Recently, the founder and CEO of CATL, Zeng Yuqun, made a rare public appearance in an interview with Nicolai Tangen, the CEO of the Norwegian sovereign wealth fundTheir conversation revealed some fascinating insights, prompting me to reflect on the remarkable journey of CATL, which stands as a leader in the global battery and energy storage industry.

For this reason, we chose CATL as our research focus to explore its path to success and the key factors that led to its rise.

1. Why It Had to Emerge from China

Similar to many great companies, CATL's success clearly aligns with the global momentum towards electrification. However, prior to CATL's emergence, Japan had Panasonic, while South Korea boasted SK, Samsung, and LG

So, what made CATL stand out in such a competitive landscape?

Many have offered various explanations, but fundamentally, this company was destined to emerge from China. Whether it was CATL or any other entity, the same outcome was inevitable.

In the interview, Zeng cited a conversation he had with former German Chancellor Angela Merkel, who questioned why Germany, a powerhouse of traditional automotive manufacturing with significant expertise in engine and transmission production, struggled to achieve similar success in battery manufacturing.

Zeng explained that globally, electrochemistry is not regarded as a high-end field, leading many top-tier universities and students to gravitate towards more lucrative disciplines such as finance and semiconductors

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In contrast, due to differing educational resource allocations and market demands, many universities in China have continued to focus on electrochemical research, which has fostered a robust pool of talent in battery technologies.

Then the question arises: why haven’t other nations prioritized electrochemistry? The answer is straightforward: it’s not profitable. Before lithium batteries were widely applied in electric vehicles, electrochemistry was viewed as a labor-intensive low-end industryGraduates in this field struggled to find good jobs, often ending up in roles related to lead-acid batteries and corrosion prevention—tasks often shunned by Western labor markets.

However, these positions presented excellent opportunities for the Chinese workforce to leverage their educational backgrounds and low labor costs

Thus, it’s regrettable that while Western nations were caught off-guard, China leveraged its unique advantages to achieve success in lithium battery technologies.

Consider CATL as a case study; despite being at the peak of the power battery cycle, the company's gross margin hovers just above 20%, and its true net margin is only slightly over 10%. In essence, it's still a demanding businessCATL currently commands a market share of 37.5% globally, approaching a monopoly, yet its annual profit is just over 40 billion RMB, amounting to about 6 billion USDThis net profit level ranks only around the 60th position among S&P 500 companies.

2. Battery Manufacturing: Easy to Start, Hard to Perfect

What distinguishes the electrochemistry industry?

This clue can be gleaned from the interview

When asked why European battery production faces consistent challenges, Zeng noted that their design is flawed, followed by incorrect processes, leading to faulty equipment.

Without a fundamental understanding of electrochemistry's principles and their implications, companies cannot anticipate future risksConsequently, scaling production can lead to yield issues and reliability concerns, ultimately resulting in safety problems years down the line—all stemming from initial errors.

The basic principles of batteries largely hark back to the Voltaic cell from over 200 years ago, revolving around redox reactions

A review of high school chemistry texts covers about 80% of battery principlesBattery structures are fundamentally simple: positive and negative electrodes, electrolytes, and separators. Yet, seemingly straightforward configurations are anything but simple.

Lithium batteries entail extreme demands regarding cost, sustainability, reliability, and safety, given their frequent usage and direct contact with usersHence, clients are reluctant to employ unknown products, as negative experiences can severely impact brand reputationThe infamous incident with Samsung's battery issues nearly cost the company its entire business, illustrating the stakes involved.

However, the operational environment of batteries is incredibly complex, influenced by conditions ranging from extreme cold to high heat, and from humid to arid climates

The intrinsic instability of chemical reactions, in contrast to mechanical operations, further complicates performance, as they are sensitive to temperature and humidity fluctuations and are subject to frequent cycles of charging, discharging, and physical impactsAs Zeng articulates, all external factors must be accounted for from the design's inception.

In simple terms, the challenge lies not in merely producing batteries but in crafting a product that excels in cost, safety, performance, and reliability simultaneouslyThis leads to a highly oligopolistic nature in the battery industry, where cost-sharing through scaling and substantial R&D investments for developing next-generation products become pivotal.

Thus, we observe the entire battery industry exhibiting a strong oligopolistic structure, with companies like BYD and CATL holding over 50% market share.

Yet, the industry is not stable, as technological advancements continuously reshape the landscape

Changes in technological pathways pose risks that could upend the entire industrial framework, reminiscent of trends in the solar industryPresently, the market's focus is on solid-state batteries—whoever achieves a breakthrough in this area could potentially disrupt CATL's dominance, exemplifying the inherent risks CATL faces.

Innovation represents a trial-and-error processCurrently, CATL boasts the highest number of electrochemical research talents within the industry, with Zeng himself being a technical expert, heightening the chances to crack the code of solid-state batteriesHowever, innovation inherently involves an element of chance, which is unpredictable.

Nonetheless, within the domestic arena, competitors like Aodig, Yiwei Lithium Energy, Guoxuan High-tech, Zhongchuang New Energy, and BYD also pose challenges

Unlike Nvidia's AI chips, which enjoy exclusive monopolistic advantages, the battery sector is far more competitive.

Recently, CATL's restrictive non-compete agreements indicate its concern over technology transfers, reflecting a palpable anxiety surrounding their competitive standing.

3. The Future of Batteries: A Rising Tide

Currently, even though the penetration rate of electric vehicles in China exceeds 50%, the global electric vehicle penetration rate rests at around 20%, indicating substantial room for growth

The current demand in China serves as a precursor to future global demand.

Additionally, energy storage systems will become the second significant growth trajectory for the battery industryThe inherent variability of solar and wind power equipment underscores the necessity for storage solutions.

Therefore, the long-term prospects for lithium batteries remain brightWith considerations of emerging sectors such as construction machinery, robotics, and aviation, under the premise of eventual electrification, lithium battery demand is projected to exceed 11 TWhThe industry maintains a tenfold growth potential, providing lithium manufacturers significant opportunities in electrification and intelligent automation.

From a growth perspective, CATL, as a company fully analyzed by the market, faces valuation challenges