[ANALYSIS] Biden subsidies, double-edged sword for Korean firms

U.S. President Joe Biden attends an event at the White House, Washington, D.C., March 9, to support legislation to strengthen supply chains for computer chips. With Washington passing bills such as the CHIPS Act directed at China, the U.S. commitment to free trade is now in question. AP-Yonhap

Subsidies fuel global EV boom but LGES, Samsung, SK face overcapacity risk

By Kim Yoo-chul

The Biden administration's implementation of the CHIPS and Science Act (CHIPS Act) and Inflation Reduction Act (IRA) clearly represents Washington's strategy of pursuing a "manufacturing renaissance" in the world's largest economy.

Growing concerns about China's meteoric growth in the electric vehicle (EV) battery and semiconductor industries helped policymakers in the U.S. stand together in reaching a bipartisan consensus to boost semiconductor and battery production on U.S. soil.

The two legislative actions are to allow the U.S. to have a greater "profound effect" across backbone industries over the next decade at least and even beyond, security experts in Seoul and Washington told The Korea Times.

"The U.S. is ambitiously and clearly trying to recover an 'industrial policy,' which had fallen out of favor after the end of the Cold War, with the help of its East Asian allies ― South Korea, Japan and Taiwan," a government official said. He added the COVID-hit supply chain troubles created the strong necessity among top Washington officials to initiate cash-intensive programs for industries they view as critical to national security.

The policies are designed to affect outcomes in particular industries. As moves to possibly cut off China's direct challenge in global clean energy supply chains, the U.S. has identified EV batteries, EVs, solar power generation, carbon capture, hydrogen and semiconductors as sectors eligible for massive federal funding as required by the acts.

South Korean battery, semiconductor and EV manufacturers ― Samsung Electronics, LG Energy Solution (LGES), Samsung SDI, SK hynix, SK On and Hyundai Motor ― are scaling up manufacturing in the U.S. helped by such direct financial assistance programs. In Europe, various governments including France are asking the EU Parliament to launch a European version of the IRA that would involve tax breaks and investment aid for foreign companies. South Korean companies also have a substantial presence in Europe.

When it comes to the rush for clean energy subsidies, a key question is how much will end up being wasted. Unlike the memory chip industry, the battery industry is yet to be fully consolidated and that means it may be harder for the South Korean battery trio to remain highly profitable as states' financial incentive programs target supply-side intervention.

President Yoon Suk Yeol shakes hands with U.S. President Joe Biden before a meeting in the Oval Office of the White House, April 26. AP-Yonhap

For example, the CHIPS Act, which provides up to $52 billion for U.S. semiconductor research, development, manufacturing and workforce development, asks recipients to reaffirm that the purchase of stocks and dividends are not an eligible use of the funds.

"Yes, subsides have a role, however, I have to say they come with a high risk from a political standpoint. State subsidies could result in overcapacity. Unlike the memory chip industry, which is controlled by the three largest suppliers, the battery industry is a highly competitive market, and the South Korean battery trio, for example, will have to review potential risks on the demand side," a former Samsung executive said.

From a business point of view, regardless of subsidies, it is difficult to predict how quickly and to what extent general consumers, in particular, will switch to EVs in the coming years.

In a recent analysis, Deutsche Bank questioned what benefits would one-off subsidies provide if EV demand only picks up slowly. The estimated combined battery-making capacity of LG, Samsung and SK by 2025 would support the production of 6.6 million EVs a year. Last year, some 750,000 of all EVs were registered in the U.S., data by market research firm Experian showed.

"A number of jobs could be created indirectly through battery suppliers and construction of factory sites. But because the traditional automotive industry's transition to EVs has been raising huge fears of jobs lost in traditional vehicle and combustion engine manufacturing, it would be difficult for the South Korean battery trio to quantify the success of subsidies. The bottom line is the U.S. wants subsidy recipients to make regular reports of their achievements using them," Park Cheol-wan, a professor of automotive engineering at Seojeong University, said.

Lowering prices while controlling inflation, and preventing long-term industry decline with a greater supply of goods are the key advantages of subsidies. But as subsidy recipients will have to ramp-up capacity, the South Korean battery makers ought to be better judges than policymakers both with regard to the indispensability of battery cell manufacturing in the U.S. and its long-term profitability.

The logo of LG Energy Solution / Reuters-Yonhap

"A single and one-off billion dollars in subsidies, if not backed by extra incentives, can't influence the general judgement. Battery producers usually rely on confirming offtake contracts with clients to lock in the amount of production," a representative of LGES said.

LGES operates a joint venture with General Motors. It has a plan to expand capacity at its plants in North America from 15-gigawatt hours last year to 55-gigawatt hours this year as it boosts capital expenditure by more than 50 percent.

Need to hedge political risk

The U.S. IRA has been a huge plus for the South Korean battery trio, however, Nice Investors Service, a domestic credit ratings agency, advised policymakers, to thoroughly review its potential flipside as it was primarily intended to strengthen battery ecosystems in the U.S.

"The IRA is a policy tool to help American companies strengthen their competitiveness in the battery industry. More incentives and aid will be given to American companies as time goes by. For the time being, Washington needs help from South Korean companies because there are no questions that the battery market will grow into a massive industry within the coming decades, creating many jobs and serving as a key national economic engine," a senior aide to former President Moon Jae-in said.

"The incumbent Joe Biden administration is building a protectionist fence around the U.S. chip and battery industries. It's not necessary for the South Korean battery trio to review any imminent exit strategy, but it is required for the government to discuss steps on how to hedge potential political risks with top executives at LGES, Samsung SDI and SK," he added.

In China, subsidies had been offered to South Korean battery makers, for several years in a "grace period," however they were then excluded from eligibility for further funding as Beijing sought to help its homegrown EV companies get a better presence.

Despite big-name foreign carmakers including Honda and Hyundai quietly slimming down their presence in China, the world's largest market for EVs with huge growth, experts said South Korean policymakers have to activate their communication channels with officials there to avoid any hangovers in the battery industry as the EV investment cycle accelerates.

"Subsidies in the EV industry are popping up across the U.S and they will pop up in the EU soon. But as seen in the recent troubles between the central Canadian government and Ontario state regarding the division of subsides, production could be delayed and even the level of profits could be squeezed because of changes in the political landscape," said Lee Yong-wook, an analyst at Hanwha Securities in Seoul.