Will It Succeed or Be Toxic... Perspectives on the Battery Investment Competition

SK Innovation's Electric Vehicle Battery Plant 1 Built in Hungary

[Asia Economy Reporter Choi Dae-yeol] SK Innovation plans to build its third battery factory in Hungary with an investment of 2.6 trillion KRW. Half of this amount will be immediately injected as cash into the local production corporation so that it can be used as soon as possible. The remaining half will be raised externally according to the progress of the factory construction. Although specific plans have not been disclosed, the company intends to secure investment funds by selling non-core assets or through subsidiary initial public offerings.

This large-scale investment draws attention because it is unlikely that the company will see performance improvements in its core business areas this year following significant operating losses last year. The company’s refining, chemical, lubricant, and petroleum development businesses account for more than 90% of total sales. Due to the impact of COVID-19 last year, performance was poor, and it is difficult to expect clear improvements this year as well.

SK Innovation has decided to build its third battery factory in China in the form of a joint venture with a Chinese battery company. After signing the contract last month, representatives from both companies are taking a commemorative photo.

Some advanced countries have started COVID-19 vaccination, and South Korea is scheduled to begin next month, but vaccine effects are expected to appear no earlier than the end of this year. This assumes that the vaccine is effective and vaccinations proceed as planned. Demand is bound to fluctuate depending on the economic situation, and even if conditions return to pre-COVID-19 levels, concerns about oversupply remain.

Despite sluggish core business, the company cannot neglect new business investments because competition for market leadership is in full swing. Considering that it usually takes at least two years to build and properly operate a factory, the company judged that it is necessary to expand production capacity in advance to avoid falling behind in the expected surge in electric vehicle battery orders from the year after next. Including the additional factories confirmed so far, the maximum production capacity is expected to increase about threefold (125 GWh) by 2025, with the company adding a ‘+α’ to indicate that further expansions are under consideration.

In July last year, Cho Myung-rae, then Minister of Environment, visited SK Innovation in Seosan City, Chungnam Province, to tour the electric vehicle battery production site.

The company expects to turn a profit in the battery business by next year. Last year, it suffered a loss of about 100 billion KRW, and considering the initial operation of the factory this year, it is not easy to generate profits. Taking into account the electric vehicle market situation and available supply volume, the company anticipates reducing the deficit by about 30% this year and starting to make money from next year.

However, although costs related to the lawsuit with LG Chem have been factored in, many variables remain in this rapidly growing market. Despite being a trend of the times, the electric vehicle market is significantly influenced by government policies in each country. Since the business involves materials and raw materials, there is always a possibility of quality issues arising. Moreover, as the market is still in its early stages, technological developments could cause market fluctuations. Among domestic battery companies, LG Energy Solution (LG Chem), which is ahead, turned profitable from the second quarter of last year after more than 20 years since starting its business in earnest. Samsung SDI considers this year as the break-even point. For SK Innovation, a latecomer, this represents a challenging endeavor.

This content was produced with the assistance of AI translation services.