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High-Flying Battery Makers Have Much To Win And Lose

Chart 1

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Governments see electric vehicles as key to carbon cutting. This is driving up the sales of the firms that make the batteries that power this transport. S&P Global Ratings believes the world's biggest battery producers face substantial upside and downside risks to ratings. While their growth opportunities are significant, they will need to navigate fast-moving technology, heavy expenditure, geopolitical forces shaping trade lines, and environmental strains.

The Race Begins For Gobal Battery Dominance

We anticipate the global battery production capacity will grow two to three times by 2025, from 455 gigawatt hours (GWh) in 2020. Many countries are encouraging battery production to foster their own domestic electric vehicle (EV) industry.

Chart 2

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Although there is now spare capacity, the excess is mainly for low-quality units. This capacity mainly grew out of a subsidy-driven boom in production in China in 2015-2018. The auto industry is seeking higher-quality batteries that can support long driving ranges. Such batteries are scarce and in high demand.

The demand for batteries that power light electric vehicles (battery electric and plug-in hybrids) may grow as much as eightfold by 2025 from 139 GWh in 2020.

Battery suppliers are expanding to gain market share. The world's largest supplier, China's Contemporary Amperex Technology Co. Ltd. (CATL), is focused on the Chinese market. It has announced investment of US$11 billion to build new capacity. We estimate its output may increase three to four times by 2025 from 69 GWh in 2020.

The world's second largest player, LG Chem Ltd., which has a stronger position in the West, will also more than double its capacity globally to over 260 GWh by 2023.

Emerging players from around the world are entering the fray. Northvolt AB, a startup, is on track to have 40 Gwh of capacity by 2025. Its major investor, Volkswagen AG, has already placed US$14 billion in orders with the firm. The U.K. startup Britishvolt targets 10 GWh of capacity by 2025. This will bolster strained supply lines.

Chart 3

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China's Battery Operations Put It At The Center Of Electric Carmaking

China has built sophisticated battery supply chains. This is part of a plan established as early as the 1990s to support development of the country's EV industry. The government wants one-in-five new vehicle sales to be electric by 2025. The current penetration rate is one-in-20. Provincial governments in Anhui, Guangdong, Henan, and elsewhere have already committed to spend billions on EVs and battery manufacturing bases over the next two to five years.

Chart 4

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Although Europe and U.S. are aggressively building battery capacity, supply will likely undershoot demand. Regulatory inducements and government subsidies made Europe the fastest-growing EV market in 2020. In the U.S., the Biden Administration has proposed tax incentives and new infrastructure (such as charging stations) that may increase the ratio of EVs to new auto sales to about 10%, by 2025. That would be a fivefold increase from a current 2% penetration rate. The stimulus will depend on measures finally adopted by Congress.

The battery supply chains in the U.S. and Europe are underdeveloped, and would need years to catch up to players such as China.

In our view, more global carmakers will utilize China's robust battery supply chain. They may leverage on their existing EV manufacturing plants in China to build vehicles for export. Tesla Inc. has been exporting its Model 3, made in its mega-factory in Shanghai, since 2020. BMW AG is also going to export its electric SUV, iX3, to 39 countries from its Shenyang plant under its joint venture with Brilliance China Automotive Holdings Ltd.

Chart 5

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Chinese carmakers including SAIC Motor Corp. Ltd., BYD Co. Ltd., and Geely Automobile Holdings Ltd. see EV exports as essential to growth. The gains of such entities will likely boost the Chinese battery suppliers. They have the most available capacity to utilize all the demand coming online.

Table 1

New Energy Vehicles Should Comprise One-In-Six Vehicle Sales By 2025
Percentage of total sales captured by battery electric vehicles and plug-in hybrids, by year and region
2019 2020 2021e 2025e
Europe 2.7 10.0 15-20 30
China 4.7 5.5 6-9 20
U.S. 2.0 2.0 2-3 10
Global 2.5 4.4 6-8 15
Note: By units sold. e--Estimate. Source: S&P Global Ratings.

However, the U.S. and Europe will likely increasingly focus on building EV supply chains for everything from microchips to batteries with an eye on minimizing reliance on China. For instance, Ford Motor Co. and General Motors Co. recently announced major investments in battery manufacturing with localized supply chains for electric vehicles in the U.S.

Global carmakers are also leveraging on their partnerships with Korean and Japanese battery suppliers, which have larger capacity available in Europe and the U.S., to secure battery supply in their home countries.

Korean Players Target European and U.S. Supply Chains

Korean players such as LG Energy Solution Ltd., SK Innovation Co. Ltd., and Samsung SDI Co. Ltd. have been investing over the past decade to establish relationships with international carmakers. They built the batteries for many multinationals' first EVs, securing sizable orders from major players such as Volkswagen, Hyundai-Kia, Renault S.A., General Motors, and Daimler AG. Their growth had been slow for many years due to the slow EV development in the West in prior years.

However, Korean firms have doubled their share of global battery sales since 2020, supported by rapid demand growth in the European market. LG Chem also captured battery orders from Tesla's Chinese operations, starting in 2020.

We expect Korean battery makers' expertise and reputation will put them in a strong position in the European and American markets over the next three to five years. Chinese players' increasing ambitions for a share of the world market, and global carmakers' plans to build their owns batteries, may somewhat undermine Korean players. This should not materially affect their sales growth given the rapid expansion in battery demand globally.

Carmakers will want to use different suppliers to manage their investment risk, particularly given the speed at which battery technology move. They may also want to spread out suppliers, as geopolitics can frequently upend trade lines.

Table 2

The Largest Auto Firms Need To Secure Partnerships With Battery Makers
Partnerships with battery suppliers

Tesla, Inc.

The company will continue to source batteries from Panasonic, LG Chem, and CATL.

Volkswagen AG

Supplier agreements with CATL, LG Chem, SK Innovation, Samsung, and partnerships with Northvolt AB and Guoxuan High-Tech.

BMW AG

Working with multiple suppliers, mainly CATL, Samsung, and Northvolt. BMW also invested in a U.S.-based producer of solid-state batteries, Solid Power. At the same time, BMW also sources sustainable raw materials--for example lithium and cobalt--for suppliers, to produce its batteries.

Daimler AG

Sourcing mainly from CATL while holding a minority stake at Farasis Energy to secure additional capacity. It is working with Sila Nanotechnologies to develop battery materials.

General Motors Co.

Joint venture with LG Chem serves as the key supplier, and developing new battery technology with SolidEnergy Systems.

Ford Motor Co.

Forming a joint venture with SK Innovation to make batteries for electric vehicles in the U.S. Through the venture, named BlueOvalSK, the two partners will invest about US$5.3 billion to build a new battery plant in the U.S. Ford is also sourcing batteries from LG Chem and Panasonic.

AB Volvo

Mainly securing battery supplies from CATL and LG Chem.

Toyota Motor Corp.

Acquiring batteries from Prime Planet Energy & Solutions and Prime Earth EV Energy (these are joint ventures with Panasonic), Toyota Industries, CATL, BYD, etc., for electric vehicles (including hydrogen electric vehicles, plug-in hybrids, and battery-electric vehicles).

Nissan Motor Co. Ltd.

Acquiring EV batteries from Envision AESC, CATL and other suppliers for Nissan Leaf, e-POWER and Ariya.

Honda Motor Co. Ltd.

Sourcing batteries from Blue Energy (a joint venture between GS Yuasa [51%] and Honda [49%]) and Panasonic. It will source batteries from CATL as it is expanding its EV products in China.

Hyundai Motor Co.

Using local suppliers such as LG Chem and SK Innovation, as well as CATL.
Note: The Information contained in this table is not exhaustive. CATL--Contemporary Amperex Technology Co. Ltd. EV--Electric vehicles. Sources: Company announcements, S&P Global Ratings.

Although carmakers such as Tesla, General Motors, Ford, and Volkswagen are going to expand into battery manufacturing, they need to manage the significant capital expenditure (capex) and research costs involved. Most carmakers still prefer to partner with large battery makers to manage these costs and to secure supply. The carmakers are also leveraging on the technology expertise of the big battery firms.

Rising NEV Sales = Efficiency Gains + Lower Battery Costs

We anticipate the cost of lithium battery packs could fall to US$100 per kilowatt hour (kWh) as early as 2024 (see chart 6). Those in the industry often say the level is an inflection point for mass adoption of EVs. It would make electric vehicles about as cheap as equivalent combustion-engine vehicles.

Chart 6

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As demand rises, economies of scale kick in. We anticipate that a virtuous cycle of rising sales, lower costs, and increased efficiency will lift carmakers and their suppliers. As batteries upgrade to solid-state technology, the cost of a unit may drop to US$50-US$80/kWh by 2030.

Volkswagen is aiming for a 30%-50% cost reduction in its battery packs by 2030, through technology upgrades, use of self-built battery operations, and increasing economies of scale.

Ford, with its recent joint-venture with SK Innovation, expects its battery-pack cost to cross the US$100/kWh threshold by 2025, and to fall to US$80/kWh by 2030.

General Motors, through its battery joint venture with LG Energy Solution, anticipates a 60% cost reduction for its Chevrolet Bolt EV, by 2025.

Technology May Unravel The Competitive Pecking Order

Battery technology moves quickly. One firm's breakthrough could upend the competitive standing and investments of rivals. Players continue to experiment with materials and battery types. We believe the competitive order of this sector will be dynamic for the next five to 10 years as entities perfect the technology and converge on a standard.

Table 3

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Battery standards will track technology, which should continue to evolve quickly for the next five to 10 years. That said, lithium nickel manganese cobalt oxide (NMC) and lithium iron phosphate (LFP) batteries should dominate the market for the foreseeable future, as indicated by their strong sale volumes.

Chart 7

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We are also monitoring whether players will be able to stabilize production at high utilization rates. Battery suppliers are doubling or tripling their production volumes every year. This pace could cause some issues, including low yields and price spikes for raw materials. Similar dynamics were seen for other booming industries using complex chemical and electrical technologies, including the display panels and semiconductor sectors.

Chart 8

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We believe our rated battery suppliers will continue to control sizable market share over the next two to three years. Likely increased operating cashflow from battery sales should partly cover their rising appetite for capacity expansion. The buffer for ratings varies, largely according to their exposure to other business lines.

Chart 9

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Chart 10

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Battery Makers Will Need To Manage Growing ESG Risks

As the EV market continues to boom, entities will need to manage substantial environmental, social, and governance (ESG) risk. This will include managing an increased need to extract precious metals from retired batteries for reuse in energy storage stations, mobile chargers, etc.

We don't know how governments will regulate on this matter, which will soon become a critical environmental issue, given the toxicity of materials and the soon-to-be massive scale of the industry. Large firms and battery suppliers will face growing pressure to shoulder this environmental responsibility.

Moreover, the extraction of precious metals at developing countries will likely require strict environmental and labor rules. Large auto firms and battery suppliers are examining upstream supply chains to ensure trade and labor practices clear a minimum acceptable standard.

These factors are becoming as important to a firm's wellbeing as controlling costs and ensuring stable supplies.

Players are also exploring new technology to find substitutes for scarce materials--for example, cobalt--used in the production of batteries.

Lastly, EV battery recalls could seriously dent business and financials. The auto parts industry has strict safety requirements. The auto industry had several recall cases in the past decades that resulted in substantial profit hits and lost market standing.

Given the battery sector is still experimenting with a complex technology, we believe firms face serious product liability risks. Ford, Hyundai Motor Co., General Motors, and BMW have recalled vehicles due to battery-related risks, including fire incidents. Although cases have so far been manageable, the battery makers had to take some financial responsibilities for carmakers' battery recalls in a few instances.

The battery sector has entered an extremely dynamic phase. Firms face substantial growth opportunities as EVs rapidly replace legacy autos. This will require heavy upfront investment in a battery standard that may be quickly eclipsed by superior technology. There are, in short, many moving pieces that may contribute to sharp ratings moves, up or down.

Related Research

Editing: Jasper Moiseiwitsch

Design: Evy Cheung

This report does not constitute a rating action.

Primary Credit Analysts:Stephen Chan, Hong Kong + 852 2532 8088;
stephen.chan@spglobal.com
Minjib Kim, Hong Kong + 852 2533 3503;
Minjib.Kim@spglobal.com
Kei Ishikawa, Tokyo + 81 3 4550 8769;
kei.ishikawa@spglobal.com
Secondary Contacts:Claire Yuan, Hong Kong + 852 2533 3542;
Claire.Yuan@spglobal.com
Nishit K Madlani, New York + 1 (212) 438 4070;
nishit.madlani@spglobal.com
Vittoria Ferraris, Milan + 390272111207;
vittoria.ferraris@spglobal.com
Lukas Paul, Frankfurt + 49 693 399 9132;
lukas.paul@spglobal.com
Katsuyuki Nakai, Tokyo + 81 3 4550 8748;
katsuyuki.nakai@spglobal.com

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