October 06, 2008 | about: CBAK
In my March 3, 2008 article for Seeking Alpha, "Is China BAK Battery Just What the Hybrid Vehicle Market Needs?" I stated:
Currently, there is a variety of lithium ion battery makers in China. The top brand is BYD [HKSE:1211.hk]. However, BYD chooses to develop its own dual mode hybrid car, F6, along with its own lithium ion battery business. This strategy may ultimately prevent most US auto makers from collaborating on the lithium ion battery.
Well, Warren Buffett decided to purchase 10% equity in BYD in late September. That ownership percentage might be increased to a higher level when the appropriate timing arrives, according to Berkshire Hathaway personnel. Buffett's purchase action further enhances my belief that China BAK Battery (CBAK), another Chinese battery maker, is now an even more attractive supplier for Chinese and Western automakers. Four facts might support the CBAK position in the alternative energy marketplace.
1. Fear Brings Customers to CBAK
Warren Buffett's action of investing in BYD is a dramatic eye opener inside China as well as in the West. For the Western automakers, Chinese power battery and Chinese hybrid vehicles now are becoming a real thing. They cannot ignore it. They have to either work with it, or compete against it. For instance, General Motors' (GM) Volt will arrive at dealerships in 2010, the same year BYD's plug-in hybrid is to be brought to the US for sale. However, the BYD vehicle will carry a price tag of at least $15,000 less than the Volt's. GM probably will have to locate a comparable low cost power battery cell package, in order to stay in the business. The same issue will face Ford (F), Chrysler, etc in 2010 and beyond.
In China, virtually all local automakers that together produce several million auto vehicles a year now have a common front runner (competitor?). They certainly prefer not to choose BYD power battery as their supply source if an alternative exists. Where can the Chinese and some Westerners go to find a competing power battery? The answer lies at a China BAK power battery facility in the Beichen District of Tianjin, a Northern Chinese port city, about an hour driving distance away from Beijing. The China BAK Tianjin facility is recently built and starts operation this month, just in time to meet with the industry inquiries and quotations. The facility is the largest independent power battery manufacturing spot in China that carries a full capacity of making 350,000 cells daily.
The fear factor will probably bring many automakers to China BAK faster than anticipated. Chinese sources indicate the China BAK power battery is considered to have high quality and reliability. That is why the China national power automotive battery research project might be located at China BAK soon, after a site audit by the nationwide battery experts in August.
2. Focusing on Strength
China BAK has made it clear that it will only supply the power battery to automakers, rather than going into the auto making business itself. Obviously, China BAK understands its strength and its limits. It is premature at this stage to compare the BYD closed business model for power battery versus the China BAK open business model. In my personal opinion, it is more efficient for China BAK to generate revenues by selling power battery to all potential automakers. Focusing on strength is not a bad idea.
3. HP Notebook Battery Contract for CBAK
China BAK disclosed recently the long awaited HP (HPQ) notebook battery qualification process is coming to fruition fairly soon. The HP site audit will be conducted this month, with purchasing contracts to follow one or two months afterward. The contract, if it happens, will be the first time a Chinese battery firm secures large scale complex power storage orders from a tier one customer. No doubt that will solidify CBAK's technical and commercial position.
4. Large Production Capacity Investing
China BAK is a small company. Over the last three years, this firm has invested all its resources of over $100 million into the fully automated cylindrical lithium ion battery production, phosphate lithium ion battery making capacity, and power battery research and development. Overcoming the cash shortage, CBAK brings its battery technologies and production capacity to the world stage for tier one customers. Starting from this quarter, the heavy battery investment pays off as CBAK re-emerges as a profitable company. CBAK now owns one of the largest battery making capacities, just in time for the world class power storage game, with a wide open business model to deal with all auto makers who are looking for a low cost long term solution.
Warren Buffett just took BYD. Two miles away, the China BAK head office is entertaining hurried-up potential partners.
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