Chip shortages and environmental targets are forcing the likes of Renault and Ford to get closer to their suppliers
Car maker is a term we use a lot but the truth is that today’s car companies are more assemblers of bought-in parts than manufacturers.
That was highlighted in a recent comment by Stellantis CEO Carlos Tavares, who pointed out that the value of a car once it’s emerged from the factory is “85% bolt-on parts”.
These parts are sourced from thousands of often nameless suppliers, but as we shift out of internal combustion engines and into an era of electric cars powered by ever more sophisticated software, car makers are trying to recapture some of the value lost to suppliers.
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The process of making parts yourself is called vertical integration and car makers are going further down that route in specific areas, most notably batteries but also chips and software. This is happening for a number of reasons: to keep some of the profit lost to suppliers; to ensure a good flow of limited supply; and to even work out exactly what the CO2 cost of the components are.
“Companies are increasingly seeing it as a competitive advantage to have greater control over the supply chain,” said Jonathan Davenport, an analyst at consultant Gartner.
Some manufacturers have always leaned towards vertical integration, notably Volkswagen. But the trend in recent years has been to farm more work out to suppliers. This keeps capital investments to make the parts off your books and, if the parts supplier is large enough, can actually work out cheaper because their broad base of customers will bring the price of those parts down through sheer scale.
The rapid pace of technology change is forcing a rethink, however. Ford will split its supply strategy between its two new divisions, Ford Blue for internal combustion engines and Ford Model E for electric cars. “Ford Blue will source with breadth of scale, while Ford Model E will source very deeply with depth,” Lisa Drake, Ford’s new head of EV industrialisation for Model E, told analysts last week.
The depth will focus on parts “very specific to EVs” – batteries, power electronics and raw materials in the batteries – and not just take over the jobs of the so-called tier-one supplies, those that sell parts directly to the OEM, rather than to other parts suppliers.
“We will go very deep into the supply chain – tier two, tier three, tier four,” said Drake. “Places where we haven’t gone before and where the semiconductor situation has now shown us where we need to be.”
The semiconductor supply crisis has been a wake-up call for car makers who were frustrated by the fact that their entire production was being held up by suppliers much further down the chain. Their frustration was further compounded by the fact chip makers saw them as just another customer, and not a very big one at that, compared with the big electronics firms.
Now the car companies are going directly to the chip makers, which previously would have sold their products to tier-one suppliers like Bosch, Continental and Harman. This is leading to a previously unheard of situation where car companies like Ferrari, Renault, Volvo and Mercedes are flagging up collaborations with chip suppliers such as Qualcomm and Nvidia.
“The traditional tier one and tier two go-to-market model has evolved,” said Enrico Salvatori, president of Qualcomm Europe.
The new vertical integration approach is different from the old model, where car companies would forge cylinder blocks themselves. They don’t have or want the capability to make chips or to refine battery materials. But they do want to secure the supply long before they need it and that means investing in or partnering specialists.
For example, VW has partnered China’s Gotion for a new battery cell plant in Salzgitter, Germany, due to start in 2025. Both Volkswagen and Volvo have invested in Swedish battery company Northvolt to create partnerships that will secure them cell production. Stellantis and Mercedes both have a stake in French battery company ACC, while Renault has put its own money into battery maker Verkor.
Investments in battery companies give car makers more of a financial stake in the most expensive element of an electric car, but the worry now is whether they will be able to source the raw materials for their ever more expansive promise of EV production.
They are trying to solve the “great raw material disconnect”, as raw material analyst firm Benchmark Mineral Intelligence phrased it. “At the moment there is insufficient investment into raw material supply to meet battery demand in 2030, let alone 2040,” said CEO Simon Moores last year following declarations made by some car makers at the COP26 climate summit to go all-electric by 2040.
So they are going deeper. As ever in the modern car world, they are generally following the lead of Tesla, which showed the way with its partnership with Panasonic on batteries. Tesla has also moved to secure raw materials with deals with the BHP Group on nickel and Glencore on cobalt. Stellantis is talking to companies to secure lithium while Renault has signed a deal with a company that aims to extract lithium from the Upper Rhine valley in Germany. BMW, meanwhile, has invested in a US company called Lilac Solutions that is researching environmentally friendly methods for extracting lithium.
“We’ve had various approaches by auto makers,” said Jeremy Wrathall, head of UK mining start-up Cornish Lithium. “No one has made us an offer to buy us, but the mood music is hotting up.”
One other big advantage of going direct to the source of raw materials is that you know exactly its provenance and probable CO2 footprint. “It’s important that you know your CO2 intensity of your input materials,” said Jon Regnart, automotive trend strategist at the UK’s Advanced Propulsion Centre. He cites VW’s investigation of Chilean lithium mining as an example.
The other big focus is on software. “We will vertically integrate key elements of the electronics and software platforms,” said Tavares in speech to present Stellantis’s strategy up to 2030. Car companies such as BMW, Mercedes and VW are busy hiring thousands of software engineers to ensure their future cars merge seamlessly into your digital life, while also delivering online services that (they hope) will be so tempting that you will be persuaded to pay additional sums to use.
Again, Tesla is leading the way by programming its own software to create a closed-off infotainment system where even Apple CarPlay and Android Auto are banned. The argument is you control the whole ecosystem, including the data generated.
The big car companies are taking a more flexible route that involves partnering the likes of Amazon on the stuff you don’t see but keeping control of the digital touchpoints.
It’s not efficient to do everything yourself, argues Continental’s head of software, Michael Huelsewies. Rather than “ploughing 1000 engineers into developing an operating system, all this stuff that nobody really sees, you can take 200 of them and put them in the pool to work out something that helps all of us, so the 800 can work on the fancy stuff”, he said.
Tavares agrees. “I’m not going to make my own operating system; it doesn’t make any sense. Consumers don’t care,” he told journalists at the recent strategy event.
He explained his philosophy on vertical integration. “If I can do it internally because I have the right skills, I will do it. If I don’t have the skills but can educate my people, I will do it. If I can’t do that, I have to partner with someone,” said Tavares. Speed would be another reason to find a partner, he said.
Vertically integrating is also vital to replace jobs lost in the switch away from combustion engines. Engines and to a lesser extent transmissions mostly remained in-house for many car companies, and they are anxious to replace that business with e-motors and other electric transmission parts – parts that in the main are currently outsourced. For example, Mercedes has bought UK maker of electric motors Yasa and will build them in its Berlin diesel engine plant. Meanwhile, Renault wants to increase production of e-motors at its Cléon plant to 500,000 a year. Analyst company IHS Markit predicts 70% of e-motors will be made in-house by car companies, compared with 33% now.
Cars will continue to be largely assembled from bought-in parts, but the planned targeted dives into the supply chain should mean better visibility on parts bottlenecks and a better understanding of what goes into the final product, neither of which is a given right now in light of the often opaque source of parts within parts.
Keyword: Why car makers are seeking to move parts in-house