Investing in China’s Battery Industry
By Mark Preen
China has ambitious plans for its battery industry as it attempts to develop its electric vehicle (EV) and EV battery industries. Analysts predict that China will have the capacity to produce over 120 GWh of batteries by 2020, and will increase its share of global lithium production from its current 55 percent to 65 percent by 2021.
However, China will need to develop new technologies and the ability to produce high end batteries to achieve its ambitions. At present, Chinese manufacturers are lagging behind foreign producers – such as LG Chem, Samsung SDI, SK Innovation, and Panasonic – on this front. Attracting foreign investment will therefore prove crucial.
Incentives and restrictions
In order to attract foreign technology, foreign battery producers are officially ‘encouraged’ to invest in China under the Catalogue for the Guidance of Foreign Investment Industries (“the Catalogue”) published in June. Under the Catalogue, the “foreign investment equity ratio shall not exceed 50 percent” stipulation has also been removed.
The removal of this equity ratio requirement from previous iterations of the Catalogue means that foreign investors no longer have to enter into joint ventures with Chinese companies, which will ease concerns about protecting intellectual property.
There are also subsidies available to battery producers. However, draft guidelines released in 2016 stipulated that battery producers would have to have at least 8 GWh of production capacity to qualify for subsidies. This favors Chinese battery producers Build Your Dreams (BYD) and Contemporary Amperex Technology Co. Limited (CATL) because it is a target that only they are able to meet.
No foreign producers in China are currently able to meet this stipulation. The Korean company LG Chem had the biggest production capacity of foreign producers in 2016 with a capacity of 2 GWh at its factory in Nanjing. In this way, the 8 GWh stipulation aims to encourage Chinese battery producers to consolidate so that they mature more quickly.
As well as battery subsidies favoring Chinese battery producers, generous EV subsidies also give domestic producers an advantage because carmakers located in China must use battery producers from a government-approved list if they are to quality for these subsidies. This list is made up of 57 manufacturers, but none of them are foreign.
A leveling playing field
The battery industry in China is becoming more open to foreign investment as it seeks to acquire foreign technology. However, foreign investors still face obstacles when operating in China as the country seeks to simultaneously acquire foreign technology and keep control of the industry.
Due to these obstacles, LG Chem is starting to diversify its production to India and Southeast Asia. However, LG Chem continues to persevere in China and has expanded its production in the country because the company recognizes the importance of the market.
If foreign producers such as LG Chem can make technological breakthroughs, then this will give them a competitive advantage even in the face of subsidy obstacles. It is also expected that the Chinese government will only give Chinese battery producers a few more years to become competitive — subsidies are expected to end in 2020.
Chinese battery producers will therefore have to end their reliance on subsidies and prepare themselves to innovate and compete on a level playing field. Meanwhile, foreign manufacturers that would like to get their foot in the door early may begin studying the local market for entry.
This is Part 2 of a two-part article on EV batteries in China. In Part 1, we discussed the competitive landscape of China’s EV battery industry.
China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEAN, India, Indonesia, Russia, the Silk Road, and Vietnam. For editorial matters please contact us here, and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates is a full service practice in China, providing business intelligence, due diligence, legal, tax, IT, HR, payroll, and advisory services throughout the China and Asian region. For assistance with China business issues or investments into China, please contact us at email@example.com or visit us at www.dezshira.com
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.
This Dezan Shira & Associates 2017 China guide provides a comprehensive background and details of all aspects of setting up and operating an American business in China, including due diligence and compliance issues, IP protection, corporate establishment options, calculating tax liabilities, as well as discussing on-going operational issues such as managing bookkeeping, accounts, banking, HR, Payroll, annual license renewals, audit, FCPA compliance and consolidation with US standards and Head Office reporting.
Foreign investors often find China’s financial system to be one of the most difficult areas to navigate when establishing or growing their presence in the country. Navigating China’s tax system, and its complexities, requires time and commitment. In this issue of China Briefing magazine, we look at the factors that make China’s tax system unique, and identify steps foreign investors can take to manage its challenges. We first examine the issues that most commonly disorient foreign investors. We then discuss the importance of pre-investment capital planning, within the context of tough foreign exchange controls, before examining the ever-maturing regulations for the transfer pricing system.