Explained: How the billion-dollar auto industry is changing, courtesy of Covid-19


The automotive industry, which encompasses thousands of companies, millions of workers and billions in sunk costs, is undergoing a change unlike any other in a century. In addition to switching from ordinary internal combustion engines to electric vehiclesit’s also going through another era shift while trying to tackle global supply chain issues.

After outsourcing much of the manufacturing process over the past half-century to focus on design, supplier management and parts assembly, major automotive companies now want greater control over their value chain – from the metals that go into EV batteries to the software in those EVs. run and the stores in which they are sold. In turn, what they want to do is turn their EV arms into tech start-ups.

However, in order to understand how automakers are moving from outsourcing to in-house the bulk of production, we must first understand what catapulted this huge, and of course costly, shift.

How the Supply Chain Crisis Unfolded

Ships stuck at sea, overwhelmed warehouses, driverless trucks: the highly complex and interconnected global supply chain was turned upside down when the Covid-19 pandemic hit. The turmoil has revealed how the need to ship surgical masks to West Africa from China can have a cascading effect on Ford’s ability to fit backup cameras to its cars at factories in Ohio and to delay the arrival of Amazon Prime orders in Florida.

For every car or truck that does not roll off an assembly line in Detroit, Stuttgart, Shanghai or Manesar, jobs are at risk. It may be miners digging ore for steel in Finland, laborers molding tires in Thailand, or Maruti Suzuki employees in India installing dashboards – the livelihoods of billions of people are at stake. the mercy of supply shortages and shipping bottlenecks that have forced factories to cut production.

The automotive industry accounts for around 3% of global economic output, and in manufacturing countries such as Germany, Mexico, Japan and South Korea, the percentage is much higher. The shockwaves of the semiconductor crisis, which has forced virtually every automaker to eliminate shifts or temporarily close assembly lines, could be strong enough to push some countries into recession. In Japan, home of Toyota and Nissan, parts shortages caused exports to fall 46% in September 2021 from a year earlier — a powerful demonstration of the auto industry’s importance to the economy.

Industry experts had said automakers were struggling to get all kinds of parts and raw materials for a variety of reasons, including Covid-related factory closures by suppliers, logistical issues involving shortages of ships, shipping containers and truck drivers, and the difficulty some suppliers have filling jobs. Industry consultant AlixPartners says supply chain issues have caused automakers to build 7.7 million fewer vehicles globally than they would if they could get all the parts and raw materials they need.

Is “Teslafication” the solution?

As the shortage of semiconductors is taking its toll and as automakers go the electric route and reshape their supply chains, doing everything under one roof seems like the way to go. And it is here that the term ‘Teslafication’ was born.

Tesla’s industrial system is to internalize all aspects of production, and therefore all profits. Elon Musk claimed his company was “absurdly vertically integrated” by any standard, not just that of the auto industry. And the biggest automakers want to emulate what Tesla, the undisputed world champion in electric vehicles, has done.

So what is Tesla doing? The electric vehicle giant recently struck deals with lithium miners and graphite suppliers, and in May 2022 confirmed a deal with Vale, a Brazilian mining giant, to buy nickel. The plan is to acquire most of its lithium, more than half of its cobalt and about a third of its nickel directly from nine mining companies. It will use these minerals in its giga-factories, the first of which began manufacturing batteries in 2017 in Nevada in partnership with Japan’s Panasonic. It plans to manufacture more cells itself at its three other gigafactories around the world. Tesla also removed other powertrain components in-house. It manufactures its own motors and much of its own electronics, giving it more control over costs as well as technology.

To add to that, Tesla also designs its own semiconductors, a move that has helped it weather the global chip shortage better than its competitors. Tesla software engineers also created a centralized computing architecture to run on these chips, ensuring seamless integration with the hardware. Elon Musk even ditched the dealership-based sales model, instead opening his own Tesla stores.

And what is the result? A whopping $724 billion in market value, almost as much as the big nine automakers combined.

What are other automakers doing?

The great players in the game do what has been an age-old practice – hounding a rival who tries something that works.

According to the bank UBS, “integration represents a strong competitive advantage in an environment of structurally tight supply chains”. For years, automakers have outsourced to major suppliers such as Bosch, Continental and Denso to focus on supply chain management, parts integration, design and marketing. Suppliers sold similar components to many customers using a scale to keep prices low. This freed up capital for automakers, but sidelined technological innovation. Mercedes Benz estimates its value added split at 70-30 in favor of suppliers.

However, hit by the global supply chain crisis, they want to do what Tesla is doing, which is to bring that ratio down to 50-50 (the figure is according to an estimate by Jefferies, an investment bank). investment) increasing in favor of internal .

BMW said in 2021 it had invested $334 million in an Argentinian lithium project. Last year, Stellantis and Renault each signed deals with Vulcan Energy Resources, and GM revealed a “multi-million dollar investment” in Controlled Thermal Resources, in each case for lithium. In April, Ford signed a deal with Lake Resources for the same ore, while Stellantis and Mercedes struck a deal with Umicore, a Belgian chemicals giant, to supply cathode materials to ACC, the two automakers’ battery joint venture. automobiles. A month earlier, BYD, a Chinese company more similar to Tesla, announced a nearly $500 million investment in a Chinese lithium miner. It is said that he bought six mines in Africa.

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Efforts to mimic Tesla’s battery gigafactories are also beginning. Volkswagen is building battery manufacturing capacity in-house and has earmarked $2.1 billion for its German plant, and says it will build six battery factories in Europe by 2030. Ford and SK Innovations of South Korea will pay $7 billion and $4.4 billion, respectively, for three joint gigafactories in America. Last year, GM unveiled a $2.3 billion investment for a battery plant in Tennessee built with LG, another South Korean company.

The purchase of off-the-shelf electric motors is also on the decline. Hyundai and the Renault-Nissan-Mitsubishi alliance are rather going it alone. BMW, Ford, GM, Mercedes and Volkswagen are planning to make more engines in their own factories. The 7.7 million cars lost in production last year due to global semiconductor shortages have prompted the industry to forge closer ties with chip designers such as Qualcomm and Nvidia, who would once have sold chips to companies further down the automaker’s supply chain.

Is there a precedent for this?

What Tesla is doing now, Henry Ford did decades ago. He often sourced raw materials, such as rubber for tires and steel for frames, from the plantations and blast furnaces owned by his company. Its River Rouge plant in Detroit was fueled by coal from the Ford mines. He was engrossed in stockpiling enough materials to ensure his assembly lines could keep running without debilitating shortages.

With sourcing insourced rather than outsourced this would certainly mean losses for suppliers and more headaches for car bosses and even though this change will provoke backlash from governments teslafication seems to be the way forward.

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