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LG Energy Solution
If you want to watch the video, it is below:
LG Energy Sol finally went public this past week, so I figured that it would be a good time to send this out. The company at the trading highs hit a $90 billion USD market capitalization, which would make it the second largest trading company in Korea after Samsung Electronics.
LG Chem continues to be the majority shareholder with an 81.8% stake. But since then, CATL has pulled ahead of LG and is now the largest EV battery provider. And I think CATL’s lithium ion iron technology seems to be pulling ahead in the market - with Tesla adopting it for all their standard range cars.
As electric vehicles gain popularity around the world, people are starting to pay closer attention to the batteries going into those EVs. A recent report by the Biden administration singles out large capacity EV batteries as one of four critical industries worth further scrutiny.
Asian-based companies are driving substantial technical progress here. In a prior video, I profiled CATL Group, the world's largest EV battery company by shipments. While they are indeed growing very quickly, CATL's leading position is almost entirely defined by its dominance in the China market. Outside of China, the situation is very different.
In this video, I want to look at another battery market leader, one with considerable strength outside of China. What had once been LG Chem, but is now called LG Energy Solution.
About LG and LG Chem
The company that would eventually create LG Chem and LG Energy Solution was founded in 1947 as Lak-hui Chemical Industries. Pronounced "lucky".
The company at first sold creams and other hygienics products. When a large number of its creams were returned due to a faulty plastic lid, the company started making plastics to help solve a problem of their own.
1958 saw the establishment of the Goldstar Company, an electronics outfit. Goldstar made radios and home appliances and would eventually grow into one of the country's largest electronics companies.
Lucky and Goldstar eventually merged in 1983 to create Lucky-Goldstar, or LG.
In the 1970s, Lak-hui entered the petrochemical business. They were soon making carpet, wallpaper, pipes, toothbrushes, pharmaceuticals, cosmetics, and more.
Pretty much everything. This sort of product expansion is not all that unusual for a chaebol.
As you might expect, LG Chem found itself doing too much and its product lineup needed some re-organization. Thus over the years, LG Chem has spun off various sister companies to handle certain products.
Its consumer brands went to LG Household and Health Care in 2001. Some of its pharmaceuticals division went to LG Life Sciences in 2002. Its carpet and wallpaper products went to LG Hausys in 2009.
So up until very recently, LG Chem’s product lineup was largely three categories: Petrochemicals like the thermoplastic ABS, electronics chemicals like those used for LCD screens, and the battery business.
Then in late 2020, LG Chem decided that it would spin-off its battery division into a new wholly owned company called LG Energy Solution. The goal was to single out the battery division as one of their core businesses and help it raise money on its own to fund its substantial capital investments.
LG Chem and Batteries
LG Chem began working on lithium ion batteries all the way back in 1995. As a diversified chemicals company, LG Chem saw an opportunity to leverage their chemical expertise to gain share in the battery space. After all, batteries are basically chemistry.
The company started out making batteries for cell phones and laptops, but for a decade they eyed the lucrative automobile market. In the 2000s, exclusively electric vehicles were not common. You were more likely to find hybrids like the Prius V, released from 2011 to 2012. Those cars were driven by nickel metal hyride batteries.
At the time, lithium ion batteries had significant cost, abuse tolerance, and calendar life concerns at high temperatures. But in turn they offered the potential of higher energy densities.
LG Chem wanted to develop a lithium ion battery not only good enough for hybrids but also entirely electric vehicles. For twenty years, the company's battery business gained infamy for being an endlessly loss-making enterprise.
But their long march eventually bore fruit. In 2009, GM selected LG to supply lithium ion batteries for their Chevrolet Volt electric vehicle, a huge breakthrough.
Since then, lithium ion battery costs have fallen very quickly. This has in part fueled the increasing economic viability of electric vehicles around the world. Today, while nickel metal hyride batteries are still sometimes used in hybrids, most EVs have lithium ion batteries. LG has been a leading beneficiary of this trend.
In part due to its ties to the chemical industrial complex, LG Chem is very vertically integrated. They spend a lot on research and development. Then leverage their supply chain to rapidly adopt and manufacture any promising new battery chemistries.
In 2001, they established their own technology center in Troy, Michigan to study battery components alongside the American car manufacturers.
The company is very globalized. LG has been willing to export its technologies abroad and build factories outside of South Korea. This has been very much necessary when it comes to the EV battery industry.
With laptop and cellphone components like batteries or semiconductors, they are small enough that you can manufacture them at home in Korea or China before shipping them abroad. This encourages companies to centralize manufacturing, which is how you get to a situation where something like half the world's chips are made in Taiwan.
But such a thing is not logistically and economically feasible for EVs because their batteries are so heavy. With automobile supply chains being as complicated as they are, manufacturers will often demand that battery factories be built near where the vehicle is assembled.
In 2010, LG Chem spent $300 million to build a 650,000 square foot battery factory in the American city of Holland in west Michigan. This one serves General Motors and their Chevrolet Bolt.
In the years since, they have built two more factories in China and another in Poland, the latter completed in 2017. These are in addition to their core facilities in Korea, which serve Hyundai Motors.
Product Analysis: Cells in Packs
Fully integrated lithium ion battery packs like the ones that go into your Tesla or Chevrolet Bolt are made up of cells. Lithium battery cells are made up of four different components.
The first two are the cathode and anode, the electrodes in an EV battery. Current flows from the two electrodes to an outside system. There is a separator. A porous membrane that keeps the cathode and anode from mixing with one another. And finally, there is an electrolyte that facilitates the flow of electrons back and forth between the cathode and the anode.
Usually, cells are first bundled into modules before being installed into the pack. Depending on their size and form, there can be thousands of these cells and modules going into a single pack.
Traditionally, cells can come in three different forms: Cylindrical, prismatic and pouch-type. For EVs, LG offers cylindrical batteries and pouches. They do also make prismatic batteries, but not for EVs.
Let us start with a cylindrical type battery cell. You might be familiar with how these are shaped. The kind of things you might stick into your Bluetooth mouse. The size and shape are more standardized, and you can tell between them based on their name.
For instance, the 18650. The first four digits indicate their size. 18 millimeters wide and 65 millimeters long. The 0 at the end tells you that it is a cylindrical battery.
Many Chinese EV companies as well as Tesla use these cells for their battery packs. The ones Tesla uses are 4680s, which are 46 millimeters wide and 80 millimeters long. Not sure why they dropped the 0 at the end.
A company like Tesla is likely putting thousands of these cylindrical cells into their packs. And this can get immensely challenging. Thousands of cells means thousands of things to place and weld without making mistakes.
Tesla learned how to do it but most car companies are not going to want to deal with that. So that is where the second type of cell comes into play: Prismatic cells.
Prismatic is a fancy word that means "highly varied". So the defining characteristic of these large-format prismatic battery cells is that they are custom. So as a result you do not have to put thousands of them into a battery pack. Rather, just hundreds or even dozens.
Many traditional car companies have preferred to go with prismatic battery cells. It works since the vendor is basically customizing the product to best fit their manufacturing and product needs. The drawback is the supply chain. Because it is custom, it is hard to dual-source for volume and dependency reasons.
The third type of battery is a pouch type, a more minimalist type cell contained in a flexible foil. Literally a bag of chemicals.
Because they are flat, thin and light, you can stuff them to the max into the battery pack. This gives the packs a very high energy density. And since they are in a bag, when safety issues occur, the pouch can swell rather than explode.
Pouch type battery cells are one of LG's core EV products. Two of their most prominent proprietary innovations are used for this pouch type battery: Their stack-and-fold cell technology and a safety reinforced separator or SRS.
Stack and fold describes a patented way of manufacturing their polymer pouch battery cells. This technique stacks the anode, separator and cathode together and laminates them into what is called a "bi-cell". The bi-cells are then folded into the battery. Stack and fold. There we go.
The second major thing is the safety reinforced separator or SRS, a patented type of separator. The separator if you recall, separates the anode from the cathode. Damage to it can cause damage to the battery and might even spark a fire.
In LG's SRS, a ceramic coating is applied that acts to provide superior abuse tolerance and stability across a variety of thermal and nail penetration scenarios. In other words, the SRS hopefully creates an overall safer battery.
Customers and Competitors
Due to its early mover and technical advantages, LG Energy has garnered an impressive range of customers. And competitors.
General Motors or GM is one of their best customers. They have been working together ever since the aforementioned Chevy Bolt. As GM moves closer towards a fully electric lineup, LG is adding two more American battery factories in Lordstown, Ohio and Spring Hill, Tennessee to help meet demand.
Those factories - both located near GM facilities - are scheduled to be completed in 2022 and 2023.
The Lordstown plant is estimated to cost $2.3 billion USD. Interestingly enough, they are both 50-50 joint ventures, hinting at some sort of technology transfer.
Out in Europe, the company supplies batteries to Daimler, Audi, and Volkswagen. Volkswagen had been one of LG Energy's larger customers, but the company recently announced a switch away from pouch-type cells to prismatic cells. The transition will probably take a long time, but it is a big deal.
In China, LG is one of Tesla's EV battery suppliers alongside China’s CATL, with plans to compete for a larger share of that business in the rest of the world.
They also formed a joint venture with Chinese automaker Geely on battery tech. This factory is in Nanjing and opened for business in 2020.
On the competitor side, LG faces some big players. In its native Korea, the company faces competition from Samsung SDI and SK Innovation. Both are backed by massive chaebol. SK also makes pouch style cells, while Samsung mostly makes prismatic cells.
LG and SK recently settled a fierce trade secret lawsuit over their battery technologies for $1.8 billion. It had threatened SK's ability to progress forward in the United States.
This had been a very big deal since SK will be supplying batteries for Ford's F-150 Lightning. Perhaps one of the most important upcoming EVs, the Lightning is the electric version of the country's best selling vehicle. I am glad to see the lawsuit resolved because it looks to be a great truck.
Outside of Korea, Japan’s Panasonic is one of LG's biggest rivals. Their global market share ex-China as of this writing is second only to LG. But most of that substantial volume is driven by two major customers: Toyota and Tesla.
Panasonic is Tesla's partner in the Nevada Gigafactory.
Probably LG's fiercest competitor would be CATL. They are expected to be the number one beneficiary of Volkswagen's switch away from pouch type batteries to prismatic.
Their recently developed cell to pack technology skips having to place battery cells into modules before loading them into the pack. As a result, the pack gets lighter, denser, and cheaper. It's a big deal and puts CATL's prismatic offerings on par with LG's pouch cells. And CATL is starting to build capacity internationally too. LG will have to adjust their lineup and up their game.
Despite the fierce competition, LG Energy Solution has an energetic future ahead of it. The unit turned losses for a decade, but strong EV battery demand worldwide finally pushed it solidly into the green in 2020. Since then, the company has started to generate very real profits.
In Q1 2021, the latest results that I have as of this writing, LG Energy Solution generated record revenues and profits. Revenues were up 88% year over year, making it a $15 billion USD run rate business.
Operating profit was 341 billion won or $310 million USD. Profit margin was 8%. LG Energy Solution is no cash-rich SaaS company, but considering all the revenue growth as well as the challenges of manufacturing actual things it is now solidly profitable.
One can argue that they should be spending even more so to secure their market position. But it seems like the focus on profit generation is for the upcoming IPO, which as of this writing has yet to happen. The company wants to raise some 10 trillion won or $9 billion USD, valuing it at 100 trillion won or $90 billion USD. Institutional investors will want to know if this business can make money.
Whether an auto supplier making just about a billion dollars annualized profit and wrestling with massive competitors - some of whom are implicitly state backed - is worth $90 billion USD is up for debate. I will leave that determination to you. But it does demonstrate the company's value and outsized importance in an extremely dynamic and world-changing future industry.