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Battery maker SK On declares ‘emergency’ as EV sales disappoint

Supplier to Ford and Volkswagen may have to be rescued by its South Korean parent as losses mount

A leading South Korean producer of electric vehicle batteries has declared itself in crisis as its customers struggle with disappointing EV sales in Europe and the US.

SK On, the world’s fourth-largest EV battery maker behind Chinese giants CATL and BYD and South Korean rival LG Energy Solution, has recorded losses for 10 consecutive quarters since being spun off by its parent company in 2021. Its net debt has increased more than fivefold, from Won2.9tn ($2.1bn) to Won15.6tn over the same period, as western EV sales have fallen far short of its expectations.

With losses snowballing, chief executive Lee Seok-hee announced a series of cost-cutting and working practice measures last Monday, describing them as a state of “emergency management”.

“We have our back against the wall,” Lee wrote in a letter to employees. “We should all pull together.”

More radical solutions are also being discussed within the South Korean SK Group conglomerate. One option under consideration, according to a person familiar with the conglomerate’s thinking, is that SK On’s parent, SK Innovation, will be merged with SK E&S, the group’s highly profitable energy affiliate that specialises in liquid natural gas production. The potential merger is set to be discussed at the board level this month.

SK On has made a series of aggressive investments in the US and Europe in recent years, betting on a widely predicted boom in demand for EVs. However, it has since announced extended lay-offs for workers at its plant in the US state of Georgia and delayed launching a second plant in Kentucky, a joint venture with its principal US customer Ford.

Chinese producers CATL and BYD dominate the global battery industry with a combined market share of 53.2 per cent, according to South Korea-based consultancy SNE Research. Their production and sales are still concentrated in its domestic market, where EV adoption has been much greater than in western countries.

With Washington and Brussels seeking to prevent a flood of imported batteries from China, South Korean makers LG, SK and Samsung SDI — along with Japan’s Panasonic — have been given the opportunity to capture future growth in western markets.

In the US, non-Chinese battery makers including SK On have benefited from billions of dollars in subsidies under President Joe Biden’s Inflation Reduction Act.

But Tim Bush, a Seoul-based battery analyst at UBS, said the South Korean battery makers had been “badly let down” by US car manufacturers, which he said had failed to produce EVs sufficiently attractive to mass market consumers to meet their own bullish sales projections.

He noted that until as recently as last year, General Motors was forecasting it would sell 1mn EVs in 2025. It sold just 21,930 in the second quarter of this year.

“The Korean battery makers haven’t been making blind investments — everything they invested was based on order books with fixed volumes and pricing,” said Bush. “But the automakers didn’t invest enough in producing high-quality affordable EVs.”

Analysts said SK was in a worse position than South Korean rivals LG and Samsung SDI, both of which have also pared back their investments, because as a late entrant to the global battery race, it had offered its customers generous terms on pricing that were now coming back to haunt it.

But Bush argued that while electric vehicle adoption had proved slower than anticipated, the transition to EVs remained “inevitable”.

“As long as the wider SK Group continues to see SK On as a trophy asset and gives it the support it needs to weather the present storm, then its long-term future is likely to be assured,” he said.

German-Italian tank tie-up sets sights on global markets

Rheinmetall and Leonardo bosses see joint venture paving way for consolidation amid slow progress elsewhere

A joint venture between Leonardo of Italy and Germany’s Rheinmetall to build tanks for the Italian army will open up new overseas markets and pave the way for greater consolidation in Europe’s arms sector, according to the chief executives of the two groups. 

“The goal is to create a new generation of vehicles that are superior compared to competitors in terms of their technical characteristics,” Leonardo chief executive Roberto Cingolani told the Financial Times in an interview. 

If the tank performs well, “it will open new global markets for us that we could not have competed in as standalone [companies],” he said.

The announcement comes after the Italian contractor last month said negotiations to collaborate with Franco-German tank venture KNDS, an alliance of France’s Nexter and Germany’s Krauss-Maffei Wegmann, had broken down.

Defence sector collaboration in Europe has historically been hampered by disagreements among governments over how to ensure national sovereignty and equal work share.

However, Cingolani expressed confidence in the Italian-German deal. “A platform like this one has good chances of being competitive for the European main battle tank,” he said.

Under the 50:50 joint venture unveiled this week, Leonardo and Rheinmetall will be the lead contractor to develop Italy’s main battle tank and armoured infantry combat vehicles, based on the German company’s Panther and Lynx models respectively.

Leonardo will play a key role in the construction, especially for the electronics and tank turrets, the rotating hubs which sit on top of the vehicle’s main body. 

Italy’s decision this year to allocate around €20bn over 15 years to renew the country’s armoured vehicle fleet helped to spur collaboration talks between the contractors. 

On Leonardo’s talks with KNDS, Cingolani said the Italian group pulled out because there was “no clear industrial strategy in the long term” for the Italian group. 

“Our technology contribution would have been minimal on their platform. They would have sold their platform, we would have made a few components, but the platform would have been theirs [not a joint one],” he said. 

Europe’s land vehicle industry remains fragmented despite the wake-up call from Russia’s invasion of Ukraine and the ensuing boost in defence spending among governments. Progress on a Franco-German plan for a joint tank, dubbed the Main Ground Combat System (MGCS), has been slow amid political discord.  

Armin Papperger, chief executive of Rheinmetall, told the FT in a separate interview that in order to balance concerns around maintaining national sovereignty with the need to consolidate, it was important for the companies involved to enter into a true partnership.

“That is the reason that we created this joint venture. If you have a German-Italian joint venture, it is a long-term partnership in that area, you can do both.”

The venture will be headquartered in Italy, where 60 per cent of the work will be done but split equally between the two companies; 50 per cent will be done by Leonardo in Italy with another 10 per cent done by Rheinmetall’s Italian-based workforce. The rest will be carried out by Rheinmetall in Germany. 

Ester Sabatino, research associate for Defence and Military Analysis at the International Institute for Strategic Studies, said the new joint venture could also prove a competitor to the European tank programme MGCS led by KNDS, which also includes Rheinmetall. 

It could “go in and take the spot of delivering an intermediate solution for a European main battle tank if there are further delays to the MGCS programme,” she said.

“What is certain is that despite political declarations on the willingness to consolidate. industrial interests and competences remain key challenges [for MGCS].”

Both companies expect to move quickly. The venture, said Cingolani, “allows us to start immediately which is very important”. 

“This is the first tangible step in the direction of the European defence space we’ve been talking about for a few months,” he added. 

The venture has already had inquiries from potential export customers, said Papperger, noting that securing orders from other European nations would help to drive consolidation.  

“We think other nations will also order now from that joint venture so that you can make a European network and this network will have production lines in different satellite states,” he said. 

It was a “process that we have to learn in Europe”, he added. “We have to involve a lot of different countries, not only two or three, and then we have a European solution.”

On the new venture’s position in Europe’s defence map, Papperger said it could eventually join the Franco-German MGCS. “Long-term I believe Italy will also, with this opportunity, be part of the MGCS,” he said. 

Europe needs a bolder plan for capital markets

From the green transition to the digital transformation, the requirement is enormous

How will Europe fund the huge sums needed to invest in energy transition, digital infrastructure and defence? Despite a vast €33tn pool of savings, Europe has a plumbing problem. Its capital markets are under-developed, while its banking sector is insufficiently sized to handle the growing demands for capital expenditure. To address the investment conundrums, deeper capital markets are needed.

The requirement is enormous: the European Commission has estimated that the green transition requires an additional €620bn each year to 2030, with another €125bn needed for digital transformation. Moreover, Vladimir Putin’s invasion of Ukraine, and the prospect of a second Donald Trump presidency in the US, are escalating demands for greater military expenditure.

Yet despite multiple bazookas from the European Central Bank, growth in lending to companies in the region since 2014 has been less than half that of the US. The gap in economic performance between the two has long nagged at Europe’s policymakers. A widening divide makes this angst acute.

“We need to mobilise private savings on an unprecedented scale, and far beyond what the banking system can provide,” former Italian prime minister and ECB president Mario Draghi argued ahead of publication of his upcoming report on enhancing Europe’s competitiveness. 

Despite some progress, there remains a vast gap in venture capital relative to GDP between Europe and the US. European companies have fewer funding options to help them invest and grow.

There is a growing chorus of calls to dust off the unfinished plans for a capital markets union, led by ECB president Christine Lagarde. Recent heavyweight reports by former Italian Prime Minister Enrico Letta and former French central bank governor Christian Noyer also argue the case.

But the idea of a single market for capital across Europe has been stalled for a decade. Bold ideas often get bogged down.

The recent European elections are likely to make things even more difficult, so perhaps it’s time to change tactics. To clear the system-wide blockages, policy architects should team up with financial plumbers, especially from the private sector.

Revitalising securitisation is the place to start, enabling insurers and pension funds to support Europe’s growth. Securitisation allows banks to transfer assets to investors, in turn freeing up their own lending capacity. This is particularly important as banks provide the majority of credit to European small and mid-sized businesses, which account for almost two-thirds of jobs.

Rules written in response to the financial crisis harshly penalised securitisations and the European market for them has never really recovered. An unintended consequence is that banks have resorted to complex synthetic transfers of risk, which only the largest can undertake, thus holding back regional banks.

Solvency II, the rule book for insurers, makes it economically unappealing to fund a long-term infrastructure project or buy a package of small business loans too, reducing potential returns and limiting available financing.

It’s time to recalibrate securitisation rules to better reflect the true risk profile of assets, keep pace with evolving capital markets and encourage investment for European growth. Reforms to Solvency II rules are also essential, along with system-wide tweaks to the banking framework and financial market standards.

The venture capital ecosystem must be nurtured, private credit harnessed and the cumbersome sustainability rules for funds recalibrated.

Above all, Europe needs a more flexible and diversified financial market. If capital markets union plans fail to deliver it may result in lower growth. It’s time to call in the plumbers.

Investment revenue is expected to rise 30% over past year as lenders report earnings this week

The early stages of a long-awaited recovery in investment banking fees is set to boost Wall Street lenders when they report second-quarter earnings starting this week, with mergers and debt deals picking back up after a lacklustre two years. 

Analysts expect investment banking revenues at JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup will on average rise more than 30 per cent from a year earlier during the second quarter, according to estimates compiled by Bloomberg. 

“You’re beginning to see a nice rebound in investment banking activity,” said Oppenheimer analyst Chris Kotowski. 

JPMorgan, Citi and Wells Fargo report results on July 12. Goldman publishes earnings on July 15, followed by Morgan Stanley and BofA a day later. Overall, rising defaults are expected to contribute to muted earnings growth for many of the largest US lenders this quarter.

The resurgence of dealmaking, though, could be a bright spot. Analysts predict the bottom lines of Goldman and Morgan Stanley, whose businesses have the biggest exposure to investment banking, will benefit the most. Large deals that closed in the second quarter included ExxonMobil’s $60bn acquisition of Pioneer Natural Resources in May, which was brokered by Citigroup, Goldman and Morgan Stanley, and Aon’s $13bn purchase of insurance broker NFP in April, which was guided by Citi and BofA, among others.

In what has been a brutal reminder of the industry’s feast-to-famine swings, investment banking revenues fell last year from record highs in 2021 to their lowest level in years. Rising interest rates by central banks around the world have damped activity for M&A and new stock market listings. 

Wall Street bosses have been talking up a recovery for more than a year — the heads of Goldman Sachs and Morgan Stanley spoke about the “green shoots” of a recovery as far back as 12 months ago — but the business has taken longer to rebound than initially expected. 

In a jolt of optimism, JPMorgan told investors last month that the increase in revenues from investment banking during the second quarter was set to rise by as much as 30 per cent, double what the bank had initially anticipated.

Smaller rival Jefferies last week reported that investment banking revenues in the three months to the end of May rose almost 60 per cent from a year earlier. Its top management said it was “increasingly optimistic” about the second half of 2024 and 2025. 

The rebound has been aided by debt offerings, as confidence in the economy has made investors more willing to jump into riskier deals. In one of the biggest deals of the quarter, struggling fitness company Peloton refinanced $1.35bn in debt in May in a deal that was led by JPMorgan and Goldman.

Bankers are not anticipating a return to investment banking activity levels seen in 2021 and 2022 when rock-bottom interest rates and government stimulus during the coronavirus pandemic led to a surge in M&A and IPOs. 

Bankers have pointed to a need for private equity firms to exit existing investments and deploy trillions of dollars in dry powder, as well as corporations reviewing their supply chains and coping with rapid advancements in technology such as artificial intelligence. 

“We have capital markets activity still running below the normal trend line and it is in the process of ramping up,” said Betsy Graseck, a banking analyst at Morgan Stanley. “That tailwind, we think, will show up in the quarter and persist through the rest of this calendar year and into 2025.”

Investors have also been fretting that persistently higher interest rates could lead to more borrowers defaulting on their loans, with credit losses in recent years coming off of historically very low levels.

Analysts expect JPMorgan, BofA, Citi and Wells, the four largest US banks by deposits, to report more than $7bn in the second quarter of so-called charge-offs, which are losses on loans marked as unrecoverable. This would be up more than 50 per cent from a year earlier. 

“We’re still in a phase where I would characterise things as normalising rather than deteriorating more visibly,” said Scott Siefers, banking analyst at Piper Sandler. “Virtually every bank investor on the planet is just acutely focused on commercial real estate in particular.”