[Why&Next] Battery Industry Actually Relieved by Electric Vehicle 'Speed Regulation'

As electric vehicles (EVs) have not sold as expected, the operation of battery factories has been put on hold. The construction of new factories has also been delayed. However, battery companies are relieved. They see this as an opportunity to ease the burden of rapid investment and mass production. Domestic battery companies are simultaneously investing tens of trillions of won to build factories in major demand markets such as North America and Europe. Although investments have been delayed, they have gained time to strengthen their fundamentals.

Facility investment is five times the profit... Battery top three relieved by speed adjustment

In the past month, plans for joint factories between domestic battery companies and global automakers have been revised three times. First, LG Energy Solution and Ford withdrew their joint battery factory investment in Turkey. Originally, this factory was to serve as a forward base for Ford’s Europe-bound EVs, but it was canceled due to the slowdown in EV transition. In the U.S., the operation of Ford and SK On’s second Kentucky plant was delayed until 2026. The joint factory between LG Energy Solution and GM, which was preparing to start operations by the end of this year, has also been postponed to early next year due to construction delays.

Additionally, SK On’s U.S. subsidiary, SK Battery America (SKBA), decided to reduce battery production at its Georgia plant and implement furloughs for some employees due to weak EV demand.

Despite investment delays and production cuts, domestic battery companies remain optimistic. On the 1st, at the ‘2023 Battery Industry Day’ event, Kwon Young-soo, Vice Chairman of LG Energy Solution and Chairman of the Korea Battery Industry Association, said regarding the EV demand contraction, "All three domestic battery companies are undoubtedly experiencing demand declines, but this is actually a good thing. If things had proceeded as originally planned, the problem wouldn’t have been money but rather a shortage of labor to build factories. Rapid growth caused us to overlook many things, but by solidifying these aspects, K-battery will have another opportunity to leap forward," expressing confidence.

Companies burdened with trillion-won scale investments have found a moment to catch their breath. LG Energy Solution is building and operating eight production plants in North America alone (two solely owned and six joint ventures). SK On is constructing or operating six plants in North America (two solely owned and four joint ventures). Samsung SDI plans to operate three battery plants in Indiana starting in 2025.

As large-scale factory operations approach, the financial burden on the three battery companies is increasing. This year, the CAPEX (capital expenditure) of the three domestic battery companies is expected to exceed 20 trillion won. LG Energy Solution is projected to invest 10 trillion won, SK On 7 trillion won, and Samsung SDI over 3 trillion won. Considering that the combined profit of the three companies is about 4.1 trillion won this year, the facility investment is more than five times their earnings (according to FnGuide consensus). Industry analysts say that the delay in factory operations only slightly postpones revenue growth but provides breathing room in terms of cost financing, raw material procurement, and workforce acquisition.

As long as the order backlog exceeding 1,000 trillion won remains unchanged, investment adjustments are not expected to significantly impact battery companies. LG Energy Solution announced during its Q3 earnings conference call that it secured an order backlog of over 500 trillion won as of last month. The industry estimates SK On holds an order backlog of 300 trillion won and Samsung SDI over 260 trillion won.

Moreover, the recent market contraction narrows the space for new entrants. Domestic companies are already advancing the battery industry through contracts and joint ventures with global automakers. With even planned factories being delayed, it is unlikely that new companies without proven technology will be allowed to enter. This is a favorable time for domestic companies who are ahead.

EV and battery markets face a chasm... The key is price and production cost reduction

However, changes in battery factory construction and operation plans indicate a slowdown in EV growth. Since 2020, demand has surged due to eco-friendly vehicle policies worldwide, leading to explosive growth in the EV market, but this growth is now clearly slowing. Prolonged high interest rates and economic downturns have contributed. The U.S. EV sales growth rate has declined from 94% in 2021 to 67% in 2022, and 50% in the first half of this year.

With the global EV penetration rate surpassing 13%, the market is said to have reached a ‘chasm.’ This refers to a temporary stagnation or retreat in demand between the early market and mainstream market after the launch of advanced technology or products. For EVs to cross the threshold of mass adoption, they must overcome high price barriers.

This is closely linked to the growth of domestic battery companies. Initially, high-performance EVs attracted attention, favoring relatively expensive but energy-dense NCM (Nickel-Cobalt-Manganese) ternary batteries, which are the strength of domestic companies. However, as the EV market moves into the mass market phase, interest in mid-to-low priced EVs and cheaper LFP (Lithium Iron Phosphate) batteries is increasing. Cost reduction is essential for the EV market to overcome the chasm.

In this context, there are also forecasts that delayed battery investments will lead to a drop in raw material prices. If the overheated competition for securing raw materials disappears in the short term, not having to pay premiums for key minerals will be a long-term positive factor.