ChinaTech #22 | China's Lithium-ion Battery Industry
.. overcapacity and implications thereof
This post is a contribution from Bhumika Sevkani, Research Analyst with the Indo-Pacific Studies Programme at the Takshashila Institution.
Impact of Over-capacity on China’s Lithium-ion Battery Industry
China’s edge in Lithium-ion battery manufacturing has resulted in most EVs globally adopting the technology, switching from the previously mainstream Nickel-Cobalt-Manganese batteries. China today supplies over 75% of batteries sold globally and has witnessed a 30% drop in battery prices in the year 2024 alone. This price drop is a result of two factors, decreasing cost of lithium and high price competition amid tier-2 suppliers. In terms of production capacity, the country has installed over 2 TWh in 2024, which is already 60% higher than the demand. With this gap, the Lithium-ion battery industry in China is bound to face the impact of ‘involution’.
The case of Li-ion batteries is similar to those of EVs- too many players, and too much capacity resulting in shrinking margins for second and third tier suppliers. Major suppliers like CATL have managed to remain profitable due to their larger share in the market. Tier 1 suppliers produce nearly 50% of the total battery cells in China. Reportedly, CATL’s gross profit margins increased between 2023-34 despite the fall in battery prices during this period. Similarly, EVE energy has also remained relatively stable. Leading firms therefore, are likely to emerge stronger from the domestic consolidation efforts due to their continued focus on R&D, cost efficiency and technologically advanced products.
As competitive pressures increase, smaller players will be squeezed out. Meanwhile, safety in batteries is increasingly being compromised to achieve cost efficiency by smaller players. This report captures the way in which second-tier battery producers have been prioritising cost reduction over safety standards for preventing thermal runaway:
“…there is a process of coating a layer of thermal insulation aerogel between the cells, which is used to delay the spread of thermal runaway in extreme situations. The initial process standard was to coat it in a “hui” (Chinese character meaning a square with a smaller square inside) shape for full coverage. As the cost pressure increased, the “hui” shape first became a “kou” (square) shape, then was simplified to a “er” (two horizontal lines) shape, and finally only a single horizontal line was left. High - specification safety configurations have become a major area for cost - cutting.”
This pressure on the battery industry is also likely due to price-wars in EVs, wherein manufacturers demand cheaper inputs. For the li-ion battery industry, the impact has also been witnessed by upstream sectors. Shanghai metal market reports that, ‘the three fastest-declining sub-sectors were upstream lithium resources (operating revenue down 56.88% YoY), cathode material (down 40.11% YoY), and electrolyte and materials (down 29.82% YoY).’ The report also mentions the widespread patent disputes between firms in the lithium battery segment.
As a result of slimming margins at home, firms in China have been exploring exports and the possibility of establishing manufacturing facilities across various regions. However, import tariffs by major markets such as the US and Europe affect Chinese exports. In addition to that, the Chinese government has imposed a licensing requirement on export of machinery and equipment required for lithium battery production. This latest inclusion in the export control list hampers the plans of Chinese battery makers to construct manufacturing facilities in other countries.
To consolidate the lithium battery industry domestically, and further innovation in alternative future battery technologies, Chinese regulators have introduced stricter rules to ensure battery safety and increased testing requirements.
Structural impediments in China’s consolidation efforts:
The regulatory efforts of curbing production by setting higher standards are contradictory to previous policies of promoting manufacturing industries. Incentives for local governments that were linked to production outputs are one of the factors responsible for the current overcapacity. As Sophie Wieviorka explains in her article explaining Chinese overcapacity, ‘…the existence of growth targets, competition for subsidies at every level of the administration, and the requirement to deliver results have prompted local governments, in conjunction with businesses, to leave surplus production capacity in place. The lack of mechanisms for market exit – a notion at odds with a managed economy – also hampers efforts to regulate the market. The ensuing involution and deflation stem from these profound imbalances, which hark back to the roots of the Chinese model. Eliminating them would require a complete paradigm shift, particularly with regard to how quantitative targets are set.’
The highly indebted local governments may also prioritise increasing local revenue generation over reform. A report by Max Reid also emphasises this contradiction stating that tier 2 and 3 manufacturers, supported by local governments increased cell production by 146% between 2024H1 to 2025H1, and that it is increasingly important for local governments to continue supporting these gigafactories to ensure stability in their economies.
While the Chinese industry undergoes consolidation amid its structural contradictions, it offers a window of opportunity for emerging markets like India to strengthen their domestic battery innovation ecosystems and markets, and for competing markets like Japan and South Korea to increase their shares and partnerships across emerging markets. The Indian market specifically has also attracted other leading global battery manufacturers to set upplants in India, offering easier diversification to counter Chinese dominance in the Indian market. Advancing innovation in alternative cell chemistries, and solid-state batteries will also play a role in greater supply chain resilience from raw materials that are abundantly available, and currently a bottleneck for countries trying to develop their domestic battery manufacturing industry.