LG Chem and Samsung SDI which have struggled with the payment of differential subsidies for electric vehicles in China, grasp an opportunity by landing an order for batteries from Volkswagen. However, a challenge for them is how they will overcome price cut pressure from carmakers and make profits.
According to industry sources on March 15, Volkswagen struck a 20 billion euro (about 26 trillion won) battery supply deal with LG Chem, Samsung SDI, and CATL of China for mass production of electric vehicles on March 13. The sources added that suppliers of batteries for Volkswagen cars for the North American market will be selected in the near future.
Volkswagen set a goal of setting up at least 16 new electric vehicle production facilities by 2025 and increasing its annual electric vehicle sales to 3 million units based on the facilities. By region, five facilities, four facilities, and one facility will be built in China, Europe, and the United States, respectively with the goal of starting their operations in 2020.
According to the plan, Volkswagen will overtake Tesla which created an electric car fever, and grow into the leading electric car company. Tesla sold 102,807 units of electric cars last year.
The battery industry expects that this order will empower LG Chem and Samsung SDI to take the lead in the electric car battery. Considering that global electric vehicles (including plug-in hybrid cars) sold about 1.1 million units last year, and the Chinese electric vehicle market, which Korean battery makers are currently unable to ship batteries to, was about 470,000 units, the order volume is enough to make up for the slump in China. LG Chem started mass production of electric car batteries in Poland in the first quarter of this year, and Samsung SDI is planning to roll out batteries in the second quarter after the completion of a plant in Hungary.
The securities industry also stated that this order will have a positive impact on the Korean battery industry including LG Chem and Samsung SDI. “Including batteries for Volkswagen electric cars for the US market, Volkswagen's battery supply contracts for electric vehicles are estimated to be between US$ 40 billion and US$50 billion until 2025," said Han Byung-hwa, a researcher at Eugene Investment & Securities. "Volkswagen posted a mere 43,000 units in sales of electric cars last year. But this means that the German automaker has great growth potential in the electric vehicle sector."
Actually, Park Jin-soo, vice chairman of LG Chem, announced that it will ramp up sales of the battery business including electric car batteries to about 10 trillion won by lading more orders from the US and Europe. Taking into consideration that sales of LG Chem’s battery business division amounted to 4.56 trillion won (US$4.1 billion) last year, LG Chem is aiming at more than doubling sales in three years.
However, there is concern that Volkswagen is mounting pressure to cut down on battery prices in return for placing big orders. In fact, a source said that SK Innovation did not participate in competing for the Volkswagen order by taking its profitability into consideration.
"A rumor is going around that Volkswagen requested that the battery supply price be pulled down to US$ 100 or less per 1kwh lower than the unit price of batteries supplied to General Motors," said a battery industry official. “Companies which won orders from Volkswagen know that it will be inevitable for them to record loss due to initial investment such as the expansion of plants. They will try to secure profitability by lowering cost by developing production and manufacturing technology for the rest of the production periods."