[넘버스]Internalization of Hyundai’s battery? Close to impossible①

Let’s interpret business, economy and technology with numbers. Numbers are a source of information. Information is open to anyone, and numbers can be seen by anyone, but not everyone has an eye to see the truth behind it. A story of numbers so that everyone can relate <넘버스>I’ll try to solve it easily.

Following Tesla, Volkswagen announced that it will produce batteries for electric vehicles directly, and the market is drawing attention from Hyundai. This is because if Hyundai Motor, the fourth largest in the world, directly produces batteries, there may be a change of perception in domestic and overseas secondary battery companies and the value chain. Hyundai Motor’s electric vehicle sales are expected to increase by more than 9 times by 2025, and if the battery internalization strategy is pursued, the impact on the market will be significant. The battery industry, which has been preparing for the’first year of electric vehicles’, suffers a fatal blow when the world’s No. 1, 2, and 4 electric vehicle sales companies produce batteries themselves.

Therefore, various outlooks and interests are being poured in from some of the market regarding the prospect of the Hyundai Motor Group’s vertical integration of electric vehicle batteries.

However, industry experts believe that Hyundai Motor Company has no plans for vertical integration of batteries and cannot afford to invest. There are three main reasons for this analysis of the industry. First, it is because Hyundai’s liquidity is significantly less than that of Tesla and Volkswagen. Second, in light of the specificity of the domestic business world, the reason is that it is contrary to’mercial morality’. Third, internalization of batteries is due to the fact that the business is not very good.

Tesla and Volkswagen are’cash rich’… Financial bleeding when considering yield

Tesla and Volkswagen have announced that they will have a battery factory of 3000 GWh and 240 GWh by 2030. In reality, Tesla will have a battery capacity (production capacity) for 120 million electric vehicles per year, and Volkswagen will have a capacity of 9.6 million units per year. Both companies have planned to directly procure most of their battery demand within 10 years through vertical integration.

The reason these companies have aggressively announced that they will produce batteries directly is because they have a lot of liquidity. <블로터>Looked at Tesla and Volkswagen’s cash equivalents at the end of last year, reaching $19.3 billion for Tesla and $33.9 billion for Volkswagen. Tesla owns 22 trillion won in cash, while Volkswagen has 38 trillion won in cash.

The current ratios of the two companies were 187.5% and 117.8%, respectively. Normally, if the current ratio of a company is less than 100%, it is considered insufficient liquidity. In the case of Volkswagen, the current ratio is not very high. Nevertheless, both companies have enormous amounts of cash, which means that there are not a lot of bullets for internalizing batteries. There are not many famous battery makers in the same country, so there is an atmosphere to implement battery internalization strategies nationally.

It is said that 3 trillion won is usually spent to build a 10GWh battery production plant. Volkswagen has announced that it will build six 40GWh factories in Europe. In this case, a facility investment of 72 trillion won is required. In fact, for Volkswagen, it’s a lot of financial bleeding.

In the case of Tesla, in order to achieve its target capa, it needs to raise an investment of 900 trillion won. However, Tesla plans to build a 100GWh production plant in Berlin, Germany and Texas, USA by 2022. It seems that about 30 trillion won of investment is needed. This, too, is a significant financial burden.

On the other hand, Hyundai Motor Company does not have enough cash to produce batteries directly. As of the end of last year, Hyundai Motor Company’s cashable assets (cash equivalents + short-term financial products) on a separate basis were totaled at 5,763.5 billion won based on the 2020 Business Report. On a consolidated basis, cashable assets (cash equivalents + short-term financial instruments) amounted to KRW 17.8 trillion. It’s not without cash, but compared to Tesla and Volkswagen, the cash on hand seems to be scarce.

Since you earn cash every year, you can’t even say that only the cash assets you have now are used to finance the battery factory. But you also have to think about the yield of the battery factory. This is the approximate amount of money required, but if the yield does not come out even with this amount of money, you may have to close the battery business with only a huge financial burden.

Batteries are a capital-intensive industry. In the process of investing in facilities, companies can borrow capital from financial institutions and shareholders. In fact, Hyundai Motor Group borrowed 10 trillion won from Korea Development Bank to build the blast furnace of Hyundai Steel, and it is still paying off. It is the opinion of experts who know the battery business that vertical integration of batteries requires a level of funding that is incomparable to the construction of a blast furnace, so it is not easy to make a big deal without substantial financial buffering capacity.

According to market research firm SNE Research, Hyundai Motor Company is expected to sell 1.35 million electric vehicles worldwide by 2025. It is expected to sell about 3 million units in 2030. According to EV Volumes, an overseas market research organization, Hyundai Motor Company sold 170,000 electric vehicles worldwide from January to November last year. The sales demand will increase by 10 to 30 times compared to the present.

Considering this, it is expected that if Hyundai Motor Company produces batteries directly, it will need a battery production plant of 38GWh by 2025 and 75GWh by 2030. This is a measurement result with an estimate of 40,000 electric vehicles per 1GWh of battery delivery. If Hyundai Motors builds a battery production plant with the goal of 2025, it will cost about 12 trillion won, and about 21 trillion won by 2030.

Considering the battery R&D manpower and production manpower, and the yield and technological gap with leading companies, LG Energy Solutions and SK Innovation, the real benefits that Hyundai Motor Company can achieve by directly producing electric vehicles may not be significant.

Aiming at the core business of SK and LG, the third and fourth place in the business world

If Hyundai Motor Company directly produces batteries, it will have no choice but to stand on the opposite side of SK Group and LG Group. Rechargeable battery is a long-awaited project that the two groups have prepared for the electric vehicle era since 1990. Hyundai Motor Company invested in automobile parts, construction, and steel, mainly in automobiles, and was not interested in the battery industry.

If Hyundai Motors also vertically integrates batteries, it seems that it will inevitably receive fierce criticism from the business world. Currently, the LG Group and the SK Group are engaged in a sharp war over the infringement of SK Innovation’s battery trade secrets. The business community believes that it will be difficult for the two groups to maintain a cooperative relationship in the future. In addition, when the Hyundai Motor Group is added, the business community explains that it is’the price of pouring oil into a burnt house’.

While LG Energy Solution and SK Innovation are engaged in litigation and public opinion wars over the infringement of trade secrets, the Volkswagen Group decided to give CATL and North Volt, Sweden the amount requested for supply to the two companies. Both companies lost the second largest supplier in the world. However, the controversy is expected to grow to a full blown if Hyundai Motors is also on board with the movement of vertical integration of batteries in finished cars.

A business official said, “With Hyundai Heavy Industries Group’s acquisition of Daewoo Shipbuilding & Marine Engineering, and Korean Air’s acquisition of Asiana Airlines, a kind of unwritten rule that the business world would not take over the same industry was broken. And LG’s strong backlash.”

In fact, there is a culture in which chaebols do not invade each other’s territory. It is an unwritten ratio that if a large group is in the same business, it does not invade each other’s territory by not acquiring or merging companies of competing groups through M&A. The Hyundai Motor Group also faced considerable opposition, either directly or indirectly, when the Samsung Group entered the automobile business in the past.

When Hyundai Motor Group enters the battery business, which is the flagship business of large domestic groups, it is difficult to avoid criticism of’vertical integration’. In the case of Tesla and Volkswagen, there are no flagship battery companies in their home countries, but the situation is different in Korea.