[ANALYSIS] New order prevails in global battery industry

U.S. President Joe Biden listens to General Motors Chief Executive Mary Barra during a visit to the Detroit Auto Show to highlight the nation's electric vehicle manufacturing, in Detroit, Mich., Sept. 14, 2022. Reuters-Yonhap

LGES, Samsung SDI to benefit most from consolidation

By Kim Yoo-chul

After painful exits and bankruptcies, the global memory chip market has consolidated with a three rational players ― Korea's Samsung Electronics and SK hynix and the U.S.' Micron Technology. These structural market changes are truly responsible for the memory chip segment's bullish performance over the last few years.

While the sector leaders are now reporting disastrous earnings results because of lowered demand amid rising inflation, supply disruptions and rising inventory levels, these leaders are positioned to benefit greatly from improving demand and supply conditions as the overall industry will continue to recover.

Key takeaways about consolidation in the memory chip market, particularly DRAMs, are: increased barriers to market entry, more diversified demand, lower-than-anticipated product output and more rational behavior by players helping the leaders lessen the impact of the sector's traditional boom-bust cycles.

Despite repeated desires from its followers, the global leader Samsung, for example, decided not to cut its chip production. This shows the industry consolidation makes a leader more efficient and helps its bottom line in profits and market share.

A new order is also prevailing in the global battery industry, as Korean battery manufacturers are on track to increase their production capacity to take on their chief Chinese rivals including CATL and BYD.

Enticed by advantages from the market consolidation and rationalization, the world's No. 2 battery maker LG Energy Solution (LGES) and its fellow domestic rivals Samsung SDI and SK On aim to remain competitive with their large-scale and technological capabilities, company officials said.

A severe economic downturn starting in the late 1990s was the factor behind the memory chip industry consolidation, as this macro-economic trend severely reduced demand in major end markets. But today's signs of consolidation in the battery industry are driven by political factors from the very beginning, with the U.S. providing more incentives and financing for Korean battery manufacturers amid pandemic supply chain disruptions.

This is a key difference that hadn't been seen in the memory chip industry, as the COVID-19 crisis and Russia's invasion of Ukraine lead the U.S. to pursue its increasingly prominent policy intervention. The U.S. views the battery industry as a critical pillar of its economic competitiveness.

Workers assemble Chevy Bolt EVs at the General Motors assembly plant in Orion Township, Michigan, Nov. 4, 2016. Reuters-Yonhap

"Given the U.S.' strategy to upscale both demand- and supply-side measures and its shift to electrification with domestic manufacturing, the pace of industry consolidation will accelerate much faster than expected," a government official, who had been deeply involved in the country's trade policies under the former Moon administration, said by telephone.

Since 2012, most of the memory chip sector's core strength has been a result of consolidation within the once-crowded DRAM segment. In 1995, the top 10 DRAM players took up about an 80 percent market share. Since then, the market has been consolidating rapidly. Between 2013 and 2014, Samsung, Micron and SK accounted for more than a 90 percent market share, according to market research firms.

"Usually, overproduction and falling product prices lead significant market consolidation. When it comes to the battery industry, because the U.S. is moving towards friend-shoring or ally-shoring, LGES and Samsung SDI could be able to win the most gains among others as they supply batteries to specific and target clients via joint ventures," a senior portfolio manager at a U.S.-based investment bank in Seoul said.

The Inflation Reduction Act (IRA), the Biden administration's policy initiative intended to accelerate the transition to electric vehicles (EVs), is another factor helping Korean battery manufacturers see a widened economies of scale, according to the manager. Economies of scale are viewed as cost benefits to a business through the scale-up production.

Representatives at LGES and Samsung SDI said their focus on market share, capacity expansion and profitability will have little negative impact on revenues as they have yet to receive any requests from major carmakers to cut the price on the batteries they supply.

In the first 11 months of last year, Chinese companies accounted for 37.1 percent of global sales, followed by the Korean trio with some 25 percent, according to SNE Research, a market research firm. But Chinese manufacturers are unable to sell their batteries in the U.S. as the IRA's tax break rules mandate vehicles manufactured in China will not meet the U.S.' final assembly requirements.

"The growing anti-China sentiment is breaking Chinese companies' global expansion. The global battery industry will be consolidated with a few players with U.S.-backed Korean producers leading the way," said Kim Il-hwan, a senior executive at Ulsan Technopark.

Minor players are repressed, establishment of collective ecosystem

The question is about what the battery industry expects to gain from the collapse of U.K.-based Britishvolt and implications from the case, as the startup went bankrupt without finding vehicle companies willing to make stable orders.

Similarly, the collapses of Qimonda of Germany and Elpida Memory of Japan had accelerated the pace of the DRAM industry's consolidation, reducing the industry's overall supply. But investors and analysts said the impact from the collapse of Britishvolt will be limited because it was a smaller startup.

Interestingly, major battery manufacturers are embracing a tit-for-tat approach to their major clients to limit the bargaining power of buyers, which is interpreted as suppliers' moves to gain the upper hand in negotiations for battery delivery costs. Because buyer power gives buyers the ability to squeeze industry margins by pressuring suppliers to cut prices, Korean battery manufacturers are hoping to stress "switching costs" amid signs of industry consolidation.

Jeon Woo-jae, an analyst at KB Securities, said the battery industry is shifting to a sellers' market, and that LGES, Samsung SDI and SK On are in favorable conditions to win more lucrative battery supply contracts.

Chinese battery maker CATL's plant is seen in Arnstadt, Germany, in this handout image obtained by Reuters on Jan. 26. Reuters-Yonhap

"The reason behind the tough negotiations between LGES and General Motors (GM) over a plan to construct a fourth battery cell plant in the U.S. is LGES' aim to be treated as an equal business partner rather than merely a supplier-and-buyer relationship, as the alliance between GM and LGES is important to GM's future EV plans. For U.S. carmakers, only South Korean manufacturers can guarantee volume production, on-time delivery and better pricing," a senior executive familiar with the matter said separately by telephone.

LGES has joint venture partnerships with leading carmakers such as GM, Honda and Hyundai Motor. Samsung SDI supplies its EV batteries mainly to BMW and it also has a battery venture with Canada-based Stellantis, while SK On has Ford as its key battery business partner.

But despite the passage of the IRA and Washington's policy intervention in the battery industry, the Korean trio stand to reap credits as they ramp up domestic battery production. But Chinese companies are still major threats as CATL and BYD are also positioned to expand their share given China's control of battery materials including cobalt and graphite.

As creation of an ecosystem is more about the connection and integration between core materials and battery cells, Samsung SDI entered an agreement with POSCO Chemical to procure POSCO's high-nickel NCA (nickel, cobalt and aluminum) products for a decade. High-nickel NCA accounts for about 40 percent of an EV battery.

"This deal will help Korean battery manufacturers reduce their reliance on China for critical materials to be used in EVs. Only players which have large scale and strong technological capabilities could survive the industry consolidation," said Kim Bong-maan, head of international business at the Federation of Korean Industries, a business lobby defending the interests of conglomerates.

Because structural changes mean stiff barriers to entry, Korea's battery trio is encouraged to broaden its battery product portfolio but is focusing on the premium end. The global EV titan Tesla, specifically, aims to mass-produce dry-electrode 4680 cells.

"As EVs go mainstream, Korean battery producers will have to respond to growing requests from carmakers to lower their margins. CATL and BYD of China are on track to stabilize the ramp-up for more production of less-pricey LFP-type batteries," said Park Chul-wan, a professor at Sejong University. "Pursuing dual-track strategies ― premium EVs for NCA-type batteries and affordable EVs with LFP-type batteries ― is necessary for LGES, Samsung SDI and SK On."

"With capacity expansion of cheaper batteries by major players, they will prioritize market share gains over profitability for a while," said Kim Chul-jung, an analyst at Mirae Asset Securities. "This will pressure margins for them, but it's unlikely the industry will fall into low profitability as the battery industry is supported by many political factors and big carmakers."