings call that the Shenxing battery and Qilin battery have begun mass production this year. Throughout the year, these batteries will account for 30–40% of the company’s power battery shipments, with many projects still progressing. The proportion of these two batteries in future shipments will continue to increase.
The Shenxing and Qilin batteries are CATL’s main products, with shared production lines even when supplying different car manufacturers. Thus, the more these products are shipped, the higher the production capacity utilization rate, leading to significant economies of scale, lower prices, and higher market share.
In a stabilized battery market, CATL’s financial figures no longer need significant improvement. The strategy now is to expand business growth points while maintaining stability.
Stabilizing domestically, expanding overseas
CATL’s market share is very stable in China. In the first half of this year, CATL’s domestic power battery installations reached 93.31 gigawatt hours, with the overall market share rising by 2.97 percentage points to 46.38%.
In the LFP battery segment, BYD surpassed CATL in the first half of 2023 with a market share of 43.68%. This year, CATL regained the top spot in the segment with a market share of 37.19%, exceeding BYD’s 35.79%.
Market share is also reflected in existing production capacity. The financial report shows that CATL’s current capacity is 323 GWh, up from 254 GWh in the same period last year, an increase of 69 GWh. The under-construction capacity is 153 GWh, up from 53 GWh last year.
In the first half of the year, CATL’s capacity utilization rate was 65.33%, a significant recovery from last year’s 60.5%. CATL pointed out in the earnings call that, due to strong market demand this year, the company sped up on capacity building and would maintain a certain level of investment for some time.
However, the financial report shows that CATL’s fixed assets were RMB 113.143 billion (USD 15.62 billion), a year-on-year decrease of 1.9%, and construction in progress was RMB 27.257 billion (USD 3.76 billion), a year-on-year increase of 9%. These values showed little fluctuation.
Capital expenditures saw a significant reduction. In the first half of the year, CATL’s cash payments for the purchase and construction of fixed assets were RMB 13.83 billion (USD 1.91 billion), a year-on-year decrease of 25%.
This means that, although CATL has many under-construction capacities, the pace of production has slowed. Although domestic market demand remains, the growth rate is clearly not as fast as before, and CATL no longer needs to expand production massively to meet business growth rates.
CATL also mentioned in the financial report that its “super-intelligent manufacturing line” has been promoted to various production bases, significantly improving production efficiency. This technology is designed for large-scale production, apt for the production of Qilin and Shenxing batteries. CATL said that its eighth-generation prismatic super line (PSL) can reduce personnel requirements by 70% and increase production speed by 300%.
In addition to stabilizing the domestic market, CATL is also expanding into overseas markets, which is the next competitive focus for battery companies.
The financial report shows that CATL’s main product sold overseas in the first half of the year was battery systems, with no significant change compared to the same period last year. However, the company’s overseas revenue reached RMB 50.529 billion (USD 6.98 billion), accounting for 30.30% of total revenue. The gross profit margin of overseas revenue was 29.65%.
CATL’s overseas business currently mainly involves exports, and expanding local production capacity overseas is urgent. CATL has disclosed six overseas factories to date, in Thuringia (Germany), Hungary, Indonesia, Thailand, as well as Michigan and Nevada in the US, in cooperation with Ford and Tesla, respectively.
Besides Indonesia and Thailand, where Chinese car companies are collectively going abroad, the other four factories face significant challenges.
In Europe, the Thuringia factory has been built but continues to lose money. CATL explained that the factory is still ramping up capacity, with the goal of breaking even for the year. The Hungary factory has completed some plant top-sealing and equipment commissioning, with construction work progressing orderly.
Building European factories requires significant resources. CATL’s German factory has invested RMB 13.34 billion (USD 1.84 billion), with a planned capacity of only 14 GWh.
In contrast, the Hungary factory has a planned capacity of 100 GWh and has only invested RMB 2.97 billion (USD 410.1 million). Even if the cost in Hungary is halved, an additional RMB 44.53 billion (USD 6.15 billion) will be needed to fully operationalize. These capacities require substantial funds and stable orders.
In the US market, the license royalty service (LRS) model forms the basis for factory construction. This model, explained during the earnings call, is said to be a win-win sharing model with partners, where CATL does not need to invest capital expenditures for production base construction, thus posing relatively low risk.
However, according to 36Kr, although no capital expenditure is required, CATL must support almost all plant, equipment, and supply chain construction work, with the partners only needing to “move in.” This model’s profit-sharing is complex and still under negotiation, with significant challenges in supply chain construction.
Overall, CATL has entered a stable period. Even amid intense price wars, it can still ensure its profitability.
Developing the overseas market will be CATL’s next growth point, but the future holds many uncertainties.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Han Yongchang for 36Kr.