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Automakers rushing to produce battery-powered, software-driven vehicles to compete with Tesla Inc are facing a new challenge: deciding what technology to develop in-house vs what to buy from vendors. Most global automakers have relied on suppliers to supply crucial parts and software, as well as manage broad manufacturing networks in low-wage nations, for decades. Becoming more vertically integrated by performing more production in-house constitutes a big transition for most global automakers.
However, some well-known automakers are making significant adjustments to their long-standing build-or-buy decisions. The success of Tesla's electric automobiles, which rely on proprietary technology developed and manufactured by the firm, is one factor. Another factor is the financial cost of supply-chain failures during the pandemic.
"The most important thing is we vertically integrate. Henry Ford ... was right," Ford Motor's CEO, Jim Farley, said earlier this month at a conference. He was referring to Henry Ford's Rouge industrial complex in Dearborn, Michigan, which took in iron ore and other raw materials on one end and churned out Model Ts on the other in the early twentieth century.
Vintage image of the colossal Henry Rouge Industrial Complex
According to Farley, the company had to abandon its early EV approach of purchasing components off the shelf. Ford now wants to manage the supply chains "all the way back to the mines" where battery ingredients are made, he said.
Volkswagen AG, General Motors, and Mercedes-Benz are among the companies following similar tactics. Mercedes bought YASA, a British high-performance electric motor producer, last year and retooled a factory near Berlin to build motors using YASA technology. In March, the German luxury carmaker announced the opening of a new facility in Alabama to produce battery packs for electric vehicles built in the United States, as well as a partnership with Japanese battery producer Envision AESC to produce battery cells in the United States.
Automakers' expenditures in miners, motors, and batteries mark a shift from decades of delegating development and production to suppliers, who could mass-produce steering controls, semiconductors, and electronic components for various vehicle manufacturers at a reduced cost.
However, in the new world of electric vehicles, investors have determined that Tesla's technique of purchasing raw materials directly, manufacturing its own batteries, and developing its own software is the winning plan. Tesla's market capitalization has risen past $1 trillion in recent weeks, surpassing Toyota Motor Corp, Volkswagen AG, General Motors, and Ford Motor Company combined.
According to Guidehouse Insights analyst Sam Abuelsamid, the share of automaker-owned intellectual property in automobiles declined from 90% to 50% between the 1970s and the 2010s. When EV pioneer Tesla demonstrated that its vertically integrated cars were a hit with consumers, many automakers lacked the in-house engineering skills to design their own electric vehicle platforms, powertrains, and battery packs.
Tesla CEO Elon Musk said during a 2020 earnings call, "We're designing and building so much more of the car than other OEMs who will largely go to the traditional supply base and [execute] like I call it, catalog engineering”.
Tesla's strategy is expensive, and the company has boosted vehicle pricing several times in recent years. Despite predicting a model with a starting price of under $25,000, Musk indicated earlier this year that Tesla was not working on the $25,000 car right now but would at some point.
According to supply sector executives, there is also a disconnect between what automakers claim about their vertical integration objectives and what happens when engineers strive to fulfil timetables to manufacture new vehicles.
"There's a lot of narrative about in-sourcing and vertically integrating, especially in areas like software. Virtually all the OEMs that we are doing business with are struggling with software development." Kevin Clark, chief executive of auto supplier Aptiv Plc, told analysts in February.