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[Feature] Coronavirus gives bargaining power to EV battery makers

Supply shortage of EV batteries intensifies amid virus outbreak, shaping supplier-led EV market

LG Chem’s cylindrical lithium-ion battery cells (LG Chem)
LG Chem’s cylindrical lithium-ion battery cells (LG Chem)

The novel coronavirus outbreak has disrupted the power dynamics of the trade relationship between European automakers and South Korean battery makers, according to industry sources and market watchers.

Though electric vehicle battery manufacturers are typically in a position to lure orders from automakers, the recent shortage of battery supplies exacerbated by the coronavirus outbreak has given Korean battery giants -- LG Chem, Samsung SDI and SK Innovation -- more bargaining power at the negotiating table.

“EV batteries account for more than 40 percent of the total cost of EV parts. As batteries are the heart of EVs, battery makers now have significant power in their hands, transforming the conventional vertical relationship between automakers and parts makers into a horizontal one,” said Kim Pil-soo, an automotive engineering professor at Daelim University.

In fact, the COVID-19 pandemic has revealed which side is more desperate.

On April 16, Poland sent a special LOT Polish Airlines flight to Korea to bring back some 200 LG Chem technicians to resume the expansion of the company’s electric vehicle battery plant in Wroclaw, opening its airways as an exception to the country’s strict border shutdown in place until May 3. The decision appears to have taken into consideration that disruptions in battery production could hurt European automakers including Volkswagen, Mercedes-Benz, Audi and Renault.

To facilitate an immediate deployment of essential personnel, the Polish government waived its two-week quarantine requirement for LG Chem employees who have tested negative for COVID-19 in Korea, according to the company.

On April 5, the Hungarian government allowed SK Innovation to dispatch some 300 employees on a chartered flight to the country to restart the company’s EV battery plant in Komarom despite its entry ban on all foreign nationals since March 16.

“Everyone is asking for more batteries, but supplies are limited. This allows EV battery makers to stand almost equal in the power game with automakers. The EV market is growing rapidly, but there are only a few who can manufacture high-quality EV batteries,” an industry source said.

It is an open secret that major automakers have become ever more dependent on electric vehicle batteries, making themselves vulnerable to the current supply shortage of batteries.

In February, the productions of Jaguar I-Pace and Audi e-Tron Quattro were brought to a halt due to a shortage of battery cells from LG Chem. In January, Mercedes-Benz also cut its EQC electric SUV production target by half to 30,000 units.

“Typically, automakers have absolute power over parts makers. However, due to the supply shortage and the limited number of battery makers, they have relatively more bargaining power than general auto parts makers,” a Posco Research Institute researcher said.

Another industry source described it, “The supply of EV batteries is crucial because EVs are basically cars with iron lids on top of batteries.”

Automakers out to win back control

“In the development stage of new EVs, automakers have to contemplate which battery cell to use. Once a decision is made, it’s difficult to use another battery cell because automakers have to readjust the unit price, energy concentration level, size and the battery management system of the new battery,” an analyst from market tracker SNE Research said.

“Even as we speak, tons of money is being poured into the expansion of EV battery plants due to concerns over the supply shortage. As the shortage is expected to become more serious in the future, automakers have to be more than just friends with battery makers.”

As the global demand for the batteries is expected to intensify, with demand of 916 gigawatt-hours overtaking the supply of 776 GWh by 2023, according to SNE Research, major automakers have taken extensive measures to prevent further disruptions in battery supplies.

In December, General Motors launched a joint venture with LG Chem to invest $2.3 billion by 2023 for the production of electric vehicle battery cells. Meanwhile, Volkswagen invested 900 million euros ($975.4 million) to form a joint venture with Northvolt to produce batteries in Germany. Part of the investment was used for the acquisition of a 20 percent stake in Northvolt, giving Volkswagen a seat on the supervisory board of the Swedish battery manufacturer.

“When the current game of chicken ends, the EV battery market will be controlled by a handful of suppliers. To prepare for such a scenario, automakers are creating joint ventures with EV battery companies and buying their stakes, a move that can prevent battery makers from using their supplies as leverage with automakers,” an industry source said.

To completely break free from the sway of battery makers, BMW has spent 200 million euros since 2017 for the research and development of its own batteries. Toyota is doing the same, as it plans to invest 1.5 trillion yen ($13 billion) by 2030. However, Korean electric vehicle battery makers remain confident.

Industry sources say that the endeavors pushed by the automakers to acquire a piece of the pie in the battery making business will gain traction, although the expertise gap is likely to remain for the time being, as battery makers have decades of accumulated experience.

“The EV battery shortage gives EV suppliers more say at the negotiating table, but it doesn’t mean they have a complete upper hand. The focus is not on taking control but the automakers knowing the importance of EV battery makers,” another source said.

Luring battery makers to their land

The competition for batteries is heating up not only for automakers but also for Eastern European nations, as they strive to host Asian suppliers’ electric vehicle battery plants.

Last year, Poland sweetened a deal with LG Chem for building battery plants in the country by granting 36 million euros in state subsidies. Hungary is also reviewing subsidies worth 108 million euros for Samsung SDI’s plants in the country, according to European Commission’s press release in October last year.

“State subsidies from Poland and Hungary mean there had been a competition between those countries,” an industry source said.

But, in contrast to Korean electric vehicle battery makers weighing incentives from Eastern European bidders, China’s state-sponsored battery maker CATL went straight to Germany, announcing an investment of 240 million euros in 2018. It decided to build an electric vehicle battery plant in an industrial zone in Arnstadt known as Erfurter Kreuz in Germany, without direct incentives from the country.

Market watchers have questioned the motive behind CATL’s choice of Germany despite the country’s higher labor costs and land prices compared to those of Eastern European countries.

CATL can rise as a dominant EV battery supplier in Germany and exert power over the local auto industry, with its competitiveness in battery price, they suggest.

“As China’s EV battery manufacturers expand abroad, manufacturers in free-market economies are up against Chinese state-backed competitors,” Anna Holzmann, an analyst of China’s industrial policies, wrote in a report in 2018 for the Mercator Institute for China Studies in Berlin.

But some industry watchers note that the technological gap between Chinese and Korean-made batteries, for now, still plays a significant determining factor for the automakers, especially for third-generation electric vehicles, which have to run more than 500 kilometers.

“CATL might lack EV battery technology, but if it cuts the battery price significantly in Europe with the money it made at home, German automakers might opt for CATL’s batteries as customers will be drawn to EVs that are $5,000 or $10,000 cheaper, despite their long charging times and lacking performance,” an industry source said.

By Kim Byung-wook (