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The FT’s Robin Harding recently said this of gigafactory economics:
“batteries are a bad business: low margin, capital intensive, dirty and hemmed in by hard physical limits on technological progress.”
Forget all notions of glitz and glamor. The battery gigafactory business is now merely a commodity volume-manufacturing proposition. Gigafactories face pricing pressures from raw material suppliers (70% of cell producer costs) and EV manufacturers. Not only do you have a low-margin product, but you also have high capex requirements to get them made — $100M/GWh/yr as reported by Billy Wu at the recent International Battery Seminar conference. Throw in a 10-30% scrap rate during the first 3 years of operation, and you get the picture. Based on these conditions, it’s likely that China’s dominance has been significantly bolstered by the $60B–$100B in government subsidies for the sector.
Here’s a specific case: Samsung SDI’s EV battery division reported a profit margin of 1% for the first time, after reporting fat losses between 2012 and 2019. It’s notable though, that consumer electronics batteries maintained higher profitability of approx 11%.
Key takeaways:
The majority of gigafactories are reporting thin margins in the 1-3% range, with top-tier players able to reach 8-10%.
Economies of scale bear out in the gross profit data, as a 100x in scale (revenue) leads to ~6x in profitability.
CATL's dominance continues, reaching $47B USD in revenue, capturing +30% of the EV battery market.
BYD, Tesla, and CATL lead R&D spending with ~$1B USD each, ~5% of revenue.
Digging into financial statements
We can learn a lot about publicly-traded battery producers as they are obligated to regularly disclose financial performance.
Below we compare some metrics of 16 public gigafactories around the world, using data accessed from Yahoo Finance on 2023-03-25:
🇨🇳 9 Chinese gigafactories (○): BYD, CALB, CATL, CBAK, EVE Energy, Farasis, Gotion, Microvast, Sunwoda
🇰🇷 3 Korean gigafactories (♢): LG Energy Solutions, Samsung SDI, SK Innovation
🇯🇵 1 Japanese gigafactory (△): Panasonic
🇺🇸 1 American gigafactory (□): Tesla
🇪🇺 1 European gigafactory (▷): Freyr
🇨🇦 1 Canadian gigafactory (◃): Electrovaya
Tips on how to interpret the plots below and raw data can be found at the bottom of this article.
Gigafactory revenues to the moon
Fig. 1 shows the revenue growth trends in these companies. For companies that have been around since the early 2000s, we can see that there have been periods of fluctuation.
However, starting ~2018 and more so from 2020 onwards, public cell manufacturers have scaled significantly in both production and sales — following the growth of the EV segment. This is especially the case for tier 1 producers like CATL, LG Energy Solutions, and Samsung SDI.
The top plot also illustrates the meteoric rise of Tesla throughout the years, while larger conglomerates with diverse businesses such as Panasonic and SK Innovation have had a more steady performance, which may be the motivation for them to spin out their battery divisions into individual companies (LG Chem → LGES, SKI → SK On). BYD also just announced 2022 figures, 4x-ing profits on their EV business.
We can then use the same year range to look at other metrics:
The bottom line: net profitability
Net profit is the amount of money a company makes after subtracting all of its expenses (direct production costs, rent, utilities, marketing costs, depreciation, amortization etc) from its total revenue. The net profit margin, comparatively, tells us the relative profitability, as a percentage of the total revenue generated.
From the top of Fig. 2 we can see that, for the 12 battery manufacturers with positive profit and revenue, as they have grown over time, so have their net profits.
The majority of cell manufacturers have a net profit margin in the 2-3% range. Pureplay gigafactories CATL, EVE, and Samsung SDI have higher margins in the 8-10% region.
Companies tend to trade profit margins for revenue on an individual basis, (for example Sunwoda, BYD, Gotion), perhaps reflecting the price competitiveness between these large high-tier cell producers.
Gross profitability: production costs only
Gross profit tells us how much a company earns after subtracting just the “cost of goods sold” (COGS) from their sales. COGS includes raw materials, labor, and manufacturing costs but omits rent, utilities, taxes, and marketing expenses. The gross profit margin then can be used as a comparative indicator of a company's efficiency in producing and selling its products.
Notably, economies of scale appear across companies in Fig. 3 (bot) via the weak positive trend between gross margins and revenue. Companies in the $100M USD revenue realm have margins of ~5% while companies in the $10B USD range get closer to 30%.
Market share: more batteries, more revenue
SNE Research provides us with the market share of the top 10 global EV battery manufacturers. Fig. 3 shows that for pureplay gigafactories, generally, a higher market share leads to higher sales and hence higher revenue. This makes sense.
What’s interesting is that smaller pure-play factories such as CALB, Gotion, EVE, and Sunwoda have similar EV market shares but drastically different revenues. This is likely due to manufacturers selling to different market segments, perhaps consumer electronics and grid storage applications.
R&D budgets: who’s spending on innovation?
Financials spent on R&D is crucial for new product development and for staying competitive in the industry. This includes spending on wages for research staff, equipment, materials, and the cost of intellectual property generation.
From Fig. 5 (top), we can see that generally, R&D budgets increase as revenue increases. The top companies like BYD, Tesla, and CATL are spending some $1B USD each on innovation.
As a fraction of revenue, Fig. 5 (bot), we see that R&D generally makes up a larger proportion of a company’s expenditure during the early days, before stratifying into 3 categories:
Higher R&D spend (~20%): Lower-tier producers Electrovaya and Microvast
Lower R&D spend (~0.5%): Korean giants LG Energy Solutions, and SK Innovation
Mid R&D spend (~5%): Everyone else
We should note here that differences in R&D spending may not actually reflect differences in strategy, and that accounting treatment may also play a role. Companies may decide to place R&D expenses as line items under COGS or another category to skew certain metrics in their income statement.
Debt-to-capital: degree of leverage
The debt-to-capital ratio tells us how much of a company’s available capital (including equity) is in the form of debt. Raising debt may allow companies to finance growth and expand in a manner that may be unavailable using internal resources alone.
In Fig. 6 there is (a messy) trend where companies may rely on larger proportions of debt during earlier growth stages. This decreased reliance on debt as capitalization increase is atypical as most businesses observe stable leverage ratios.
We could speculate why it appears that the gigafactory lifecycle typically starts with debt and is progressively reduced: is this indicative of the typical borrowing for greenfield development, followed by higher cash generation used to pay down the debt? Do gigafactories gain access to more equity funding as they scale?
The most leveraged company currently is Sunwoda. Overall, a higher degree of leverage may signify more exposure to the risks of downturns. Electrovaya is not plotted here as it currently has a negative total capitalization.
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General notes on plot interpretation:
Plot marker shapes correspond to the country of origin for the gigafactory.
The largest plot marker represents the metric for the latest year (usually 2023 or 2022).
The trailing markers represent historical yearly values and the lines connect them in chronological order.
As log scales are often used, vertical lines correspond to transitions (for example in profitability) between negative values, which are cut off by the log scale, and positive values.
We indicate non “pureplay” cell manufacturers with a (*) for companies that also make EVs like BYD/Tesla and a (^) for larger conglomerates, like Panasonic, where batteries are only a subset of the larger business.
As companies are listed on international stock exchanges, we used approximate 5-year-averaged exchange rates to normalize to USD: CNY(0.15), KRW(0.0008), EUR(1.1), CAD(0.75), HKD(0.128), JPY(0.009).
Raw financial data used to generate the analyses below can be accessed at this repository.