[Business Diplomacy] As Trump targets EVs, Hyundai-Kia shifts gears to hybrids

“I will end the electric vehicle mandate on day one.”

With Donald Trump gaining traction as the Republican presidential candidate, this declaration at the Republican National Convention in Milwaukee on July 18 has sent ripples of concern through the South Korean automotive and battery industries. The potential implications of Trump’s return to the White House, coupled with his protectionist and anti-EV stance, have companies like Hyundai-Kia and major Korean battery makers bracing for impact.

While the Biden administration has not exactly mandated electric vehicles, the new air pollution limits issued by the Environmental Protection Agency effectively force automakers to increase EV sales. Trump has repeatedly criticized this regulation and called it Biden’s “EV mandate” for its stringent tailpipe pollution limits.

Should Trump become the next president, analysts believe Korean automakers can soften the blow by boosting local production and focusing on hybrid vehicles. However, the Korean battery industry, which relies heavily on US IRA tax credits for EV batteries, could face severe financial strain if these credits are slashed.

Hyundai-Kia’s hybrid pivot

If Trump imposes higher tariffs on all imports as he has proposed, including overseas-made cars, Hyundai-Kia may struggle to absorb the costs without passing them on to consumers -- a challenge given the current stagnation in US auto demand.

In 2023, Hyundai and Kia exported 58,100 and 42,100 vehicles to the US, representing 13.8 percent and 13.7 percent of their global sales, respectively. These exports account for 30.8 percent and 26.1 percent of Hyundai and Kia’s production from Korean factories. An additional 10 percent tariff on these imports could dent their profitability. However, unlike when Trump was elected eight years ago, Hyundai Motor Group now has a contingency plan.

Hyundai Motor Group has expedited the opening of its Metaplant in Georgia, initially slated for next year, to produce a combination of EVs and hybrids in October of this year. This move is expected to boost local annual production capacity to between 300,000 and 500,000 units. By increasing hybrid production at this new facility, Hyundai and Kia aim to counterbalance the potential effects of import tariffs and a reduction in the Inflation Reduction Act tax credits for EVs. Detailed plans regarding hybrid production and adjustments are expected to be disclosed during the CEO Investor Day on Aug. 28.

“Assuming the Georgia plant reaches its maximum annual production target of 500,000 units, Hyundai and Kia’s US production share could rise from 38 percent in 2023 to as much as 68 percent by 2027. This shift would place them on par with or ahead of major competitors like General Motors and Toyota, whose US production shares are 67 percent and 54.7 percent, respectively,” said EV sector analyst Yim Eun-young from Samsung Securities.

The demand for hybrid vehicles remains robust, driven by inadequate EV charging infrastructure and consumer concerns over charging times. Hyundai Motor's latest second-quarter results show this trend, with hybrid sales up 26.4 percent year-over-year. Hybrids now make up 11.6 percent of total sales, a 2.4 percentage point increase from the previous year, marking their first double-digit share.

Battery makers on shaky ground

On the other hand, the three major Korean battery makers -- LG Energy Solution, SK On, and Samsung SDI -- are particularly vulnerable. They have been compensating for their poor performance with tax credits under the IRA, which could be curtailed if Trump returns to power.

While it is unlikely that Trump could fully eliminate the IRA through Congress, he might rescind the executive order implementing the IRA or tighten the requirements for the tax credits.

Last year alone, Korean battery companies received about 1.3 trillion won ($9.4 billion) in IRA tax credits. Excluding the IRA tax credits, LG Energy Solution reported an operating loss of 252.5 billion won in its second-quarter earnings report last Thursday. SK On could have accumulated more than 600 billion won in losses last year alone without the IRA tax credits. Samsung SDI also saw AMPC revenue of 46.7 billion won for the first time in the first quarter after confirming that its battery pack factory in the US qualifies for the IRA tax credit.

Lee Chang-sil, CFO of LG Energy Solution, said during the second-quarter earnings call that he expects sales to gradually increase from the second half of the year, eventually achieving a positive operating profit even excluding the IRA. “We’re going to do everything we can,” he said.

However, there are still worries about a comprehensively reduced investment in the Korean battery industry if IRA support is cut back under a potential Trump administration.

“The three Korean battery companies -- LG Energy Solution, SK On, and Samsung SDI -- have an estimated 117 gigawatt-hours of production capacity in the US as of 2023, expected to grow to 635 GWh by 2027 if their US investment plans are completed. These investments have been driven by expected IRA benefits, and any changes to the IRA could force companies to rebalance their strategies,” said researcher Kim Kyoung-yoo from the Korea Institute for Industrial Economics and Trade.

Kim also emphasized that slowing EV growth is more unfavorable for battery companies than automakers, who can pivot to internal combustion and hybrid vehicles. According to SNE Research in 2022, Korean battery companies rely on EV demand for nearly 80 percent of their revenue.

“If the US battery market, which has high growth potential with an EV penetration rate of less than 10 percent, faces a slowdown in demand under Trump’s policies, Korean companies may have to downsize their businesses and reduce investments both domestically and internationally,” said Kim.