Samsung SDI’s Strategy Reinforces Li-ion Opportunities

BMI View : China's fast expanding EV market presents opportunities for li-ion battery suppliers, and we foresee more companies entering partnerships to manufacture domestically, capitalising on lower costs and better access to the market.

Following Tesla's announcement in early 2014 of its plan to build a lithium-ion (li-ion) battery 'Gigafactory', Samsung SDI has followed suit, and broke ground on its li-ion battery plant in Xi'an on August 18. Although the USD600mn investment will only allow Samsung to produce 40,000 units of battery packs a year when it becomes fully operational in 2015 - a far cry from the 500,000 units that Tesla's Gigafactory will be capable of - its investment is in line with our long-term positive outlook on the li-ion market in China.

Tapping Into The Expanding EV Market

Gaining Momentum
China - Electric Vehicle Sales, Units

Samsung SDI’s Strategy Reinforces Li-ion Opportunities

BMI View : China's fast expanding EV market presents opportunities for li-ion battery suppliers, and we foresee more companies entering partnerships to manufacture domestically, capitalising on lower costs and better access to the market.

Following Tesla's announcement in early 2014 of its plan to build a lithium-ion (li-ion) battery 'Gigafactory', Samsung SDI has followed suit, and broke ground on its li-ion battery plant in Xi'an on August 18. Although the USD600mn investment will only allow Samsung to produce 40,000 units of battery packs a year when it becomes fully operational in 2015 - a far cry from the 500,000 units that Tesla's Gigafactory will be capable of - its investment is in line with our long-term positive outlook on the li-ion market in China.

Tapping Into The Expanding EV Market

We believe that the expanding EV market in China will present li-ion battery manufacturers with opportunities over the next five years. Although the government has in recent months downplayed its initial rhetoric of achieving sales of 5mn EVs by 2020 (and 500,000 units by 2015), it is still bent on promoting the EV segment, and is now gunning for sales of 273,150 EVs by 2017. Sales growth for the segment has been strong so far, and according to the China Association of Automobile Manufacturers (CAAM), a total of 17,642 EVs were sold in 2013, representing 38% growth from the 12,552 units sold in 2012. Makers of li-ion batteries, a key component of EVs, will be a key beneficiary of the expanding EV market.

Expect More Localisation And Partnerships

In May, we highlighted that Korean battery suppliers will be critical in the development of the EV market ( see 'Korean Battery Suppliers Crucial To EV Development', May 23) and this view has played out - albeit with a twist. Although Korea maintains its technological advantage in high-value added production, battery suppliers are looking to produce in China instead. LG Chem also announced in July that it has signed a memorandum of understanding (MOU) to build a li-ion battery plant in China, with plans to break ground in September.

We believe the main draw for battery suppliers to produce locally is cost. According to a report by Korea's Electronic Times, the price of li-ion batteries for electric vehicles and energy storage systems in Asia has fallen by 30% over the past year (from USD500-600/kWh in 2013 to USD350/kWh in 2014), but prices in Korea have remained elevated at USD400-500/kWh. Samsung's move into China will allow the company to hire local Chinese employees at a lower wage and purchase cheaper materials that are made domestically, producing batteries that are less costly than the ones made in Korea. In addition, by partnering with the Chinese government and local companies, Korean suppliers gain access to connections that these local players have, facilitating their entrance into the market.

Key Risks To Suppliers

Although we are positive on the long-term outlook for the li-ion battery market, we believe a key risk lies in the government's abilities to support the segment in achieving its targets. While sales of 5mn EVs by 2020 is definitely a long shot for China's auto sector, achieving 273,150 units by 2017 might still prove to be a stretch, considering that this requires around 100% annual growth in EV sales over the next three years consecutively. Even with the removal of the 10% tax on EV purchases that are expected to kick in in September 2014 (lasting until December 2017), it is our view that the government is slightly overzealous in its expectations for a segment that is still being challenged by vehicle range and pricing issues.

Gaining Momentum
China - Electric Vehicle Sales, Units

That being said, the uptake for EVs has been promising in 2014. In H114, 12,791 battery EVs and 8,507 plug-in hybrid EVs (PHEVs) have already been sold (amounting to a total of 20,477), and the segment looks poised to cross the 35,000 full-year mark set by the government. While we do not expect the segment to meet the government's EV sales target by 2017, we believe EVs remain an attractive market for auto makers and suppliers, and sales growth will remain robust over the next five years.

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