Automakers racing to develop battery-powered, software-driven vehicles to compete with Tesla are confronting a new challenge: what technology to build themselves, and what to keep buying from suppliers, a Reuters article noted.
The news agency said becoming more vertically integrated by doing more manufacturing in-house represents a major shift for most global automakers, who have relied for decades on suppliers to produce critical parts and software, and manage sprawling manufacturing networks in low-wage countries.
However, Reuters said, some established automakers are embracing drastic changes to their longstanding build-or-buy calculations. One factor is the success of Tesla’s electric vehicles, which rely on proprietary technology the company develops and manufactures itself. Another is the financial damage done by supply-chain breakdowns experienced during the COVID-19 pandemic which began early in 2020.
“The most important thing is we vertically integrate. Henry Ford… was right,” Ford CEO, Jim Farley, said at a conference earlier this month, Reuters noted. Farley’s reference was to company founder Henry Ford’s Rouge manufacturing complex in Dearborn, Michigan, which in the early 20th century took in iron ore and other raw materials at one end, and despatched Model Ts off the assembly line at the other.
Ford’s Dagenham plant, opened in 1931 east of London, England, to replace an older plant in Manchester, was much the same: built right alongside the River Thames, it had its own port where raw materials were unloaded to emerge eventually as part of finished cars.
Reuters said Tesla rivals such as Volkswagen, General Motors and Mercedes-Benz, are now pursuing similar sourcing strategies as the EV maker. Mercedes last year acquired British high-performance electric motor manufacturer YASA, and has retooled a factory near Berlin to produce motors based on YASA technology. The automaker in March opened a new factory in Alabama to build battery packs for US-made electric vehicles, and said it would partner with Japanese battery maker Envision AESC to build battery cells in the US.
“We are going deep into sourcing,” Mercedes-Benz chief executive Ola Kaellenius told Reuters during a briefing in Alabama.
The investments by automakers in mines, motors and batteries were a departure from decades of handing control over development and production to suppliers, who could produce steering controls, semiconductors and electronic components at greater scale and lower cost for multiple vehicle manufacturers, the news agency said.
Now, in the new world of EVs, investors have decided Tesla’s approach of buying raw materials directly, building its own batteries and engineering its own software is the winning strategy. Reuters noted Tesla’s market capitalisation has soared back above $1 trillion in recent weeks, outweighing that of Toyota Motor, Volkswagen, GM and Ford combined.
“Major players have realised electric vehicles are the future, but they have yet to widely recognise that they have to up their game in terms of motors, transmissions, battery technologies, inverters and electric powertrains,” Peter Rawlinson, CEO of EV startup Lucid Group, said in an interview with Reuters which noted Rawlinson previously was Tesla’s VP of vehicle engineering.
Between the 1970s and the 2010s, the share of automaker-owned intellectual property in their vehicles decreased from 90% to 50%, Guidehouse Insights analyst Sam Abuelsamid told Reuters. That meant many automakers lacked the in-house engineering expertise to develop their own electric vehicle platforms, powertrains and battery packs when EV pioneer Tesla showed its vertically integrated cars were a hit with consumers.
“We’re designing and building so much more of the car than other OEMs who will largely go to the traditional supply base and [execute] like I call it, catalogue engineering,” Tesla CEO Elon Musk reportedly said during a 2020 earnings call.
Reuters noted Tesla’s approach was costly and the company had raised vehicle prices repeatedly in the last few years. Despite promising to deliver a model that could start at about US$25,000, Musk earlier this year reportedly said: “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 was also a gap between what automakers say about their vertical integration strategies and what happens as engineers try to meet deadlines to deliver new vehicles, supplier industry executives told the news agency.
“There’s a lot of narrative about in-sourcing and vertically integrating, especially in areas like software,” Kevin Clark, chief executive of Aptiv reportedly told analysts in February. “Virtually all the OEMs that we are doing business with are struggling with software development.”
Xavier Mosquet, a senior adviser at Boston Consulting Group, told Reuters many manufacturers still prefer to buy EV technology to avoid the cost and complexity of manufacturing in-house.
“There are a number of automakers who in a way want to continue buying and manage the final integration,” Mosquet said, adding that it would take several years to determine which approach is successful.
Many automakers were also hesitant to completely in-source EV manufacturing at a time when EV purchases still make up only a fraction of total vehicle demand.