Car makers pushed to become miners and coders in EV shift

Major manufacturers are racing to secure deals with mining firms for battery materials

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6 mins read

16 December 2022

Car makers have been able to rely on an established supply chain for decades, but as we move into the EV era, they're having to rediscover their pioneering roots to do much more of the grunt work themselves.

Electric reinvention has given Ford déjÃ vu as it tries to lock in the battery materials it needs to prepare for its gradual shift away from combustion engines.

“It goes all the way back to Ford's obsession over vertical integration with the Model T,” Doug Field, chief product developer at the company’s Model E division, told a conference run by the bank Bernstein. “It goes back to owning the fields that fed the sheep that made the wool and stuffed the seats.”

The pressure to vertically integrate – to do more yourself – is coming from the need to lock down the supply of in-demand raw materials, as well as forge technology partnerships and try to maintain employment levels amid the shift to EVs, which are much less labour intensive to manufacture.

However, the new vertical integration is very different from the old. For one thing, most car makers want to avoid getting too bogged down and spending too much cash in areas they aren’t comfortable operating in.

The rush to secure the minerals to make batteries is a case in point. “The next bottleneck will be battery materials,” Field said.

But while Ford founder Henry Ford was happy to buy a rubber plantation to supply tyre factories (Fordlandia in Brazil, built to bypass the British monopoly on rubber) and grow soybeans to turn into plastics, modern car companies have so far baulked at the idea of actually owning mines.

Even Tesla, the modern era’s Ford equivalent as far as vertical integration goes, hasn’t committed to digging its cars out of the ground, so to speak.

“We don’t particularly integrate just for the hell of integrating,” CEO Elon Musk said in answer to the mining question on the company’s third-quarter results call in October.

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“If there was a great supplier who's better than us or we think actively is very good, then we would outsource in that case. But if we have to go mine, we will mine.”

Instead, what Tesla and others such as BMW, Ford, Mercedes-Benz, Stellantis and Volkswagen are doing is going right through the supplier tiers to strike agreements with the mining companies for battery materials.

For example, Tesla has 16 deals, according to a recent Financial Times investigation, Ford has eight and BMW has seven. Most are so-called off-take deals, where they promise to buy a certain amount of lithium, nickel or whatever they need in return for investment or help raising funds.

This year’s Mining World conference, held in London at the end of November, was full of buyers from the automotive industry. “I’ve never seen that before,” said Jeremy Wrathall, head of UK mining start-up Cornish Lithium.

BMW reckons its agreements have already helped keep material costs down amid a spike in lithium prices.

“We're directly sourcing the critical raw materials, such as cobalt and lithium,” BMW chief financial officer Nicolas Peter said on the company’s third-quarter results call. “This is why you don't see this significant increase [of raw material prices] in our results.”

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Those without that ability have suffered.

“We look at 2022, specifically, the cost of the battery skyrocketed,” William Li, CEO of Chinese premium EV maker Nio, said on its most recent results call in November. He cited a recent increase in the cost of lithium carbonate, a key ingredient: “This has significantly affected the battery cost, and for us this is actually out of our control, and it's very difficult for us to predict.”

Li acknowledged that another Chinese car company was much less badly affected. “BYD is an exception, because they have the vertical integration of the batteries and other technologies,” he said.

BYD’s desire to control the whole EV value chain, including batteries, motors and electronic controls even extends to buying its own vehicle-carrying ships – a smart move in a time when shipping is constrained and becoming costly as a result.

Like BYD, Tesla is another manufacturer that's keen to become involved in areas traditionally left to suppliers. The cost of components from tier-one suppliers (those that supply direct to the car maker) are just 21% of the total Model 3’s bill of materials, compared with 71% for the Volkswagen ID 3, the bank UBS has calculated.

In 2020, Musk himself spoke dismissively of the “catalogue engineering” practised by his rivals, whereby most components are bought in. “It’s not very adventurous and products end up looking the same,” he said.

Tesla has reaped the advantages, for example in more efficient use of the battery, but the rest are catching up fast.

We’ve written before about the desire of car companies to forge partnerships with chipmakers like Qualcomm and Nvidia to help power their goal of launching “software-defined” cars with increasingly smart autonomous capabilities.

As with mining for battery materials, the goal with software is to leverage the knowhow of experts, sign them up as partners rather than suppliers and hopefully keep costs lower while at the same time benefiting in ways not possible in the old tier relationship.

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Renault, for example, has brought in Qualcomm to work on a future software operating system based on Google’s Android Automotive, and Qualcomm has invested in Renault’s Ampere EV arm.

“We're the first to do that. We share the cost and continuous benefit from state-of-the-art technology,” Renault CEO Luca de Meo said at the company’s capital markets day in November.

He claimed the partnership cut development costs by 25%, reduced development time from more than five years to below four and “reduced execution risk”.

Execution risk while developing software is something Volkswagen Group knows all about, with a string of failures under its belt, but the company remains committed to keeping it in-house – albeit developed with the help of partners.

“It was the completely right decision to go for our own operating system for the Volkswagen Group,” new CEO Oliver Blume said on his first quarterly results call for the company.

That was backed up by his CFO, Arno Antlitz, who said; “We really think having our own software in our own hands is a clear competitive advantage."

The same goes for batteries, Antlitz said on the same call. The company’s Powerco battery division will be “a key differentiator in our industry”, he promised.

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Again the production of batteries is developing in a way that’s part vertical integration but also part traditional supplier.

Volkswagen, for example has agreements with Swedish battery maker Northvolt, as well as Gotion and Sunwoda, both from China. Other car makers are racing to lock in partnerships with mainly Asian-headquartered battery makers to ensure they have the supply, such as Nissan having an agreement with Envision AESC in the UK.

Manufacturers generally prefer to buy from suppliers because this outsources much of the part’s development costs. The supplier is more likely to build it cheaper, thanks to the greater economies of scale of having a wider customer base.

The EV era is forcing a rethink on that front as well, as car makers look to soften the blow of job losses from the exit from combustion-engine manufacturing.

Building an electric car requires 40% less labour, Ford CEO Jim Farley told a Detroit conference sponsored by civil-rights activist Jesse Jackson’s Rainbow Push Coalition in November. “We have to insource, so that everyone has a role in this growth,” Farley said, according to a Financial Times report.

Other car makers are doing the same. For example, Mercedes-Benz bought British electric motor maker Yasa and plans to build its products in its Berlin diesel-engine plant; and Renault wants to increase production of motors at its plant in Cléon, France, to 500,000 a year.

Analyst company IHS Markit predicts 70% of motors will be made in-house by car companies, compared with 33% now.

How vertically integrated car makers will remain after the EV supply chain matures and stabilises is hard to say. It’s likely that they will switch back to outsourcing, despite the homogenous nature of parts sharing. The cost savings are just too good to ignore.