1 Trillion Won Kona EV Battery Replacement, First Step Taken but...

① New Battery Supply Line LG, Sequential Supply Planned
② Additional Negotiations Expected After Final Fire Cause Determination
③ LG Energy Solution, Possible Impact on Listing Schedule

In January, an electric vehicle Kona EV caught fire for unknown reasons while charging at a public electric vehicle charger installed at a taxi company in Yucheon-dong, Dalseo-gu, Daegu. Firefighters who arrived at the scene are conducting extinguishing operations.

[Asia Economy Reporter Choi Dae-yeol] Hyundai Motor Company and LG Energy Solution have agreed on how to share the costs incurred during the battery replacement process for the Kona electric vehicle (EV). This outcome is interpreted as a result of Hyundai's intention to quickly resolve the fire issue and reflect the provision for losses in last year's financial results, and LG's interest in minimizing the shared costs.

Neither company clearly explained the exact amount each will bear. According to the revised disclosure made on the 4th when correcting the fourth-quarter earnings, the industry estimates the cost to be between 1.08 trillion won and nearly 1.4 trillion won. This discrepancy appears to stem from the provision already reflected in the fourth quarter of last year and how the cost of the replacement batteries is calculated.

The agreement was reached faster than initially expected, and replacement will begin as early as late this month, but significant challenges remain. The key issue is whether the supply of replacement batteries will be smooth. Hyundai has decided to replace batteries sequentially according to a set order, as it lacks the physical capacity to replace batteries for over 80,000 vehicles all at once and there are supply issues with new batteries.

LG Likely to Struggle to Deliver Existing Contract Volumes
Replacement Starting Late This Month... May Extend Beyond the New Year

According to LG Chem's business report, the factory utilization rate over the past three years has been around 60%. At first glance, this seems sufficient. However, this figure represents the actual production volume relative to total production capacity and does not imply that the factory utilization rate can be increased further at this stage to boost delivery volumes.

Battery production involves yield issues and other complexities, so even after building factories, it takes a certain period before mass production can begin. LG Energy Solution's battery order backlog is known to be close to 200 trillion won, and considering that some of this includes supply scheduled for next year and beyond, the company is not in a position to produce a large number of unplanned batteries in the short term.

In 2019, when Joko Widodo, the President of Indonesia, visited Hyundai Motor's Ulsan plant, Chung Eui-sun, then Senior Vice Chairman of Hyundai Motor, was explaining the Kona Electric vehicle.

How the cause of the fire is ultimately determined is also crucial. This battery replacement was carried out based on a high possibility of issues with the battery cells as a corrective measure, but this is only an interim result. According to last month's announcement by the Ministry of Land, Infrastructure and Transport, there is also a possibility of problems with the Battery Management System (BMS), which is the responsibility of the automaker, and additional investigations are currently underway.

Neither company has specifically stated whether they will renegotiate the cost-sharing based on the final results of the fire cause investigation. However, given the unprecedented decision to replace batteries in over 80,000 vehicles at once and the potential for EV fire issues to resurface at any time, it is highly likely that both companies agree on the importance of accurately identifying the cause and clearly assigning responsibility.

LG Battery Industry's First Annual Profit, Deficit When Including Provisions
Timely External Funding Important but Concerns Over Negative Impact on Valuation

There is also interest in whether this will affect LG Energy Solution's planned initial public offering (IPO) scheduled for this year. LG Chem, the corporation before LG Energy Solution's spin-off, recorded an additional provision of 550 billion won in losses in the fourth quarter of last year, which would result in a deficit if reflected in LG Energy Solution's battery business segment performance. When LG Energy Solution announced its preliminary operating profit for the entire last year at the end of January, it reported 388.3 billion won, marking its first profit. Including the loss would mean a deficit. Typically, companies with deficits find it difficult to go public. However, according to the listing regulations of the Korea Exchange, companies with high growth potential and a market capitalization exceeding 1 trillion won can list regardless of other financial conditions.

The market had expected LG Energy Solution to proceed with IPO procedures in the second half of this year, considering external factors such as other companies' listing schedules. Rather than increasing facility investments after securing orders as in the past, the company is in a position where it needs to proactively attract external funds by monitoring market trends and making preemptive investments. Regarding whether the company will proceed with the IPO as planned despite the deficit, the company stated, "No concrete decision has been made yet."