China's protectionism threatening LG Chem, Samsung SDI
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Beijing wants full localization of battery production
By Kim Yoo-chul
China’s latest decision to exclude two Korean battery firms ― LG Chem and Samsung SDI ― from its electric vehicle (EV) battery approved suppliers list has surprised global investors and original equipment manufacturers (OEMs).
China is said to have pressured the Koreans to open up their core technologies to Chinese domestic EV companies in return for approving the Korean companies, which complicates the matter, said a report by Bernstein Research.
The report was based on in-depth interviews with up to two dozen senior industry officials to find out the background of China’s latest decision concerning LG Chem and Samsung SDI.
Views were split whether or not the two Korean battery suppliers will receive certification in the next round ― the sixth such round ― after China rejected them in the most recent round in June.
Theoretically, this means EVs equipped with batteries from the two Korean companies could soon cease to qualify for subsidies from the government.
It remains unclear whether the cut-off for subsidies will come, although BMW has already stopped production and sale of its 5-series of PHEV in China. Samsung SDI is a key battery supplier for BMW.
“It’s also possible that the Korean suppliers are simply navigating the certification and approval process ― they should ultimately be allowed onto the EV battery list,” one policy think tank official in China was quoted as saying in the report.
Korea’s decision to deploy the Terminal High Altitude Area Defense (THAAD) missile defense system was cited as one of the hidden reasons that can further complicate matters.
“Recent political tension relating to Korea’s decision to deploy the THAAD system could prove detrimental to the Korean battery suppliers’ efforts to gain certification. It’s become a diplomatic issue ― and far too high a level a matter for one or two companies or even an industry to resolve in a vacuum,” an American executive was quoted as saying.
Analysts and company officials said Wednesday that they don’t worry too much about China’s possible protectionism in favoring local battery makers over LG Chem and Samsung SDI with their superior technology, given China’s need to grow the EV industry.
As batteries are on the cusp of meteoric growth as costs fall to levels that make EVs economical, the two Korean battery suppliers are “well-positioned” to ride the EV wave.
Price of entry
The report said China had locked out LG Chem and Samsung SDI because Beijing was keen to avoid a situation such as the one in the conventional car industry, where foreign suppliers dominate power-trains and other critical technologies.
LG Chem and Samsung SDI have been asked to localize key technologies or at least research and development (R&D) operations on the ground in China. China already expressed the country’s eagerness for LG Chem and Samsung SDI to localize their R&D.
“Full localization of production and R&D may be required as the price for battery entry,” said the report, stressing that localization of both battery cell and pack production represented a “bare minimum” for entry.
Also, the full localization of R&D was cited as a necessary pre-condition to continue LG and Samsung’s key battery business in China.
“China would stop at little to obtain competitive battery technology … China could go down the high speed rail route ― the transfer of technology from foreign firms to domestic rolling stock producers during the 2000s,” said the report.
Based on that perception, Samsung’s acquisition of a stake in BYD, was a “goodwill gesture” to receive favorable treatment from the Chinese government and be recognized as a helper for China’s battery industry in return for letting it in.
Samsung invested 510 billion won in BYD, the world’s top EV manufacturer, and said the decision was aimed at strengthening its car components-related business.
Samsung claims to already have R&D staff in China, while LG Chem said they’re in the process of moving R&D personnel there.
China has a huge interest in becoming a dominant, or at least competitive, player in the EV supply chain.
With huge subsidies and supportive measures, China wants to have champions in EVs just as it’s wanted local brand OEMs to become industry leaders.
“China doesn’t want to get into a situation like it did in conventional cars where Bosch, Conti and Delphi supply everything to the Chinese OEMs, and charge them whatever they want.”