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RPT-FOCUS-Power Play: Volkswagen abruptly pulls plug on South Korean battery makers

Wed 17th March, 2021 11:46pm
(Repeats story published Wednesday; no changes to text)
    By Heekyong Yang, Yilei Sun and Christoph Steitz
    SEOUL/BEIJING/FRANKFURT, March 17 (Reuters) - Days before
Volkswagen AG  VOWG_p.DE  held an event to announce a major
ramp-up in its electric vehicle production, the German car maker
abruptly told its South Korean battery suppliers their current
technology would be largely excluded from those plans. 
    The decision by the world's second largest automaker to move
the bulk of its cars to a different battery cell in two years
came as a shock to LG Energy Solution and SK Innovation
 096770.KS , three people with knowledge of the situation told
    "It's not our everyday business routine to get such
one-sided notice from a partner ... people seemed to be pretty
alarmed," one of the sources said.
    Volkswagen's shift to a new unified prismatic battery, away
from the pouch-style manufactured by LG and SK, is likely to be
a massive blow given the pair have invested billions in pouch
production sites in the United States, Europe and Asia.*:nL8N2LD3JE
    The shift also raised concerns among battery suppliers that
the race by automakers to meet growing demand for EVs in a
rapidly changing technological environment could leave them
behind almost overnight.
    "Volkswagen's announcement is just the beginning of the
competition in the EV market, signalling that huge investment
will be made competitively in the future," said Lee Jae-il, an
analyst at Eugene Investment & Securities. 
    Volkswagen is under intense pressure to cut battery costs,
strengthen its position in China, and better compete with Tesla
Inc  TSLA.O . China's Contemporary Amperex Technology Co Ltd
(CATL)  300750.SZ , which already supplies Volkswagen and Tesla,
is making prismatic batteries, the technology favoured for
Volkswagen future vehicles.
    Thomas Schmall, Volkswagen's board member in charge of
technology, said this week the company would keep its current
contracts, adding 80% of its post 2025 generation of EV cars
would use prismatic batteries. Schmall did not specify battery
technology for the remaining 20%.
    Schmall said it would not be a big deal for battery
suppliers to switch to production of prismatic cells, although
analysts suggested doing so would require significant
reinvestment and time to overhaul factories.
    SK, which had announced a contract in 2018 to supply
Volkswagen with pouch batteries but had not yet started doing
so, said it currently has no plans to produce prismatic
batteries. It supplies pouch batteries to Hyundai Motor
 005380.KS  and its sister company Kia  000270.KS .
    LG, which makes prismatic batteries but only for smaller
goods such as laptops, declined to comment on whether it would
expand that production to EV batteries. Volkswagen was one of
its biggest clients for pouch batteries, but it retains Tesla,
General Motors  GM.N  and Hyundai Motor. It also builds
cylindrical batteries for Tesla.
    Of particular concern to executives at auto parts suppliers
was Volkswagen's relative lack of consultation with LG and SK
about the battery shift, a break with tradition from the
industry strategies pioneered by Toyota  7203.T  decades ago.   
    When LG told Volkswagen it would send an executive to
Germany to discuss the potential battery switch, Volkswagen told
LG not to, all three people with knowledge of the situation told
Reuters. They declined to be identified because they are not
authorised to speak to the media.     
    "This is rare among automakers and suppliers which they have
good relationship with," said Yale Zhang, head of the
Shanghai-based consultancy Automotive Foresight. "Traditionally
automakers invite core suppliers to discuss future technology
before finalising as they need to ensure supply."
    It comes just days after outgoing Panasonic Chief Executive
Kazuhiro Tsuga told the Financial Times his company needed "to
graduate from our one-legged approach of relying solely on
Tesla." Panasonic lost its coveted decade-long position as
Tesla's exclusive supplier last year when the carmaker unveiled
plans to begin developing its own batteries and add LG and CATL
as purchasing partners.*:nL4N2EE3C0*:nL3N2AQ0RH*:nL2N2GJ19H
    Two sources told Reuters SK and LG's situation was
complicated by a U.S. legal battle between the bitter rivals
that has threatened to disrupt Volkswagen's EV production at its
Tennessee factory and left the carmaker "very unhappy" with the
    "Volkswagen warned South Korean battery makers early last
year that Chinese battery makers would be beneficiaries of the
legal disputes," one person told Reuters.
    China, the world's biggest car market and a key battleground
for EV, is the winner in Volkswagen's shift from the lighter
pouch batteries to the generally safer and easier to source
prismatic batteries.
    As well as its deal with CATL, Volkswagen told Reuters it
planned to source batteries from Wanxiang A123 and Guoxuan
High-tech Co Ltd  002074.SZ . A source close to Guoxuan told
Reuters it anticipates striking a supply deal for lithium iron
phosphate batteries in a year or more.
    Other China suppliers were likely, Volkswagen said, as it
begins the roll-out of five models of its ID series of EVs in
the country this year.
    "The Chinese have become very strong on a technological
level which means the supply side is bigger," Volkswagen CEO
Herbert Diess told Reuters, adding he believed the company
remained a relevant customer for LG and Samsung SDI  006400.KS ,
which supplies prismatic batteries.
    "We actually need every cell, every bit of capacity that is
available," Diess said. "But we will have a bigger say in terms
of cell design."

 (Reporting by Heekyong Yang in Seoul, Yilei Sun in Beijing and
Christoph Steitz in Frankfurt; Editing by Sayantani Ghosh, Joe
White and Jane Wardell)
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