(Bloomberg) — LG Corp. companies that supply batteries to General Motors Co. set aside 1.1 trillion won ($918 million) to cover costs related to the recall of Chevrolet Bolt electric vehicles, reassuring investors concerned about a rift between the South Korean conglomerate and a major carmaking customer.
LG Chem Ltd.’s battery unit LG Energy Solution said Tuesday it will book 620 billion won in charges after fires led GM to recall more than 100,000 Bolts. LG Electronics Inc., which packaged LG Energy’s cells into modules, separately booked 480 billion won in costs as it released third-quarter earnings that missed analysts’ estimates.
Including the initial costs reflected in their second-quarter earnings, the LG group companies have now booked a total of 1.4 trillion won in recall-related provisions. LG Energy said it will now resume the process of pursuing an initial public offering and strengthen its partnership with GM. The automaker estimated in August that replacing batteries would cost about $1 billion and that it planned to seek reimbursement from LG.
“LG’s swift agreement with GM on recalling Bolt electric vehicles provides clarity on the profit impact and the solidity of its partnership with GM,” Horace Chan, a Bloomberg Intelligence energy analyst, said in a note. “LG needs to ensure there are no more large-scale defects in the future, as investors’ patience has been stretched by a series of recalls over the past year.”
Shares of LG Chem closed up 4.2% in Seoul trading, while LG Electronics advanced 3.3%. LG Chem spun off LG Energy last year, and the company submitted an IPO application to the Korean bourse for preliminary review in June. It said at the time it aimed to make its debut later this year.
LG Energy “has smoothly resolved the recall issue with GM, an important client under a strategic partnership for more than 10 years,” the Korean company said in a statement.
There’s been speculation the battery-fire problem might have been caused during the packaging of the cells into modules, which LG Electronics handled, rather than the production of cells by LG Energy, according to a note from Samsung Securities Co.
Last month, GM said it’s found a fix to avoid battery fires in the Chevrolet Bolt EV, and that manufacturing processes for lithium-ion batteries in the model and the larger Bolt EUV have been improved. GM linked the fires to two defects: folded separators and torn anode tabs.
Some analysts shrugged off the additional charges, saying LG Energy still has a strong reputation.
“I don’t care much about the fires for now,” said Lee Seung Hoon, head of equities at DB Asset Management Co. “The defective batteries were early models, and they might have had some flaws at the time. LG Energy has solid brand power, so it’s not easy for GM to abandon a major battery maker.”
(Updates with Bloomberg Intelligence analyst’s comment in the fourth paragraph.)
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