[SMM Analysis] The Global Lithium-ion Battery Industry Navigates Capacity Shifts Between Energy Storage and EV Power

The Global lithium-ion battery manufacturing landscape is undergoing a distinctive pattern of demand-driven capacity reallocation. Rather than a structural migration, the industry is experiencing flexible production switching between energy storage systems (ESS) and electric vehicle (EV) power batteries—driven by policy incentives, demand cycles, and the differing economics of each segment.

In 2025, global lithium-ion battery production exceeded 2100 GWh, with power battery drawing near 1,500 GWh and energy storage battery production near 550 GWh . By 2026, total lithium battery production are projected to grow approximately 56% year-on-year to over 3,300 GWh, with energy storage lithium battery production expected to exceed 1,000GWh. Within this rapidly expanding market, production capacity is not static—it flows between segments in response to discrete demand pulses triggered by policy windows and regulatory deadlines.

Switching Drivers and Timeline

The capacity switching pattern observed throughout 2025–2026 is driven by discrete demand signals: policy windows, regulatory deadlines, and segment-specific surges.

Q2–Q3 2025: ESS → Electric Commercial Vehicle Shift

The global commercial vehicle segment experienced a surge in demand, with new energy commercial vehicle sales reaching close to a million units in 2025—an approximately 60% year-on-year increase and a market penetration rate of about one quarter. Within this, new energy heavy-duty trucks saw explosive growth. Coupled with a full purchase tax exemption policy, this demand surge triggered a redirection of ESS production capacity toward commercial vehicle power batteries.

Q4 2025: Electric Commercial Vehicle → ESS Reversal

The year-end concentrated delivery window for energy storage projects—mainly driven by annual grid-connection deadlines in China—prompted capacity to flow back toward ESS.

H1 2026: Continued Energy Storage Delivery + Residential ESS Shift

The first half of 2026 saw sustained storage project deliveries alongside a marginal slowdown in electric commercial vehicle demand. Meanwhile, ex-China residential ESS demand recovered, supported by incentives in selected markets—most notably Australia, which drove some power capacity toward the residential storage segment.

What Switched, and At What Cost

Capacity reallocation operated along two distinct pathways, each involving different cell models:

Pathway 1: Large-cell switching within power batteries (324Ah & 588Ah). Larger-format cells—principally 324Ah and 588Ah—move between commercial vehicle and passenger vehicle power battery lines. When commercial vehicle demand surges (as it did in 2025 with heavy-duty trucks), these lines can be repurposed to serve the higher-volume passenger segment, and vice versa. Both applications sit on the power-battery side of the industry, so the switch is intra-segment.

Pathway 2: Power-to-ESS line conversion (120Ah). Smaller 120Ah cells sit at the boundary between power and energy storage applications. Lines producing 120Ah cells can be converted from power battery duty to ESS duty—or redirected back—depending on which segment offers better near-term economics. This is the cross-segment switch that links the two halves of the battery market.

Switching cost and lead time: On average, retooling a production line for a different cell model takes two to four weeks and costs roughly USD 140,000 per switch. This is the baseline friction that makes capacity reallocation a considered decision rather than a continuous flow—and it is the reason process technology becomes decisive, as the next section explains.

Process Technology Determines Switching Flexibility

Not all production lines can switch with equal ease. The underlying cell manufacturing process defines the elasticity of capacity reallocation:

Winding Process: In this approach, electrodes are wound around a winding needle. Physical constraints—needle length and curvature radius—limit production to fixed cell models. Switching to different models requires changing the winding needle, incurring high retrofitting costs and long lead times. As a result, 324Ah winding lines can only switch between ESS and commercial vehicle power cells of the same model.

Stacking Process: Electrodes and separators are stacked layer by layer, free from winding needle and radius constraints. By adjusting electrode length and the number of stacked layers, stacking lines can produce cells of any capacity. This enables flexible switching across all cell models. BYD is the primary player with large-scale stacking capacity—its Blade Battery lineup is entirely produced using the stacking process.

Conclusion

The lithium-ion battery industry's ability to flexibly reallocate production capacity between energy storage and EV power segments reflects both the scale of its manufacturing base and the responsiveness of its supply chain. As energy storage continues its rapid ascent—with 2026 energy storage lithium-ion battery production projected to grow over 90% year-on-year—and the continuous acceleration of commercial vehicle electrification process, this demand-driven switching dynamic is likely to persist.

However, the degree of flexibility varies significantly by process technology. Stacking-based manufacturers like BYD are positioned to respond to demand shifts with minimal friction, while winding-based players face higher switching costs and narrower optionality.