GM's expanded recall plan hit LG stocks

By Kim Yoo-chul

Shares of LG Chem, LG Electronics and LG Corp. dropped aggressively on Monday amid concerns about the grave financial impact on the group's top three affiliates from General Motors' expanded recall plan.

GM expanded its voluntary recall of Chevrolet Bolt electric vehicles (EVs) to include newer models because of a potential fire risk. Its expanded recall decision last week could cost the U.S. carmaker an additional $1 billion, bringing the total to some $1.8 billion to possibly replace “potentially fault battery modules” in it EVs.

The affected GM's EVs were using NCM 622 battery pouch cells manufactured by LG Energy Solution (LGES). LG Electronics modules use LGES's battery cells in products supplied to GM. GM was seeking reimbursement from LGES and LG Electronics as the soon-to-be-recalled parts were produced in LG's plants in South Korea and the U.S. state of Michigan.

LG Chem, the parent company of LGES, plummeted 11.14 percent to end 798,000 won, at Monday's closing, while LG Electronics shares fell by 4.10 percent to 140,500 won. LG Corp. dropped 5.09 percent to 89,500 won, according to data provided by Korea Exchange (KRX), the country's main bourse operator.

Investors' massive sell-off of the three LG affiliates' stocks due to GM's expanded recall campaign decision was mostly because of concerns that LGES may delay the timing of its planned local IPO.

The EV battery business is a critical growth driver for LG Group earnings, as LGES is trailing only China's CATL in the global EV battery industry, while LG Electronics, which exited its handset business, is on track to shift its focus toward vehicle component-related businesses taking advantage of LGES's rich clients such as Tesla, GM, Hyundai and Audi.

“Ahead of the planned IPO, GM's latest decision is truly bad news for LGES and LG Electronics as GM wants both LGES and LG Electronics to heavily cover the recall costs. How the two LG affiliates plan to split recall costs has yet to be decided. But out of $1.8 billion, two LG units are expected to cover at least 65 percent,” said Jeon Chang-hyun, an analyst at IBK Investment.

Samsung Securities analyst Cho Hyun-ryul said GM's recall will result in LGES possibly delaying its planned local IPO for a month as LGES has no options but to reflect the estimated split cost for the recall before finalizing the necessary IPO paperwork. For a comparison, at the time of Hyundai Motor's decision six months earlier to recall more than 80,000 Kona EVs due to potential battery fire risk, officials said the total recall cost would be about 1 trillion won with LGES assuming it would cover 65 percent.

But Noh Kyung-tak, an analyst at Eugene Investment, claimed the impact of GM's recall campaign on profits of LGES and LG Electronics will be limited. “GM's expanded recall campaign won't seriously hurt its partnership with LGES. That means despite the recall decision, construction work on two battery plants in the U.S. states of Ohio and Tennessee will proceed as scheduled as GM doesn't want to delist LGES from its battery supply chain.”