As the automotive industry looks ahead to 2023 and beyond, it does so on the back of encouraging indicators of recovery and growth – particularly in the electric vehicle market.
In the U.S., a record number of electric vehicles – more than 200,000 – were sold in Q3, while third-quarter sales in the EU rose 22% year-on-year to 259,449.
Nevertheless, the increasing demand in the sector has placed further strain on a supply chain already restricted by the conflict in Ukraine and the shortage of semiconductors This has had a dramatic impact on the cost of manufacturing electric vehicles – and nowhere is this more evident than with battery production.
Between the beginning of 2021 and mid-2022, the cost of materials critical to battery manufacturing – such as lithium, cobalt and nickel – soared, and has continued to remain at high levels. Such was the increase in raw material costs, that in the middle of 2022, they were 144% greater than at the end of Q1 2020.
With EV batteries typically constituting approximately 30% of the vehicle’s cost, OEMs will struggle to bring costs down until production reaches sufficient scale. It is therefore critical that manufacturers start to identify smart efficiencies in the production process to simplify cost management, boost profit margins, meet demand and sufficiently prepare the market for further growth.
An effective and timely route for OEMs to explore is to streamline and onshore the battery supply chain. This is particularly pertinent with rules-of-origin legislation both in the U.S. and Europe.
In the U.S. market, OEMs are nearing the end of the phase-in period for the most recent US-Mexico-Canada Agreement in July 2023, at which point 75% of a passenger vehicle will need to be sourced from North America to be exempt from a 2.5% tariff. To avoid a 10% levy in the U.K., by 2027 manufacturers will need to ensure that 55% of exported vehicles constitute components from the EU and U.K. with a battery pack that’s fully originating.
At a time when production costs are eye-wateringly high for manufacturers large and small, adjusting the supply chain to accommodate more local suppliers is critical for optimizing growth in the longer term.
Onshoring the supply chain also yields benefits from a cost management perspective. By opting for suppliers in closer proximity, manufacturers can reduce shipping times/costs, helping to mitigate long delays and therefore irregular payments to suppliers. With smoother cash flow and more stable reserves, OEMs can look to focus on growth and investment in areas key to developing future mobility solutions.
Consolidation is key for manufacturers looking to streamline operations and weather the challenges posed by prevailing market conditions. These objectives can be taken a step further by opting for a single Tier 1 supplier that manages each facet of the design, testing and production process under one roof.
This is particularly pertinent with battery pack production, which can require 20 different processes from initial conception to a vehicle-ready unit. Traditionally managed by a vast array of suppliers, this fragmented process is costly, time-consuming and not conducive to boosting productivity and growth. A supplier that manages the process from end to end, therefore, offers OEMs a lifeline to free up critical time and resources to focus on delivering a highly cost-competitive product.
By opting for a simpler, more local supply chain, OEMs can optimize their operations, meet consumer demand and pave the way to further success for sustainable, fully electric vehicles – future-proofing not only their business, but the health of the mobility industry as well.
James Eaton (pictured, above left) is co-founder and CEO of IONETIC, a U.K. start-up specializing in EV battery pack technology.
