With the advent of the global automotive industry's electrification wave, the situation in which automakers divested their parts manufacturing operations and relied on external suppliers is quietly changing. Major car companies are trying to further control the supply chain of electric vehicles, forging new partnerships with raw material producers on the one hand, and investing in facilities that produce chemicals for batteries on the other.
At present, some large car companies such as Volkswagen have invested heavily in joint venture factories to ensure their own electric vehicle battery supply. Now, these car companies are also looking to further expand their business, hoping to reduce production costs, ensure the supply of sought-after parts and further control the quality and performance of car batteries.
Tesla was one of the first companies to produce more interiors for electric car batteries, a move that helped the electric car pioneer become the world's most valuable automaker. Another reason automakers are trying to gain more control over their supply chains is that semiconductor shortages are hampering auto production. Taking the Volkswagen Group as an example, despite high customer demand and maximum car purchase orders, Volkswagen delivered fewer vehicles last year than in 2020 due to a shortage of semiconductor supply, and the delivery of battery electric vehicles in the group almost doubled. Domestically, volkswagen will sell about 3.3 million units in China in 2021 due to the impact of the global chip shortage, down 14% year-on-year. All of these factors have led to the urgent need for Volkswagen to establish its own electric vehicle supply chain.
In recent weeks, Volkswagen and Stellantis NV have announced deals to lock in lithium supplies, while Volkswagen also plans to build a similar cathode materials factory with Belgian materials. These initiatives indicate that the automotive industry is once again beginning to integrate vertically, but the integration period is at the time of electrification, which may disrupt the usual relationship system between car companies and their suppliers. This strategy can be traced back to the early days of the automotive industry, when some automakers owned or acquired much of the supply chain needed for production. Car companies have always relied on suppliers to compete with each other to improve profitability. With only a handful of companies producing the best-quality batteries and chemicals, the pricing power of car companies has been weakened. Thomas Schmall, a member of Volkswagen's board of directors and ceo of the company's parts business, said last year that relying solely on suppliers to develop battery technology is like not making its own engines.
The global automotive industry is already aggressively trying to sell more electric vehicles, and some large auto companies have pledged to invest billions of dollars to expand their product lineups. In addition, governments are rolling out measures to stimulate the production and sale of electric vehicles, while tightening emissions regulations. According to foreign analysts, electric vehicle sales are expected to account for half of global new car sales by 2030.
But the supply chains required for these models are very different from those built for decades for gasoline-powered cars and trucks. The seismic shift to electrification has raised concerns about whether OEMs will be able to obtain enough high-quality materials to produce batteries and other components that are critical to achieving future sales targets.
In the future, having more control over the supply chain can help OEMs avoid price increases and parts shortages. The COVID-19 pandemic and the disruption caused by the recent shortage of semiconductors are further pushing the automotive industry in this direction, prompting manufacturers to reduce their reliance on global outsourcing.
In terms of batteries, the production of lithium-ion batteries relies heavily on China, and the refining and production of key materials are carried out domestically, which increases the transportation costs of multinational car companies and is easily affected by factors at other levels. In recent decades, the world's major OEMs have basically stopped vertically integrating, divested their parts manufacturing operations, and relied more on external suppliers to provide parts. Vertical integration can be capital-demanding and risky. Until then, automakers had struggled to develop new capabilities such as software development within their organizations, leading to delays and declining sales.
When Tesla invested heavily in battery manufacturing capacity, part of the reason was that it was necessary to do so. Tesla needs a lot of batteries to achieve its goal of making cheap mass-market electric cars. To meet its own needs, Tesla and Panasonic joint ventured to build its first gigabit factory. A few years later, almost all major automakers were following Tesla's lead and investing in their own joint venture battery factories. To offset the risk of further upstream development, automakers are forging partnerships to share the burden of project costs and leverage the expertise of companies already in the field. It's clear that those that don't are likely to rely too heavily on battery suppliers for the most expensive technologies in their cars and cede profits to them, a situation that no OEMs want to see.