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South Korean auto battery firms take on Chinese rivals but with trepidation

By Heekyong Yang

SEOUL (Reuters) - Under pressure from clients eager to diversify away from China, South Korean makers of automotive batteries have pledged to develop a more affordable type of battery chemistry favoured by their Chinese rivals.

But LG Energy Solution (LGES), SK On and Samsung SDI say it will be hard to go full steam ahead with lithium iron phosphate (LFP) batteries as they can't yet compete on price, executives and company officials familiar with their business strategies said.

Feeding their worries is slowing growth in electric vehicle sales and the potential for changes in U.S. subsidies should President Joe Biden lose the 2024 election, they said.

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The firms - which until two years ago had solely pushed nickel-based lithium-ion batteries for electric vehicles - are also reluctant to undermine their efforts to develop cheaper nickel-based batteries, the sources added.

South Korean battery makers have long argued that nickel-based batteries are better due to greater energy density that provides longer driving ranges as well as being smaller and lighter.

But global automakers are now pressuring them to develop LFP batteries, according to the sources.

"Our automotive customers have told us: 'We would like to buy batteries from your firm - LFP batteries for our smaller cars and nickel batteries for our more premium cars'," said an executive at a major Korean battery maker.

Six battery industry sources spoke to Reuters for this article. They were not authorised to speak to media and declined to be identified.

The three firms said in statements to Reuters that they planned to build LFP batteries which are better than existing products, enhancing energy density and other features. Samsung SDI also said it plans to secure LFP cost competitiveness through product design and by improving processes and facilities.

LFP batteries made by Chinese suppliers like CATL and BYD are roughly 20% cheaper than nickel counterparts, analysts say.

Automakers are not only eager to cut costs, but those looking to sell in the United States want to take advantage of electric vehicle subsidies made available under the Biden administration's Inflation Reduction Act.

New U.S. rules, however, further limit the amount of Chinese content in batteries eligible for credits from next year, forcing automakers to pin their hopes on sourcing LFPs from non-Chinese suppliers.

For example, Ford Motor, which uses LFP batteries made by CATL in China in its Mustang Mach-E SUV, has said the model currently in dealer showrooms was unlikely to qualify for federal tax credits from January.

At present, none of the three major South Korean suppliers - which account for nearly half of global automotive battery supply excluding the Chinese market - make LFP automotive batteries. LGES does, however, manufacture other types of LFP batteries.

TALL ORDER

All three firms have recently said they are accelerating LFP development. LGES and Samsung SDI are targeting mass production in 2026, while SK On says it has completed development and is in talks with customers about commencing supply.

But matching their Chinese rivals in cost will be a tall order, the sources said.

"While we are aware of the growing need for our own LFP battery production, we have to do it in a way that works for us and our clients, meaning we need to price LFP batteries competitively with Chinese products and we also need to make a profit," the executive at the major battery firm said.

Building an LFP supply chain will take time. For a start, there are no makers of cathodes for LFP batteries in South Korea, so the three firms will have to source those cathodes from China.

Chung Wonsuk, an analyst at Hi Investment & Securities, estimates any Korean-made LFP batteries would likely be 17% more expensive than Chinese products and that could jump to 40% if the batteries were produced in the U.S. due to higher labour and infrastructure costs.

Over the past year, the three South Korean battery firms have announced a combined $44 billion in investments to expand production capacity - mainly in the U.S. to qualify for subsidies.

Aggressively investing to build or retool plants for LFP production could be difficult in the next two to three years, the sources said, especially given slower EV sales that are partly due to a spike in auto financing costs for consumers.

"We might not see blockbuster investment announcements like we have had in the past few years," said an executive at another Korean battery firm.

General Motors, Ford and Tesla, which all source batteries from South Korean firms, have recently said they will delay EV-related spending, citing slower sales.

"Recently, automaker customers have slowed their battery orders to manage their EV inventories...this is the first time the battery sector has faced such a pause since the EV renaissance of the past few years," the first executive said.

Korean battery makers are also conscious that Donald Trump, the leading Republican candidate in the upcoming U.S. presidential election, plans to sharply cut EV subsidies.

"Making batteries in the U.S. doesn't really generate much profit in the first place," said Cho Hyunryul, a senior analyst at Samsung Securities.

"If U.S. subsidies were significantly reduced, then South Korean battery makers might consider...diverting their resources to other regions."

(Reporting by Heekyong Yang in Seoul; Additional reporting by Joe White in Detroit; Editing by Miyoung Kim and Edwina Gibbs)