Understanding the Complex Dynamics

The UBS analyst's comments reflect a more complicated relationship, suggesting that the U.S., often seen as an ally, plays a significant role in South Korea's current struggles. This complexity began with the Biden administration’s Inflation Reduction Act (IRA) in 2022, aimed at promoting clean energy and combating climate change. The IRA offered substantial subsidies for electric vehicle purchases, but only for those meeting specific criteria, including production in North America and use of batteries with a substantial domestic component.

This legislation indicated that the U.S. aimed to “Make American New Energy Great Again,” with the battery being a crucial element, as it constitutes 30–40% of an electric vehicle's cost. Yet, the market is largely dominated by a few major players, with five manufacturers from China and South Korea controlling 75% of the global battery market. Establishing a new American battery company from scratch poses significant challenges.

Recognizing this reality, the U.S. sought alliances. In April 2023, various stakeholders, including U.S. and Korean battery industry representatives, convened to explore integrating South Korean manufacturers into the U.S. market. Eager to reverse their fortunes, LGES announced plans to establish three factories in the U.S.—two in Arizona and one in Michigan—aiming for a production capacity of 225 GWh by 2025.

Despite the optimistic outlook, unforeseen challenges loom. The intricacies of high-tech manufacturing extend beyond mere factory operations; they encompass the necessity for a skilled workforce and a reliable supply chain. Taiwan Semiconductor Manufacturing Company (TSMC) faced a similar dilemma when assessing Germany's semiconductor suppliers, leading to delays in their plans due to inadequate local resources.

Currently, South Korean battery manufacturers encounter a parallel challenge in the U.S., where local suppliers are ill-equipped to meet their requirements. According to Benchmark Mineral Intelligence, in 2022, the U.S. battery industry relied heavily on imports for key materials. The situation is expected to remain dire, with projected import dependencies remaining as high as 82% and 92% for anode and cathode materials, respectively, by 2032.

The crucial supply chain issues have driven up production costs for U.S.-based battery manufacturing. Some analysts suggest that producing lithium iron phosphate batteries in South Korea could be 17% more expensive than in China, and the cost increases to 40% if produced in the U.S. This disparity is unsustainable for South Korean manufacturers already operating on narrow margins.

The slowdown in the electrification efforts of Detroit's major automakers has led to caution among Korean manufacturers. In July, SK On announced further layoffs at its Georgia plant and postponed the construction of its joint venture facility with Ford in Kentucky, while LGES and Samsung SDI also scaled back their U.S. investments. The reality is that navigating a competitive landscape dominated by Chinese manufacturers is compounded by the underdeveloped state of the American lithium battery industry.

The Shift Toward LFP Technology

As South Korean manufacturers grapple with these challenges, they face an additional hurdle: the rise of lithium iron phosphate (LFP) batteries in Western markets. Until 2020, the prevalent choice among Western automakers, including Tesla and the German Big Three, was primarily nickel-cobalt-manganese (NCM) lithium battery technology, which was viewed as superior.

However, the introduction of BYD's Blade Battery and Tesla's adoption of CATL's LFP batteries represented a pivotal shift. These developments challenged the perception that LFP batteries were only suited for lower-end vehicles, especially following safety concerns surrounding high-nickel NCM batteries. The inherent advantages of LFP technology, such as cost-effectiveness and safety, became increasingly appealing to manufacturers.

Consequently, the market share of LFP batteries surged from less than 40% in 2020 to over 60% by 2023 in China, with global adoption accelerating as Tesla and BYD achieved profitability with LFP batteries. In Europe, major players like Volkswagen and Renault announced plans to integrate LFP batteries into their future models, while in the U.S., Ford's partnership with CATL for a new factory exemplifies the trend.

For South Korean manufacturers, who have heavily invested in NCM technology, this shift poses significant challenges. Despite the U.S. government's scrutiny of CATL, American automakers like Ford have remained committed to partnerships with Chinese manufacturers, further complicating the landscape for South Korean firms.

Adapting to New Realities

At the InterBattery 2024 exhibition in Seoul, South Korea, major battery manufacturers and industry stakeholders expressed a renewed focus on LFP technology. SK On's CEO announced plans for mass production of LFP batteries by 2026, while Samsung SDI and POSCO Holdings are also exploring similar timelines and partnerships.

The irony lies in the historical context: South Korean companies once viewed their battery technology as being generations ahead of their Chinese counterparts. However, as the market shifts towards cost-effective solutions, the South Korean belief in technological supremacy has come under scrutiny.

The lessons from the memory industry, particularly the fate of Elpida, underscore the risks of competing solely on quality while neglecting cost. CATL's rapid rise, coupled with its increased R&D spending, has positioned it to dominate the market, further challenging South Korean manufacturers.

As the global automotive industry pivots towards LFP batteries, South Korean firms must confront the reality that their differentiation in high-nickel NCM technology has diminished. Competing on cost has traditionally been a weakness for South Korean manufacturers, while Chinese companies excel in this arena.

The ideal trajectory for South Korea's battery industry was once envisioned as collaboration with the U.S. to form a cohesive supply chain for electric vehicles. However, the uncertainties brought about by the IRA and shifting political dynamics have left the future of South Korea's battery sector in limbo. The question remains: will American policies favor friend-shoring, or will a shift towards more traditional energy policies alter the landscape yet again? This dilemma not only affects the battery industry but also the broader economic future of South Korea.

The video titled "Countries Urges Automakers to Disclose EV Battery Brands After Fires" explores the growing concerns surrounding the safety and transparency of electric vehicle batteries. As incidents of battery fires have raised alarms, there is increasing pressure for manufacturers to disclose the origins and components of their battery technologies, particularly amidst the rising competition from Chinese manufacturers.