Historically, automotive OEMs sought to reduce their costs by outsourcing the supply and distribution of their vehicles. They applied pressure on tier 1-4 parts suppliers to levels at which the profit margins in some suppliers were only just achievable. The pandemic highlighted the stresses of outsourcing on the OEMs’ supply chain. Technological changes have also pushed OEMs to review supply chains, a key example being the production of batteries and the raw materials associated with the production process. Controlling more of the supply chain dynamic allows the OEM to create a more secure supply chain, improved quality and consistency of the parts supplied and to reduce costs, with less profit margins being given to those third-party tier 1-4 parts suppliers.
Is this the end for tier 1-4 parts suppliers?
The answer is no. OEMs will still retain some third-party providers as they won't be able to bring 100% of the production in-house – since they generally don't have the capital or the technical expertise to undertake all processes. Therefore, we believe that there'll be three business models for OEMs:
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However, we're starting to see a number of OEMs who are moving down the vertical strategic route in order to gain greater control over the most important parts of their supply and distribution chain. The semiconductor shortage has helped fuel this change. Toyota, for example, started to design its own semiconductors and then set up its own factories to produce its own semiconductors. This move has enabled Toyota to create a more secure supply chain – crucial for success in the growth of electric vehicles. It's estimated that between 500 and 1,000 more semiconductors will be required in EVs and autonomous vehicles, and controlling this section of the supply chain is key whether in-house or through partnerships.
Seeking production efficiencies in-house
Currently, Tesla’s supply chain is one of the most effective and efficient in the automotive industry. The company has no legacy vehicle manufacturing and distribution processes and has therefore been able to construct new and more efficient plants compared with a number of the older OEMs.
Although Tesla continues to use tier 1-4 parts suppliers, the number of these parts providers is being reduced by designing them out of the process, and in some cases by bringing selected processes in-house. For those processes not taken over by Tesla, there'll still be a number of Tesla staff implants in the 1-4 tier parts suppliers to ensure the part's manufacturing consistency and quality. In the first generation of Tesla vehicles, Model S, there were 3,400 of tier 1 parts suppliers and 21,000 of tier 2. In the most recent Model 3 and Model Y vehicles, this has been reduced to 2,100 of tier 1 parts suppliers and 19,000 of tier 2 – and there's increased focus on reducing the parts providers further.
Securing raw materials through key partnerships
Notwithstanding increased efficiency in vehicle production, OEMs need to secure their raw materials, especially for BEVs. The number of OEMs that have partnered with the large lithium and critical mineral mining companies has increased.
For example, Australia's Pilbara Minerals has a partnership with Great Wall Motor Company in China. Stellantis has a lithium hydroxide offtake agreement with Vulcan Energy Resources in Germany and also has a USD 76 million equity investment in the firm, making Stellantis the firm’s second-largest shareholder. And Tesla has also been prolific in securing supply of its raw materials with offtake agreements with Core Lithium and Liontown Resources.
Refining and battery manufacturing is also key to the process. Tesla has led the way with the construction of the 50 gigawatt Corpus Christi Lithium Refinery in the US. It's also building a 60GW cathode plant in Texas, has gigafactories for batteries in the US (Nevada), Germany and China, and is constructing factories in other areas of the world such as Mexico.
Moving into distribution and sales
The security of the supply chain is only part of the OEMs’ strategic focus: they're also reviewing other areas of the downstream automotive industry (factory gate to the end consumer). Ford has its own logistics company in the UK, transporting its vehicles from Dagenham to its UK dealers. Some OEMs own their own dealer networks – in the UK, this includes Stellantis and Ford. Furthermore, the agency model also represents a move by the OEMs to enter the new vehicle sales market, ensuring that the OEM has full access to customer details. The agency model is being implemented by Mercedes-Benz and being considered by a number of other OEMs in the UK and Europe.
Used vehicles, charging networks and fuel supply
Used vehicles are also becoming interesting for OEMs wanting to have a presence in this area of the market. Heycar and Motor Depo are owned by OEMs, for example. Stellantis has taken the process a step further with its exposure to the refurbishment vehicle market with Stimcar in France. Others are looking at new areas relating to the customer, such as charging with Ionity, whose OEM partners are Mercedes-Benz, Ford, BMW, VAG and Hyundai. This charging not only serves the UK, but operates across Europe, with a network of 350kW ultra rapid chargers. This follows the strategy being employed by Tesla with its rapid chargers, which is encouraging a greater uptake of customers and customer loyalty to the BEV OEMs.
The OEMs have become increasingly interested in becoming involved in supplying fuel to BEVs. Tesla has already started with the supply of its Powerwall and Solar Roof power generation assets. Mercedes-Benz has launched a US energy division, and Ford and General Motors in the US are becoming involved in Virtual Power Plants working with both retail consumers and B2B customers.
Such a process enables the OEMs and their partners to pool together thousands of decentralised energy resources, such as BEV and powerwalls with permission from customers, to provide this stored power back to the electricity grid. RMI, one the early adopters of this technology, estimates that virtual power plants could reduce US peak demand by 2030 by 60 gigawatts – the average consumption of 50 million households – and by 200GW by 2050.
Positioning for the future
OEMs are reaching out and positioning themselves in the supply chain and also the distribution and B2C markets. Although the production of vehicles will remain central to the OEMs’ activities, it will become only one activity of many to ensure the security of their supply chain, and their customer and distribution chains, with the aim of ensuring maximum touch points with the consumer.
For more insight and guidance, get in touch with Owen Edwards.
