CATL's Crossroads: Morgan Stanley's Stake Cut and the EV Battery Supremacy Battle

The recent decision by Morgan Stanley to reduce its stake in CATL's Hong Kong-listed shares has sent shockwaves through the EV battery sector. While some market watchers initially misinterpreted regulatory filings showing rising short positions as bullish signals, the downgrade of CATL's stock rating to “equal weight” from “overweight” by Morgan Stanley's analysts reveals a deeper strategic concern: Is the world's largest battery maker losing its grip on the fast-evolving electric vehicle market? For investors, the question is whether this marks a fleeting stumble or a turning point in the race for battery supremacy.

The Catalyst: Morgan Stanley's Downgrade

Morgan Stanley's move was rooted in three interconnected risks. First, domestic competition in China's battery market is intensifying. Second-tier manufacturers like Svolt Energy and CALB are adopting aggressive pricing strategies, eroding CATL's market share. Second, the lithium price collapse—now below RMB 200,000 per ton—has undermined CATL's lithium rebate program, a key lever for securing EV contracts. Finally, geopolitical headwinds, particularly U.S. scrutiny over CATL's alleged military ties, threaten its global expansion ambitions.

The firm's analysts noted that CATL's domestic market share fell to 40.8% in April 遑, down from 45% in March, as EV makers like Nio and Li Auto diversify their supplier bases. This shift reflects a strategic pivot by automakers to reduce reliance on any single battery provider—a move that could permanently restructure the industry.

The Competitive Landscape: A New Era of Price Warfare

The battle for market share is now a zero-sum game. Second-tier Chinese battery makers, unburdened by legacy costs, are willing to sacrifice short-term profits to gain scale. Price cuts of 10-20% by these rivals in 2025 have forced CATL to reconsider its pricing strategy. While CATL's lithium rebate program once provided a cost advantage, falling lithium prices mean this edge has faded. The result? A margin squeeze that could redefine industry profitability.

For investors, this raises a critical question: Is CATL's 35.9% global market share in 2025 sustainable? The company's Hungarian plant—a cornerstone of its European ambitions—now faces logistical and regulatory hurdles, while U.S. market access remains uncertain. Meanwhile, BYD's vertically integrated battery production and Tesla's push for cheaper 4680 cells are further complicating the landscape.

Valuation: A Contrarian's Opportunity or a Trap?

CATL's shares have fallen 18% since the downgrade, valuing the company at around 6x forward EV/EBITDA—a discount to its 10x multiple in late 2022. For contrarians, this could signal a buying opportunity. However, the risks remain asymmetrical. If CATL's domestic market share continues to slip below 40%, or if geopolitical barriers limit its global footprint, the stock could underperform further.

The company's valuation assumes continued dominance in both cost and technology. Yet, the recent price wars suggest that scale alone may no longer guarantee profitability. Investors must ask: Can CATL innovate fast enough to offset these pressures, or is it becoming a victim of its own success?

Geopolitical Risks: The Elephant in the Supply Chain

The U.S. Department of Defense's designation of CATL as having potential military ties has introduced a new layer of risk. While CATL denies these allegations, the scrutiny complicates its ability to secure U.S. partnerships or access federal incentives. This isn't just a regulatory headache—it's a reputational and operational barrier. For a company aiming to dominate global EV supply chains, such hurdles could prove existential.

Investment Strategy: Proceed with Caution

For now, the prudent approach is to remain cautious. CATL's long-term moat—its R&D prowess and scale—still exists, but the near-term risks are acute. Contrarians might consider a small position at current levels, but only if they believe CATL can regain pricing power and navigate geopolitical minefields. Meanwhile, investors seeking safer bets might look to diversified automakers like Tesla or BYD, which benefit from vertical integration and less regulatory exposure.

Conclusion: The Battery Supremacy Race Heats Up

Morgan Stanley's stake reduction is more than a signal—it's a wake-up call. The EV battery market is entering a new phase, where cost discipline and geopolitical agility matter as much as technology. CATL's path to maintaining its leadership is fraught with challenges, but its fate will define the next chapter of the EV revolution. For investors, this is a moment to balance long-term potential against near-term risks—a reminder that even giants can stumble in the fast lane of innovation.