LG Energy Solution inks battery deal with Mercedes amid profitability struggles

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LG Energy Solution inks battery deal with Mercedes amid profitability struggles

Published: 08 Oct. 2024, 17:19 Updated: 08 Oct. 2024, 17:46

SARAH CHEA
chea.sarah@joongang.co.kr

LG Energy Solution employees pose with the company's cylindrical batteries. [LG ENERGY SOLUTION]

LG Energy Solution sealed a 10-year battery supply deal with Mercedes-Benz as the Korean battery maker struggles to defend its profitability amid faltering EV demand in global markets.

Under the deal, LG Energy will supply the German luxury maker with 50.5 gigawatt-hours of batteries starting Jan. 1, 2028, according to its regulatory filing on Tuesday. That's equivalent to producing batteries needed for around 700,000 EVs.

The size of the deal is expected to be in the trillions of won, though details have not been decided.

LG Energy reportedly plans to supply Mercedes with its 46-millimeter (1.8-inch) cylindrical batteries, a battery type introduced by Tesla with higher energy efficiency. It said the sale and supply will be handled mainly in North America, and LG is currently building a cylindrical battery plant in Arizona.

LG's 46-millimeter cylindrical battery is said to have five times more energy capacity and six times more density than the previous version, which also allows for a 16 percent longer driving range.

LG Energy Solution's cylindrical battery plant under construction in Arizona [LG ENERGY SOLUTION]

LG Energy Solution is also planning to start mass production of a cylindrical battery plant in Ochang, North Chungcheong, within the year. The batteries will be supplied to Tesla.

The announcement came as Mercedes was harshly criticized for using batteries from Chinese brands — including the obscure brand Farasis Energy — for most of its EVs sold in Korea after an EQE explosion in early August.

Mercedes used LG Energy's batteries for EQC models in Korea.

The big-scale contract came as the Korean maker reported 448.3 billion won ($332 million) in operating profit during the July-to-September period, down 38.7 percent on year, according to its preliminary earnings announcement.

It still slightly beat the market estimation of 420 million won compiled by market tracker FnGuide.

Revenue fell 16.4 percent to 6.9 trillion won, but it surpassed the consensus of 6.7 trillion won, helped by growing sales of energy storage systems in the North American market.

Still, the Inflation Reduction Act (IRA) tax credits played a crucial role in saving the company from falling into the red. The company's bottom line included 466 billion won in IRA incentives. Without them, it would have posted an operating loss of 17.7 billion won.

The U.S. Advanced Manufacturing Production Credit under the IRA offers generous tax credits to energy-friendly product manufacturers for making specific components within the United States. For EV batteries, it grants $35 per kilowatt-hour for cells and $45 for modules.

The preliminary report did not provide an earnings breakdown or a net profit estimate. LG Energy will release finalized third-quarter earnings figures on Oct. 28.

"The sales recovery is limited this year due to sluggish EV sales of LG's major clients like General Motors and Tesla," said analyst Lee Yong-wook from Hanwha Securities and Investment.

"Next year is still hopeful as sales of Kia EV3, Honda Prologue GM's Equinox are on the rise and EV growth will likely enhance in Europe when the stricter environment guidelines go into effect."

LG Energy Solution shares closed at 436,500 won on Tuesday, up 3.93 percent from the previous trading session.

BY SARAH CHEA [chea.sarah@joongang.co.kr]