Its New EV Battery Partner, The Controversy, & How To Invest

Ford has always been a leading American Automaker. They pioneered the first mass-produced automobile, the “Model T,” in 1908 and ushered in a new era of industry in the US. With the proliferation of electric vehicles, the world is undergoing another massive shift, and Ford is determined to continue leading. For the legacy automaker to get ahead in this race, it must outperform its competitors on a critical front for electric vehicles (EVs): producing low-cost, high-range batteries. Ford has partnered with another trail-blazing manufacturer for this task: China’s Contemporary Amperex Technology Co. Limited (CATL), the world’s leading battery maker.¹ We believe this partnership is creating a compelling investment opportunity for both companies.

In March, Ford announced a $3.5 billion investment in a new EV battery plant, licensing technology from CATL to produce lithium-ion phosphate (LFP) batteries.² The Inflation Reduction Act (IRA) passed in the US last year provides incentives for EV industry participants to manufacture and sell in the United States. Ford’s CEO, Josh Farley, stated that the Act was the reason they invested in the plant. “The IRA changed the economics for us,” he said in a recent CNBC interview.

Ford will operate the plant through a wholly owned subsidiary, entitling the company and its customers to the full tax benefits allotted by the IRA. Ford’s partnership with CATL to manufacture top-quality batteries it would otherwise not be able to produce makes business sense for the two companies. However, the collaboration between a US and Chinese company, which will receive IRA funds intended to help onshore US jobs, has drawn controversy.

Some pundits in the US have criticized Ford for licensing technology from CATL due to its Chinese roots. Virginia Governor Glenn Youngkin made a political point of rejecting Ford’s bid to build its new plant at a tax-advantaged site near Danville, VA, citing Ford’s relationship with CATL. In so doing, the potential 2024 presidential hopeful sacrificed a potential 2,500 new, high-paying jobs in an economically challenged part of his state for political gain.³

“The battery business is global,” said Josh Farley when questioned by reporters over his agreement to license technology from CATL. Farley also reaffirmed his belief that CATL represented Ford’s best possible technology partner and reiterated that the China-based conglomerate would have no ownership stake in the plant. He said that despite their intention to remake the United States’ EV industry, a laggard among developed nations, they had to turn to an overseas partner on technology.

The new plant in Michigan will make Ford the only firm to manufacture both nickel-based (NCM) and lithium-based (LFP) batteries here in the United States.² LFP is more geared toward commercial customers, which comprise the bulk of Ford’s customer base and is the focus of the new plant.

Who is CATL?

Few could have predicted that Yuqun Zeng, a rural farmer from Fujian Province, would go on to found what would become the world’s largest EV battery supplier. His company, CATL, is now among the world’s largest, most innovative companies. Beyond Ford, CATL also supplies batteries for Tesla, NIO, and other global EV makers.

CATL began as a spin-off of Amperex Technology Limited (ATL), which Yuqun Zeng founded as a battery company for consumer electronics in 1999. In 2011, when the EV industry boomed in China, Zeng realized that vehicle batteries could present a massive, long-term opportunity. In 2012, Zeng and his vice-chairman, Shilin Huang, created CATL to tap into this burgeoning market.

Why Is CATL an Ideal Partner for Ford?

One of CATL’s advantages is the high level of sophistication and efficiency at which they operate. CATL’s Ningde factory was recognized as a Global Lighthouse Factory by the World Economic Forum in 2021.⁴ This designation awards manufacturing leaders who have successfully applied advanced technologies such as artificial intelligence (AI) and data analytics to improve efficiency, transform business models, and achieve profitable growth in tandem with environmental stewardship.

Expanding upon the mass production model championed by Henry Ford himself, CATL has built an extremely efficient manufacturing system to maximize productivity while maintaining product quality and safety. The factory integrates AI, advanced analytics, digital twin technology, 5G, and edge/cloud computing to ensure all procedures are seamlessly connected and coordinated. Through licensing technology from the battery giant, Ford can bring the efficiency and scalability of CATL’s plants in China to the United States. This is overwhelmingly positive for Ford and the EV industry in the United States.

CATL has also positioned itself as a global leader in battery research and innovation. Its research team had over 10,000 people with 4,445 patents globally in 2021⁵. Its leading position in the next generation of battery tech has positioned the company to continue its success over competitors. As the revenue leader in the battery industry⁶, CATL can continue its high R&D spending to maintain its technological advantage.

The company’s research and development efforts have paid off. CATL has an exclusive battery packaging technology called Cell-To-Pack (CTP) 3.0. Their latest generation of battery using CTP 3.0 is called “Qilin” and boasts a 255 Wh/kg energy density. That density level can provide an astonishing range of nearly 1,000 km (620 miles) on a 10-minute fast charge.⁷

Ford’s product line will benefit from the best-in-class battery technologies developed by CATL. Range is an important factor in a consumer’s decision to purchase an EV over an internal combustion engine (ICE) vehicle, and CATL’s battery technologies offer the highest range on the planet.⁷

How to Invest

Shares in both Ford and CATL have traded lower since the announcement of the partnership, even though it is immediately cash flow positive for CATL. Meanwhile, Ford will incur all the IRA-subsidized upfront costs to eventually reap the benefits of having a US-based factory capable of producing the most advanced EV batteries. From CATL’s perspective, they will be gaining a significant foothold in the US EV market without putting up the initial capital to build a factory. The deal will also add another global automaker to CATL’s roster of international partners.

The bottom line is that electric vehicles, and most complex electronic devices for that matter, are a marvel of modern technology and supply chains. They rely on intricate connections between raw materials, manufacturing capabilities, and end retailers that can span national borders, physical boundaries, and oceans. Even automakers that stick with US-based partners must source raw materials from elsewhere, including war-torn and politically unstable parts of the globe. The IRA wisely accounts for this and permits tax benefit recipients to work with international suppliers.

However, since CATL trades on the Shenzhen Stock Exchange, it is often excluded from international and emerging market ETFs. Additionally, since investors cannot buy CATL stock in most brokerage accounts, access to one of the world’s most exciting companies is severely limited.

KraneShares offers two ETFs with high exposure to CATL. The first is the KraneShares MSCI China Clean Technology Index ETF (Ticker: KGRN), which currently has CATL as its second-largest holding at an 8.6% weight as of March 24, 2023. The Fund also holds other battery makers, Tianneng Power, at a 1.54% weight, and Gotion High Tech, at a 0.86% weight, as well as leading China EV companies and leading solar companies.

The KraneShares Electric Vehicles & Future Mobility ETF (Ticker: KARS) also holds CATL at a 3.88% weight. KARS provides access to global companies in the EV ecosystem, including other battery makers such as Gotion, at a 0.79% weight as of March 24th, 2023, and additional exposure to US, European, and Asian stocks. Bloomberg New Energy Finance (BNEF) is KARS’ index provider. BNEF reviews KARS’ index composition monthly to ensure alignment with the EV ecosystem and future mobility themes.

Neither ETF currently holds Ford, meaning they can complement an investors’ existing exposure to Ford’s stock. They also provide diversified* exposure to the themes of electric vehicle adoption and clean technology globally.

Conclusion

The partnership between Ford and CATL represents a powerful alliance between two historic innovators in their respective fields. Geopolitics aside, the partnership could benefit CATL and Ford, providing the legacy automaker with the technology it needs to compete with Tesla and other automakers to lead the EV race.

* Diversification does not ensure a profit or guarantee against a loss.

Citations:

1. Venditti, Bruno. “Ranked: The Top 10 EV Battery Manufacturers,” Visual Capitalist. September 25, 2021.
2. Wayland, Michael. “Ford to move forward with $3.5 billion EV battery plant with Chinese company,” CNBC. February 13, 2023.
3. Seitz-Wald, Alex. “Virginia Gov. Youngkin stokes 2024 campaign speculation after killing Ford battery plant over its links to China,” CNBC. January 22, 2023.
4. “Recognized by World Economic Forum as Global Lighthouse Factory, CATL Leads High-Quality and Sustainable Manufacturing in Battery Industry,” PR Newswire. September 28, 2021.
5. Data from Contemporary Amperex Technology Co. Limited (CATL) as of August 24, 2022.
6. Data from SNE Research as of July 18, 2022.
7. “CATL launches CTP 3.0 battery ‘Qilin,’ achieves highest integration level in the world,” Contemporary Amperex Technology Co. Limited (CATL). June 23, 2022.