Summary of Key Points
Automakers are clearly aware of the significant risks involved in battery production—high capital investment, difficulty in crossing technical boundaries, and the potential for overcapacity to become a burden. However, they are still entering the battery manufacturing business. The primary reason is that battery costs account for 30%-40% of the total vehicle cost, significantly squeezing the profits of automakers, while companies like CATL (Contemporary Amperex Technology Co., Ltd.) enjoy high profit margins of around 17%. Additionally, supply chain security (experience from early periods of battery scarcity) and local government incentives (to extend the industrial chain) are important factors. Nevertheless, battery production requires a sufficient scale to be viable; otherwise, it can become a liability. CATL has responded by building a consumer-preferred battery brand, making it more difficult for automakers to produce batteries in-house. The goal for large automakers is not to make money from the battery business itself but to reduce overall vehicle costs and maintain their profit margins.
Detailed Analysis
1. Profits are Being Eroded, forcing Automakers to Reclaim Control over Batteries
- High Cost Contribution: Battery packs represent the largest cost component in electric vehicles (30%-40%), meaning nearly half of the cost goes to battery suppliers.
- Profit Compression: In the first half of 2026, the overall automotive industry's profits plummeted by 20%, while CATL's profit margin remained at 17%. Most automakers had profit margins below 2% (Beiqi was close to zero, and GAC and Geely even suffered losses). This means that automakers, despite selling many cars, are seeing a large portion of their profits taken by battery manufacturers.
- Cash Flow Challenges: Battery companies require payment within 200 days, but automakers only allow customers to pay within 60 days, putting significant pressure on their cash flow.
- Fear of Being Strangled by Suppliers: During the early stages of the new energy vehicle market, there was a shortage of batteries, and automakers had to compete for them. They don't want to be at the mercy of suppliers again.
2. The Challenges of Battery Production: Not Everyone Can Afford This “Money-Burning Game”
- Lack of Scale Leads to Losses: Battery production benefits from economies of scale; the larger the output, the lower the cost per unit. For example, NIO (NIO Inc.) concluded that it couldn't improve its gross profit margin by producing batteries in-house within three years and decided to abandon this approach due to insufficient sales volume and low factory utilization, which prevented cost reduction.
- Technical Barriers: Automakers, accustomed to working with engines (mechanical and thermal systems), face a completely different field with battery technology (electrochemical processes and electrode coating). Traditional engineers need new teams to overcome these challenges.
- Overcapacity Becomes a Burden: If new energy vehicle sales fall short of expectations, the depreciation of equipment and employee salaries in self-owned battery factories can become a financial burden, counteracting any cost-saving efforts.
3. Different Approaches Taken by Large Automakers
- BYD: Full vertical integration (producing batteries before building vehicles). FDIC Battery first serves BYD's own vehicles. Even if it doesn't generate profit, this approach reduces BYD's costs and allows for more flexible pricing.
- Great Wall Motors: Created an independent company, Honeycomb Energy. Although it incurs losses, it provides a supply chain backup for Great Wall and gives them leverage in negotiating with suppliers.
- FAW Group: Combined cooperation with CATL (Time-FAW) to address production issues, while also developing their own fast-charging and sodium-ion battery technologies.
- GAC: Pursues multiple strategies, including purchasing batteries, forming partnerships, and investing in InPai Battery (10.9 billion RMB), as well as developing Gigawatt Technology for ultra-fast charging batteries, all with the aim of reducing costs and ensuring supply.
- Geely: Integrates various sources, such as purchasing batteries, forming partnerships, and utilizing internal battery assets (Yaoning and Jidian). They established Jiyao Tongxing to increase self-sufficiency while still relying on external suppliers to some extent.
4. CATL's Counterplay: Leveraging Consumer Awareness
- Shifting from the Background to the Forefront: Previously, consumers didn't care about who made the batteries in their vehicles. Now, CATL has built brands like “Shenxing” and “Kirin,” making its batteries a recognized standard (similar to Intel Inside in computers).
- Increasing Challenges for Automakers: If automakers use batteries from other manufacturers, consumers may question their quality and safety. When producing batteries in-house, they must not only ensure technical competence but also convince consumers of the quality.
- Brand Loyalty: Consumers tend to trust CATL due to its safety record and quality data, raising the bar for automakers trying to produce batteries on their own.
5. The Critical Barrier: Scale as a Prerequisite for Battery Production
- Only Large Automakers Can Afford It: Only companies with annual sales of millions of new energy vehicles have the capacity to utilize battery production (e.g., producing 18 GWh of batteries requires selling 300,000 vehicles per year). Scale is essential to spread costs and maintain high production efficiency.
- Small Automakers Face Difficulties: Without sufficient scale, battery production is likely to result in losses, with factories operating at suboptimal capacity and higher costs compared to purchasing from suppliers.
- Partial Self-Sufficiency: Even large automakers do not aim for 100% self-sufficiency; they retain some external purchases to keep competition between internal and external suppliers, thereby reducing costs and ensuring supply.
In Conclusion
Automakers are entering the battery manufacturing business not to profit from it but to ensure the viability of their vehicles. Any potential profit from the battery business is acceptable as long as it helps reduce overall vehicle costs. Small automakers should avoid this venture due to the high risks. CATL, on the other hand, uses its brand to establish a strong consumer connection, continuing the ongoing competition between the two parties.