China an­nounces it’s stop­ping sub­si­dies for EV bat­ter­ies, and Sam­sung and LG get ner­vous

China has cut sub­si­dies for the Korean com­pa­nies’ mod­els It gives “the do­mes­tic bat­tery mak­ers a chance to catch up”

Bloomberg Businessweek (Asia) - - CONTENT - −Bruce Ein­horn and Hee­jin Kim

The days of Korean tech com­pa­nies lag­ging be­hind their ri­vals in Ja­pan are long over. From smart­phones to ad­vanced screens, sub­sidiaries of Sam­sung and LG have mar­ket share that Ja­panese brands such as Pana­sonic should envy. One no­table ex­cep­tion is the bat­ter­ies used to power elec­tric ve­hi­cles. Pana­sonic makes 36 per­cent of them (it’s part­nered with Tesla), com­pared with less than 8 per­cent for LG Chem and 5 per­cent for Sam­sung SDI. That’s be­com­ing a big­ger deal: World­wide de­mand for elec­tric ve­hi­cles swelled 87 per­cent last year, to 672,000, ac­cord­ing to SNE Re­search.

To in­crease their share of the mar­ket, LG and Sam­sung have been count­ing on de­mand from China, which last year made up a third of the mar­ket for elec­tric-ve­hi­cle bat­ter­ies. The Chi­nese gov­ern­ment says it’ll re­duce smog by putting 5 mil­lion EV cars and buses on the road by 2020. Both Korean com­pa­nies have been mak­ing ma­jor in­vest­ments in new pro­duc­tion fa­cil­i­ties in China, but a change in gov­ern­ment pol­icy threat­ens to up­set their plans.

Buses are about half the EV mar­ket in China, and the gov­ern­ment has sus­pended its once-gen­er­ous con­sumer sub­si­dies for EV buses us­ing bat­ter­ies like the ones Sam­sung and LG make—a com­bi­na­tion of nickel, cobalt, and man­ganese (NCM). Sub­si­dies will con­tinue for less-ad­vanced lithium-iron-phos­phate (LFP) bat­ter­ies, ac­cord­ing to the state news agency, Xin­hua. Sam­sung’s bat­tery unit, which last year opened an NCM bat­tery fac­tory in China and plans to in­vest $600 mil­lion there by 2020, said in a state­ment that the com­pany is “con­sid­er­ing var­i­ous ways to re­spond.” LG’s bat­tery unit de­clined to com­ment.

Hun­dreds of Chi­nese man­u­fac­tur­ers are now mak­ing EV bat­ter­ies, with mixed re­sults. Last year there were at least six cases of elec­tric ve­hi­cles catch­ing fire on Chi­nese roads. The gov­ern­ment can’t af­ford to ig­nore the safety is­sues, says Paul Gao, a McKin­sey se­nior part­ner in Hong Kong. “Most of the Chi­nese bat­tery play­ers still have dif­fi­culty mas­ter­ing NCM,” he says. “Chi­nese play­ers are not able to pro­vide con­sis­tent qual­ity and re­li­a­bil­ity.” By con­trast, Gao says, they’ve en­joyed suc­cess with LFP bat­ter­ies, which are heav­ier and less pow­er­ful.

With­out gov­ern­ment sub­si­dies,

672

thou­sand Global de­mand for elec­tric ve­hi­cles in

2015

which can ac­count for as much as 40 per­cent of the price of an elec­tric ve­hi­cle in China, mod­els with NCM bat­ter­ies will have more trou­ble find­ing buy­ers. A Chi­nese shift away from NCM could mean a 10 per­cent drop in LG’s global bat­tery sales, says Lee Dong-Wook, an an­a­lyst with HI In­vest­ment & Se­cu­ri­ties. Sam­sung should ex­pect a 15 per­cent over­all hit, says Kim Ji-San, an an­a­lyst with Ki­woom Se­cu­ri­ties. Pana­sonic is much less ex­posed, with less than 1 per­cent of its EV bat­tery sales com­ing from China, says Si­mon Yu, manag­ing di­rec­tor at SNE Re­search.

Push­ing lo­cal bat­tery pro­duc­ers to make their NCM de­signs safer should also help them be­come more com­pet­i­tive against for­eign com­pa­nies, says Mark Newman, a se­nior an­a­lyst with Bern­stein Re­search in Hong Kong. The sus­pen­sion of sub­si­dies “is very clearly a po­lit­i­cal step from China to give the do­mes­tic bat­tery mak­ers a chance to catch up,” Newman says.

The bat­tery sub­si­dies have al­ready be­come a diplo­matic is­sue be­tween China and South Korea, threat­en­ing to over­shadow the bi­lat­eral free-trade agree­ment the coun­tries im­ple­mented last year. On March 19, Korea’s trade min­istry said the Chi­nese gov­ern­ment has agreed to con­sider a re­quest to con­tinue sub­si­diz­ing NCM bat­ter­ies. Chun Taekmo, a chief fund man­ager of Hyundai In­vest­ments, says there’s rea­son to be­lieve China will re­lent, given how much more ef­fi­cient a well­made NCM bat­tery is, com­pared with its LFP coun­ter­part.

Even if China does re­new the sub­si­dies, Sam­sung and LG have good rea­son to worry that the gov­ern­ment may find other ways to pro­mote lo­cal ri­vals. While the bat­ter­ies of com­pa­nies such as BYD— No. 2 in global mar­ket share be­hind Pana­sonic— aren’t as ad­vanced, Chi­nese tech­nol­ogy com­pa­nies have proved they can quickly make up that kind of ground. “The Korean man­u­fac­tur­ers are very wary,” says I-Chun Hsiao, an an­a­lyst with Bloomberg New En­ergy Finance in Tokyo. “What they are very afraid of is some­thing sim­i­lar to what hap­pened in the so­lar in­dus­try, when within two or three years the Chi­nese caught up and Ja­panese and Kore­ans have gone bank­rupt or lost mar­ket share.”

The bot­tom line China’s sus­pen­sion of sub­si­dies for Sam­sung and LG’s type of elec­tric-ve­hi­cle bat­ter­ies could mean dou­ble-digit sales drops.

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