China Wanxiang Group’s investment in financially troubled A123 Systems has moved quickly from a memorandum of understanding (client registration required) on August 8 to a definitive agreement, executed a week later. Wanxiang is certainly not a new name to those paying attention to the clean tech space. The company is actively expanding internationally, acquiring a $420 million minority stake in GreatPoint Energy, establishing a joint venture with Ener1 (client registration required) and partnering with, investing in, and forming a joint venture with Smith Electric Vehicle (client registration required).
In reality, lithium-ion batteries and the broader electric vehicle (EV) space are only a very tiny part of the group’s whole business. Wanxiang is China’s largest auto part supplier, serving almost all of the automotive original equipment manufacturers (OEMs) in China as well as leading international OEMs. It is famous for universal joints, bearing, drive axles, suspension struts, braking systems, rubber seals, and body panels, and is a bumper supplier for the likes of Audi. Being a highly influential group in Zhejiang province, the company has easy access to bank loans, making the $450 million total investment in A123 less painful for Wanxiang than it would be for many companies.
Chinese companies’ foreign merger & acquisition (M&A) activities are being driven by technology acquisition and/or foreign market penetration, and Wanxiang is no different. Chinese battery companies like ATL, China BAK, and CALB have much longer histories of lithium-ion battery R&D and a greater focus in this area than Wanxiang. As such, the fastest route for Wanxiang to catch up is to acquire technologies from foreign companies, which they will absorb to improve their own products then leverage existing sales channels already in place to distance themselves from would-be domestic competitors.
However, it is questionable whether the heavy investment can drive meaningful change in Wanxiang’s domestic business. Reviewing China’s EV landscape, only 8,368 full electric and hybrid electric vehicles were produced in 2011. Even though the Chinese government plans to put half a million EVs on the road by the end of 2015, only around 92,000 units can be produced in that year (see the report “Hype vs. Policy: The Chinese Market for Lithium Batteries” — client registration required). In addition, local product protection plays an important role in China’s EV market compared to traditional vehicles, adding greater complexity for companies in the EV value chain to supply to other provinces. Wanxiang is located in Hangzhou city, one of China’s six EV pilot cities, so a local market for Wanxiang exists. But it is only a portion of the already disappointing overall EV market in China. The $450 million investment is certainly a long-term bet if China’s EV market is the driving force.
Acquiring reputable foreign technology can also be used to alleviate the “made in China” stigma in developed economy markets. In other interviews with China’s large lithium-ion battery companies, most have indicated they are actively looking for sales opportunities in foreign EV markets, but they lack sales channels. It is challenging for major foreign EV OEMs to accept Chinese-made batteries from the more established, reputable battery suppliers, let alone for a company like Wanxiang that lacks a battery pedigree. This applies to the vehicle market in general, where Chinese automakers are viewed today with the same skepticism met by Japanese automakers during the middle of the last century, and more lately by Korean OEMs. Enter A123, not only with advanced technologies, but very strong customer networks with high-profile EV OEMs around the world ranging from upstarts like Fisker to established high-end brands such as BMW. Wanxiang hopes to increase access to the international EV market through A123′s already existing international customers. However, given A123′s trials and tribulations, which include product recalls and inconsistent customer acquisition, Wanxiang should know that there is some work to do before its foreign EV market penetration can ride on A123′s coattails.
The real medium-term nugget in the deal for Wanxiang may lie in grid storage, which has big market potential in China, and is substantially controlled by only two companies: State Grid and China Southern Grid. State Grid has opened a large grid-storage demonstration project in 2011 (Zhangbei), and Wanxiang is one of the four bid winners, along with CALB, BYD, and ATL. According to interviews with many executives in State Grid, big project winners must have good technology and close relationships with the grid giant, with the latter being much more important than technology. Wanxiang indeed has a very close relationship with State Grid. While it is unlikely that State Grid will open a new large grid storage project within two years, subsequent growth looks assured as renewable energy proliferates. China has installed 17.6 GW in wind turbines during 2011, representing over 20% of China’s power generation installations for the year. However, in our discussions with China’s National Development and Reform Commission (NDRC), only 80% of the wind energy can be utilized until grid storage is deployed. For Wanxiang, it is hard for outsiders to judge if the company will really digest A123′s technology and transfer it into its products, but because of the good relationship between Wanxiang and State Grid, Wanxiang’s acquisition of a controlling share of A123 gives State Grid a strong reason to ramp up battery procurement from Wanxiang.
Winners and losers in China’s domestic lithium-ion battery landscape may well be defined by which can pick up quality assets to shore up their technology and market needs. As we recently predicted:
“As technology developers around the globe struggle to stay afloat, even with quality technology, Chinese companies will be on the lookout for opportunities. In the near term, the foreign opportunity will be technologically focused, and Chinese companies will be looking for technology licensing or joint venture opportunities with large foreign companies, as well as M&A opportunities among startups and small to medium enterprises in foreign countries. Venture capital (VC)-backed Li-ion battery startups will be needing exits, some at pennies to the dollar, making VC-backed startups with advanced technology especially hot targets for Chinese big Li-ion battery companies as they inorganically grow their capability.”
Competitors in the space both in China and around the globe better be ready, as we’ve only just begun the global roll-up, and Chinese entities will not be spectating.