SEOUL, Feb. 25 (Korea Bizwire) — South Korean battery makers are facing uncertainty over their businesses on safety issues and legal disputes amid an intensifying competition for the booming market as automakers rush to go all electric.
Three manufacturers — LG Energy Solution Ltd., Samsung SDI Co. and SK Innovation Co. — are well-positioned suppliers of rechargeable batteries, a key component of electric vehicles, with their advanced technology and global production capacity.
The trio’s combined share more than doubled from 2019 to account for 34 percent of the global market in 2020, according to the data by SNE Research.
Their shares on the Seoul bourse posted a meteoric rise last year in line with the robust sales and high hopes for the growing industry becoming one of the top-performing sectors amid the COVID-19 pandemic.
To further growth, the companies vowed to jack up investments to expand their production capacity in the coming years.
However, they face challenges at home and abroad to get ahead in the highly competitive market against their Chinese and Japanese rivals.
Industry leader LG Energy is in the hot seat over fire risks associated with its batteries used in Hyundai Motor Co.’s Kona EVs after 15 fires were reported since the launch of the subcompact SUV in 2018.
On Wednesday, Hyundai Motor said it will recall battery systems in some 82,000 EVs, including Kona as well as Ioniq and Elec City buses, on potential fire risks.
The decision came less than four months after an initial recall program updated software of Kona’s battery system to limit the maximum charging rate to 90 percent.
The automaker said it will consult with LG Energy on how to share the recall costs estimated at about 1 trillion won (US$900 million) once the government announces the final probe results.
The transport ministry said initial findings of an investigation showed a Kona EV caught fire because of a problem with the battery cell, which was manufactured at LG’s Nanjing plant in China.
It also said Hyundai misapplied LG’s suggestions for fast-charging logic in the battery management system.
If the investigation concludes defects in battery cells were behind Kona EV’s fires, it could cost several hundred million dollars and also deal a blow to the reputation of LG Energy, which supplies batteries for Tesla’s Model 3 and other mainstream EVs
LG vowed to step up safety measures and quality inspection processes, saying its batteries’ problems, which occurred when the Nanjing plant initially began production, have since improved.
Industry players will be closely watching how the automaker and battery maker will share the bills because it is the first mass battery pack replacement among EV makers conducting voluntary recalls over fire risks.
In November, General Motors launched a recall of 68,766 Chevrolet Bolt EVs with LG’s batteries after five reported fires.
An LG Energy spokesperson said the batteries in Bolt EVs were made in the Ochang factory in South Korea on a different production line and are operated under a different battery management system from Kona EVs.
The recall issue comes at a critical time for LG Chem’s battery subsidiary as it is pushing for its initial public offering on the Seoul bourse later this year.
LG is not alone in having to ensure the quality of its batteries to tap deeper into the global market.
BMW and Ford, which use batteries made by Samsung SDI for their plugged-in hybrid cars, in late 2020 recalled some of their EVs due to battery fire concerns.
BMW said internal investigation showed particles may have entered the batteries during the production process, which could lead to a short circuit within the battery cells when the battery is fully charged.
Although a final investigation result has not yet been released, the clients’ recalls of Korean EV batteries affected Samsung SDI’s profits.
The company posted a lower-than-expected 246.2 billion won in operating profits in the fourth-quarter due to funds set aside for recall costs.
“We expected the EV battery business to turn to black but failed to achieve the goal due to quality-related costs,” Kim Yoon-tae, the head of Samsung SDI’s Finance and Management Support, told investors in January, noting the company improved product screening protocols after the recalls.
Market watchers said the voluntary safety recalls at an early stage of EV adoption may hurt short-term profits of battery makers, but they remained positive on their mid-term outlook on the global transition to EVs.
“Recall issues will lead to one-time costs, but they do not pose a fundamental risk to the battery industry,” Shin Youn-joo, an analyst at Mirae Asset Daewoo, said.
“Automakers’ transition toward EVs is inevitable, and there are only a handful of companies that can make quality batteries.”
Uncertainty also remains over a prolonged legal battle between LG Energy and SK Innovation, which have been at loggerheads over lawsuits related to EV technology at home and abroad.
On Feb. 10, the U.S. International Trade Commission (ITC) sided with LG in a trade secret case and issued a 10-year import ban on SK Innovation, while giving temporary permits on batteries and components needed to make products for Ford and Volkswagen in the U.S. to allow them to find new partners.
The ruling, if finalized, could deal a serious blow to SK Innovation, which has been building a $2.6 billion factory in Georgia to provide EV batteries to Volkswagen and Ford.
SK Innovation expressed regret over the decision but cited the 60-day presidential review period, noting President Joe Biden’s priority on EVs. As for compensation, the company said it is ready to negotiate with LG under “reasonable” conditions.
LG said SK will have difficulties in winning future car battery deals unless it comes forward and makes compensation for the unlawful acts, warning of additional legal action depending on SK’s stance toward the ITC ruling.
Despite growing pressure from politicians in South Korea and the U.S. as well as SK’s clients, they haven’t yet started the negotiation process on a seemingly big gap on the settlement amount.
According to industry sources, LG demanded nearly 3 trillion won in compensation, but SK offered less than 1 trillion won ahead of the ITC ruling.
Industry observers said the two rivals may soon enter into negotiations as LG needs money for the recall expenses and SK seeks to clear obstacles in its U.S. business, but it remains unclear how the process will play out.
“Although a settlement is the most likely scenario for SK Innovation as the import ban could jeopardize its U.S. battery business, it could have difficulty with financing,” Lee Jin-myong, an analyst at Shinhan Investment Corp., said.
“The company’s shares could face downward pressure in the short term, but its battery business still retains momentum for the mid-to-long term.”