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Author | Freddy

Last year, the lithium battery market was inevitably in decline due to the continuous decline in lithium salt prices. According to the current price of lithium iron phosphate batteries, most domestic battery manufacturers are facing the dilemma of losses.

But overseas battery giants are also having a hard time.

Although it has been ranked among the top five in the global power battery installation list for several consecutive years, South Korea's SK On has suffered losses for ten consecutive quarters since it was spun off from SK Group in 2021. In the first quarter of this year, the loss (about 1.7 billion yuan) increased 17 times compared with the fourth quarter of last year.

Faced with the severe winter of lithium batteries, compared with its sister company SK Hynix, which has been reborn with the help of AI, SK On's profit prospects have become confused and it is waiting for the group to provide assistance.

However, the decline of overseas battery giants may become an opportunity for China's lithium battery to further open up the international market.

01The wealth is overwhelming

As a subsidiary of SK Group, the third largest chaebol in South Korea, SK On was born with a silver spoon in its mouth.

Carrying the hope for the group's rebirth, SK On was separated from its parent company SK Innovation and operated independently in 2021. The following year, it received an investment of 2.8 trillion won from the group.

With ample funds and a stable customer base, the company received orders of up to 1,000GWh shortly after its establishment, and began to bet big on the expected surge in demand for electric vehicles.

In order to maximize this wave of "huge wealth", SK On is working at full capacity. In 2020, SK On's European and Chinese factories will officially start mass production, and the US factory will soon start mass production. By 2023, the planned production capacity will be 76 GWh, with the proportion of production capacity in various regions being: China 46%, the United States 28%, Hungary 20%, and South Korea 6%.

From 2021 to 2023, SK On has successively supplied electric vehicle batteries to Ford Motor, Hyundai Motor, Volkswagen and other companies, ranking among the top five in global power battery installed capacity for three consecutive years, with a market share of about 5%.

However, excessive production capacity investment, fluctuating production costs, and a single technology route pushed SK On into a bottomless pit of burning money.

In the first quarter of this year, SK On's sales dropped 49% from the previous quarter to 1.68 trillion won (about 8.8 billion yuan). Last year, it lost 581.8 billion won, but in the first quarter of this year, it lost 331.5 billion won (about 1.7 billion yuan), a 17-fold increase from the fourth quarter of last year.

What is even more fatal is that SK On's net debt increased fivefold from 2.9 trillion won last year to 15.6 trillion won (about 82.2 billion yuan).

As a result, the risk of insolvency and lack of funds for operations is increasing.

SK Group, one of the largest financial backers of SK On, is seeking to merge SK E&S within the group with SK Innovation.mergeSK E&S is a subsidiary of SK Group that produces liquefied natural gas, which means that SK On is using a traditional energy company with more stable profitability to help it overcome difficulties.

At the same time, the Korean lithium battery giant can only try its best to save money. Not only has it slowed down its investment in the US market, which was previously the focus of its layout, but it has also postponed the start of production of its second joint venture factory with Ford. Even the head of the company, Lee Seok-hee, directly announced that he would freeze the salaries of all executives until the company can turn losses into profits. In addition, company executives are also required to take economy class when traveling internationally and are required to go to work before 7 a.m. every day.

02 Who caused the Waterloo of Korean companies?

The domestic market space in South Korea is limited. In fact, Korean battery companies have embarked on the road of going overseas very early. However, in recent years, faced with Chinese companies overtaking them, not only SK On, but also LG and Samsung SDI should have felt the "crisis."

From January to May this year, Korean-made power batteries had a global market share of 22.3% in terms of installed capacity, down 2.8 percentage points year-on-year.

As for Chinese companies, the total market share of the six Chinese companies in the TOP10 alone reached 64.5%, an increase of 3.2 percentage points year-on-year. The market share gap between Korean and Chinese companies further widened to 42.2%.

Faced with the rapid growth of domestic manufacturers such as China Innovation Aviation and EVE Energy, SK On's installed capacity fell behind significantly in the first quarter of this year (-8.2%), lower than the industry average growth rate (22%), and its market share also showed a downward trend.

The lithium battery industry is beginning to show signs of differentiation, and we can already tell from the performance who is running fast and who is running slow.

In addition to SK On, the other two Korean battery manufacturers are also having a hard time. In 2024, LG Energy Solution's revenue and profits continued to fall. This is even if LG Energy Solution can obtain tax credits from the U.S. Inflation Reduction Act, which can provide a tax credit of up to $35/kWh for producing batteries in the United States. As for Samsung SDI, its operating profit in the first quarter of this year also fell 29% year-on-year.

On the other hand, in China, take Xinwanda, which ranked tenth last year, as an example. Its recent semi-annual report shows that its profit reached between 767 million and 899 million yuan, a year-on-year increase of 75% to 105%.

The main factor for the decline in the competitiveness of Korean companies can be summarized as the European and American electric vehicle markets that they mainly serve are not as competitive as the Chinese market.

When Korean battery companies enter the European and American markets, they mainly choose ternary lithium batteries, which have higher energy density than lithium iron phosphate but are more expensive. However, the focus of Chinese battery companies is on lithium iron phosphate batteries, and the proportion of lithium iron phosphate installed in the Chinese market can reach more than 70%.

With the application of CTP1.0 and 2.0, the energy density gap between the two is narrowing rapidly, but the cost gap is obvious.

Last year, CATL's supercharged battery, Geely's Aegis battery, and BYD's second-generation blade battery to be launched in August have all made great progress in recharging time, greatly weakening the advantages of ternary lithium batteries.

As of June 25 this year, the average price of lithium iron ore for automobiles in the domestic battery market was 380 yuan/kwh, and the average price of high-nickel ternary for automobiles was 550 yuan/kwh. Reflected in the terminal vehicle price, the price difference between the two can reach nearly 30,000 yuan for the same load capacity.

Now that the price war is intensifying, the cost advantage of lithium iron phosphate has become more prominent. Even the European market is switching. Many European car companies including Stellantis, GM, Hyundai, and Volkswagen have indicated that they will introduce lithium iron phosphate batteries.

Korean battery companies are not only unable to keep up with the gap in lithium iron phosphate batteries, but the market share of ternary batteries will inevitably be impacted. At present, domestic companies are promoting the implementation of 46 series large cylindrical battery projects, and CATL's market share in Europe has surpassed LG Energy Solution to become the largest battery supplier. SK On's main technology route is high-nickel ternary soft packs, but its market share and shipments are not outstanding.

Prior to this, SK On made a series of aggressive investments in the United States and Europe.

In addition to the two battery factories in Tennessee and Georgia, two more factories are currently being built in Kentucky, with a total production capacity expected to exceed 180GWh, enough to provide batteries for 2.5 million electric vehicles.

However, last year, the production and sales of electric vehicles in the European and American markets were always lower than expected, forcing SK On to delay the pace of production capacity. The other two Korean battery giants were also affected. In their expectations of the electrification demand in the European and American markets, the battery companies seemed too optimistic.

However, this cannot be entirely blamed on it. As mentioned at the beginning, SK On received orders of up to 1,000GWh just after its start, so it is reasonable to invest in this. It is just that the sudden decline in interest shown by European and American car companies in electrification has made it impossible for Korean companies to stop, which can be regarded as a pitfall for the latter.

We have analyzed in "Europe and the United States cannot afford pure electric vehicles" and "The biggest short in electric vehicles, prices are rising like crazy" that since last year, the subsidy conditions for pure electric vehicles in the auto markets of various European and American countries have either gradually declined or become harsh, making it impossible to form an operating environment that encourages automakers to develop and sell more pure electric models.

Due to the decline in oil prices, electric vehicles have a very low cost-effectiveness compared to gasoline vehicles and hybrid vehicles. In addition, the lack of infrastructure and differences in geographical density also make the threshold for using pure electric vehicles higher than in our country's market.

The sluggish demand in the European and American pure electric markets has forced automakers to adjust their product mix. The huge gap between their actual sales and their target expectations has deeply "backstabbed" Korean companies. Until last year, GM predicted that it would sell 1 million electric vehicles by 2025, but only sold 21,930 in the second quarter of this year.

SK On is reportedly in talks with several automakers about supplying square batteries in an effort to diversify its product portfolio to meet the challenges of slowing global demand for electric vehicles. But this means changing production lines, which means further pressure on capital expenditure and profitability.

03 Lithium battery global decline

This includes manufacturing projects in the domestic lithium battery industry chain, as well as the production capacity of automakers and supporting suppliers in North America since the passage of the U.S. Inflation Reduction Act, which has far exceeded the upper limit of market demand forecasts in previous years.

Under the continued squeeze of price wars and capacity expansion, it is inevitable that the industry landscape will be reshaped through a reshuffle.

From 2023 to the present, there have been more than 30 traceable incidents of termination of lithium battery business in the lithium battery manufacturing field, involving multiple sub-sectors such as lithium batteries, nickel-lithium raw materials, and lithium battery raw materials, with a total investment scale of more than 60 billion yuan.

The valuation of A-share companies is adjusted ahead of performance. For most lithium battery companies, it is not easy to avoid losses, but the profit elasticity next year still depends on the supply and demand relationship.

According to statistics, as of July 14, 32 listed companies in the lithium battery industry chain released their 2024 semi-annual performance forecasts. The total net profit range of these 32 lithium battery listed companies in the first half of the year was "a loss of 580 million yuan to a profit of 2.822 billion yuan", a decrease of 101.88%-90.87% compared with the same period last year.

Signs of the lithium battery decline are still expanding, and the current situation in the industry is already very serious.

As of July 5, the price of square lithium iron phosphate batteries was 0.35 yuan/Wh. Currently, most second- and third-tier manufacturers may be operating at a loss with a cost of no less than 0.4 yuan/Wh, with extremely low industrial utilization and uneven quality.

Jiewei Power, which once ranked among the top 15 in terms of installed capacity, was included in the list of dishonest persons subject to enforcement this year. Its battery production base has been shut down since last year, and the investment of 10 billion yuan in expansion planned in cooperation with the government has ended in vain.

The retreat of lithium batteries will set off a global industrial competition. Korean companies, which have been forced into a corner, have even promoted the topic of "de-risking" in an attempt to point the finger at Chinese power battery manufacturers, whose global share is increasing.

In order to integrate into the global electric vehicle manufacturing system, domestic power battery manufacturers have chosen localized production when going overseas. However, as European and American countries compete for pricing power in the new energy industry, restrictions on Chinese companies will not stop. In general, global competition in the lithium battery industry has become an unstoppable trend, and the huge losses of Korean battery giants may just be the beginning of intensified competition.

(End of the full text) Originally produced by Gelonghui, please do not reprint without authorization