SHANGHAI, Jun. 19 (SMM) – The elimination of inefficient capacity halved the number of China’s lead-acid battery producers, but capacity increased instead falling.
The number of lead-acid battery producers fell from more than 2,000 in 2011 to about 400 currently following the massive industrial consolidation, but the aggressive expansion by leading companies left lead-acid battery capacity in suplurs.
SMM analyst Zhang Shu said in an interview that the Chinese government has been trying to contain the overgrowth in lead-acid battery industry by policies concerning to environmental protection, but companies were still expanding actively.
Given the severe overcapacity, China’s battery giants, including Chaowei Power (00951.HK) and Tianneng Power (00819.HK), fired price wars, leaving SMEs struggling for survival.
Aggressive Expansion by Large Companies
According to Chaowei Power, the industrial consolidation provides opportunity for leading companies to capture larger market share. The company revealed in its annual report that it has established production bases in Shandong, Jiangsu, Henan, Zhejiang, Anhui and Jiangxi by the end of 2012, increasing its capacity from 2011’s 56 million units to 90 million units, a rise of 60.7%. Besides, the company also built new facilities in Zhejiang’s Changxing county and Hebei’s Xinhe County last year.
In addition, Chaowei Power also acquired 60% of Jiangsu Yongda Power’s share, 28% of Zhejiang Zhenlong Power’s stake, 85% of share of Qinyang Libiao Plate.
Zhang also said Chaowei Power was not the only company busy in expansion, as many large companies reported schedules for constructing new production bases in their annual reports. The net result is that many companies have to postpone or call off their expanding projects as the market is not able to consume the excessive capacity.
However, the consequence of the continuous expansion is pronounced. China’s lead-acid battery capacity hit 256 million KVAH last year, but output was only 170 million KVAH, leaving the capacity utilization at merely 66%, and China’s will see further increase in capacity this year.
Intensifying Price Wars
SMM analyst Zhu Rongrong believes that Chinese government has been promoting development of lithium battery sector, but most downstream buyers still favored lead-acid battery due to immature technology for lithium battery production.
The continued rise in lead-acid battery output is not a reflection of strong demand from electric vehicle and automobile sectors. Rather, most domestic electric vehicle battery producers reported slipping orders, Zhu said.
An anonymous source disclosed that the government curbed investment in lead-acid battery industry and raised requirements for the industry to reduce pollution incidents, but it was still difficult to restrict expansion of well-known companies, such as Chaowei Power and Tianneng Power, which reported high taxes and profits.
Notably, lead-acid battery production became highly concentrated, with electric vehicle battery market basically dominated by Chaowei Power and Tianneng Power, and competition between the two giants was intensified.
The price war in electric vehicle battery market has been ignited late last year and was exacerbated this year. Both Chaowei and Tianneng cut price for 48V12AH battery to RMB 300/set and those for 48V20AH battery to RMB 500/mt. Chaowei again cut battery prices in early June, while Tianneng raised its rebates offered to distributors.
The rapid capacity growth and waning demand are two major factors contributing to falling battery prices, according to Zhang Shu, and the price war not only placed great sales pressure on non-leading enterprises, but also hurt benefits for the two leading companies. Chaowei Power admitted that the fierce competition starting Q4 last year has impeded its sales increase.
Similar issue is also loomed in backup battery and ignition battery markets, albeit not evident.
An industry insider said the resolution of overcapacity should rely on both government policies and market competition, as the government will not overly restrict market development.