Tennessee Plant Will Operate Independently by SK on After Reorganization, Aiming to Cut Debt, Lower Fixed Costs Amid Slowing EV Demand
SK on's Tennessee plant in the U.S.
SK on has completed the reorganization of BlueOval SK, its US battery joint venture with Ford, and will operate the Tennessee plant independently. Although the companies embarked on a large-scale joint investment to target the North American electric vehicle market, they have shifted to independent operating systems amid slowing electric vehicle demand and expanding cost burdens.
SK on announced on May 21 that it has converted the existing BlueOval SK Tennessee plant into ‘SK on Tennessee’ and entered a sole operation system.
Under this reorganization, SK on will solely own and operate the Tennessee plant, while Ford will take charge of the two Kentucky plants previously under BlueOval SK.
BlueOval SK is a joint venture established by SK on and Ford to produce electric vehicle batteries in the US. The two companies pursued a large-scale investment in 2022 to build battery plants in the US, but entered into a reorganization of the joint venture structure as the growth rate of the electric vehicle market slowed more than expected and Ford’s electrification strategy was adjusted.
The core of this reorganization lies in easing financial burdens rather than expanding production bases. SK on expects that the termination of the joint venture system will reduce its borrowing burden by about 5.4 trillion won (approximately $3.6 billion). Considering the high interest rate environment, an interest cost reduction effect of about $180 million, is expected annually.
The fixed cost burden will also decrease. SK on anticipates a reduction in the annual depreciation burden of about 330 billion won related to the Kentucky plants. Due to the nature of the battery industry, where large-scale facility investments are inevitable, depreciation and financial costs of plants that have not sufficiently increased their utilization rates act as a direct burden on profitability.
For SK on, it can expect the effect of shedding burdensome assets while maintaining its North American production base. By operating the Tennessee plant independently, autonomy in customer response and production operations will increase, while the decision-making burden that occurred under the joint venture structure will simultaneously decrease.
This decision also aligns with the trend of the global battery industry shifting from an aggressive expansion competition to a profitability-centric strategy. Prompted by the US Inflation Reduction Act (IRA), domestic battery companies have rapidly increased their North American production capacity, but factory utilization rates and fixed cost burdens have recently emerged as new variables as slowing electric vehicle demand and investment pace adjustments by automakers overlap. Ford is also known to be changing the utilization plan for the Kentucky plants in the process of readjusting its electric vehicle business strategy.
Through this reorganization, SK on is expected to accelerate the improvement of its financial health. For SK on, improving profitability has been considered a major task due to the burden of large-scale overseas investments and initial operation costs. Rather than a measure to completely downsize in the North American market, the independent operation of the Tennessee plant has a strong characteristic of lowering profit and loss burdens through selection and concentration, and securing the capacity to respond to future demand changes.
As the Tennessee plant has launched as an independent entity, securing stable volumes and managing utilization rates in the future are also expected to remain as homework. If the recovery speed of the North American electric vehicle market is slower than expected, it may take time to boost profitability even under an independent operating system.
An SK on official said, “Through this reorganization of the joint venture system, we have strengthened our financial structure and increased the efficiency of production operations in the US,” adding, “Based on the newly secured independent production base, we will actively respond to changes in the North American market.”
Michael Herh
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