South Korea's three battery makers are expected to post losses in the first quarter this year. Brokerage industry estimates show LG Energy Solution's revenue falling 6 percent from a year earlier to 5.89 trillion won, with an operating loss of 148.7 billion won. Samsung SDI is expected to report revenue of 3.49 trillion won, down 10 percent, and an operating loss of 268.6 billion won. SK On, SK Innovation's battery business, is estimated to post an operating loss of 310.8 billion won.

Weak conditions in automotive batteries and a transition period for shifting away from ESS capacity are cited as common factors. LG Energy Solution's ESS revenue share is expected to jump to 33 percent in 2026 from 12 percent in 2025. Samsung SDI is also reshuffling its production structure by converting EV lines to ESS. SK On has also left open the possibility of converting its Tennessee plant for ESS. A domestic production promotion tax credit, dubbed Korea's version of the IRA and expected to take shape in a July tax revision plan, is emerging as a variable for a profitability turnaround in the second half.

LG Energy Solution's automotive battery business faces delayed demand recovery centered on North America, while major customers' utilization rates remain low. The company is broadly seen as passing through a bottoming phase. It is defending overall results with demand for small batteries and an improved product mix. ESS has entered structural growth as AI data centers expand and renewable energy-linked demand increases, but profitability improvement is gradual due to initial cost burdens. Kyobo Securities forecast ESS revenue would expand to 2.73 trillion won in the fourth quarter from 1.74 trillion won in the first quarter, reaching 9.05 trillion won for the full year.

Samsung SDI's small-battery business is also moving through a trough, helped by a recovery in demand for power tools. With global infrastructure investment expanding and demand for data center construction rising, shipments are expected to increase in the second to fourth quarters. Demand weakness centered on European OEMs is persisting in medium and large batteries, and restructuring is under way, including downsizing and converting lines at its Hungary plant.

ESS, a key growth business, is being reshaped in its production structure through EV line conversions and an expansion in project-based orders. With a high-price structure that includes components beyond cells, its profitability base is more stable than automotive batteries. Kyobo Securities expects operating profit margin in the ESS segment to improve to 15 percent in the fourth quarter from 12 percent in the first quarter.

SK On remains in the middle of restructuring. Hana Securities said operating losses in SK Innovation's battery business are expected to narrow slightly to 858.4 billion won this year from 931.9 billion won last year, making a return to profit a distant prospect. SK Innovation also declared on a conference call a battery restructuring and a shift to becoming an LNG-centered energy business operator.

It has already sold a 49 percent stake in its Guangdong EUE unit through an equity swap with EVE Energy. It also dissolved its Ford joint venture and now solely holds 45 GWh in Tennessee, leaving open possibilities for supply to ESS and other automakers. The possibility of additional restructuring in Europe and the United States cannot be ruled out. Hana Securities analyzed that SK Innovation's market capitalization of 19 trillion won effectively reflects SK On at close to zero.

◆ July tax revision plan seen as watershed...direct cash refunds for loss-making firms

The biggest policy variable in the second half is the domestic production promotion tax credit. DS Investment & Securities said the finance ministry formalized the introduction of the credit to respond to the reshaping of global supply chains, in a March work report briefing to President Lee Jae-myung (이재명). The scheme has the same structure as the U.S. AMPC (45X) and provides a tax credit of 10 to 25 percent linked to domestic manufacturing costs. Differentiated credit rates by company size are under discussion, including 10 to 15 percent for large companies, 15 to 20 percent for mid-sized firms and 20 to 25 percent for small businesses.

Direct refunds and third-party transfer rights are expected to have a major impact on results. Even without corporate tax payable due to operating losses, companies can receive uncredited tax amounts back in cash or sell credit rights to other firms to secure liquidity. In financial statements, it serves as a cash-like subsidy that is added directly to operating profit, similar to the U.S. AMPC.

The existing Restriction of Special Taxation Act focused on CAPEX and R&D credits, making it effectively useless for loss-making firms. DS Investment & Securities cited a 2024 Korea Chamber of Commerce and Industry survey showing 50 percent of 100 advanced companies could not use up tax credits in the same year and carried them forward, while the carryforward ratio for large companies reached 91 percent.

Because the system is linked to domestic manufacturing costs, the higher the share of domestic production, the greater the benefit. DS Investment & Securities analyzed that applying a 15 percent credit on annual manufacturing costs of 1 trillion won would generate a cash inflow effect of 150 billion won each year. Whether per-item credit rates and refund caps are finalized in the July tax revision plan is expected to be a watershed for battery-sector investment sentiment in the second half.

All three companies are pushing to expand ESS lines in South Korea, making ESS an area where demand growth and policy benefits overlap. But whether tax credits will apply to exports is still under discussion, so the actual scale of benefits for the three battery makers, whose sales are mostly overseas, is expected to hinge on this variable.