LG Energy Solution Faces Tariff-Driven Headwinds: Navigating a Volatile Market for Automakers

LG Energy Solution (LGES), a key supplier to automakers including Tesla, General Motors, and Hyundai, has issued a stark warning: its Q2 2025 revenue is expected to decline from Q1 levels, driven by tariff volatility and cautious spending by clients. The company’s CFO, Lee Chang-sil, noted that automakers producing outside the U.S. and supplying to its market are “very carefully checking their production strategies” amid regulatory uncertainty. This caution has led to reduced battery procurement volumes, underscoring a broader industry-wide struggle to adapt to shifting trade policies.

Tariff Volatility and Automaker Caution

The U.S. tariff landscape has become a critical challenge for global automakers. New executive orders and ongoing trade disputes have introduced uncertainty, prompting manufacturers to delay investments and tighten inventory management. For LGES, this translates to weaker demand for EV batteries—a segment now overshadowed by the rapid growth of energy storage systems (ESS).

LGES’s Q1 2025 results provide a glimpse into these dynamics. While operating profit surged 138% year-on-year to 375 billion won ($262 million), this gain relied heavily on a 458 billion won tax credit under the Inflation Reduction Act (IRA). Excluding this credit, LGES would have posted an 83 billion won loss. The company also cited a 2.9% quarterly revenue drop to 6.3 trillion won, reflecting slowing EV demand in key markets.

Strategic Shifts to Mitigate Risk

To navigate these headwinds, LGES is recalibrating its strategy:
1. Production Reprioritization: Construction of its Arizona ESS plant has been paused, with resources redirected to its Michigan facility to accelerate lithium-iron-phosphate (LFP) battery production—a move that aligns with IRA compliance and reduces reliance on Chinese imports.
2. CapEx Reduction: Capital expenditures will drop by 30% in 2025 compared to 2024, focusing on “indispensable investments” such as optimizing existing facilities and advancing dry electrode technology.
3. ESS Growth Focus: ESS revenue is being prioritized as automakers and utilities seek energy storage solutions. New contracts, including a 10GWh order for 46-series batteries from a North American automaker and a 4GWh residential ESS deal with Delta Electronics, highlight this shift.

Financial and Operational Realities

LGES’s Q1 performance masks underlying vulnerabilities. The 8.5% depreciation of the South Korean won against the U.S. dollar boosted revenue conversion, but automakers’ inventory conservatism—such as GM’s 94% year-on-year rise in U.S. EV sales—has created inconsistent demand patterns. Meanwhile, GM’s retraction of its 2025 sales forecast due to tariff uncertainty underscores the industry’s fragility.

LGES also faces headwinds from falling battery prices and rising competition. Chinese competitors, temporarily blocked by U.S. tariffs, could return with lower-cost solutions post-2026. To counter this, LGES is advancing partnerships with North American material suppliers and investing in lithium mining ventures to secure IRA-compliant raw materials.

Outlook: Balancing Risk and Growth

Despite near-term challenges, LGES remains optimistic about 2025. The company forecasts 5–10% annual revenue growth, driven by IRA-eligible U.S. production (45–50GWh capacity) and new ESS contracts. Its decision to pause Arizona construction and repurpose Michigan capacity aligns with a broader push to decouple from China’s supply chain.

The company’s cost-cutting measures—such as reducing CapEx by 20–30%—will be critical to sustaining margins. Additionally, its ESS expansion, bolstered by grid-scale deals like Poland’s PGE contract, positions it to capitalize on rising energy storage demand.

Conclusion: A Resilient Play in a Turbulent Market

LG Energy Solution’s Q2 decline reflects the precarious state of global automakers amid tariff volatility. Yet its strategic moves—localizing production, prioritizing ESS, and cutting costs—suggest a path to stability. With IRA-eligible capacity growing and ESS demand surging, LGES is well-positioned to weather regulatory headwinds.

However, risks remain. A 4.4% intra-day share price drop following its Q2 guidance highlights investor skepticism about prolonged automaker caution. Success hinges on the company’s ability to execute its shift to ESS and maintain IRA compliance while competing with low-cost rivals.

For investors, LGES offers a high-risk, high-reward bet on EV and energy storage markets. While near-term volatility is inevitable, its 5–10% revenue growth target—and its role as a critical supplier to GM and Tesla—makes it a key player to watch in the coming years.