Batteries At The Heart Of EV Industry
EV manufacturers are turning to lithium-ion batteries to power their furious slew of new car models and varieties of other means of transportation: trucks, buses, recreational vehicles, boats, drones, trains, and airplanes. Lithium batteries for drones are replacing nickel cadmium and nickel metal hybrids. Meanwhile, R&D is forging ahead seeking alternatives to lithium-ion batteries that serve the full EV and plug-in hybrids market that is climbing to 8-10% of global vehicle production.
My previous article for Seeking Alpha discusses batteries being at the heart of EVs. Yet, the manufacturers of smart EV batteries are given short shrift as investments. The public, analysts, and media are focused on EV automakers. There are few public companies primarily in the business of developing and producing EV smart batteries that are not in the pack of battery makers owned by a particular automaker or multinational corporation with other priorities. The West has largely conceded EV battery manufacturing to Asia.
South Korea-based LG Chem Ltd. S/ADR (Grey:OTC:LGCEY) (OTCPK:OTCPK:LGCLF) makes batteries, not vehicles. There are competitors, but they have no presence on American exchanges, offer scant financial information, or seem to be shaky based on available information. LGCEY enjoys a good reputation for quality, on-time product delivery, and reliability.
LG Chem was once the tenth largest chemical company in the world before slitting into various segments. In 1999, the company moved into the lithium-ion battery cell business. In early 2012, LG Chem was the third-largest EV battery producer in the world. Among its customers are automakers of the Bolt, Volt, Focus, and ZOE. The company built a +$300M plant with U. S. subsidies in Holland, Michigan. LG also has an exclusive deal to supply its batteries in India to Mahindra & Mahindra (OTCPK:OTCPK:MAHDY). LG also makes batteries for other uses like its wall mountable lithium battery for generating power in solar heated households.
LG Chem has plants in Poland where it is planning to triple production capacity of EV battery cells annually to fulfill new orders from Volkswagen (OTCPK:VWAGY). The company is investing $571M more in Poland to ensure deliveries to VW by the end of 2019. China-based Volvo (OTCPK:VOLAF) is using LG Chem batteries from China plants for plug-in cars to be in compliance with new regulations from the government.
Before legal entanglements in Japan, isolato Carlos Ghosn talked in 2015 about Nissan (OTCPK:NSANY) jettisoning its battery building program and purchasing EV batteries most likely from LG Chem. In 2018, the father of the LEAF confirmed this is the future plan, but it was not meant to be. Nissan continues manufacturing and installing its own batteries from subsidiary Automotive Energy Supply Corporation. In January '19, the CEO of General Motors (GM) touts that "GM has never replaced a Volt or Bolt battery."
On the downside, LG Chem has not produced an annual report for nearly three years, and financial data are difficult to interpret. Market Screener offers the best statements on the Internet and prices the shares in USD at $280, I think. MarketWatch further reports there are 25 BUY recommendations; four are OVERWEIGHT and 2 HOLD. The company home pages are insufficient for investors or just the curious. It is critical to speak with a registered broker and certified accountant before purchasing any shares of LG Chem.
Investors Can Learn From Wobbly Companies
In contrast to LG Chem's steady growth, for example, is pure-play battery maker and China-based CBAK Energy Technology (NASDAQ:CBAT). Its future is wobbly at best. CBAT reportedly filed for bankruptcy in the past and once again has near insurmountable debt and high account receivables. Like a three-cup trick, management recently changed the name of the company, the stock symbol, and moved home base to another city following years of financial suffering.
CBAK Tech is today based in the seaport city Dalian, China. The company is engaged in the R&D, manufacture, and sales of high-power lithium batteries. Products include a square battery in an aluminous shell, polymer battery, cylinder battery, and more. Applications of the products are for light electric vehicles, electric vehicles, electric buses, energy storage, backup power supply, and electric tools. Four years ago, shares sold for $4.29 each, but after a steady slide, they are now at 98 cents. Revenues in 2017 were reportedly +$45M, but total debt topped $39M. Free cash flow was -$16M.
The company announced in January '19 signing a deal with an unnamed customer to deliver 19M batteries over 3 years. The announcement caused a pop up in share price from 40 cents in January '19 to $1.19 in February. It is reported that CEO Li Yunfei bought 1,666,667 shares at $1.02 in the same month. The price jump can be alluring but, in my opinion, is unlikely more than an airy promise. Whether it has the cash to fulfill the commitment is questionable.
CBAT has a minimum number (5%) of institutional investors or analysts following the stock. ~$2.4M shares are owned by insiders, and the remainder by the general public. The market cap is ~$27M. The company is highly leveraged; its recent announcement of a big deal is with an unnamed battery buyer; there are few institutions owning the stick, so investment in CBAT is not recommended. Not much has changed since Andri Capital's warning last May that this is a company not worth the investment risk. CBAT makes a good business case study about a weak company from which investors are able to gain insights.
CATL, China's Leading EV Battery Maker Enters The U.S.
Contemporary Amperex Tech (Shenzhen:CATL) was founded in 2011. It went public in 2018. Share price soared 44%. Even so, costs to expand were underfunded by an estimated 50%. CATL operates huge production plants in China, four international sales and service facilities and one in Japan. CATL has supplier agreements with BMW (OTCPK:OTCPK:BMWYY), Volkswagen, Daimler (OTCPK:OTCPK:DMLRY), and Jaguar. CATL owns a large stake in North American Nickel Inc. (OTCQB:OTCQB:WSCRF) of Canada. Revenues are expected to rise 48% in 2019.
The company opened a plant in Detroit and plans to supply U.S. automakers. CATL has a new joint venture with a Chinese automaker, and this year, announced an agreement with Honda (NYSE:HMC). CATL is China's largest maker of lithium batteries and intends to introduce next-generation low-cobalt batteries in 2019. Check with your broker if Americans can buy shares listed on the Shenzhen Exchange.
The Landscape Is Littered With EV Battery Makers
Others big in EV battery research and manufacturing are not toll-manufacturers yet. They either have other interests diverting attention and resources from EV smart battery development and sales, or they focus primary efforts on supplying their own EVs. This may change in the future for Chinese carmaker BYD (OTCPK:BYDDY) (OTCPK:BYDDF). BYD is spending $3B to quadruple its EV battery production capacity by 2020. BYD intends becoming the leading supplier of batteries displacing CATL from the top spot. Management talks about spinning off BYD's battery division.
Panasonic (OTCPK:PCRFY) (OTCPK:PCRFF) has been slow to forge new relationships with EV automakers. PCRFY has been diligently working to be the lead supplier in a deal with America's largest EV maker. Is the deal stalled or dead? Panasonic recently announced plans to partner with a Japan-based automaker to co-produce EV batteries, as Japan aims to lower the costs of EVs in its quest to replace legacy vehicles on the roads with all-electric and hybrid vehicles.
Daimler is moving ahead by mass-producing hybrid and all-electric vehicles. The company expects to buy $23B worth of battery cells mostly from LG Chem and SK Innovation (Grey:OTC:SKOVF). But with one SKOVF China-based battery plant closed since the beginning of 2017 and a new plant planned for the U. S. not yet built, it seems most likely LG Chem will get the lion's share of new business.
Finally, Johnson Controls International (NYSE:JCI) once produced 154 million lead-acid and lithium-ion batteries - one-third of the industry's output - every year. JCI built two new factories in China to serve that market. Then, JCI sold its power unit, and the new owners are no longer pursuing the high-voltage sector of the battery market, i.e., smart batteries for EVs.
Batteries Are The Weak Link In The Industry
Standalone EV battery public companies are lurching works in progress. They depend on the success of EV manufacturers. Much of their cost depends what they pay for lithium and cobalt. The battery makers consume a lot of cash dedicated to R&D and manufacturing. Overall, U. S. EV battery producers ceded the EV battery market to Asian companies. China companies somewhat ham-handedly corralled the industry in the government's rush to become the world's largest producer of EVs.
Batteries, though, are the weak link in EV market expansion, customer service, satisfaction, and convenience. Bloomberg warns, "Batteries are the most common source of problems." Customers complain they don't perform as advertised, drain fast, and run dangerously hot spontaneously combusting. China-made EVs come in for customer criticisms with complaints about faulty motors, transmissions, odometers, and bad odors.
Automakers might like the proprietary blessings from producing their own EV batteries, but R&D, manufacturing, and the limited sales opportunities are a drag on cash and other resources needed for vehicle manufacturing. On the other hand, EV automakers dedicating resources and attention to the energy storage business might find they are building energy companies and are their own best customers.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.