What do battery production woes mean for Tesla, Ford and Samsung’s share prices?

The Tesla [TSLA] and Ford [F] share prices reflect two sides of what’s been happening in the electric vehicle (EV) sector since the start of June. Tesla’s share price has proven resilient during the semiconductor crisis that has forced its Detroit rivals to slash production targets. Ford’s share price, however, has declined since early June.

Automotive manufacturers have made ambitious production targets, and to meet these, companies such as Tesla and Ford, depend on EV batteries from the likes of South Korea’s Samsung [005930.KS] and China’s BYD [BYD]. Already, the semiconductor crisis is putting these targets into question, but another headache over a skills gap in battery production could put them under further strain.

 

What’s happening with Tesla, Ford and Samsung’s share prices?

Tesla’s share price has gained almost 20% over the past three months (through 8 October), easily outpacing Ford’s share price gain of near 3%. Over the 12-month period, that position is reversed, with Ford’s share price seeing a 105% surge, compared with Tesla’s 81% gain – both stocks have been benefiting from the increased pace of the transition to EVs.

Samsung’s share price has been something of a laggard, despite delivering decent third-quarter profit. The semiconductor and battery manufacturer’s stock is down 10% over the past three months, although that could represent decent value for bargain hunters out there, especially considering it trades at a 10.4 forward price to earnings ratio.

During the week ending 8 October, Ford’s share price had started to motor upwards. Giving investors’ confidence is the Detroit mainstay’s announcement that it would power a new lineup of EVs by building its own auto production complex in the US. Although, that depends on getting the electric batteries it needs.

 

South Korea’s battery makers are facing a skills gap

The skills gap faced by South Korean battery manufacturers could seriously inhibit battery supply for EVs. One reason for the brain drain is South Korean battery engineers seeking employment opportunities overseas. 

That’s good news for European and American manufacturers. Swedish-based Northvolt, which has a joint venture for battery production with Volkswagen [VOW.DE], has been snapping up Korean technicians. But it’s not such good news for South Korea’s Samsung, LG Energy Solutions and SK Innovation’s battery unit SK ON. These three companies occupy a third of the EV battery market, according to Reuters, and supply both Tesla and Ford with electric batteries needed for EVs.

Exacerbating the problem is the fact that battery demand has grown exponentially in the last few years, leaving South Korea with a shortage of skilled workers to fill the 3,000 roles needed. The talent shortage in South Korea and abroad is only likely to get worse with the battery market set to triple in size by 2025 to $90bn, according to data from IHS Markit.

“Although we are seeing such a growth in the industry, it appears that we are facing a shortage of talent. It is crucial to recruit external talents as well as nurturing our own talent” - an official at LGES

 

If this skills gap is not plugged, then it could lead to a slowdown in the advancement of battery technology which is pivotal to a successful transition to EVs as manufacturers spend billions developing cars.

“Although we are seeing such a growth in the industry, it appears that we are facing a shortage of talent,” an official at LGES said. “It is crucial to recruit external talents as well as nurturing our own talent.”

 

Where next?

Despite the staffing problems, it’s difficult to see the established Southeast Asian companies giving up too much market share.

China’s BYD, which was founded in 1996 to make lithium batteries, is another dominant player out of Southeast Asia. The company has held talks to supply batteries to Tesla and Toyota [TM]. BYD’s battery business is so resilient that it expects to list it as a separate company. Indeed, Bank of America expects BYD’s EV battery revenue to grow by a CAGR of 66% between 2020 and 2023.

Over at Samsung, the semiconductor giant announced its best quarterly profit in three years during the week ending 8 October. Operating profit for the third quarter was up 28% from the same period last year, coming in at KRW15.8trn won ($13.26bn).

While western automobile companies have focussed on the development of combustion engines, the shift to EVs means that Southeast Asian battery specialists who have years of experience and strong supply chains should stand to benefit, even if technicians are lured overseas by the promise of better wages.

More pertinent, perhaps, is that any slowdown in having enough people to meet demand could hurt production deadlines or force automobile manufacturers to go elsewhere for their battery needs.

As it stands, Samsung’s share price has a target of KRW101,837 from analysts tracking the stock on Yahoo Finance, representing a 42% upside based on 8 October’s close. Tesla has a $688.11 price target, which would see a 12% downside, reflecting concerns that the stock is overvalued. Ford’s share price has a $15.36 price target, which would see a slight upside from $15.12 on 8 October.