[ANALYSIS] Tesla, BYD's price cut create 'havoc' for LGES, Samsung, SK

A partially disassembled 4680 structural battery pack from a Tesla Model Y, built in Austin, Texas, is displayed under a sheet of plexiglass in Auburn Hills, Michigan U.S. March 3, 2023. Reuters-Yonhap

Following EV price declines, Korean battery trio follows CATL to produce affordable LFP-type batteries to secure profit margins

By Kim Yoo-chul

The global electric vehicle (EV) market has enjoyed robust growth despite continued supply chain challenges. Supply disruptions during peak periods of the COVID-19 pandemic and Russia's invasion of Ukraine had a short-term effect on the industry because EV sales rebounded from the second half of 2022.

Earlier predictions of growth in EV sales were not very convincing. However, strong policy support in both the U.S. and China, as well as continued technological improvements, have helped overall EV demand remain bullish. Research firms expect the battery value chain to increase almost 10-fold between 2020 and 2030 to reach as much as $140 billion in annual revenues.

But such policy changes ― the provision of up to a $7,500 tax credit for EV purchases in the U.S. and even the EU's recent unveiling of the Critical Raw Materials Act (CRMA), aimed at weaning the continent off Chinese critical materials for use in EVs ― are impacting the growing EV market.

Because entry barriers are rising again and the market is seeing signs of consolidation with just a few players controlling major stakes, leading Korean battery producers ― LG Energy Solution (LGES), Samsung SDI and SK On ― are facing increasing challenges.

Regarding these challenges, it is too early to say which of these Korean manufacturers should strictly focus on deliverables as the market has yet to be fully consolidated.

China's CATL and BYD are increasingly being challenged by the Korean battery trio in terms of volume guarantees from promising clients. This means that the industry's leading players are still in the process of differentiating their products to win more customers, raising the possibility that the industry may enter a "boom-bust" cycle earlier than expected.

"It's quite fair to say that the battery industry is engaged in a fierce race for market share. Demand for EVs will remain strong in the next few years, however, I would say Korean battery manufacturers should focus on improving their fundamentals as the boom-bust cycle, previously seen in the semiconductor industry during painful consolidation, is set to come earlier than thought," a senior manager at U.S.-headquartered investment bank in Seoul, said.

SpaceX owner and Tesla CEO Elon Musk speaks during a conversation with game designer Todd Howard (not pictured) at the E3 gaming convention in Los Angeles, California, June 13, 2019. Reuters-Yonhap

After exits and bankruptcies, a new order has prevailed in the global semiconductor industry with Samsung, SK, Micron Technology, Kioxia and Western Digital controlling both the DRAM and NAND flash-type chip markets. The key benefits of this consolidation is that all the leading players are positioned to pursue greater benefits as they should avoid traditionally-painful periods of losses.

As batteries are considered a national security issue, some executives and fund managers claim that the battery industry will not remain highly cyclical.

Mismatches between supply and demand as well as macroeconomic uncertainties can be attributed to the level of industry volatility, however, since the beginning, Washington has been asking Seoul's battery companies to share the specifics of key data related to manufacturing and operations for supply chain resilience amid the U.S.-China technology war.

Tesla's price cut, CATL's shift to profits

"LGES, Samsung SDI and SK On should be fully aware that the recent price cuts by Tesla and China's BYD, the largest EV manufacturer in China, are the beginning of at least a medium-term trend because the global EV industry is moving toward maturity. This is quite good news for customers; but, this may be good news or maybe not-that-good news for manufacturers," said Jang Chung-hoon, an analyst at Samsung Securities in Seoul. LGES is one of Tesla's top battery suppliers.

He stressed EV price cuts will become a trend not just a short-term fad as the EV king Tesla is simply a "cost-leader" and is clearly setting its tone for the price decline trend. Because the industry is seeing massive production ramp-ups, the industry is also seeing significant cost declines.

Tesla's progress in terms of reducing its anode production investment compared to Korean and Chinese battery manufacturers is accelerating the industry's drive to reach early economies of scale. Another point of concern from the standpoint of the Korean battery trio is that global lithium production is expanding rapidly. This means that battery producers cannot justify any rise in battery manufacturing costs to automakers.

"I would say that the Korean battery trio will put more focus on profits over market share. The core factor behind CATL's impressive 17.2 percent profit margin that it generated last year from its battery business was because of the popularity of quite cheaper LFP-type batteries. I would recommend LGES, Samsung SDI and SK On to win long-term contracts with their key clients through the stable provision of LFP-type batteries," the senior manager said.

A worker stands outside a Contemporary Amperex Technology Ltd (CATL) factory in Ningde, Fujian Province, China in this undated file photo. Reuters-Yonhap

LGES's group-wide operating profit margin last year remained at 2.78 percent, data provided by the Korea Exchange showed. The company didn't disclose its profit margin earned from its battery business. SNE Research said CATL was the leader in the global battery industry with a 37 percent share, followed by LGES and BYD with 13.6 percent each.

LGES said it will invest up to 7.2 trillion won for the construction of a second battery manufacturing plant in the U.S. Among this, 3 trillion won has been assigned to build a plant to manufacture LFP-type batteries. CEO Kwon Young-soo told reporters that LGES' partnership with Tesla was "going smoothly," and added the company will put a priority on its profit margin and improving its financial health. However, the company's vice chairman declined to elaborate.

Regarding any updates about plans for the mass-production of LFP-type batteries, both Samsung and SK representatives said they were preparing for volume production. However, NCM-type batteries are considered more profitable.

"Tesla is said to have promised volume purchases of LGES-made LFP-type batteries from its new U.S. plant, which will go online in 2025. Samsung SDI is rumored to have shown its interest with Stellantis and GM over a volume commitment for its LFP-type batteries. Once negotiations are completed, an announcement will be made," said an industry executive asking not to be identified citing the sensitivity of the issue.

Ford Motor said earlier that LFP technology is already in the U.S. and added manufacturing these type batteries on U.S soil will help it build more EVs faster and make them more affordable for its customers.