Amid EV Market Slump, Is Samsung SDI's ESS Shift a Tailwind?

The U.S. EV market is experiencing a slump, with sales down 40% year-over-year. Despite this, companies continue to invest by establishing joint ventures, leading to increasing pressure from growing investments. Concerns have been raised, particularly regarding financial worries such as rising fixed costs if the market does not activate even after expanding production facilities through large-scale investments.

Samsung SDI resolved these market risks by announcing the liquidation of its joint venture with GM on August 11. This liquidation eliminates additional costs and investment burdens, and the resources secured will be allocated to expanding ESS (Energy Storage System) capacity. This strategic shift appears to be a move to flexibly respond to uncertain EV market conditions and secure new growth engines.

Even during the EV battery market boom in the early 2020s, Panasonic opted for a strategy of maintaining minimal production capacity, refraining from excessive expansion. This conservative approach has resulted in reduced fixed cost burdens amid the current EV market slowdown, positively impacting its stock price defense. Consequently, Panasonic's past choices are now proving advantageous in the current uncertain market conditions.

Last Friday, Samsung SDI announced it secured 4.5 trillion won by selling its stake in Samsung Display. This amount is nearly identical to the funds needed for the ESS expansion scale anticipated by the market. Securing these funds signifies that Samsung SDI has strategic confidence in expanding its ESS business and has prepared the resources to execute its specific investment plans.

While increased supply generally acts as a negative signal when demand stagnates, in the ESS market, the rate of demand growth is so steep that it acts as a positive. Particularly, the estimated demand in North America currently reaches 70-80 GW, and hyperscalers continuously emphasize the need for self-generation. ESS is essential for such self-generation, but this is additional demand not yet reflected in existing demand forecasts. Therefore, ESS expansion appears to have entered an attractive investment phase that can directly lead to current stock price increases.

Batteries are more than just commodities or products; they serve as essential infrastructure within energy networks. From this perspective, batteries should be recognized as a component of national security assets. Their importance is further highlighted in markets where the de-China logic is strongly at play amid global supply chain restructuring.

The battery industry is in an early growth stage, too soon to apply cyclical logic. Domestic investors, accustomed to semiconductor investment logic over the past two years, might think increased supply could lead to oversupply, but this logic does not yet apply to the battery industry. The up-cycle for this industry is expected to last for more than three years, and it is transforming into a crucial asset that should be approached from an existential security perspective, beyond mere environmental friendliness.

The demand for ESS within data centers is based on a fundamental shift beyond simple emergency power sources. Data centers, both existing and new, must now dramatically increase their self-generation proportion, moving away from relying on grid connections for power supply. This is becoming increasingly essential due to intensifying U.S. government off-grid requirements and regulations. While the semiconductor industry is pondering growth from 100 to 200, ESS is in an explosive growth phase, going from 0 to 100.

While the semiconductor sector may not decline sharply until the first half of next year, the painful experience of the past month and a half has created a strong need for portfolio reallocation among investors. In this situation, the battery sector has high expectations for profit growth next year due to base effects and potential policy benefits following the U.S. midterm election results in November. Therefore, the demand for fund migration from semiconductors to the battery sector is overwhelmingly strong.

A significant change is underway: the Chinese government plans to abolish its export tax rebate system for batteries. While this issue has not yet received widespread attention, it could provide an opportunity for South Korean battery companies to rebound in the European market. If the rebate, which helped Chinese companies secure price competitiveness, is eliminated, Korean companies may face a more level playing field in the European market.

Despite concerns about competition with Chinese companies, the North American battery market is showing explosive growth. New installations in North America increased by 76% year-over-year in June, demonstrating very rapid growth. This clearly indicates that the overall market share continues to expand, suggesting significant growth potential in the North American market despite China-related risks.

The era dominated by the WTO system and free trade logic in the 2000s has ended. Currently, geopolitical risk acts as the most powerful variable, outweighing a company's inherent competitiveness. Over the next 20 years, energy security logic is expected to be the key driver of industries. Therefore, major industries, including the battery industry, must formulate strategies from a geopolitical perspective.

As the battery market continues to grow, the expansion of the North American market can provide significant spillover effects for Korean companies. Moreover, with energy security logic starting to operate in Europe, Korean companies are expected to maintain market share and benefit in that market as well. This can lead not only to market expansion but also to strengthened strategic positioning due to geopolitical importance.

If the Democratic Party wins the U.S. presidential election, expectations for the battery sector as a beneficiary of unwinding Trump's policies are likely to grow, acting as a positive factor for stock prices. While eco-friendly policies were products of the zero-interest rate era, fields related to energy security, such as ESS, will remain important regardless of changes in administration. Therefore, investment in energy security will continue regardless of which administration takes power, and the battery sector is expected to receive sustained benefits.

Samsung SDI has been named the top pick in the secondary battery sector. This is not simply because it is a large-cap stock with a high market capitalization, but because it has the highest upside potential when comprehensively considering EPS (Earnings Per Share) growth rate, future new order possibilities, and valuation. For investors considering portfolio shifts at the end of the year, Samsung SDI will be an attractive option.

It is important to understand the background of interest rate hikes. The Bank of Korea presented a growth rate forecast of 3.3% for this year and raised next year's growth rate as well. While this may feel different in reality, it should fundamentally be interpreted as a sign that interest rates are being raised because the economy is strong. Therefore, interest rate hikes should not be viewed solely negatively but rather as a reflection of positive economic trends.