DETROIT – The market for electric vehicles may be in its infancy, but two global technology providers are joining forces, convinced they need each other to meet growing demand for battery systems.

During last week’s media preview at the North American International Auto Show here, top executives from German automotive supplier Continental and South Korean battery producer SK Innovation sign a “heads of agreement” contract calling for the formation of the joint venture by this summer.

The discussions between the companies began about five months ago. With its lithium-ion battery expertise, SKI will focus on cell development, while Continental’s core contributions will be electronics and system integration.

SKI brings to the relationship a new battery plant soon to open in Seosan, South Korea, as part of a $1 billion investment.

The plant is flexible enough to serve multiple sectors, including consumer electronics, and large enough to supply at least 25,000 batteries and as many as 40,000 annually for electric vehicles, including the Hyundai BlueOn subcompact and Mercedes-Benz SLS AMG E-Cell sports car.

“You all know that countries are forced to introduce further regulations to reduce carbon emissions, which is especially true in big cities where we have to get that solution under control relatively quickly,” Continental CEO Elmar Degenhart tells journalists before he and SKI CEO Jay Koo sign the agreement.

Degenhart says long-range plans call for battery production facilities in other parts of the world to meet customer needs.

Once the agreement is finalized later this year, Degenhart says the JV should log its first sales of EV systems within two years. He says patience is a virtue that is vital to the JV’s success.

“This is an investment for the future, definitely,” he tells journalists. “We know we cannot expect making big profits four to five years from now.”

Without a dramatic recession, Degenhart says the auto industry can anticipate sales of about 100 million vehicles globally by 2020.

Of those 100 million, he expects 8% will be hybrid-electric vehicles and up to 4% will be all-electric vehicles. 

Looking further into the future, Degenhart says fourth-generation EVs should arrive in about 2024, at which time global vehicle sales should exceed 110 million units.

By about 2025, Degenhart predicts volumes for hybrids and EVs “could develop into the direction of 30% to 40%. Then we could talk about really high-volume demand for battery systems.”

Between now and then, falling battery costs will trigger greater demand for EVs and hybrids, Degenhart says. While most consumers say they will pay up to an extra $2,000 for zero-emission driving, he says the current premium of $13,000 remains prohibitive.

“We have to introduce second-, third-, fourth-generation types of technology to bring costs down in a stepped approach to, let’s say, below $5,000 as the premium,” he says. “If we have reached that point, then consumers will have much higher acceptance for this technology.”

He says the $5,000 cost premium could be attainable in 2023.

Continental is not the first German mega-supplier to form a battery JV. Bosch in 2008 paired up with Samsung SDI to launch the SB LiMotive JV, which supplies BMW ActiveE electric car. Future EVs from BMW and Fiat also will receive SB LiMotive batteries.

While SB LiMotive is a 50/50 JV, Continental’s new partnership will have a different structure.

SK Innovation will be the majority partner, with a 51% stake, while Continental will hold the remaining 49%. Degenhart says he has no concerns about Continental being the minority partner.

“Most important in a partnership is trust. If there is no trust, the corporation will not be successful,” he says. “From the very first second of our discussions with SKI, we were in complete agreement about this relationship.”

Although the new JV will focus on lithium-ion battery chemistry, Degenhart says it will be agile enough to adopt new and better technologies. “For sure, this will change over time,” he says.

Even without its new partner, Continental has racked up some impressive wins in the EV sector.

Last year, the supplier launched its first high-volume electric-drive systems for the Renault Fluence and Kangoo EVs in Europe. Renault has said it plans to sell at least 70,000 of the EVs this year.

Continental’s innovative package for the vehicles consists of an externally excited synchronous motor that requires no rare-earth materials, which helps keep cost down.

Based in Hannover, Continental spends some E170 million ($216 million) annually in research, development and industrialization of hybrid and EV technology.

But several rivals also are investing heavily in EV battery development, including LG Chem/Compact Power, A123 Systems and Panasonic. A battery JV between Johnson Controls and Saft has been terminated.

Degenhart says the Continental-SK pair-up is positioned to weather the consolidation that is expected to eliminate small players from the market.

“If we cannot provide our customers with the technological advantage over our major competitors, why should they consider a new player in the market?” he says. “For sure, our target is to be one of the top three players in batteries.”

tmurphy@wardsauto.com