LG Chem of South Korea FDI in Bolivia’s Lithium Industry

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L i $ LG Chem of South Korea FDI in LG Chem of South Korea FDI in Bolivia’s Lithium Industry Bolivia’s Lithium Industry LG Chem Global Strategy Team Scott He Harvey Hong Arash Parham Kenneth Turner

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LG Chem of South Korea FDI in Bolivia’s Lithium Industry. LG Chem Global Strategy Team Scott He Harvey Hong Arash Parham Kenneth Turner. Executive Outline. LG Chem Company Overview & Global Strategy Lithium Opportunity Risks & Challenges Proposed FDI Project Go/No Go Decision. - PowerPoint PPT Presentation

Transcript of LG Chem of South Korea FDI in Bolivia’s Lithium Industry

Page 1: LG Chem of South Korea FDI in Bolivia’s Lithium Industry

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LG Chem of South Korea FDI in Bolivia’s Lithium IndustryLG Chem of South Korea FDI in Bolivia’s Lithium Industry

LG Chem Global Strategy Team

Scott HeHarvey Hong

Arash ParhamKenneth Turner

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Executive OutlineExecutive Outline

LG Chem Company Overview & Global Strategy Lithium Opportunity Risks & Challenges Proposed FDI Project Go/No Go Decision

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The LG Chem CompanyThe LG Chem Company

Company Highlights• Former LG Group Chem Division• Publicly traded (Korean Stock Exch.)• 2 primary segments

– IEM and Petrochemicals• 13,000 employees worldwide• 2008 Net Income KRW 1 trillion • Key recent partnerships

Lithium Battery supplier for:- GM (fuel cells)- Hyundai-Kia- Volvo

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Global StrategyGlobal Strategy

• Vertical integration• Hedging against future price increase of lithium carbonate

“For core business reinforcement, we need to achieve cost leadership, product leadership and market leadership. In difficult times with depressed demand and a global glut, our first and foremost challenge is to ensure cost leadership by reducing costs. By doing so, we can provide better products at cheaper prices than our competitors” - LG Chem CEO Kim Bahn-suk

Lithium Battery Value Chain

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Opportunity – Supply & DemandOpportunity – Supply & DemandLithium Industry

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Opportunity – Supply & DemandOpportunity – Supply & DemandLithium Battery Industry

• Lithium-Ion Battery Facts– Now, 84% of portable devices use lithium-ion batteries– Predicted, 60% of all electric vehicles in 10 years will operate on lithium-ion batteries (superior performance)

• LG Chem Top Competitors in Lithium Battery Industry– Sanyo (Japan)– BYD (China)– Johnson Controls-Saft Joint Venture (US-France)– Enerdel (US)– A123 (US)– Electrovaya (Canada– China BAK Battery (China)

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Risks & ChallengesRisks & Challenges

• Political Risk- Slow transition to democracy- Pro-nationalism v. Pro-privatization- Expropriation- Poor Democracy (<$10,000 PPP GDP per capita)

• Political Risk Mitigation- Political Risk Insurance: (KEIC) Korea Export Insurance Corporation

Source: ONDD 2010.

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• Past Economic Stress– Latin Amer. Debt Crisis 1980’s– Hyperinflation (nearly 60,000%)– Foreign exchange fluctuations– Recovery via economic austerity

• Current Position– 100% IMF Debt relief in 2005– Trade Surplus– Low sovereign debt/GDP– Current Account & Fiscal Surplus– Fitch currency rating “B”– Key risks remain – Central Bank

Risks & ChallengesRisks & Challenges (cont.)

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Proposed FDI ProjectProposed FDI Project

• Resource seeking greenfield JV with COMIBOL

• 40% share in $350M Lithium processing plant

• Positive NPV over 15-year horizon, highly dependent on the market price of lithium carbonate

NPV Analysis

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Low Lithium Carbonate Price Projection High Lithium Carbonate Price Projection

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Go/No Go DecisionGo/No Go Decision

• NO GOo Political Environment

Erratic behavior of current government Local population is anti-foreign investment Strict regulatory environment

(maximum 40% share, limited management control) Unreliable source of lithium due to uncertain political environment

o Rate of Return (Risk vs. Reward) Capital intensive project with cost overrun risks

o Assessment score below target (<75)

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Questions?Questions?

THANK YOU

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Mode of Entry FDI-JV Recommendation NO GO!

Minimum Acceptable Score 75 Earned Score 59

Consideration Categories Relative Strength

Point(10 being the

ideal condition)

Category Weight

Category Point

FinancialCapital Requirements High 5Profit Potential Moderate 8Financial Risk Moderate 6

Category Average 6.3 4 25

Strategic PositioningAccess to Scarce Recourses High 10Vertical Integration High 9Entry to New Markets High 8

Category Average 9.0 4 36

ManagerialManagement Requirement High 3Operational Control Low 2Speed of Entry High 5

Category Average 3.3 3 10

MarketEffective Customer Demand High 9CompetitorsInvestment Foreign High 2

Domestic Low 10Product Foreign Moderate 7

Domestic Low 10Export Platform High 10Easy Access to International Markets Low 4Growth Prospects High 8

Category Average 7.5 4 30

TechnologyTechnology Risk High 7Product and Process Improvements Moderate 6

Category Average 6.5 2 13

Regulatory/Political

Currency Risk Moderate 4

Protection of Intellectual Property Low 2

Expropriation Risk High 1

Agreements Enforced Low 3

Corruption High 2

Local Reaction High 2

Environmental Liability High 5

Stability of the Government Moderate 5

Category Average 3.0 5 15

Maximum Possible Points 220 129 Earned Points

Proposed FDI Project Score 59 / 100

Local population is highly suspicious of foreign investors

There is a potential for adverse environmental impacts however the laws to protect the environment are not heavily enforced

With $4600 PPP per capita income, the Bolivian democracy may not survive in the long run, however, president Morales has been able to consolidate his power in the past years and enjoys wide public support

Bolivia doesn't have a good record regarding protecting foreign assets

In the past 5 years Bolivia has nationalized many industries

Bolivian government has unilaterally broken foreign investment agreements in the past

Because of the high poverty levels and lack of transparency the government officials are susceptible to corruption

Expected growth in lithium ion battery market

The lithium ion battery is not the only technology, other technologies may emerge

Processing of Bolivia's lithium deposits is less efficient that deposits in Chile

Bolivian economies dependence on commodity exports make the currency susceptible to commodity price changes

Other countries produce lithium carbonate and can impact the supply

All the lithium deposits are owned by the Bolivian government

The majority of the products will be exported

Bolivia lacks direct access to shipping lines and the roads need significant improvements

The planning and design for the project needs to start immediately

Lithium is being used in many industries

Other international companies are submitting investment proposals to the Bolivian government

No domestic entities competing for the investment

Consistent with LG Chem's vertical integration strategy

Improving LG Chem's position in South America

Deep involvement of management anticipated due to complex environment

Minority stake limits the operational decision making power

Comments

Capital intensive project

Highly dependent on lithium carbonate price

Securing a reliable source of lithium carbonate