Battery factory production may compensate for tanking Tesla car sales and signals a bold stroke by Elon Musk to diversify business. Ni Tao Inside Tesla's Megapack battery factory in Shanghai The escalating price war has led industry watchers to decry continuous drops in bidding prices, which "have fallen by a third within six months," according to Zhu Gongshan, chairman of GCL Group, a green energy supplier. He further remarked that "competition will only become more intense" as the industry gets caught between "ice and fire," meaning that while some see opportunities, others face an extreme price squeeze. Amid cutthroat competition, plunging prices, and shrinking margins in China, Tesla's Megapack will presumably rely on exports to sustain its high profitability. The Megapack implications Notably, Tesla does not produce its own energy storage cells. It primarily sources them from power battery giant CATL. Yet, its storage products are in high demand overseas. So what gives Tesla the edge? This can partly be attributed to the brand power and recognition that Tesla commands, to the envy of its Chinese rivals and suppliers. Additionally, declining global lithium prices have helped Tesla maintain high margins in less competitive overseas markets. To sustain this stellar performance, all Tesla needs to do is focus on quality standards, integration and a further embrace of China's effective and resilient supply chain. And what is in this for Chinese energy storage companies? Apart from accelerating supply chain clustering, Tesla's experience highlights the importance of differentiation. Despite China's dominance in the energy storage supply chain, no domestic company, not even leaders like CATL, has been able to match Tesla's pace of expansion. This serves as a reminder for Chinese firms to adjust their competitive strategy, starting with investment in research and development to optimize technology, safety and cost efficiency. Safety and quality standards are crucial. Price competition over the years has led to safety issues like increased fire hazards in some storage facilities. This is particularly concerning for deployment near residential areas. Since Tesla's higher-cost batteries appeal to premium customers who prioritize quality over price, this could educate the market and facilitate global adoption of energy storage, an industry insider told Shanghai Daily, requesting anonymity. With Chinese battery firms actively expanding overseas, Tesla's presence in the supply chain helps to enhance industry standards and capabilities. This in turn will benefit Chinese firms with similarly high-end product lines. A downward spiral ahead? Nonetheless, China's energy storage industry could be in for a major shakeup. On February 9, the National Development and Reform Commission and National Energy Administration issued a policy ending mandatory storage requirements for new renewable energy projects. In 2017, provinces like Qinghai in northwestern China began to mandate that new wind and solar farms be paired with energy storage facilities. Soon this policy was adopted nationwide. This mandate became a key driver of China's energy storage boom. By 2023, 28 provinces had imposed a 10-20 percent storage requirement for all new solar and wind programs. For every 1,000 megawatt-hours of wind power generated, at least 100 megawatt-hours of energy storage must be installed nearby. This made storage a dominant component of China's grid energy storage, Rao Hong, a member of the Chinese Academy of Engineering, said last year. However, the mandate raised upfront investment costs while also creating challenges like low utilization rates and safety risks due to immature business models. Now, without forced storage adoption, many lower-tier companies will presumably be knocked out of the market. At the same time, survivors of the looming shakeup will seek higher profits by following Tesla's lead with expansion abroad, targeting high-value, high-margin markets. Between them and a higher margin are tariffs, especially in the US. With Donald Trump in the White House, Chinese power batteries this year will face a 28.4 percent tariff, including a 25 percent Section 301 tariff, which will extend to battery energy storage systems in 2026. This is why Tesla's commercial storage focus will likely remain on Europe, the Middle East, and other regions so far unaffected by US tariffs, while US demand will be largely met by its Lathrop plant in California. In 2019, when Tesla began to build its Shanghai Gigafactory, China's electric vehicle supply network was largely underdeveloped. Today, China leads the global battery energy storage supply chain. This time around, Tesla's role is more a model player than a "catfish," demonstrating that price wars only signal a race to the bottom. The question is: Can Tesla help China's energy storage industry break free from the relentless competition on price and move up the value chain? (The author, a former Shanghai Daily opinion writer, now works as a business analyst and communication strategist. He has no conflict of interests to declare.) Ma Mingyan / Imaginechina Photo taken on June 18, 2024 shows the energy storage power station at the world's first wind solar heat storage project in Golmud City, the Mongolian-Tibetan Autonomous Prefecture of Haixi, northwest China's Qinghai Province. Source: SHINE Editor: Wang Xiang