BYMOF - BYD And New Batteries: Cheap BEVs Coming And Don't Forget Tesla

2023-04-05 10:47:30 ET

Summary

• The industry races to make the internal combustion engine redundant. CATL suggests that sodium ion battery configurations may satisfy 65% of the car market.
• New version of LFP batteries from CATL omits iron and replaces it with magnesium, zinc and aluminium resulting in 210 kWh/kg energy density.
• Sodium ion batteries are going to contribute to major cost reduction in BEVs so, (not forgetting Tesla’s innovations), expect the era of cheap BEVs to be very close.
• The next phase of China’s emissions reduction regulations, due July 1, 2023, might mean millions of petrol and diesel cars will no longer be able to be sold in China.
• The above battery developments have implications for the ICE industry and also the leading BEV manufacturers. The oil industry might pay attention too.

As a follower of the electrification of transport, sometimes I forget how fast this sector of the energy industry is changing. And then I realise just how close we are to the exit of the ICE (Internal Combustion Engine). Of course there are a huge number of details to be sorted out, not the least of which relates to taking the current ICE fleets off the roads, but I'm now convinced that this year might be the year when it becomes clear that we are entering the end of the ICE. Three companies have a leading role in this transition. They are Chinese companies CATL (Contemporary Amperex Technology Co (300750.SZ)), which is the dominant lithium battery manufacturer and innovator, and BYD ( OTCPK:BYDDF ) the second leading battery maker, but also a major electric automobile, truck and bus manufacturer. The third key company is Tesla ( TSLA ). The rest of the wheeled transport industry is following these innovators in the switch from ICE to BEV (Battery Electric Vehicle), except for Toyota ( TM ) which still thinks it has time to continue making hybrid vehicles for the foreseeable future. Here I provide some colour about how I've come to the conclusion that this year we'll see convincing evidence of transition. With cars the big change is going to be a dramatic cost reduction in the price of BEVs.

CATL new battery configurations

CATL is the world's biggest LFP (Lithium Iron Phosphate) battery manufacturer and its batteries are used by many car manufacturers, including Tesla ( TSLA ), Volkswagen ( OTCPK:VWAGY ), BMW ( OTCPK:BMWYY ) and Ford ( F ). It is traded on the Shenzen exchange in China, so the stock is not very accessible to most US investors. In the past 12 months CATL's stock price is down ~20%. CATL has many major innovations in lithium battery technology as described below, but the big one is the coming substitution of sodium for lithium.

Sodium ion batteries have been considered to have a substantially lower charge density than lithium ion batteries, but just as LFP batteries have been improved sufficiently to be installed successfully in many new BEV models, with satisfactory range (more than 400km), the same is happening for sodium batteries.

CATL is improving the charge density of sodium ion batteries and seems to have succeeded in producing sodium ion batteries with 200 Wh/kg energy density. CATL says that BEVs with 500 km range can be achieved with sodium ion batteries. CATL is also trying out combinations of sodium ion and lithium ion batteries for optimal battery configurations. CATL has suggested sodium ion batteries in some form will satisfy demand for 65% of the car market. One suggestion is that sodium ion batteries will be 20% cheaper than the lithium counterparts.

Not content with the above innovations, CATL has also announced an updated version of its LFP batteries called the MP3 in which the iron in LFP is replaced by a mixture of magnesium, zinc and aluminium. The MP3 batteries are 15% more energy dense, at 210 kWh/kg, than LFP batteries. They cost less than batteries containing nickel and cobalt. The claim is that the MP3 batteries will enable a 700 km range for a Tesla Model 3 with a battery pack similar in size to a Tesla Model 3 with an LFP battery.

A recent report suggests that CATL's batteries are becoming to be too cheap . This suggestion might be the result of bad nightmares from ICE manufacturers who find it difficult to believe the pace of change.

BYD on sodium ion batteries

A recent YouTube video goes into considerable detail about BYD's plans for introduction of sodium ion battery-powered BEV models. The key point made in the video is that sodium ion batteries are not a long way behind LFP (Lithium Iron Phosphate) batteries. Both sodium ion and LFP batteries are safer than lithium NMC (Nickel, Manganese, Cobalt) batteries in terms of flammability when damaged. The key differences between LFP and sodium ion batteries is that sodium ion batteries work better at low temperature (eg 90% efficiency at -20C) and also charge faster (15 min to 80%) than LFP batteries.

There seems to be an expectation that BYD will mass produce sodium ion batteries in Q2 2023 (ie more or less now!). The expectation is that these batteries will be incorporated in some models of the BYD Qin EV, Dolphin and Seagull. The expected price of the BYD Seagull in China has been reported to be as cheap as $8,860.

Given the above comments about how BYD is positioning itself concerning BEV car manufacture in 2023, it isn't surprising that BYD is tipped to become the world's biggest BEV manufacturer in 2023. Apart from the US, where it isn't going (yet), BYD has big plans just about everywhere.

Is there a slowdown coming for BEVs due to lack of interest or are customers waiting for cheaper BEVs?

If you want to get a pulse on BEV adoption (after Norway) then China is the place to look . 2022 was a blowout year with 22% of new car sales being 100% electric (BEVs). Remember that comparable figures for BEV sales in China as percentage of total sales was 5.1% in 2020 and 12% in 2021. This is what exponential growth looks like.

The above has happened before the dramatic change in pricing that is going to come from the developments I discuss here. In December there was a slowdown (just 13% growth, lowest in two years) from the massive 74% year on year increase for BEVs in 2022. Could this be an economic slowdown coming, some incentives for plugin vehicles lower in parts of China, or, (as I suspect) customers understanding that a historic price drop is coming for BEVs?

New emissions standards coming to China on July 1 2023

A story just out of China, which is by far the largest car market in the world, suggests that the next phase of Chinese emissions requirements (China 6 standard due July 1 2023) might lead to potentially millions of petrol and diesel cars becoming unsellable in China. The new China 6a standard combines best practice in Europe and the US in addition to new standards in China.

It is clear that the new standards will disproportionately impact foreign car makers as the Chinese industry is already far down the path of full electrification. Indeed the data for the first two months of 2023 gives an insight into changes already happening in Q1 2023. For Chinese brands the year on year change for January and February is a 0.1% increase in market share to 53.1% (reflecting big falls in cars with an ICE being balanced by substantial increases in BEVs). Japanese brands have been dramatically impacted with the market share being 15.5% which is down 40% year on year for January and February. German brands are down just 21.2% to 19.2% market share. US brands have been less impacted, down 12.5% to 9.8% market share. The report claims that the two largest global car manufacturers (Volkswagen and Toyota) aren't even planning mass produced EVs until 2027. I'm not certain that this is correct for Volkswagen, but it aligns with Toyota's view that there is still plenty of time for sale of hybrid vehicles, which of course have an ICE.

The changes in battery technology and manufacturing are not over

The amazing changes happening in battery technology at CATL and BYD are transforming, but they aren't the end of the story, with technical developments at many levels in battery technology. For example silicon (Enovix ( ENVX )) and new carbon (Sparc Technologies (SPN:ASX) anode materials developments look interesting. A detailed look at this area shows a vast number of companies in the race for battery innovations.

Conclusion

When the world's two biggest battery suppliers (CATL and BYD) reveal major new directions in battery technology in relation to the transition from ICE (Internal Combustion Engine) to BEV (Battery Electric vehicle), you know that change is coming. Recent refinements of lithium ion battery composition and the introduction this year of sodium ion batteries for wheeled transport is a very big deal. While a number of car manufacturers are engaged with these innovations, BYD is beginning to lead the pace of change as it moves to become the world's largest electric vehicle manufacturer in 2023.

However, don't discount Tesla in this story. One thing that was made clear at the recent Tesla Master Plan 3 event was that Tesla is agnostic about the battery technology it injects into its vehicle manufacture. I wouldn't be surprised to see a Tesla with a sodium ion battery in the mix soon. Tesla's focus on reducing the manufacturing costs have meant many changes in their processes, including bringing manufacture in house, producing a new permanent magnet motor, new battery manufacturing processes, full ownership of controller manufacture which is moving to be 48V, and dramatic reduction in manufacturing footprint. All of these things herald dramatic reductions in the cost of BEV manufacture over and above the cost of batteries.

As a result of the above, I remain very focused on Tesla and BYD as leaders in the historic race to produce a quantum change in the price of a mass consumer BEV, because these companies are relentless in their innovation and they build fine cars. The rest of the industry is racing to catch up (except for Toyota, which still thinks there is a future for hybrid vehicles!)

There are going to be a lot of losers in the auto industry soon. Perhaps 2023 will be the year when reality bites for legacy ICE manufacturers who think the switch to electrification of transport is going to require decades. I'm reminded of the famous picture of the rapid transformation from horse and cart to motorised transport in New York in the early 1900's. The big market where change is happening really fast is China. This is a time for careful consideration not only of who will be the winners in the electrification of transport, but also which (ICE manufacturing) companies you need to think about exiting. And also with a likely large change in oil needs, it is a good time to rethink the oil & gas industry. A recent Wall Street Breakfast points out that cuts in oil production this year mean that global oil production will be 3% lower for the first half of 2023.

I am not a financial advisor but I follow closely the electrification transport and its impact on the car manufacturing industry (and likely to be followed by dramatic changes in the oil and gas industry). I hope that my perspective is interesting to you and your financial advisor as you review your investment portfolio in energy and transport.

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