China’s battery dominance grew from local industrial clusters, vertically integrated firms, and manufacturing scale—not subsidies alone—offering lessons for global competitors.

The race to compete with China in electric vehicle (EV) batteries is already underway in boardrooms and ministries across Europe, North America, Japan, and South Korea. But for competitors trying to close the gap, the most important question is not how much Beijing spent. It is how two Chinese companies, CATL and BYD, built capabilities that subsidies alone cannot explain. Chinese battery manufacturers now control 68.9 percent of all EV battery installations worldwide. That dominance was built through a layered system of national policy, local government support, and sustained firm-level innovation. Consequently, understanding each layer is essential for any competitor that wants to do more than slow China down with tariffs.

The subsidy story is real but incomplete. However, the more uncomfortable finding is that learning-by-doing, the accumulated manufacturing experience that comes from running enormous factories at scale, drove Chinese battery costs down faster than any competitor could match, and those cost advantages then spread globally. The roots of that advantage lie partly in Beijing, but just as critically in the cities, development zones, and firms that translated national policy into operational capability. This piece examines those roots through the contrasting cases of CATL in Ningde and BYD in Shenzhen, compares the business models and battery technologies they developed, and draws out the implications for competitors seeking to respond.

CATL and BYD provide particularly revealing cases because they represent China’s two dominant battery producers while embodying contrasting organizational models. Comparing them illustrates that China’s competitive advantage rests not on a single business model but on multiple pathways to industrial leadership.

Chinese Local Governments and Development Zones as Incubators

CATL’s origins in Ningde illustrate the active, recruitment-driven model. When local officials identified Zeng Yuqun, a Ningde native and co-founder of consumer electronics battery giant ATL, as a target in 2004, they pursued him for four years before preferential land terms, tax incentives, labor recruitment assistance, and new rail and road links secured his commitment in 2008. CATL was founded in the Dongqiao Economic and Technological Development Zone in 2011, and Ningde officials subsequently cultivated a dense supplier ecosystem around the company, attracting investments in cathode and anode materials, separators, electrolytes, and intelligent manufacturing equipment. By the end of 2025, more than 90 upstream and downstream companies had clustered in Ningde, enabling vertically integrated production from raw materials through finished battery systems, and the cluster has since been designated a national advanced manufacturing cluster.

BYD’s relationship with Shenzhen follows a different logic. Founded in 1995 as a nickel-cadmium battery manufacturer, BYD was already a Shenzhen company before either the city or the national government had a coherent EV strategy. The critical local government intervention came not through recruitment but through procurement: BYD’s first pure EV was launched in 2009 for the Shenzhen municipality as a taxi model, giving BYD a captive urban customer that provided both revenue and a real-world testing environment at scale. As BYD scaled, Pingshan District, the site of its headquarters campus, was incorporated into the Shenzhen National High-Tech Zone, which hosts the national new energy automobile industry base and has since attracted more than 300 manufacturers, research institutes, and testing platforms around BYD.

The contrast reveals something important about how China actually builds industrial champions. Ningde built a cluster from scratch around a single recruited anchor firm. Shenzhen offered BYD a diversified high-tech ecosystem, a large early domestic market, and the credibility of China’s most recognized innovation city. Both worked, but through distinct pathways, and neither looks much like the Beijing-centric story that Western policy debates typically tell.

Two Business Models: Merchant Supplier Versus Vertical Integration 

CATL is a merchant supplier: it makes batteries that automakers such as Tesla, BMW, Mercedes, Volkswagen, and Stellantis install in their vehicles. Because CATL does not build vehicles itself, it negotiates battery prices with multiple global automakers, often from a position of strength because switching battery suppliers requires costly redesign, testing, and certification of vehicle platforms. The central government’s 2016 battery whitelist restricted New Energy Vehicle(NEV) purchasing subsidies to domestically produced batteries, excluding foreign competitors from subsidy eligibility and creating a protected domestic market. CATL, having already invested heavily in manufacturing capacity, was well positioned to exploit that protection, securing a dominant share of China’s EV battery market. Ningde officials capitalized on that dominance, recruiting tier-two supply chain companies to the area specifically to serve CATL, which became the Ningde industrial cluster. Together, the battery whitelist and the Ningde cluster gave CATL the foundation to compete. Substantial research and development (R&D) helped CATL turn its merchant-supplier model into a technological advantage, with 54 percent of its innovations now classified as frontier-advancing.

BYD takes the opposite approach: rather than supplying components to others, it manufactures its own motors, chassis, batteries, and, increasingly, its own chips through BYD Semiconductor. Unlike CATL, BYD is a vertically integrated, all-in-one EV manufacturer that also operates within a multi-anchor firm zone, coexisting with companies such as SMIC and Honor. Because BYD is vertically integrated, it does not need to negotiate with outside automakers over the relationship between the battery and the vehicle. Instead, BYD internalizes those decisions, giving it a major cost advantage over other EV manufacturers worldwide. The BYD Seal, for instance, can be produced $4,656 cheaper than the Tesla Model 3, of which $2,369 is attributable to vertical integration alone, the largest single factor in the gap. BYD’s combined R&D and overhead expenditure per vehicle is also $1,719 lower than Tesla’s, not because BYD spends less in absolute terms, but because it spreads that spending across a substantially larger number of vehicles sold. Of that $4,656 total cost advantage, only $292 is attributable to subsidies, undermining the argument that Beijing’s subsidies are the primary source of Chinese firms’ competitive edge.

Battery Technology: Convergence and Divergence 

Those business models also shape technological choices: CATL’s role as a supplier pushes it toward flexibility, while BYD’s vertical integration encourages whole-vehicle optimization. Both CATL and BYD build lithium-ion batteries, the dominant EV chemistry, but diverge sharply on cathode selection. Lithium iron phosphate (LFP), built on stable, inexpensive iron and phosphate compounds, offers superior thermal safety and cycle life at the cost of energy density and range. Nickel cobalt manganese (NCM) achieves higher energy density through nickel content but carries greater thermal risk and exposure to supply-volatile materials. Critically, NCM’s components respond more readily to incremental improvement, making frontier energy density gains cheaper to pursue than comparable advances in LFP. Solid-state batteries represent the next competitive frontier, replacing the liquid electrolyte with a solid medium to improve both energy density and safety, though at higher manufacturing cost; both companies have begun to deploy semi-solid-state designs as of 2024.

CATL’s battery strategy reflects its merchant supplier model: serving automakers with divergent needs requires running both LFP and NCM chemistries simultaneously, and as of 2025 the firm holds 70.9 percent of the domestic NCM market and 37.1 percent of LFP. Its Qilin battery (CTP 3.0), launched in 2022, introduced a cell-to-pack architecture that eliminated the module layer entirely, achieving 72 percent volume utilization, a range exceeding 1,000 kilometers, and a 10-to-80 percent charge time of 10 minutes. In 2024, CATL developed lithium manganese iron phosphate (LMFP) cathodes to offset nickel supply volatility while raising energy density and operating voltage. Two years later, it released the Qilin condensed battery, a semi-solid-state design substituting a gel-like condensed matter for the conventional liquid electrolyte. These advances collectively illustrate how CATL has consolidated market dominance through technical superiority and product flexibility rather than price competition.

BYD committed fully to LFP in 2007 for its lower cost and greater patent accessibility relative to NCM. Its vertical integration lets it capture the full value of any innovation, since there is no external automaker to bargain with over the proceeds. BYD thus directs R&D toward catch-up innovation and vehicle-system optimization rather than the frontier, because rivals can often imitate a breakthrough at a substantially lower cost. In practice, only 17 percent of BYD’s innovations qualify as frontier-advancing, the remainder split between catch-up improvements and performance optimization. The Blade Battery, launched in 2020 alongside the Han EV, was a turning point for BYD: its cell-to-pack architecture, using blade-shaped cells in place of the module layer, raised energy density enough to close LFP’s range gap with NCM. In 2022, BYD’s cell-to-body architecture integrated the battery pack directly into the chassis as a load-bearing element, doubling torsional stiffness and reaching 66 percent volume utilization. Both breakthroughs are products of the whole-vehicle optimization that vertical integration enables. That is the advantage BYD’s model creates: not merely leadership at the chemistry frontier, but rapid gains from integrating the battery into the vehicle as a system.

Competitive Advantages Abroad and Implications for Western and Asian Competitors 

China’s battery dominance is not the product of one policy lever, one subsidy regime, or one lucky firm. It rests on the interaction of local state capacity, deep manufacturing ecosystems, and corporate strategies that convert scale into learning, and learning into advantage. CATL and BYD show that a key source of strength lies not just in who funds innovation, but in how firms are organized to capture it, refine it, and commercialize it faster than rivals.

These advantages, however, are not without vulnerabilities. China’s battery industry faces intense price competition, concerns over excess manufacturing capacity, growing trade restrictions, and pressure from geopolitical fragmentation. Whether the ecosystem that produced today’s leaders can sustain similar gains under slower domestic growth remains an open question. Recognizing these constraints does not diminish China’s achievements; rather, it underscores that industrial leadership must continually be renewed.

For Western and Asian competitors, the lesson is uncomfortable but clear. Tariffs and industrial policy may slow Chinese expansion at the margins, but they do not replicate the organizational depth that Beijing’s ecosystem has produced. Competing effectively will require more than subsidies or supply-chain de-risking. It will require long-term investment in manufacturing capability, tighter coordination between firms and governments, and a willingness to build industrial clusters that support sustained learning.

CATL and BYD also reveal that China’s advantage is not monolithic. One company leads through technical breadth and supplier flexibility; the other through vertical integration and system optimization. Together, they illustrate a broader model of industrial power: the ability to align institutions, firms, and technology around scale. That alignment is what competitors must understand if they hope to challenge China on batteries, and eventually on other frontier industries too.

The implications extend beyond electric vehicles. Similar combinations of state coordination, local experimentation, industrial clustering, and firm-level organizational innovation are increasingly evident in sectors ranging from solar photovoltaics and drones to advanced manufacturing and artificial intelligence. Understanding CATL and BYD is therefore not simply about explaining today’s battery industry. It is about understanding the institutional foundations of China’s broader technological competitiveness.

About the Authors: Zenel Garcia and Justin Blank 

Zenel Garcia is associate dean and associate professor at the US Army War College, where he holds the Henry L. Stimson Chair of International and Military Studies. His research focuses on the intersection of international relations theory, security, and geopolitics in the Indo-Pacific and Eurasia. 

Justin Blank is an intern at the US Army War College and a Master of International Affairs candidate at Penn State University. His research focuses on the intersection of Chinese elite politics, political economy, and international security. 

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