Automakers rushing to develop battery-powered, software-driven vehicles to compete with Tesla face a new challenge: what technology to build themselves and what to keep buying from suppliers.
Becoming more vertically integrated by doing more in-house manufacturing represents a major shift for most global automakers, which for decades have relied on suppliers to produce critical parts and software, and manage sprawling manufacturing networks across low-wage countries.
But some established automakers are adopting drastic changes in their long-standing build-or-buy calculations. One factor is the success of Tesla’s electric vehicles, which rely on proprietary technology that the company develops and manufactures itself. Another is the financial harm caused by supply chain disruptions during the pandemic.
“The most important thing is that we’re integrating vertically. Henry Ford…was right,” Ford Motor Co CEO Jim Farley told a conference earlier this month. Farley’s reference was to company founder Henry Ford’s Rouge manufacturing complex in Dearborn, Michigan, which in the early 20th century absorbed iron ore and other raw materials at one end and churned out Model Ts. from the assembly line to another.
Farley said the company needed to move away from its earlier EV strategy of buying off-the-shelf components. Now, he said, Ford is aiming to control the supply chains “down to the mines” that produce battery materials.
Rivals such as Volkswagen AG, General Motors Co and Mercedes-Benz AG are pursuing similar strategies. Last year, Mercedes acquired British high-performance electric motor maker YASA and revamped a factory near Berlin to produce motors based on YASA technology. The German luxury carmaker opened a new plant in Alabama in March to build batteries for US-made electric vehicles, and said it would partner with Japanese battery maker Envision AESC to build cells battery in the United States.
“We are deepening the supply,” Mercedes-Benz chief executive Ola Kaellenius told reporters during a briefing in Alabama.
Automakers’ investments in mining, motors and batteries are moving away from decades of handing control of development and production to suppliers, who could produce steering controls, semiconductors and electronic components at on a larger scale and at a lower cost for several car manufacturers.
In the new world of electric vehicles, however, investors decided that Tesla’s approach of buying raw materials directly, manufacturing its own batteries and designing its own software was the winning strategy. Tesla’s market capitalization has climbed back above $1 trillion in recent weeks, surpassing that of Toyota Motor Corp, Volkswagen, GM and Ford combined.
“Major players have realized that EVs are the future, but they haven’t yet widely recognized that they need to up their game in terms of motors, transmissions, battery technologies, inverters and generators. electric powertrains,” said Peter Rawlinson, CEO of EV startup Lucid Group. Inc, said in an interview with Reuters. Rawlinson was previously vice president of vehicle engineering at Tesla.
Between the 1970s and the 2010s, the share of intellectual property held by automakers in their vehicles fell from 90% to 50%, according to Guidehouse Insights analyst Sam Abuelsamid.
This meant that many automakers lacked the in-house engineering expertise to develop their own electric vehicle platforms, powertrains and batteries when electric vehicle pioneer Tesla showed its vertically integrated cars were a hit with consumers.
“We design and build so many more cars than other OEMs who will largely go to the traditional supply base and [execute] as I call it, catalog engineering,” Tesla CEO Elon Musk said on a 2020 earnings call.
Tesla’s approach is costly, and the company has raised vehicle prices several times over the past few years. Although he promised to deliver a model that could start at around $25,000, Musk said earlier this year “we’re not currently working on the $25,000 car. At some point we will. But we have enough on our plate right now.”
There’s also a disconnect between what automakers say about their vertical integration strategies and what happens when engineers try to meet delivery deadlines for new vehicles, supplier industry executives said.
“There’s a lot of storytelling about insourcing and vertical integration, especially in areas like software,” Kevin Clark, chief executive of automotive supplier Aptiv Plc, told analysts in February. “Virtually every OEM we deal with struggles with software development.”
Xavier Mosquet, senior adviser at the Boston Consulting Group, said many manufacturers still prefer to purchase EV technology to avoid the cost and complexity of in-house manufacturing.
“There are a number of automakers who in some way want to continue buying and managing the final integration,” Mosquet said, adding that it would take several years to determine which approach is effective.
Many automakers are also hesitant to manufacture electric vehicles entirely in-house at a time when electric vehicle purchases are still only a fraction of total vehicle demand.
Today, only Tesla, EV startup Lucid Group Inc and China’s BYD Co Ltd manufacture their electric motors entirely in-house, according to IHS Markit, followed by Hyundai Motor Co and the Renault-Nissan-Mitsubishi alliance.
Other automakers, including the Mercedes-Benz Group, Ford and Porsche, use supplier electric motors for their current electric vehicle models.
“Electric powertrain can’t be bought off the shelf at a world-class level, it’s not a commodity,” Rawlinson said. “This is a technology race and the market doesn’t see it yet.”
Mercedes said it plans to manufacture electric motors, batteries and electronic components in-house from 2024. The company is also working to cut costs by securing raw materials directly from miners, the company told Reuters Chief Technology Officer Markus Schaefer.