By Heekyong Yang

SEOUL (Reuters) – South Korea’s LG Energy Solution (LGES) is in talks with about three Chinese suppliers to produce low-cost electric vehicle batteries for Europe, a senior executive said, with competition likely to intensify after the EU imposed additional tariffs on Chinese-built electric vehicles.

LGES’ potential partnerships come at a time when the global electric vehicle industry is grappling with a sharp drop in demand and underscore the growing pressure that non-Chinese battery companies are facing from automakers to lower their prices to levels that can compete with cheaper Chinese competitors.

French carmaker Renault announced this month that it would incorporate lithium iron phosphate (LFP) battery technology into its plans to mass produce electric vehicles, choosing LGES and Chinese rival CATL as partners to build a supply chain in Europe.

The announcement followed the European Commission’s decision in June to impose an additional tariff of up to 38 percent on electric vehicles imported from China, following a months-long investigation into subsidies that sparked a flood of investment commitments in Europe from Chinese electric vehicle makers and battery companies.

“We are in talks with Chinese companies that will develop LFP cathodes with us and produce them for Europe,” Wonjoon Suh, head of the advanced automotive battery department at LGES, told Reuters. He declined to name the companies.

“We are considering various measures, including establishing joint ventures and entering into long-term supply contracts,” he said, adding that such a partnership should help LGES reduce its LFP battery manufacturing costs to a level that can compete with its Chinese competitors within three years.

The cathode is the most expensive single component in an EV battery, accounting for about a third of the total cost of a battery cell.

China dominates the global LFP cathode market and its largest producers are Hunan Yuneng New Energy Battery Material, Shenzhen Dynanonic and Hubei Wanrun New Energy Technology, according to battery market tracker SNE Research.

Most EV batteries today use one of two types of cathode: nickel-based or LFP.

Nickel-based cathodes, like those used in Tesla’s longer-range models, can store more energy but are made of expensive materials. LFP cathodes, popular with Chinese electric car makers like BYD, typically don’t store as much energy but are safer and tend to be cheaper because they use materials that are more common.

South Korean battery companies have focused on producing nickel-based batteries and are now expanding their production to include LFP battery production, which is dominated by Chinese competitors. The pressure comes from automakers looking to expand their product offerings to include cheaper models.

Suh said LGES is considering three locations – Morocco, Finland and Indonesia – to work with Chinese companies to produce LFP cathodes for the European market.

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LGES has negotiated supply contracts for LFP batteries with automakers in the U.S., Europe and Asia, but demand for affordable electric vehicles is stronger in Europe, as this segment accounts for about half of electric vehicle sales in the region, which is more than in the U.S., he said.

South Korean battery makers LGES, Samsung SDI and SK On had a combined 50.5 percent market share of the European electric vehicle battery market in the first five months of this year, with LGES’ share at 31.2 percent, according to SNE Research. Chinese battery rivals had a 47.1 percent market share in Europe, led by CATL with 34.5 percent.

LGES has existing battery joint ventures with General Motors, Hyundai Motor, Stellantis and Honda Motor at a time when growth in electric vehicle sales is slowing. Suh said the installation of some equipment required for the expansions could be delayed by up to two years in agreement with the partners due to slowing demand. He predicted that demand for electric vehicles would recover in Europe in about 18 months and in the U.S. in two to three years, but that would depend in part on climate policies and other regulations.

LGES shares closed down 1.4%, weighed down by weak Tesla results and lagging the 0.6% decline in the broader KOSPI market.

(Reporting by Heekyong Yang; Editing by Ju-min Park and Jamie Freed)