Korean battery makers' premium strategy faces challenge

South Korean battery giants’ strategy for the electric vehicle market has been to go for premium, high-performance batteries, but the recent strides of Chinese makers with cheaper and less powerful batteries have brought that into question.

According to a report released by industry analysis firm Adamas Intelligence on Monday, shipments of lithium iron phosphate batteries for EVs has increased more than sixfold on year in the second half of 2020, signaling the advance of entry-level, low-cost batteries churned out by Chinese makers including CATL and BYD.

LFP batteries are bulkier and less powerful than high-nickel lithium-ion batteries, making them inadequate for third-generation EVs that need to travel more than 500 kilometers. However, they are more than 50 percent cheaper and safer from fire concerns.

“If an EV loaded with LFP batteries demonstrates a performance 80 percent of Hyundai’s Kona EV (powered by lithium-ion batteries) but has a price 40 percent cheaper, it will certainly have a chance. In terms of entry-level, small-sized compact EVs, LFP batteries have a competitive edge,” an SNE Research official said.

“When customers in underdeveloped countries such as India purchase an EV in the future, the first thing they will consider will be the price, not performance.”

Mindful of the entry-level EV market, LG Energy Solution said in the conference call last month that the company was developing its own LFP batteries. Samsung SDI and SK Innovation are not currently developing LFP batteries.

“LG Energy Solution believes that high-nickel lithium-ion batteries will lead the passenger EV market. However, LFP batteries might have usage in different markets,” an LG Energy Solution official said.

“LFP batteries have low energy density and therefore have to be charged frequently. For EVs that are less affected by driving range, such as city cars, LFP batteries are affordable options” 

Another Korean battery firm expressed pessimism over LFP batteries, saying that underdeveloped countries, which lack infrastructure such as charging stations, were not the main target markets for EVs in the first place.

“In countries with enough economic strength to roll out the infrastructure, customers with purchasing power will opt for performance, not price, in EVs,” the battery firm official said. 

“However, it’s undeniable that there is a growing demand for LFP batteries due to recent EV fires (involving lithium-ion batteries).”

Leading the rise of LFP batteries has been China’s CATL. The firm has made major strides in the global battery market with its LFP batteries, winning supply deals for premium EV brands -- namely Tesla.

Since July, CATL supplied its LFP batteries to the standard range version of Tesla Model 3 manufactured in China, allowing Tesla to save $3,000-$4,000 per car. However, the LFP batteries have a significant weakness in cold temperatures, as Model 3’s driving range dropped by 40 percent in cold weather, according to the Environment Ministry of Korea.

Amid controversies over the performance of LFP batteries, CATL is doubling down on its commitment to LFP batteries, announcing last month that it would invest $280 million to construct a new factory that will manufacture raw materials for LFP batteries.

The company is also moving fast to challenge, or even overtake, Korean competitors in premium EV markets.

According to multiple media reports, Hyundai Motor has recently chosen CATL and South Korea’s SK Innovation -- instead of LG Energy Solution or Samsung SDI -- as battery suppliers for the third batch of EVs to be produced on their EV-dedicated modular platform E-GMP, which require higher-end units.

Hyundai neither confirmed nor denied such reports, saying that the company was “in talks with various suppliers.” Another Chinese battery maker, BYD, is also reportedly in talks with Hyundai Motor to be a supplier for the third batch.

Experts say that CATL has two to three years of technological gap to catch up with Korean battery makers. LG Energy Solution held the highest number of battery patents as of last year, at least 10 times as many as CATL. However, it would be a mistake to look down on CATL’s technological capacity, considering that the company was the world’s first company to have begun the mass production of pouch-type lithium-ion batteries that contain 80 percent nickel in April 2019, according to B3 Intelligence report.

To widen technological gap with CATL and offer a longer driving range, Korean battery makers are putting more nickel inside their batteries to make them more powerful. LG Energy Solution aims to roll out lithium-ion batteries that contain 90 percent nickel in the second half of this year. In the same period, Samsung SDI plans to introduce lithium-ion batteries that contain 88 percent nickel. SK Innovation is preparing lithium-ion batteries that contain 95 percent nickel and set to mass-produce them in 2023.

However, Korean battery makers’ efforts to create more powerful batteries may not connect well with customers after all, just as customers can’t tell much difference between the performance of iPhone X and iPhone XS. Once the ratio of nickel inside lithium-ion batteries reaches 80 percent, they become powerful enough to provide driving range of 500 kilometers or more on a single charge, just like internal combustion engine vehicles do. For average drivers, the driving range of 500 kilometers is more than enough.

Meanwhile, CATL is following the old playbook of economies of scale -- bringing down the price through scale and to undercut competition. CATL, whose annual battery production capacity stood at 109 gigawatt-hours last year, aims to expand the figure to 336 GWh, 500 GWh and 600 GWh by 2023, 2025 and 2030 respectively.

LG Energy Solution’s battery production capacity was 120 GWh last year and the company plans to more than double it to 260 GWh by 2023. SK Innovation’s capacity last year was 19.7 GWh and the company aims to increase the size to 85 GWh by 2023 and 125 GWh by 2025. Samsung SDI, whose capacity was estimated at 30 GWh last year, has yet to reveal its expansion plan.

“Korean battery makers can’t compete with CATL due to China’s cheap electricity prices and labor costs. It would be more realistic and safer for them to focus on quality and wait for orders from ‘next Tesla,’“ the SNE official said.

By Kim Byung-wook (kbw@heraldcorp.com)