Tesla suppliers: L&F’s $2.9bn order is a down payment on resilience

Tesla has just pushed a small, low-profile South Korean company into the spotlight. The US electric-car maker signed a $2.9bn order for L&F to supply battery materials through into 2025. The deal reflects US pressure for its companies to reduce reliance on China, and Tesla’s broader diversification of suppliers

Electric-car makers depend heavily on Chinese companies for everything from raw materials to batteries. Suppliers of battery materials Zhejiang Huayou Cobalt and CNGR Advanced Material are among fast-growing businesses that have benefited from surging electric car sales and rising prices for battery materials. 

L&F will provide cathode materials to Tesla and its affiliates for its automotive, energy generation and storage sectors. Electric-car makers. want to lock in supplies at predictable prices. That scramble has intensified as a result of President Biden’s Inflation Reduction Act. This includes a consumer tax credit for buyers of new electric cars if the final assembly location was in the US and production did not involve “foreign entities of concern”.

Even with this backdrop L&F is a surprising choice. The company is among smaller makers of cathode materials in South Korea. Its market value of $7bn is less than a tenth that of local peers such as LG Energy Solution. The latter already has battery supply agreements with Tesla. Another peer, Posco Chemical operates the world’s largest cathode material plant.

For L&F, the deal will help cover rising labour costs and new production lines. Shares have gained about 50 per cent since a January low. But they still only trade at 30 times forward earnings, less than half local peers. 

For Tesla, L&F contributes to operational resilience. The US company has adeptly hedged risks from costly supply chain disruptions. It has escaped the worst of the chip shortage over the past two years. It has secured a large range of suppliers across continents and within countries, diversifying supply chains early on. It has set an example other big manufacturers should follow.

The Lex team is interested in hearing more from readers. Please tell us what you think of Tesla’s supply diversification strategy in the comments section below.