Tesla's Shanghai Megapack plant may rewrite the playbook for energy storage in China

After nine months of construction, Tesla's Megapack battery factory in Shanghai went into operation on February 11, with significant importance for both the US-based electric carmaker and China's massive energy storage industry.

The launch of the new plant was a bright spot in a week of woes for Tesla.

On the same day as the Megapack factory came on line, Tesla shares in New York fell for a fifth consecutive day to their lowest in three months. Analysts attributed the decline to tanking car sales to Tesla founder Elon Musk's surprise US$97 billion bid for OpenAI and to Chinese electric carmaker BYD's announcement of a new assisted driving system seen as a challenge to Tesla.

Within this context, the booming battery business may play a crucial role in further diversifying Tesla's operations.

Tesla entered the energy storage sector in 2015, and launched Megapack in 2019. Its energy storage business has since grown apace. Its total deployment in 2023 reached 14.7 gigawatt hours, a 125 percent year-on-year increase – more than seven times the figure in 2019.

Tesla's financial report, released on January 30, said the company deployed 31.35 gigawatt hours of energy storage in 2024, up 114 percent from the previous year. The gross margin for the segment stood at 26.2 percent, surpassing the 17.9 percent margin for its electric-vehicle business.

It's fair to say that energy storage has become Tesla's increasingly critical alternative growth engine, aligning with its strategic vision of becoming a green energy and mobility company.

Betting on China, again

Musk has again placed the right bet on China. Only in China can Tesla integrate more deeply into the local supply chain.

Globally, Chinese companies almost entirely dominate the energy storage sector, covering everything from upstream lithium carbonate materials to battery cell manufacturing, from midstream storage system integration to downstream installation and operations.

Last year, research organization BloombergNEF released its Energy Storage Tier 1 List that included 38 global Tier 1 energy storage manufacturers for the third quarter of 2024 – 27 of them were Chinese.

By establishing a battery factory in Shanghai, Tesla can tap into China's robust supply chain, cementing its competitive edge in global markets while driving down manufacturing costs across the board.

Tesla's new factory primarily produces Megapack batteries. Resembling a white shipping container, Megapack weighs over 38 tons and can store 3.9 megawatt hours of electricity – enough to power 3,600 households for one hour.

Official reports indicate that the initial production plan targets an annual output of 10,000 Megapack units, matching the capacity of Tesla's Lathrop, California, factory.

Going forward, Shanghai-produced Megapacks will be shipped to global markets, with mass production expected to be completed in the first quarter of 2025, reaching a total energy storage capacity of nearly 40 gigawatt hours.

Currently, China's annual newly installed energy storage capacity is about 50 gigawatt hours, a fourth of the global total.

Who are the end-users?

So where is the primary market for Tesla's Shanghai-made Megapack – at home or overseas?

My assessment is that Megapack will be primarily for export, especially to developed markets in Europe and the Middle East.

Last May, when the Megapack plant broke ground, Tesla reportedly received its first domestic order from the state-owned Lingang Group.

Shanghai, with its legion of industrial parks and manufacturing hubs, has enormous potential for the application of Megapack batteries. This holds promise for Tesla's local business development.

For instance, the Lingang New Area, where the Megapack factory is located, hosts numerous factories, data centers and computing hubs. These are sectors with high energy storage demand.

Normally, energy storage can be divided into two segments. The first is utility-scale storage, also known as grid storage, which is built alongside wind and solar farms, typically in remote areas. This is unlikely to have a major application in Shanghai.

The other is commercial energy storage, which follows a distributed model and is often deployed close to end users.

Tesla's challenge in this market is pricing: Megapack is too expensive for the local commercial storage market.

A two-hour version of the Megapack, which offers 1.9 megawatt of power and 3.9 megawatt hours of energy, costs around US$2 million, before tax.

This translates into over 3 yuan (41 US cents) per watt hour – two to three times higher than domestic alternatives, says energy industry analyst Zhang Jinhui.

The huge discrepancy in pricing makes Megapack a premium product rather than a mainstream option in China.

Endless price wars

Over the past few years, intense competition and an influx of new players have led to plunging prices for commercial energy storage batteries in China.

According to a 2023 survey by Sungrow, a domestic renewable energy provider, 50,000 new energy storage companies were registered in 2023 – averaging 150 per day.

In mid-2023, leading Chinese storage battery maker Energy Singularity priced its commercial storage battery cabinets at 1.55 yuan per watt hour. By December, its rival TWS Technology almost halved the price on a similar liquid-cooled battery cabinet to just 0.88 yuan per watt hour.

Predatory pricing kicked into higher gear a little more than a year later, when competitors further slashed the prices on battery products to as low as 0.5 yuan per watt hour. To encourage adoption, some even offered zero-cost trials with a six-month payment deferment.

In comparison, Tesla's Megapack remains priced at nearly 3 yuan per watt hour.

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.)