In recent times, the escalating costs of raw materials have severely impacted the performance of Contemporary Amperex Technology Co., Limited, commonly known as CATLThis battery giant, which has rapidly ascended to a leading position in the global lithium battery industry, has found its profitability under scrutiny as its ability to negotiate prices within the supply chain comes into questionThe onset of the new year has unveiled a chilling decline in profits and market share for CATL, raising concerns about its established reputation in a fiercely competitive market.

As reported by the China Automotive Power Battery Industry Innovation Alliance, CATL's dominance as a supplier has been challengedIn April 2022, CATL managed to install 5.09 GWh of new energy batteries, diminishing its market share from 45.5% the previous year to 38.28% in the same month of 2022. Notably, its lithium iron phosphate battery installations accounted for 3.05 GWh, dropping below that of its rival, BYD, which has now taken the lead in this segment.

The first quarter of 2022 has yielded CATL’s poorest performance since its IPO

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A stark announcement revealed that the company’s net profit attributable to shareholders slipped dramatically to 14.93 billion yuan, marking a 23.62% year-on-year declineMeanwhile, its gross profit margin experienced a staggering drop from 27.28% to 14.48%, while the net profit margin fell from 12.23% to just 4.06%, both figures hitting unprecedented lows.

Over the past several years, CATL has undergone a rapid expansion, fueled by its capacity to scale production and reduce costsThe market capitalization of the company skyrocketed from an initial 50 billion yuan to a zenith of 1.6 trillion yuan, bolstered by an impressive market shareThis once established CATL as a crucial player with significant pricing power, enabling it to maintain an advantageous position even as other firms in the upstream and downstream sectors faced substantial losses.

However, the plummeting financial results from the first quarter have placed CATL’s pricing strategy under intense scrutiny

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As costs rise due to the inflation of raw materials and competitive pricing pressures from the sales spectrum, investors are left pondering if the protective barriers that CATL has built around its market position are indeed sufficient to withstand these challenges.

The dynamics of the electric vehicle (EV) market have shifted significantly over the past couple of yearsIn 2021 alone, the worldwide sales of new energy vehicles reached approximately 6.5 million units, a staggering increase of 109% year-on-yearWithin this context, China saw explosive growth, with its new energy vehicle sales more than doubling to 3.52 million units, underscoring a dramatic rise in the penetration of EVs to 13.4% of the overall marketThis boom has given rise to a commensurate surge in demand for power batteries, with global shipments reaching 375 GWh and a remarkable 182.5% increase in the Chinese battery shipment volume.

CATL's triumphs reached a pinnacle in 2021, as reported figures indicated the company's revenues exceeded 130.36 billion yuan, generating net profits of 15.93 billion yuan, an impressive growth of 185.35% compared to the previous year

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Its sales of power battery products also saw a massive leap, registering 116.71 GWh with revenues soaring to 91.49 billion yuan.

Nonetheless, juxtaposed with these buoyant figures were the grim Q1 2022 resultsCATL's revenue during the first quarter was around 48.68 billion yuan, showcasing growth yet revealing declines in other critical metrics, such as net profit, which tumbled by over 23% year-on-yearThe company's management remarked that the sharp escalation in raw material prices was a significant catalyst for these downturns.

From August 2021 onwards, there has been a consistent rise in lithium battery materials, including lithium carbonate and lithium hydroxideData shows that by December 2021, these key materials witnessed pricing hikes of 277%, 80%, 155%, and 213% year-over-year for various sectors

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As of March 2022, further increases persisted, intensifying the pressure on battery manufacturers such as CATL.

Interestingly, although raw material costs began to spike in August, CATL was somewhat insulated through 2021, with its gross profit margins maintaining a solid position at around 22%. However, the unprecedented decline in margins observed in early 2022 can be attributed to a convergence of growing costs against depressed margins, indicating a significant shift in market dynamicsThe first quarter of 2022 saw CATL’s gross margin plummet from 27.28% to 14.48%, and the corresponding net margin also halved.

In terms of inventory, CATL has seen a marked increase, with total inventory values escalating to approximately 61.58 billion yuan, reflecting a radical year-on-year surge of over 258%. The company’s inventory management has thus become a focal concern, with inventory levels and future sales projections demonstrating a notable disconnect.

Adding to this pressure, CATL has been tasked with negotiating price hikes with its downstream customers, aiming to counteract the negative impacts of soaring material costs

Given the significant role that power batteries play—accounting for over 30% of an electric vehicle's cost—maintaining competitive pricing while attempting to improve profit margins has become a daring balancing act.

Over the years, a pattern of decreasing battery prices has been notable for CATLData shows that from 2018 to 2021, the sales price of CATL's product has consistently declined, with 2021 observing sales prices around 0.78 yuan per Wh, a drop of 12.36% year-on-year and indicative of an overarching strategy aimed at maintaining market share amidst rising competition and growing cost pressures.

In a strategic pivot, CATL's board has been increasingly vocal about adapting its pricing strategy, aiming to shift away from a long-held commitment to low-price tacticsAs competitors and newer entrants flood the market with budget-friendly battery products, CATL must navigate a new climate where its erstwhile pricing powers appear less potent.

Emerging contenders, such as Zhongxin Innovation, are now positioning themselves advantageously in the market

Having initiated a public offering in March 2022, this company demonstrated remarkable growth rates of over 200% in production output from 2019 to 2021. Their ability to sell at lower prices places additional pressure on CATL and its established pricing structures.

As of early 2022, CATL is now facing pressure from dual fronts: competition from automotive manufacturers who want to shift towards self-reliant battery production, as well as aggressive pricing strategies from lower-tier battery manufacturersIn an environment characterized by oversupply and decreasing prices, CATL is confronting the arduous task of balancing volume with profits.

To counter these challenges, CATL has been focusing on cost control measures, seeing a noteworthy decrease in administrative and selling expenses as indicated in their recent earnings report

The company has effectively minimized these costs while simultaneously attempting to retain or improve profitability.

As a predominant player in the sector, CATL is also keenly aware of the necessity for overseas expansionReports indicate that while the company has secured an impressive market share domestically, penetrating international markets is crucial for sustaining its growth and maintaining competitive advantage.

The future of CATL’s growth will hinge on how adeptly it can navigate this challenging environmentWith the evolving landscape of electric vehicles and escalating competition, recalibrating its pricing strategies, addressing rising raw material costs, and effectively managing inventory are critical steps required to fortify its market position.

Ultimately, as CATL moves towards the next chapter of its growth, the industry will closely observe whether the company will continue to solidify its stature as a stalwart within the lithium battery market, or if the mounting challenges will compel a significant reassessment of its strategies.