China Plays Defense On EV Batteries, Offense On Hydrogen

Image: Author Generated

In the intricate dance of global technology and trade, Beijing's latest moves reveal a familiar, yet increasingly assertive, strategy. We see a government determined to secure its technological dominance, even at the risk of undermining its own corporate champions. This strategy is unfolding on two critical green-energy fronts: a defensive maneuver to restrict the export of its world-leading electric vehicle battery technology, and a determined offensive to conquer the hydrogen fuel cell market, a sector where the West has long struggled to find its footing.

Beijing recently unveiled new restrictions targeting the export of core EV battery technologies, a clear sign of its intent to protect a hard-won competitive advantage. It's crucial to note that these measures from the Ministry of Commerce and Ministry of Science and Technology target the technology itself, not the finished products. Chinese-made batteries and manufacturing equipment can still be shipped freely, but the underlying know-how is now subject to state control.

We believe this is a direct reaction to the "China plus one" supply chain diversification trend and the broader geopolitical trade war. It's an attempt to keep the most valuable parts of the technology inside China for as long as possible, thereby slowing the development of competitive ecosystems in other countries. It is, to some extent, an expected move in the current tit-for-tat environment. However, we think this strategy is ultimately short-sighted. As we have seen with rare earths, such protectionist measures inevitably create the conditions for substitute technologies, materials, and know-how to be developed elsewhere. The U.S. is already ramping up efforts to mine critical minerals, and countries from Australia to Southeast Asia are getting into the game.

Furthermore, this policy seems to shoot China's own companies in the foot. Leading manufacturers like CATL (3750.HK; 300750.SZ) are aggressively expanding overseas, building plants in places like Hungary to service European automakers and attempting to establish a presence in the U.S. If they are barred from using their most cutting-edge technology in these new facilities, they risk being hobbled in the global marketplace. While China's current advantage lies in its immense production volumes, which competitors in Japan, Korea, and the U.S. cannot yet match, this move may only buy a few years of leadership. In the long run, if the technology is critical, alternative solutions will be developed, and we should not forget that commercial espionage practiced by China in the past has never been a one-way street.

A high-stakes bet on hydrogen

While Beijing plays defense with batteries, it's mounting a full-scale offensive in another green energy sector: hydrogen. Yet here, the story is one of potential versus performance. There are cases, such as Shanghai Refire (2570.HK), one of China's leading makers of hydrogen fuel cells, that give pause. The company's revenue fell by 10% in the first half of this year, a worrying sign for a firm in what is supposed to be a high-growth industry. Refire's financial reports are filled with talk of Beijing's strong policy support, but the commercial results have yet to materialize.

This raises a critical question for investors: how should one approach a company that enjoys immense government backing from Beijing but operates in a sector that has yet to prove its commercial viability? We believe the key is to understand that national industrial policy in China does not guarantee success for individual companies. One need only look at the chip industry, where Beijing poured money for over a decade, to see the travails of wasted investment and corruption that preceded any real technological breakthroughs. Chinese investors often take their cues from government pronouncements and move en masse, but policy support alone is not enough.

The West has been working on hydrogen for more than 20 years with little to show for it. Can China succeed where others have struggled? We think it's possible, for two reasons. First, Beijing has demonstrated a willingness to commit massive amounts of money over a long period. Second, it has the political stamina to play the long game until it succeeds, either by becoming the clear leader or by waiting for the opposition to give up. Many Western companies, beholden to shareholders demanding quarterly returns, simply do not have the capacity to invest for such a long duration.

That's not to say the West is out of the race. There are some cases of Japanese companies, like Toyota (7203.T), and European firms, like BMW (BMW.DE), that continue to invest in fuel cell technology, convinced of its future. In the U.S., we believe there will eventually be a renewal of interest, particularly for the trucking industry, where hydrogen offers significant advantages. It will be interesting to see if China's sheer will and state-led investment model can come to dominate this industry, or if Western companies can somehow stay in the ring.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.