Korean battery maker SK On expects business turnaround in H2

SK On Co., the battery unit of South Korea’s top energy company SK Innovation Co., said on Monday it expects a business turnaround in the second half at the earliest and is likely to post an operating profit on an annual basis in 2025.

An improved battery product yield and an expected inventory depletion at customers’ factories coupled with new electric vehicle launches will boost SK On’s profitability, company officials said.

Earlier in the day, SK On posted 331.5 billion won ($241 million) in operating loss for the first quarter, slightly improved from a loss of 344.9 billion in the year-earlier period, but down sharply from the previous quarter’s loss of 18.6 billion won.

The company attributed its worsening losses to reduced US battery subsidies as SK On’s clients and automakers slashed electric vehicle production amid a slower-than-expected EV uptake worldwide.

“Our US clients tried to use up their battery inventories instead of ordering new battery cells from us. Accordingly, our battery sales came below our expectations,” said Kim Kyung-hoon, SK On’s chief financial officer.

Global EV makers and battery makers have benefited from US tax breaks under the Inflation Reduction Act (IRA), which took effect last year.

LOWER US TAX BREAKS

The IRA grants up to $7,500 per electric vehicle produced if it is assembled in the US and the battery's minerals are either mined or processed in the US or countries with free trade agreements with Washington.

SK On’s crosstown rival and the world’s No.2 battery maker LG Energy Solution Ltd. has posted strong profits in recent quarters thanks to US tax credits it received for its batteries made in the US and Korea under the Advanced Manufacturing Production Credit (AMPC) program.

Under the AMPC program, eligible battery makers can receive tax benefits, including a $35 tax credit per 1 kilowatt-hour produced by a battery cell and a $10 tax credit per 1 kWh battery module manufactured in North America.

Spun off from its parent SK Innovation in October 2021, SK On hasn’t reported a quarterly profit as it spent heavily to build new factories and develop new types of batteries to meet various client requests.

However, company officials said SK On’s business fundamentals have become stronger, cautiously forecasting a turnaround in the second half of this year and an annual operating profit next year.

Among other things, battery manufacturing yields at its plants in Korea and abroad have improved to over 90% from below 80% previously, officials said.

SK STRENGTHENS TIES WITH HYUNDAI MOTOR

Company officials said SK On’s recent decision to transform battery production lines at its second US plant in Georgia to produce battery cells for Hyundai Motor Co.’s vehicles instead of its other client Ford Motor Co. is also encouraging.

In the US market, Hyundai Motor sold 268,785 EVs last year while Ford’s EV sales stood at 72,607 units.

SK On plans to retrofit the battery production lines in the US state of Georgia for Hyundai EVs by the end of this year.

SK’s global battery production capacity is also expected to rise to 152 gigawatts (GW) by year-end from 88 GW at the end of 2023. Its Hungary plant with a production capacity of 30 GW is slated to begin operations in the second half and a 33 GW Chinese plant is set to become operational by year-end.

“We expect our client automakers to lower their battery inventories alongside new EV launches in the second half,” said an SK On official.

IPO PLAN

SK On needs to turn a profit as it promised an initial public offering (IPO) by 2026 while attracting external investments in previous years.

If the company fails to go public by then, investors could exercise their “call and drag” option rights to sell their shares bundled with stakes owned by the largest shareholders.

Chey Jae-won, SK On’s executive senior vice chairman, said in December he expects the company’s growth potential to steadily increase in the coming years based on its accomplishments so far.

Last September, Fortune named SK On, Tesla, General Motors and Charge Point as leaders in the US’ electrification push and ranked them first among innovative companies changing the world.

Some analysts, however, say that it may be difficult for SK On to turn a profit soon given its dwindling market share.

According to market researcher SNE Research, China’s Contemporary Amperex Technology Co. Ltd. (CATL), the world’s top battery maker, saw its global market share excluding China rise to 38.4% from 33.6% last year.

SK On’s market share has dropped to 4.5% from 6.2% over the same period.

SK On’s accumulated operating losses may also prevent the company from making aggressive investments to remain competitive, analysts said.

Write to Woo-Sub Kim at duter@hankyung.com

In-Soo Nam edited this article.