To Finance Massive Investment in R&D and Facility Expansion
Rumors about LG Chem spinning off its secondary battery business have been going around steadily since the global electric vehicle (EV) market began to take shape in earnest. Every time such rumors surfaced, the company said that it has not decided on the matter yet.
The spin-off has been continuously discussed within LG Group. Its decision to implement it in coming December has to do with the recent global market situations. The global car market has begun to shift towards eco-friendly vehicles, fueling the growth of the rechargeable battery market.
The European Union’s tougher regulations on emissions have pushed global carmakers towards increasing the proportion of eco-friendly car production and sales. U.S. Tesla, a worldwide leader in the EV industry, has begun to cooperate with China's CATL in addition to its long-time partner Panasonic, sparking off new partnerships between carmakers and battery makers. Recently, General Motors (GM) announced that it will invest US$2 billion in Nikola, a hydrogen truck company called a "second Tesla."
Above all, the rapid growth of the EV market has intensified competition among Korean, Chinese and Japanese battery makers, who are virtually dominating the global battery market. Market research firm IHS Markit predicts that the market for EV batteries will grow by 25 percent annually over the next seven years. Chinese companies including CATL are rapidly growing on the back of subsidies from their government.
Analysts say that the time has come for EV technologies to make a quantum jump such as the development of full-solid batteries that have twice as much capacity as existing products. Large-scale R&D investment is essential to securing advanced technologies.
"The current global EV battery market is reminiscent of the early 2000s when semiconductor technology significantly advanced and competition for taking orders was hot," an industry analyst said. "As the EV market has begun to expand in earnest, EV battery producers need to make large-scale R&D investments to stay ahead their competitors." At the same time, they need to make large-scale facility investments to keep up with rapidly expanding EV demand. As of the end of 2019, LG Chem's order backlog amounted to 150 trillion won.
The fact that LG Chem’s battery business division has become profitable also encouraged the company to spin it off. LG Chem surprised analysts by posting 6.953.2 billion won in sales and 571.6 billion won in operating profit in the second quarter. Although the business results of the battery division were not disclosed separately, it is believed to have posted a meaningful surplus for the first time.
LG Chem will spin off the battery business into a wholly owned subsidiary, which makes it easier for the company to attract investment. The spin-off is expected to allow LG Chem to raise funds needed to finance its massive investment in R&D and facility expansion.