Key Takeaways Where The World's Biggest Battery Makers Stand

Chart 1

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 Global 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

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

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

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

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

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

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

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

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

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

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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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.

Contemporary Amperex Technology Co. Ltd. (BBB+/Stable/--) (primary analyst: Stephen Chan)

Over 90% revenue exposure to battery businesses. In our view, CATL's position as the world's biggest battery maker by installation will solidify over the next two to five years. Its economies of scale and dominant position in China will support its standing. Robust EV sales in China should help the firm. We expect EV sales in the country to grow 40%-50% annually in 2021-2022.

We see some downside risks to our forecasts of the company's EBITDA margin of 22%-23% in 2021 and 21.5%-22.5% in 2022. Falling prices for batteries and price fluctuations for the precious metals used in the units may strain CATL's profit. That said, we believe CATL will generate an above-average margin, underpinned by a utilization rate of over 70%.

CATL should remain in a net cash position in 2021-2022. We anticipate its free operating cash flow should be sufficient to cover its planned US$11 billion in capex over the next five years.

LG Chem Ltd. (BBB+/Stable/--) (primary analyst: Minjib Kim)

40%-50% revenue exposure to battery businesses LG Chem is one of the largest petrochemical producers in Asia. The company makes a wide range of upstream and downstream products. It operates in five major segments: petrochemicals (46% of 2020 revenue), energy solutions (41% of sales; includes battery products), advanced materials (9%; information and electronic materials, and engineering plastics), life sciences, and agricultural chemicals.

LG Chem runs its battery business through its wholly owned subsidiary, LG Energy Solution. It spun off this unit in December 2020 for a potential initial public offering. The company had total production capacity of 140 GWh as of December 2020 and reached over US$10 billion in revenue in 2020.

LG Energy Solution makes EV batteries (50%-70% of total revenue), batteries for small devices including battery supply to major American phone manufacturers (20%-40% of sales), and energy storage systems (less than 10%).

LG Chem's energy solution business recorded 25%-50% annual revenue growth in 2017-2020. It should generate similar gains in 2021-2022. The firm's growing scale and stabilizing production have underpinned a profit rebound starting in 2020, excluding one-off expenses.

We expect the business' operating margin to remain at around the mid to high single digit in 2021-2022. That said, we note that the business will likely remain exposed to quality-related disruptions and costs. For example, the company's energy storage system and EV batteries have been responsible for fires, and have come under investigation.

LG Chem's credit profile should be stable over the next 12-24 months. The company's aggressive investments in offshore EV battery production will increase its debt. However, the sound EBITDA growth of the petrochemical and battery businesses should keep its debt-to-EBITDA ratio at 1.4x-2.0x in 2021-2022. This compares with 1.8x in 2020, and 2.7x in 2019.

Panasonic Corp. (A-/Stable/A-2) (primary analyst: Kei Ishikawa)

15%-20% of revenue exposure to auto businesses Panasonic has substantially improved the bottom lines of its automotive solutions business and EV battery business, which it runs in partnership with Tesla. Panasonic reached 35 GWh capacity in fiscal 2020, and is aiming for 38 GWh to 39 GWh capacity in fiscal 2021. We believe Panasonic will likely focus on developing high-density technology in the U.S. but not in China, where the industry is prohibitively competitive.

The restructuring and cost cuts of the past two years have steadily improved Panasonic's earnings structure. In addition to improvements to its auto-related business, home appliances and devices have captured strong demand during the pandemic. They are selling well.

These business lines should mitigate the effect of the pandemic on the firm's avionics business and other hard-hit units. We now expect the EBITDA margin to improve to nearly 10% in fiscal 2021 from about 9% in fiscal 2020, with gradual improvement thereafter.

Although we believe it will accelerate investing for growth, including in the EV battery business, we do not expect the capex related to the battery business to increase materially.

We believe the company can sell assets to cover its capex. This would be consistent with its conservative financial policy. Due to a recently announced deal with Blue Yonder, U.S.-based information technology services provider, Panasonic's debt to EBITDA ratio is expected to deteriorate to more than 1x in fiscal 2021 from about 0.5x in fiscal 2020. That said, it will be still below the 2x threshold that would prompt us to consider a downgrade.

SK Innovation Co. Ltd. (BBB-/Negative/--) (primary analyst: Minjib Kim)

5%-10% of revenue exposure to auto businesses SKI is the largest oil refining company in Korea, with capacity of 1.1 million barrels per day. The company principally engages in oil refining and marketing. It is also involved in the manufacturing and sale of petrochemicals and lubricants, and exploration and production in Korea and overseas. The traditional business still generates most of the company's revenue and earnings.

SKI has been aggressively expanding its EV battery production business, which it sees as a growth engine. However, it has come to this business a bit later than the biggest players. The company plans to increase its production capacity to 85 GWh by 2023 from 30 GWh as of end-2020. We expect the company's revenue will grow rapidly, as it adds capacity. The economies of scale will help the company to reach the break-even point in the coming two to three years.

SKI's debt grew rapidly in the past few years. This was the result of aggressive investments in building EV battery capacity, generous shareholder returns, and weakening earnings of the traditional refining and petrochemical business. The company reported debt grew to Korean won (KRW) 13.6 trillion in 2020 from KRW11.1 trillion in 2019.

We expect that the company's ratio of debt to EBITDA to remain well over our downgrade trigger of 4.0x in 2021-2022 due to a tough operating environment for its refining and petrochemical business, and continued heavy investments. The company is working on several deleveraging measures to improve its credit metrics. This could potentially see its ratio of debt to EBITDA recovering to near or below 4.0x.

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Editing: Jasper Moiseiwitsch

Design: Evy Cheung

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