When CATL releases its financial report, downstream automakers will surely wear frowns.
The claims that "CATL's profits surpass the total of the seven major automakers" and "automakers' profits are all taken by battery manufacturers" highlight the tough times in the automotive industry, with sharp criticism directed at the profit-making suppliers.
Compared to its large downstream clients, CATL indeed makes too much money. In 2018, SAIC's net profit was ten times that of CATL, but in the first half of this year, it was only one-third of the latter. The automotive industry's profit of 195.4 billion can only be converted into the equivalent of 4.5 CATLs.
The industry first felt the speed of CATL's money printing in 2022, when the price of lithium carbonate soared to nearly 600,000 per ton, causing battery costs to rise significantly, leaving automakers lamenting. CATL managed to "struggle" on the edge of profitability with a small profit of 30 billion.
Since then, CATL has become a dominant player, and former GAC Chairman Zeng Qinghong's complaint of "Am I just working for CATL?" has gradually transitioned from a joke to a routine concern for automakers.
To this day, while automakers are embroiled in price wars, they are also burning money on R&D to match the rapid iteration cycles of consumer electronics. In the end, the majority of profits are taken away by upstream battery manufacturers. Not only are profits thin, but they also have to line up to pay upfront to secure quality production capacity from suppliers.
CATL may have its flaws, but the fact that automakers have become workers is not solely determined by one supplier.
Who Stole the Profits
In recent years, the automotive industry has fallen into a strange cycle of "rising income, declining profits."
Compared to 2022, last year's automotive industry income increased by 1.8 trillion, while profits decreased by 71 billion. Although 7 million more cars were sold, not only did it not create new profits, but it also lowered the original levels. In the first half of this year, industry profits directly erased 49 billion, a year-on-year decrease of 20%.
The harder the automotive industry's situation becomes, the more real the claim that automakers are working for CATL feels.
As a highly profitable supplier in the upstream of the industrial chain, CATL has repeatedly set profit records in recent years, breaking through 70 billion last year. In the first half of this year, profits exceeded 40 billion, making industry experts anxious.
According to Cui Dongshu, Secretary General of the Passenger Car Association, automakers must start making batteries to regain their say in profit distribution; battery industry expert Wang Jianxin more tactfully suggested that automakers and battery manufacturers should collaborate on R&D or jointly build factories as a workaround.
The focus is directed at the upstream, but the problem is that the thinning profits in the automotive industry cannot all be blamed on battery manufacturers. The divergence in profits stems from the asynchronous development of the automotive industry chain's upstream and downstream.
First, they are at different stages.
After 2018, the Chinese automotive market entered a period of stock, with nearly zero growth over the past seven years and annual sales remaining around 27 million. The overall market has not changed much, while internal divisions have intensified.
The market share of fuel vehicles shrank by more than one-third from 95%, with 9 million fewer sold in a year; sales of new energy vehicles, on the other hand, grew by over 12 times, capturing half of the market. Consequently, the performance of traditional car manufacturers generally declined, while the performance of those focused on new energy was just the opposite.
For instance, SAIC had a net profit of 36 billion in 2018, and now barely exceeds 10 billion. In the same period, BYD's profits expanded from 2.7 billion to 32.6 billion. This indicates that not every player in the automotive industry is seeing shrinking profits; the internal distribution is problematic.
When calculating profits in the automotive industry, one must consider the struggling fuel vehicles, while CATL's profits are built on the rapidly growing new energy market. Selling just one more car guarantees an increase in battery installation capacity, making it difficult not to be profitable.
Secondly, their progress in going overseas is different.
Compared to domestically, overseas competition is relatively mild, with higher gross profit margins, making it a natural profit hub. In recent years, automakers and battery manufacturers have been actively planning to go overseas and grab market shares, but the pace is notably uneven.
Overall, the automotive industry is still struggling to penetrate overseas markets, far from the harvest period. In contrast, the power battery industry has not only gone abroad before the explosive growth of new energy vehicles but has also seen six companies in the TOP 10, among which CATL is the fastest progressing.
In the first half of this year, CATL's domestic market share increased to 46%, while its overseas market share also rose to 39.9%. With its significantly superior market share, CATL earned net profits that domestic automakers can only envy.
If the upstream's exorbitant profits and the downstream's difficulties persist long-term, the outside world will easily establish a causal relationship, ignoring the real reasons for the current situation.
Root Cause
The significant decrease in automotive industry profits has often placed battery costs in the spotlight as the main culprit.
Power batteries are the highest-value component per vehicle, which means suppliers naturally have the advantage of taking away the most profit from each car sold. If BYD purchases batteries from CATL, a gross profit of 20,000 per car may have to be split with CATL.
However, in reality, over the past decade, the price of power batteries has fallen by more than 60%, with the price of individual Wh of battery cells decreasing from over 1 yuan in 2016 to around 30 cents now, enough to save tens of thousands on a 60 kWh battery.
Today, battery costs are still affecting the overall vehicle profits; ultimately, it results from the self-inflicted turmoil in the automotive sector.
On one hand, as battery technology matures and costs decrease, new energy vehicles have begun to pack larger batteries, and the increase in capacity ironically makes system costs harder to reduce. On the other hand, many automakers have a model that corresponds to a battery cell, with separate molds for battery packs, which unwittingly increases cost expenses.
The formation of this internal turmoil stems from a more structural contradiction: the automotive market structure is too fragmented.
The sales discrepancy among the top five domestic manufacturers in the first half of the year is less than 200,000 units, while new forces are fiercely competing, with no absolute leader in sight. This fragmentation compels automakers to actively engage in internal competition, and more critically, automakers can only tacitly accept the dominance of suppliers, settling for a 10% profit margin while suppliers take 20%.
This is the true culprit behind the automotive industry’s profitability crisis.
In contrast to the power battery market, which has early signs of an oligopoly, with a structure resembling "CATL + BYD + Others," the automotive industry is very low in concentration.
CATL's market share in domestic installations is approximately equal to the combined total of the second to tenth places, while SAIC, as an industry leader, only holds 13%, narrowly exceeding BYD and Geely. Looking solely at the new energy vehicle market, BYD is also under 25%.
In most industrial supply chains, those with higher concentration hold more power. The side with higher concentration can easily form price agreements, avoiding high-intensity price wars while being more scarce and better positioned to impose conditions.
The automotive supply chain is currently in a phase of concentrated upstream and fragmented downstream, where automakers have no bargaining power against suppliers, nor do they hold any pricing power against customers.
When the price of raw materials like lithium carbonate surged, CATL could confidently transfer costs to downstream automakers with the assurance that "if you don't buy, others will," even demanding advance payments. When demand exceeds supply, automakers must secure production lines and commit to yield fluctuations.
When battery prices rise, automakers have to bear the costs themselves; even when caught up in price wars, they dare not easily pass costs onto consumers, squeezing profits from both ends.
The good news is that the profit distribution imbalance caused by misaligned market concentration is a temporary issue. The automotive market can look to the smartphone sector for reference.
Restructuring Bargaining Power
In 2016, two significant events occurred in the smartphone industry: Qualcomm sued Meizu for infringement, and Samsung cut off screen supplies to Xiaomi.
Qualcomm had a strict policy back then, "No License, No Chips," meaning to buy Qualcomm’s baseband chips, one had to pay patent licensing fees based on the selling price, paying according to the number of units sold. Even Apple had to comply, but Meizu wanted to use first and pay later, which led to Qualcomm suing them.
The old grudge between Xiaomi and Samsung originated from a supplier meeting, which ended unhappily, prompting a Samsung executive to voice concerns to headquarters, directly cutting off the supply of AMOLED screens to Xiaomi, forcing Lei Jun to personally apologize.
Ten years ago, Qualcomm and Samsung were strong because Qualcomm nearly monopolized the baseband chip and wireless communication markets, and Samsung controlled 99% of global AMOLED production capacity. In contrast, the downstream mobile phone market was a fierce battleground where no one held proportional bargaining power.
Today, the smartphone market has formed a stable structure of "Samsung + Apple + China’s TOP 5," where upstream Qualcomm faces challenge from MediaTek, and Samsung Display is being closely pursued by Chinese companies. At this point, the two companies not only won't fall out but have adjusted their attitudes to organize management visits to major clients overnight.
The reset of bargaining power in the supply chain essentially results from the dissolution of upstream monopolies and the acceleration of downstream concentration.
Similar to smartphones, the current automotive market is extremely fragmented, with over 130 automotive brands available, but only a few sell over a million units per year. Leading automakers are straining against each other, with none willing to give an inch, objectively speaking, the intensity of integration in the automotive industry far exceeds that of the smartphone in its earlier days.
The most direct manifestation is the price war; since Tesla initiated a price reduction for the Model 3/Y in January 2023, this new round of price wars has continued for three and a half years.
In the first half of this year, the automotive industry saw a 5% increase in revenue per car, yet a 17% decrease in gross profits, meaning that a car originally priced at 300,000 had a profit of over 20,000 but now is only left with a little over 10,000. When the iteration cycle of new cars is compressed to a monthly basis, today's new car could become unsellable old stock by next month, rendering the price war the most effective means of clearing out excess.
The short-term result is that profits in the automotive industry are getting thinner, but in the long run, as weaker automakers go out of business, the market will concentrate towards leading firms.
If leading firms each sell a million vehicles annually, even sharing 30% of their battery orders would be enough to affect the survival of upstream suppliers. To maintain capacity utilization, the upstream would have to lower their prices, and the profit in the supply chain would be redistributed.
At that time, people may no longer care about who earns more or less; the focus would shift to how much public value the automotive industry could create with its regained bargaining power.
The rise and growth of the new energy industry is fundamentally a macro narrative of industry, with little to do with individual micros, but it is also due to this that ordinary people's interests are easily abstracted into "labor costs" and "operational burdens," rather than being concretely represented as individuals.
If this rise is destined to come at the expense of ordinary people's interests, then this victory seems excessively bleak. Looking back, when CATL raised salaries by 200 yuan, it faced mockery, but the truth may very well be that CATL's offered compensation is already among the best levels in China's manufacturing industry.
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