Borrowing from the Past to Move into the Future

The auto industry isn’t likely to forget the ongoing worldwide microchip shortage anytime soon. How could they? The crisis cost more than $200 billion in lost revenue and sapped global production by more than 11 million vehicles in 2021.

It’s safe to assume the industry is taking steps to prevent such a calamity from happening again, but the post-pandemic wake-up call of 2021 wasn’t just about computer chips. The shortage shined light on a gapping vulnerability in the 40-year-old “just-in-time” supply-chain model that is beginning to creak under its own weight.

EV batteries, materials reveal supply chain weakness

Even while the microchip debacle is still ongoing, automakers are scanning the horizon for the next weak link, and electric vehicle battery supplies represent some of the biggest cracks.

“We're thinking about what this means for the world of batteries and all sorts of other components that are really mission critical for our company and our capability,” Ford CEO Jim Farley said last year.

Ford made headlines in December when the company stopped accepting customer reservations for its new, highly touted pickup, the electric F-150 Lightning. The company shut down orders after reaching 200,000 units, citing a shortage of lithium-ion batteries.

“We’ll get the semiconductors, that’s a matter of prioritizing the (battery-electric vehicles) over the (internal combustion engine) vehicles,” Farley said. “The issue is batteries. That’s what we have to solve.” To get ahead of this problem, Ford has invested in lithium mining companies like Redwood Materials and Lake Resources in order to procure battery raw materials.

And Ford isn’t the only one. As the price of EV batteries continues to skyrocket, major automakers ranging from Ford and GM to Volkswagen are shoring up supply chain strategies. They are forming joint ventures with battery material manufacturers to build factories that will ensure future battery deliveries will be reliable and affordable.

Tesla highlights benefits of vertical integration

They are taking a page from the supply chain manual Tesla has been rewriting since the 2010s, when it began its transition back to a vertically integrated supply chain model perfected by Henry Ford’s Rouge Plant a century ago. As Elon Musk described the process as it relates to Tesla’s new gigafactory in Austin, Texas, “Raw materials go in one side, cars out the other side.”

Tesla’s outsourcing system began to present problems for the company about a decade ago when suppliers could not implement innovations quickly enough, prompting a shift to inhouse manufacturing of key components ranging from lithium batteries and electronics to passenger seats.

With Tesla in the lead, and legacy manufacturers now awakened by the microchip crisis, the future supply chain for electric vehicles may look very different from the “just-in-time” system that dominated the internal combustion engine industry for decades. The trust is no longer there, industry watchers say.

“There's going to be quite a supply shock when you look at the growth trajectory of electric vehicle sales both in the U.S. and globally over the next decade or two,” said Garrett Nelson, analyst for investment research firm CFRA.

The spirit of the industry is shifting away from tradition, says Volkswagen executive Thomas Schmall. Automakers are seizing control over their own battery technology the same way they control development of their own engines.

So, buckle up. Grumbles from board rooms can be heard across the auto industry as change is in the air. Companies are already aligning with battery suppliers through joint ventures on billion-dollar factory projects. Some companies may even sidestep suppliers altogether and take chip and lithium battery manufacturing in house.

And why not? Tesla’s been doing it for years, and the company has signed multiple offtake deals with mining companies to purchase raw lithium straight out of the ground. However, to secure additional savings and avoid bottlenecks, Tesla has been looking into mining materials themselves. As Musk tweeted on April 8, “Price of lithium has gone to insane levels! Tesla might actually have to get into the mining and refining directly at scale.”

Indeed, the EV industry is borrowing from the past to move into the future. Henry Ford would be proud.