A South Korean city, home to one of the world’s biggest steelmakers, is betting its manufacturing expertise, plus billions of dollars in investments and government incentives, can help it dominate a 21st-century industry: electric vehicle (EV) batteries.
Companies in the south-eastern hub of Pohang — famous for Posco Holdings steel mills and one of the country’s elite universities — are aggressively building out EV battery campuses as carmakers hurry to find reliable suppliers outside China. Three South Korean giants in the global battery market — LG Energy Solution, Samsung SDI and SK On — have promised 40 trillion won ($40.9 billion) in domestic investments with their local suppliers.
It is a welcome development for both the city and the country, where the world’s lowest birth rates and an ageing population are a long-term threat to economic growth.
“Steel is the only industry in Pohang — we are facing limits to growth,” said Wan-Hyung Lee, who runs Haedong Engineering, a machinery maker that supplies Posco and has started a battery recycling business. “Pohang needs to find something new.”
Spread out along the mouth of the Hyeongsan River, Pohang has a history of pivoting quickly to new industries. The city has long been known as “the miracle of Yeongil Bay”, a reference to the rapid buildup of the steel industry in the 1970s under the country’s then-ruler, Park Chung-hee. Even the city’s storied football team, the Pohang Steelers, traces its roots to Posco.
Decades ago, when Park ordered the industry to develop, workers were pressed to build the first steel plant on strict deadlines or die trying. That start-up culture — without the harsh directives from Seoul — remains part of the city’s DNA.
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Accelerating high-tech investments
While China dominates EV battery production globally, the ground is shifting quickly. To accelerate high tech investments in a world where companies want to diversify their supply chains, South Korea’s trade ministry last year identified batteries as one of the country’s three strategic industries, along with semiconductors and artificial intelligence. The national government stepped up with offers of cheap electricity, water and land for factories.
Recently, President Yoon Suk Yeol went further, saying the government and companies including Samsung Electronics will pour some US$422 billion ($563 billion) into areas such as chips and EVs in the nation’s most aggressive effort yet to win a heated global race for tech supremacy.
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Crucially, Pohang — a city of just 500,000 compared to Seoul’s 9.9 million — has the land EV battery companies need. It quickly embraced its chance to become South Korea’s battery capital, a place where critical minerals are processed or recycled and fed into the production chain. All that has helped South Korea become the world’s biggest battery and component manufacturer after China, according to a report from BloombergNEF.
Buoyed by the growth and the momentum to make supply chains less reliant on China, some of the industry’s promoters see Korean manufacturers having the potential to become the battery equivalent of Taiwan Semiconductor Manufacturing — the chip maker that dominates its industry.
“Korea might have a company like TSMC in the future that makes any kind of batteries, because automakers can no longer use Chinese cells,” said Professor Kang Byoungwoo, who does research on battery technology at Pohang’s top university, known as Postech.
As teams of students in Kang’s lab tested out tiny battery cells, the professor said he is studying whether manganese-rich or single-crystal cells for batteries can make them cheaper and safer.
The nation’s success is evident at the recent annual InterBattery conference in Seoul, where 40,000 attendees include representatives from Europe, Australia and US states including Arizona, Georgia and Kentucky, all pitching for investment opportunities in South Korea and back in their home countries.
While the nation’s multinationals help build some of the large campuses springing up around Pohang, the smaller suppliers in this burgeoning battery universe have pushed South Korea’s small-cap index to a world-beating rally. The Kosdaq index has gained 15% this year, well ahead of similar gauges in other major markets.
The biggest single Investor in Pohang’s battery expansion efforts is Ecopro Group, a less well-known battery-materials supplier for Samsung SDI and SK On, whose products are used by Ford Motor, BMW, Hyundai Motor and Volkswagen.
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During a visit to Ecopro’s battery campus — a five million-sq m (500ha) plot at Yeongilman Industrial Park, a special economic zone provided by the city — forklifts, trucks and workers were busy building out the new facilities. It is the most visible sign of the US$2.5 billion the company is investing in what it calls a closed-loop ecosystem for producing almost all kinds of products required for EV batteries — lithium hydroxide, precursor chemicals, cathodes and recycling centres.
“Automakers want cheaper and safer batteries,” said Byeong-hoon Kim, head of Ecopro Materials at his company’s industrial park, where it seeks to have five campuses processing battery minerals. “We plan to have an integrated production system to use recycled battery metals to produce precursor” chemicals and other materials at lower cost, he added.
Pohang’s steel giant is not standing idly by. Posco Chemical, the battery unit of Posco Group, broke ground in April 2022 on a cathode plant with a 30,000-ton capacity right across from Ecopro’s site. GS Engineering & Construction Corp, a Seoul-based builder, seeks to spends 150 billion won building a battery recycling plant set to start operating this year.
It’s not just Korean firms. CNGR Advanced Material, the world’s largest precursor maker based in China, signed a memorandum of understanding in November 2022 with the Pohang city government to invest about one trillion won to build a precursor plant with 100,000 tons of annual capacity.
Impact of US politics
But building a South Korean TSMC will require more than cheap land, investment promises and a can-do culture. It’s also going to rely on something entirely out of the government’s control: domestic politics in the US.
Landmark legislation signed by President Joe Biden offers about US$370 billion in subsidies and tax breaks. Provisions of the Inflation Reduction Act are meant to wean the US from its dependence on China, in part by offering incentives for EVs to be produced domestically. In addition, a certain percentage of the components of the cars’ batteries — mostly critical minerals — must be extracted or processed in the US or in a country the US has a free trade agreement with. That percentage climbs each year.
To comply with the legislation and have cars eligible for subsidies in 2023, battery-makers will have to source at least 40% of their minerals from outside China, with the threshold rising to 80% by 2027. That timeline will be tough to meet. As of last year, South Korean firms got about 58% of their lithium, 64% of cobalt and 70% of graphite from Chinese partners, according to official data.
As a result, South Korea is among a number of key allies arguing that the US should ease up on some of its tight deadlines.
Biden has vowed to make tweaks to the law to address allies’ concerns and the issue will be among the topics President Yoon is expected to raise with the US leader during an official state visit to Washington in late April.
Right now, however, there are few domestic options for US automakers when it comes to EV batteries, and some South Korean companies are resisting the Inflation Reduction Act’s pressure to build directly in North America, said Jung Ho Joon, an official at the Pohang city government’s Battery Special Zone Support Team.
“They find the cost for building a plant abroad is 50% to 70% higher than doing so in Korea,” he said. If the US hardens its views on domestic production, Pohang will be put at a disadvantage.
However, according to Anna Lee, an analyst at Yuanta Securities Korea in Seoul, some companies will pivot quickly.
“Korean battery-mineral makers are still reluctant to build a plant in the US due to higher costs,” Lee said. But if that is what they have to do, then “they will definitely build all kinds of plants in the US”. — Bloomberg
