From left, Tae-won Choi, chairman of SK Group, and Kwang-mo Koo, chairman of LG Group.
The’battery war’ over the lawsuit for infringement of trade secrets between LG Energy Solutions and SK Innovation is intensifying without an exit. SK Innovation is striking’doubled’ in anticipation of US President Joe Biden’s veto power from the International Trade Commission (ITC). LG Energy Solution is pushing SK Innovation, saying, “It lacks authenticity.” Both companies are showing signs of not backing down to achieve the’break-even point’ (BEP) of the battery business early.
SK Innovation’s board of directors held an expanded audit committee on the 11th with all outside directors present. On this day, the Audit Committee was held to in-depth review the final decision of the ITC announced on the 10th of last month (local time). It was reported that the ITC ruling, whether President Joe Biden exercised his veto, and the situation of negotiations with LG Energy Solutions were discussed.
According to the industry, SK Innovation and LG Energy Solution had negotiated once on the 5th. The two sides are reported to have confirmed their disagreement on the negotiated funds. LG Energy Solutions held a corporate briefing on the 5th and said, “The settlement amount proposed by SK is different from the settlement amount considered by the company in trillions.”
On this day, the board of directors conveyed the position that it was virtually unacceptable to the requirements of LG Energy Solutions. The board of directors said, “We will closely look at the requirements of competitors, but SK Innovation will not be able to accept the requirements of a level that has no meaning to continue its battery business in the US or that significantly lowers its business competitiveness.”
It suggested that if both sides fail to narrow down the settlement amount, they could in fact withdraw from the US business. This means that it is not possible to pay the level of settlement money required by LG Energy Solutions while demanding the U.S. president’s veto. SK Innovation cannot import battery-related raw and subsidiary materials into the United States for 10 years from 2023 if President Joe Biden accepts the ITC ruling on the 10th of next month. Virtually no production activities in the United States will be possible.
LG Energy Solutions and SK Innovation suggested plans to expand battery factories in order to draw a decision in favor of each company from the US administration. The United States is encouraging the sale of electric vehicles and energy storage systems (ESS) to achieve’Net Zero’, which will eliminate any net carbon emissions by 2050. Currently, in the US, Panasonic, LG Energy Solutions, and SK Innovation of Japan have battery production bases. Chinese battery makers do not have factories in the US due to uncertainties between the US and China.
LG Energy Solution and SK Innovation are sending a’love call’ to the US administration as hostage for local jobs and investments in the US.
Current status of major battery production bases in the U.S. (Source = Benchmark Minerals Intelligence)
SK Innovation is appropriately utilizing the international situation such as the’value chain’ of the US battery industry and the conflict between the US and China as a’leverage’. If SK Innovation cannot produce in the US, the local battery value chain will actually remain only Panasonic and LG Energy Solutions. If one domestic company and one Japanese company remain, the’buying power’ of the US consumers will be reduced, which is negative for the US and global consumer companies as a result. SK Innovation can take advantage of these points to escape from the position of a’party infringing trade secrets’ in negotiations with LG Energy Solutions.
Provisions of Hyundai Motor Company and LG Chem related to Hyundai Motor’s electric vehicle fire recall. (Source = Financial Supervisory Service)
On the other hand, the industry explains that the situation is a little more unfavorable for LG Energy Solutions. LG Energy Solutions recently decided to share the cost of recalling 80,000 units with Hyundai Motor Company. It is known that the cost that LG Energy Solution should bear is at least 600 billion won and a maximum of 1 trillion won. LG Energy Solutions predicted a turnaround last year due to the expansion of its global sales volume, and incurred an operating loss of 171.7 billion won, reflecting the provisions for recall expenses. This is a factor that requires LG Energy Solutions to agree with SK Innovation. SK Innovation’s battery business posted an operating loss of 4265 billion won last year.
LG Energy Solutions expressed displeasure with the decision of the board of directors through commentary on the day. LG Energy Solutions criticized, “It is unreasonable to say that it is an unreasonable request from the perpetrator’s point of view and that it is unacceptable, and I think that it is an attitude that lacks sincerity in solving the problem.”
Subsequently, LG Energy Solutions suggested, “If SK Innovation sincerely comes to the negotiating table and makes a proposal for discussion and discusses it, it will be possible to reward shareholders, such as cash, royalties, and shares.” In fact, SK Innovation has opened a consensus that a compensation plan without cash outflow is possible.
Nevertheless, it seems unlikely that the two sides will end this’battery war’ through an agreement. This is because both LG Energy Solution and SK Innovation have spent astronomical investments while preparing for the battery business since the 1990s. After nearly 20 years of investment, the era of electric vehicles has opened, and both companies have a way to recover their investments.
However, the battery industry is a capital-intensive industry, and it costs trillions of won to build a production plant. SK Innovation invested about 3 trillion won to build a 21.5 GWh production plant. Arithmetically, it amounts to 140 billion won per 1GWh. Both companies have production plants in Asia (Korea, China), the United States, and Eastern Europe.
LG Energy Solution battery operating profit trend. (Source = Financial Supervisory Service and our IR book)
Both companies have made astronomical investments, but the battery industry is an industry with low margins. Excluding CATL, both companies’ margins from the battery business are around 3%. Both companies need’economy of scale’ and at the same time need a stable supplier. The challenge is to achieve the break-even point as quickly as possible. For this reason, LG Energy Solution was caught up in the recall cost to be paid to Hyundai Motor Company, and SK Innovation was unable to pay the settlement amount of trillions of won. This is why both companies are not backing down from the’battery war’.
SK Innovation’s battery business performance trend. (Source = SK Innovation IR Book)
An industry official said, “Because of the low-margin battery industry, we have no choice but to fierce competition for survival. This is why both companies have no choice but to take legal action even if their national interests and corporate image are damaged.”