Changing market: Visitors look at a Hyundai EV in the United States. Hyundai and Kia exported a combined total of 100,200 vehicles to the United States last year. — AP
SEOUL: “I will end the electric vehicle (EV) mandate on day one.”
With Donald Trump gaining traction as the Republican presidential candidate, this declaration at the Republican National Convention in Milwaukee on July 18 has sent ripples of concern through the South Korean automotive and battery industries.
The potential implications of Trump’s return to the White House, coupled with his protectionist and anti-EV stance, have companies like Hyundai-Kia and major South Korean battery makers bracing for impact.
While the Biden administration has not exactly mandated EVs, the new air pollution limits issued by the Environmental Protection Agency effectively force automakers to increase EV sales.
Trump has repeatedly criticised this regulation and called it Biden’s “EV mandate” for its stringent tailpipe-pollution limits.
Should Trump become the next president, analysts believe South Korean automakers can soften the blow by boosting local production and focusing on hybrid vehicles.
However, the South Korean battery industry, which relies heavily on US Inflation Reduction Act (IRA) tax credits for EV batteries, could face severe financial strain if these credits are slashed.
If Trump imposes higher tariffs on all imports as he has proposed, including overseas-made cars, Hyundai-Kia may struggle to absorb the costs without passing them on to consumers – a challenge given the current stagnation in US auto demand.
In 2023, Hyundai and Kia exported 58,100 and 42,100 vehicles to the United States, representing 13.8% and 13.7% of their global sales, respectively. These exports account for 30.8% and 26.1% of Hyundai and Kia’s production from South Korean factories.
An additional 10% tariff on these imports could dent their profitability. However, unlike when Trump was elected eight years ago, Hyundai Motor Group now has a contingency plan.
Hyundai Motor Group has expedited the opening of its Metaplant in Georgia, initially slated for next year, to produce a combination of EVs and hybrids this October.
This move is expected to boost local annual production capacity to between 300,000 and 500,000 units.
By increasing hybrid production at the new facility, Hyundai and Kia aim to counterbalance the potential effects of import tariffs and a reduction in the IRA tax credits for EVs.
Detailed plans regarding hybrid production and adjustments are expected to be disclosed during the Chief Executive Officer’s Investor Day on Aug 28.
“Assuming the Georgia plant reaches its maximum annual production target of 500,000 units, Hyundai and Kia’s US production share could rise from 38% in 2023 to as much as 68% by 2027.
“This shift would place them on par with or ahead of major competitors like General Motors and Toyota, whose US production shares are 67% and 54.7%, respectively,” said EV sector analyst Yim Eun-young from Samsung Securities.
The demand for hybrid vehicles remains robust, driven by inadequate EV charging infrastructure and consumer concerns over charging times.
Hyundai Motor’s latest second-quarter results show this trend, with hybrid sales up 26.4% year-on-year.
Hybrids now make up 11.6% of total sales, a 2.4 percentage point increase from the previous year, marking their first double-digit share.
On the other hand, the three major South Korean battery makers – LG Energy Solution, SK On, and Samsung SDI – are particularly vulnerable.
They have been compensating for their poor performance with tax credits under the IRA, which could be curtailed if Trump returns to power.
While it is unlikely that Trump could fully eliminate the IRA through Congress, he might rescind the executive order implementing the IRA or tighten the requirements for the tax credits.
Last year alone, South Korean battery companies received about 1.3 trillion won in IRA tax credits. Excluding the IRA tax credits, LG Energy Solution reported an operating loss of 252.5 billion won in its second-quarter earnings report last Thursday.
SK On could have accumulated more than 600 billion won in losses last year alone without the IRA tax credits. Samsung SDI also saw advanced manufacturing production tax credit revenue of 46.7 billion won for the first time in the first quarter after confirming that its battery pack factory in the US qualifies for the IRA tax credit.
Lee Chang-sil, chief financial officer of LG Energy Solution, said during the second-quarter earnings call that he expects sales to gradually increase from the second half of the year, eventually achieving a positive operating profit even excluding the IRA. “We’re going to do everything we can,” he said.
However, there are still worries about a comprehensively reduced investment in the South Korean battery industry if IRA support is cut back under a potential Trump administration.
“The three South Korean battery companies – LG Energy Solution, SK On, and Samsung SDI – have an estimated 117 gigawatt-hours (GWh) of production capacity in the United States as of 2023, expected to grow to 635GWh by 2027 if their US investment plans are completed.
These investments have been driven by expected IRA benefits, and any changes to the IRA could force companies to rebalance their strategies,” said researcher Kim Kyoung-yoo from the Korea Institute for Industrial Economics and Trade. — The Korea Herald/ANN
