Which Buffett-backed company has a… battery problem

Which Buffett-backed company has a… battery problem
Which Buffett-backed company has a… battery problem

By Anjani Trivedi

Backed by Warren Buffett’s Berkshire Hathaway, China’s biggest electric vehicle maker, BYD, has posted impressive first-half 2022 profits, but it is still struggling with battery production costs.

It’s not just raw materials or other components that many manufacturers complain about. While the Shenzhen-based company noted in its half-year results announcement that it has made adjustments to some car models to deal with fluctuating prices of raw materials such as lithium, nickel and cobalt, the biggest hurdle is manufacturing costs. of its high-tech batteries.

Scale

The challenge for BYD shows how difficult it is to produce batteries on a large scale – even if the technology is modern and high-level – and why this will become one of the main obstacles in the short term as demand grows.

Compared to the world’s largest battery maker, Contemporary Amperex Technology, BYD’s technology is more advanced with its Blade battery, which it notes can also be used in some Tesla vehicles.

The innovative form factor – the shape, size and physical characteristics of the material – allows for more even heat distribution, which is a big plus given the fire risk. Because it’s so long in length (about 1 meter, compared to about half that for its competitors), but also narrow, BYD’s battery is more space-efficient, which ends up giving it greater energy density.

The Chinese company’s battery component materials are around 5% cheaper than CATL’s and this ensures that it uses almost a quarter less electrolyte – the substance that allows electricity to flow from the anode to the cathode – and also costs less, as UBS analysts have noted. This is exactly what all manufacturers worldwide are striving for.

However, here’s the thing: the price of the battery pack (or housing) is almost 30% more than the price of CATL. Additionally, manufacturing costs are 21% higher due to the battery architecture, again according to UBS analysts.

Blade uses the so-called “stacking method” for its electrodes, which means that the anode, separator and cathode are arranged like a “deck of cards”, as UBS puts it. CATL’s counterpart, on the other hand, uses the winding process, a proven method that manufacturers have been using for a long time.

Cost

In the long run, stacked electrodes are likely to prove a winner, as the energy in this battery model is more evenly distributed. However, at the moment, it is an expensive method.

Technology and R&D costs are high, even as a percentage of sales compared to CATL’s. It is good that the company is a beneficiary of many Chinese government grants and subsidies. In 2021, it received 4.48 billion yuan ($650 million), while in 2020 it received 2.26 billion yuan. BYD’s battery operating margin lags behind CATL and its South Korean rivals. Nomura analysts expect this trend to remain unchanged for the next five years.

Over the past four years, CATL, with nearly 40% of the global battery market, has scaled at a much faster rate in terms of total battery capacity than BYD, with a 13% market share.

Even compared to South Korea’s LG Energy Solution, it has been slower to add gigawatt hours. It is difficult to scale up if the manufacturing cost is so high, as it is not easy to adjust the processes quickly.

This is also likely to make it difficult to develop large fleets of cars and batteries overseas and not just in China for large electric buses, as BYD is currently doing. No wonder even Berkshire is now starting to reduce its stake in the company. Regulatory filings filed Tuesday showed that Buffett’s company has reduced its equity stake in the company, which it held for more than a decade, after much speculation in July that it was preparing to do so.

Overall, BYD’s innovative and long-term potential for success is at a high cost right now. That’s what hinders its ability to scale as quickly as its biggest competitor.

The cost, technology and scale trade-off facing BYD is a real warning to all battery companies – and EV makers too – who advertise that they have best-in-class technology that is ready to “destroy” the obstacles in the near future: today, more than ever, everything is a matter of cost.

The article is in Greek

Tags: Buffettbacked company #a.. battery problem

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