GM's battery partnership with LG Chem will have 2 major benefits as the company begins the transition to electric vehicles (GM, KRW)

mary barra

On Thursday, General Motors and LG Chem announced that they will split ownership of a battery-production joint venture.
Demand for batteries is set to rise dramatically over the next decade as automakers increase electric-vehicle production.
GM may have opted for a joint venture over merely continuing to buy batteries from LG Chem because it wanted to have more control over its battery supply, said David Whiston, an industrials analyst at Morningstar.
GM and LG Chem's factory also has the potential to achieve economies of scale and create cost savings for GM on what is the most expensive part of an electric vehicle, said Ed Kim, the vice president of industry analysis at AutoPacific.
But the partnership is not without risks, including cultural differences, tariffs on exported batteries, and lower-than-expected demand for electric vehicles.
Sign up for Business Insider's transportation newsletter, Shifting Gears, to get more stories like this in your inbox.
Visit Business Insider's homepage for more stories.

On Thursday, General Motors and LG Chem announced that they will split ownership of a battery-production joint venture, deepening their existing relationship. LG Chem, one of the leading suppliers of lithium-ion batteries, makes batteries for GM's Chevrolet Bolt EV hatchback.

The companies will invest up to $2.3 billion in the joint venture and, starting in the middle of next year, they plan to begin construction of a battery factory in Lordstown, Ohio, where GM idled (and later sold) a vehicle-assembly plant earlier this year. The plant was a point of contention in the 50-day strike at GM's US factories led by the United Auto Workers in September and October.

Demand for batteries is set to rise dramatically over the next decade as automakers increase electric-vehicle production. Competitors, like Volkswagen and Toyota, have also announced battery-focused joint ventures this year, and Tesla has operated a battery factory with Panasonic since 2016.

"It seems like, eventually, every automaker may have to do this," said David Whiston, an industrials analyst at Morningstar.

The joint venture will give GM a more stable battery supply

GM may have opted for a joint venture over merely continuing to buy batteries from LG Chem because it wanted to have more control over its battery supply, Whiston said. The automaker plans to release 20 electric vehicles by 2023, and doesn't want to face a situation where a battery shortage could force it to delay deliveries, he added. GM will have first access to the Ohio plant's output, which would not necessarily be the case if it were buying batteries from a factory operated by a supplier that worked with other automakers.

GM and LG Chem's factory also has the potential to achieve economies of scale and create cost savings for GM on what is the most expensive part of an electric vehicle, said Ed Kim, the vice president of industry analysis at AutoPacific. UBS estimated last year that batteries made by Panasonic at Tesla's Nevada factory were less expensive, per kilowatt-hour, than any competing batteries, including those made by LG Chem. GM and LG Chem on Thursday highlighted a plan to develop battery technology as another potential route to lower costs.

But there are cultural and economic risks

But the partnership is not without risks. There is always the chance that large companies will be culturally incompatible, and when each company has an equal stake in a partnership, decision-making can be difficult, said Jessica Caldwell, the executive director of insights at Edmunds.

There are also potential concerns that lie beyond GM and LG Chem's control. Many of GM's upcoming electric vehicles will be sold in China, and there are questions over whether batteries imported from the US would be subject to tariffs, Whiston said. And demand for electric vehicles may not increase as fast as GM expects, though the joint venture could serve as a hedge against the risk of low demand, Kim said, as GM could potentially sell the batteries it doesn't use to competitors.

Join the conversation about this story »

NOW WATCH: Apple just released iOS 13.2 with 60 new emoji and emoji variations. Here's how everyday people submit their own emoji.