CATL proposed Lithium-ion battery rebate program to its NEV customers

According to the program, for NEV customers that participate in it, 50% of their expenses on CATL batteries will be settled based on a fixed lithium carbonate price of Yuan 200,000/tonne over the course of the following three years (2023-2025), and the remaining 50% will be settled at market prices. At the end of each year, CATL will offer the rebates. To enjoy such rebates, customers must guarantee that within the first three years, at least 80% of the batteries they purchase come from CATL, and the purchase volume in the fourth and fifth year should not be less than that in the previous year. Besides that, customers have to make certain advance payments.

Figure 1: Lithium carbonate price per ton

According to industry sources, Tesla has rejected the proposal, but the others are still debating about it.

Notes: All content is subject to CATL's official announcement. The author holds no responsibility in the investment decisions made by investors based on this article.

Background and rationales of this rebate program

CATL has been promoting the so-called contracted-processing-line model to NEV makers since 2020, which is presented as follows:

Finished product price = raw material price + processing fee + reasonable profit

The processing fee decreases gradually as the scale and efficiency of battery production increase. The pricing method is mainly in accordance with the industry practice, and it is a prevailing method adopted in the non-ferrous metals industry.

There are four reasons that can explain why CATL promotes this model:

1. Although CATL is the world's largest lithium-ion battery producer for EVs, the company has no significant influence on the upstream lithium ore prices, as it failed to acquire lithium mines decisively in its early stage.
2. With large purchasing volumes of raw materials, CATL can secure relatively lower long-term contract prices.
3. Under this pricing model, the fluctuations of lithium carbonate prices have little impact on CATL's profits.
4. Soaring prices of raw materials such as lithium carbonate have dealt a heavy blow to Chinese NEV battery makers except CATL and BYD. This rebate program will make it more difficult for those second-tier battery manufacturers to compete with CATL.

China's NEV sales slumped in the first month of 2023. According to the CPCA data, the country's total NEV wholesales came in at around 410K units in January, down by 45% from December 2022. Though January's volume logged a year-on-year growth of 16.5%, it was far lower than the 94% surge of wholesales for the whole year of 2022. Due to China's phase-out of NEV subsidies and the spike in COVID-19 infections across the country last December, Chinese consumers are more cautious in buying new cars including NEVs.

Figure 2: China NEV wholesale sales volume chart (Jan 2021 to Jan 2023)

Sales pressure will inevitably lead to inventory overhang and price cut. In fact, Tesla took the lead in cutting car prices in January, followed by other NEV manufacturers. As China's NEV manufacturers are on the brink of suffering losses, they opt to pass the pressure to their battery suppliers, expecting lower battery prices.

Compared with other battery makers, CATL has more cost and technology advantages, allowing it to offer lower prices. In addition, the smooth progress of CATL's lithium ore refining operations in Yichun and other places also contributed to its final proposal of this aggressive rebate program.