Electric vehicles (EVs) are rolling out of automaker plants around the world. But there’s a problem. The supply chain that has worked so well, for so long, building internal combustion machines, doesn’t work for EVs. So, what’s next?
As electric vehicles (EVs) begin to move out of the niche and into the mainstream, their manufacturers must grapple with all sorts of weighty production issues. The supply chain stands as one of the most vexing.
Simply put, car manufacturers can’t rely on their traditional, well-established and highly efficient sourcing, production and distribution patterns. They can’t necessarily turn to their longtime partners and major suppliers, either. In many cases, they must cast their lot with a new set of players, not to mention distinctly new materials and specific processes that sometimes have little in common with past practices.
“We’re talking about a completely different supply chain,” said Thomas Cullen, senior consultant at Britain’s Transport Intelligence, commonly known as Ti. “It is completely different because it’s totally different technology.”
EVs and the Supply Chain
One, of course, is based on the internal combustion engine, while the other is rooted in electric propulsion. A gasoline engine and a battery are completely different beasts.
Global plug-in EV sales remain a sliver of the overall car market. For the first eight months of this year, global EV sales topped 1.42 million, according to “Inside EVs.” That’s less than 3% of total car sales for the same period.
China has emerged as the dominant market for electric vehicles. Last year, EV sales in China topped one million, representing 8% of China’s overall car sales. Europe registered 386,000 and the US notched 361,000, according to “Inside EVs.”
Estimates for growth are all over the place. JP Morgan, for one, predicted that plug-in sales in 2025 will reach 8.4 million. (The bank’s estimate for hybrid sales is much larger.) In a lengthy report released in May, the International Energy Agency (IEA) predicted EV vehicle sales globally in 2030 could range from 23 million to 43 million.
As auto manufacturers grapple with new technologies, they are struggling to figure out the associated supply chain. It’s no easy task. “This changes from month to month. It’s an incredibly dynamic situation,” said Cullen, a logistician who has researched and written extensively on the subject, perhaps more than any one individual. Car manufacturers will “admit that there’s an extraordinary degree of uncertainty,” he said.
Cullen cited the issue of certain microprocessors. To begin with, auto manufacturers find themselves dealing with companies they don’t necessarily know. And they quickly discover they’re no longer king of the hill, when it comes to buying power. “They are now comparatively small purchasers of such products compared to the large consumer electronics manufacturers,” Cullen explained. “This illustrates a completely new dynamic on the supply chain.”
With electric propulsion, the battery is at the heart of the electric car. It’s also by far the most expensive component. And, while it’s been shrinking in cost as well as becoming more efficient, it’s still 33% of the total price of a midsized electric vehicle, according to research by BloombergNEF.
Battery Logistics
With the exception of Tesla and the Chinese maker BYD, all car manufacturers source their batteries from outside suppliers. That creates another dynamic alien to automotive giants. They can’t rely on their own technology. They must vie with competitors for the best batteries and place enormous bets on battery suppliers. These suppliers hold the cards, not the auto manufacturers, as enhanced battery performance is absolutely critical to the car’s success.
“If you have a component that everybody needs, such as a battery, it doesn’t matter whether you have a Gigafactory,” said Cullen, referring to Tesla’s mammoth, lithium-ion battery and car assembly plant in Nevada. “If you have the design of a new battery, you’re on the money. If your battery is 10 or 20 percent more efficient, you’re just going to clean up, because that is so central to the performance of the car.”
According to Benchmark Mineral Intelligence, Korea’s LG Chem is the world’s largest lithium-ion battery maker, with plants in Poland, China, South Korea and Michigan. Second is China’s battery star, Contemporary Amperex Technology Ltd., usually known as CATL. That’s followed by BYD. Japan’s Panasonic is fourth and Tesla ranks fifth.
Battery supply chains themselves are complex and, these days, controversial. Attention is centered most on cobalt, a mineral necessary to keep batteries from overheating as well as helping them maintain their capacity as they are charged and uncharged. More than 70% of the world’s cobalt production is located in the Democratic Republic of the Congo. About one third of this is ad hoc and unregulated.
A group of stakeholders has formed a global battery alliance in an attempt to ride herd on standards. In a widely circulated opinion piece presented September at the World Economic Forum’s Sustainable Development Impact Summit, Michael Lightfoot, the chief corporate officer at LeasePlan, called on battery makers to be more transparent about where their cobalt is sourced. In addition, Lightfoot lobbied for a more sustainable battery production, including reuse and re-manufacturing. “Some 11 million tonnes of spent lithium-ion batteries are forecast to be discarded by 2030,” he wrote. “In our view, they need to be designed with circular economy principles in mind.”
The battery is at the heart of an EV, but it’s by no means the only part of an electric car that matters. Electronics and microprocessing are far more fundamental than gasoline-powered engines, although, admittedly, computers have become much more important in traditional vehicles as well.
This illustrates another critical difference between the traditional supply chain and the emerging one for electric vehicles. Car manufacturers must “have the components that deliver the solution,” said Cullen. “The difference between one company’s components and another company’s components may well be very great, much greater than you would get with a mechanical engineering.”
Supplies for a Supply Chain
Again, it’s not only identifying the suppliers best able to deliver necessary electronics, but also competing for their business. And, they’re vying for these suppliers not only with each other, but with, say, mobile phone manufacturers as well. This means that the supplier is in the driver’s seat. “The power relationship on the supply chain has changed,” said Cullen. “Different components suppliers will have dramatically more power than they have had previously.”
Tesla has had a history of missing production deadlines. Reasons for these glitches vary, but the company acknowledged that one major difficulty lies with its supply chain: It relies on single suppliers for many key components. “While we obtain components from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source,” the company said in a statement. “To date, we have not qualified alternative sources for most of the single sourced components used in our vehicles and we generally do not maintain long-term agreements with our suppliers.”
That makes the company far more vulnerable to delays when suppliers down the chain miss their production deadlines.
Tesla isn’t alone, however, in scrambling for suppliers of critical components.
The automotive industry has developed a supplier ecosystem that is based on proximity. Suppliers build factories close to automakers. Tier two suppliers build plants close to tier one suppliers. All this allows auto manufacturers to source components quickly and efficiently from factories located 100 miles or less from the assembly plant.
The EV fundamentally alters this ecosystem. Sourcing becomes far more globalized. Tier ranking becomes meaningless.
The EV Revolution
Manufacturers are scrambling to figure out the logistics necessary for such a system. “The supply chain geography will be different,” said Cullen.
Long-held relationships must change as well. As the battery manufacturers also indicate, supplier’s cross national boundaries. So, it isn’t a matter of, say, Japanese battery companies supplying Japanese car manufacturers. Nor can EV manufacturers source batteries from plants nearby.
This points out another vexing issue: safety. Lithium-ion batteries are considered hazardous materials. If they will be sourced globally, how will they be packed and transported? There’s some consensus that batteries will be moved by reefers in containers, but details are far from set.
Volvo Cars has laid down the gauntlet. It has pledged to produce only electric or hybrid powertrains going forward and predicts that by 2025, 50% of all its cars will be electric only vehicles. Other manufacturers will likely follow suit. In September, Daimler announced that it would stop developing new internal combustion engines and focus solely on designing and developing electric propulsion.
Designing is one task. The nitty-gritty of production is quite another.
“The business model of electric vehicles is different. The role that intellectual property plays within the supply chain is different,” concluded Cullen.
