LG Energy Solution performed well in Q1 but still faces challenges such as improving profitability

"Optimism Also Exists: 'Recovery If Raw Material Prices Rebound and Other Conditions Are Met'"

Experts from LG Energy Solution Daejeon Technology Research Institute. (Photo by LG Energy Solution)

[Asia Economy Reporter Moon Chaeseok]

They performed well, but there are many challenges.

This was the industry's reaction after major battery companies announced their preliminary first-quarter earnings. The current performance is said to be a temporary phenomenon resulting from increased facility investments aimed at securing 'economies of scale' in anticipation of a showdown with China and Japan around 2025. The year 2025 is expected to be the commercialization point for all-solid-state batteries and the enforcement date of the "United States-Mexico-Canada Agreement (USMCA)," which requires that over 75% of production parts in the US, Canada, and Mexico region qualify for tariff-free benefits.

LG Energy Solution, the domestic market leader, announced on the 7th that its consolidated preliminary operating profit for the first quarter decreased by 24.1% year-on-year to 258.9 billion KRW. The main reasons cited for the decline in earnings were sluggish battery shipments due to production disruptions in finished vehicles caused by prolonged automotive semiconductor shortages and worsening global supply chain instability. The sharp rise in raw material prices and logistics costs following Russia's invasion of Ukraine at the end of February also contributed to the deterioration of profitability.

The operating profit exceeded the securities firms' forecast of 147.8 billion KRW by more than 100 billion KRW. This was influenced by higher-than-expected shipments of cylindrical batteries supplied to Tesla, the linkage of battery prices to major raw material prices, and yield improvements (the ratio of defect-free qualified products) due to automation in the production process.

However, not only LG Energy Solution but also SK On and Samsung SDI need to address profitability improvement issues, and there are concerns about management risks such as Samsung's slow pace of investment in the US. SK On is expected to post an operating loss in the first quarter. According to the securities industry, SK On is projected to incur an operating loss of 130 billion to 170 billion KRW in Q1. The cost burden from the commercial operation of new battery plants and rising raw material prices are expected to be the main causes. Since SK On initially stated that it would turn profitable after the facility investments by the fourth quarter, the first-quarter loss is seen as not a major problem. In this regard, Kim Jun, Vice Chairman and CEO of SK Innovation, SK On's parent company, said at the shareholders' meeting on the 30th of last month, "We need to prepare 220GWh by 2025, so there is a short-term negative impact on SK On's operating profit," but added, "The forecast for a return to profitability from Q4 2022 remains valid."

Samsung SDI is expected to have relatively higher immediate profitability because its overseas production bases incur lower costs than other companies. According to securities estimates, Samsung SDI's first-quarter operating profit is expected to be 286.4 billion KRW, an increase of 115.02% compared to the same period last year. It is analyzed that cylindrical battery performance will be significant. Samsung SDI Vice Chairman Jeon Young-hyun said at the shareholders' meeting on the 17th of last month, "When the first-quarter or first-half management performance results come out, the market will recognize our efforts, and the stock price can recover."

There is also a view that the recovery of the three battery companies' earnings is only a matter of time. It is believed that as the prices of key raw materials such as lithium, nickel, and cobalt stabilize and the supply issues of automotive semiconductors gradually resolve, these problems will naturally be solved. Samsung's next-generation battery 'Gen5,' which began mass production from the third quarter of last year, is contributing to profit growth by being installed in BMW i4 and iX models. LG and SK are actively accelerating the expansion of overseas production facilities to outpace Chinese competitors such as CATL and BYD. LG Energy Solution plans to invest about 6.3 trillion KRW this year to build joint factories with General Motors (GM) and Stellantis. SK On is constructing factories in North America and Turkey with Ford, and Samsung SDI is building a factory in the US with Stellantis.

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