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Supply chain
Roadblocks to supply chain renewal
The supply chain issues facing carmakers speak to the problems all manufacturers must now tackle, says IMD’s Carlos Cordon.
How do you build an electric car? Many of the world’s largest automakers are still trying to work out the answer to that deceptively straightforward question. And their internal debates are a microcosm of many the arguments and tensions that supply chain executives globally are now facing.
The first part of the debate is the question of outsourcing and procurement. The traditional model for the auto industry has been to depend heavily on suppliers for key components, rather than manufacturing them in-house. But while working with extensive networks of original equipment manufacturers of parts has advantages – OEMs specialise in producing high-quality components in niche areas – it exposes the automaker to the potential for supply chain disruption. That risk became very real during the Covid-19 pandemic and the subsequent upheaval.
In which case, as the auto industry repositions itself for electric car production, maybe it makes sense to move towards a more vertically integrated model. For example, a string of large automakers have already made significant investments in electric battery factories of their own, with the goal of reducing their reliance on third-party suppliers for such a fundamental component.
That’s one way to do it. Another option is to build much more direct relationships with suppliers. Tesla, for example, has sourced the semi-conductors used in its vehicles directly from manufacturers, rather than buying parts from suppliers with microchips already installed. As a result, when the global shortage of semi-conductors threatened to bring automotive production to a halt in 2021, Tesla had more chance than most of its rivals of getting hold of key suppliers. It was even able to talk to manufacturers about the possibility of refashioning microchips made for other purposes for use in its vehicles.
Automaker to miner?
Equally, vertical integration could go even further than manufacturing more components inhouse. Last year, the Financial Times reported that Tesla had held discussions with Glencore that could lead to it taking a 10-20% stake in the mining and commodities giant. Tesla’s CEO Elon Musk had already noted on Twitter, “Tesla might actually have to get into the mining & refining directly at scale”.
So far, Tesla’s discussions with Glencore – and Musk’s Tweets – have come to nothing. But the company’s direction of travel is logical enough; there’s no point in owning battery factories as part of a strategy to avoid supply chain disruption if those factories can’t easily source the raw materials they need for the manufacturing process.
That’s a real possibility. Demand for lithium, cobalt and nickel – all key metals in battery production – outstripped supply in 2021 according to S&P Global Market Intelligence and the situation doesn’t appear to have eased much since then. The supply of these metals is limited – lithium mines, for example, are struggling to keep pace, particularly since electric vehicles need high-grade metal.
Against that backdrop, it’s not difficult to see why companies such as Tesla might be interested in buying into raw materials producers. However, there are limits to this strategy given that privately-owned miners and commodity traders may not be able to deliver all the raw materials required for electric vehicles if they’re operating in countries where policymakers have other ideas.
The most obvious example is China, where companies such as Renault are increasingly concerned about the Government’s moves to restrict exports of certain raw materials; already, China has said it will curtail overseas sales of gallium and germanium, both crucial to the production of electric vehicles and semi-conductors. It produces 60% and 90% of the world’s supplies of the two metals respectively.
Indeed, the political question looms large over global supply chains in industries such as automotive. Some problems may simply be out of manufacturers’ control – if a trade war or political tension, say, leads to a shortage of raw materials or key components, there may simply be no way to respond.
This is not a new risk. As long ago as 2017, the danger of over-reliance on a single producer was evident to automotive companies; conflict in the Democratic Republic of Congo (DRC), which then accounted for two-thirds of global cobalt production, threatened to curtail supplies, with prices soaring accordingly.
There’s a related issue here too. As companies come under pressure to improve their social and environmental behaviours, scrutiny of their supply chain partners is increasingly tough. In DRC, for example, groups such as Amnesty International and Unicef have pointed to concerns about child labour in mines. Yet another supply chain headache for automotive manufacturers to worry about.
Where should we build?
It isn’t just a question of how much of the supply chain to take control of that manufacturers, but also where exactly to exert that control. The conventional wisdom post-pandemic is that globalisation is a spent force – that Covid-19 proved that extended supply chains were just too vulnerable. But there are plenty of problems with reshoring and nearshoring too.
Most obviously, it’s not possible to nearshore supplies of raw materials. They will continue to be imported from the countries in which they are found, wherever those may happen to be. Efforts to find new sources of such materials can be accelerated – Glencore itself is investing heavily in a recycling facility in Italy, for example – but manufacturers are ultimately dependent on the natural world.
As organisations grapple with how to reinvent supply chains for the world they now face, they cannot even be sure about demand forecasts.
Nor it straightforward to decide where to site manufacturing facilities for components as part of a vertical integration strategy. It makes sense to produce batteries, say, close to the assembly line, since these are heavy items to transport over longer distances. But other factors come into play too, not least labour costs and Government subsidies.
In Canada, for example, a recent decision by Volkswagen to build a battery plant in Ontario was greeted with jubilation by policymakers amid mounting concern that the country has been losing out to the US and Mexico as companies in North America have nearshored and reshored. More than 50 EV battery plants alone are slated to open in the US and Mexico by 2030, according to data from the US Department of Energy. Cheaper wages and incentives for foreign direct investment are key factors.
In Europe, meanwhile, Volkswagen has still to finalise its plans. It has confirmed plans for facilities in Germany – important as its home market – in Sweden, where it has a pre-existing relationship with Northvolt, and in Spain, where the Spanish government offered a suite of generous incentives. But the original plan to open a fourth facility in Eastern Europe is on hold as the company weighs up the more generous incentives on offer in the US.
The backlash against globalisation, in other words, is not clear cut. In some cases, it may be a shift to regionalisation, rather than full-on reshoring. In others, it may still make sense to source from further afield.
A wrong move now could cost
None of this is easy for automakers – and the difficulty is even greater because the decisions they make will determine their success or otherwise over an extended period. Investment is required now to sustain medium- to long-term capacity, but once made, it will be difficult to change direction.
Worryingly for the automakers, it is not even clear how much capacity they will need – or when. After all, there are growing doubts that what seemed to be an inevitable a headlong rush into electric vehicles even two years ago. The backlash against electric cars is a phenomenon with different drivers – ranging from political agendas to concern about the industry’s own environmental footprint or the lack of charging infrastructure, but it is very real.
That is not a comforting thought. As organisations grapple with how to reinvent supply chains for the world they now face, they cannot even be sure about demand forecasts. The climate change imperative surely means the demise of vehicles powered by internal combustion engines, but the speed of that demise is by no means certain.
The long list of dilemmas facing the automotive sector is hardly confined to it. Manufacturers across multiple industries now face exactly the same sorts of questions. Building supply chains fit for the future will not be easy – and there is no consensus on how to do it.
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