BriefCASE: OEMs’ battery sourcing conundrum

These are uncertain times for the nascent electric vehicle (EV) industry. There is much to deal with. Changing regulations, tepid consumer demand, rising price wars and geopolitical uncertainties are top of mind. Some adjustments in investment strategy will inevitably be required in these early days, but OEMs cannot lose sight of a future where their success will depend on the steps they take now. Key to that future is the prevailing strategy adopted around EV battery value chains. Unfortunately, there is no single solution here. Much depends on the individual OEM's appetite for risk and control and the level of in-house competency and resource.

Battery sourcing strategy

There are three main components of an EV battery: cell, module and pack. Automakers can have distinct levels of control for the value chain of these components. S&P Global Mobility categorizes OEMs' battery sourcing strategy under four types: value chain integration, partnerships, system integration and outsourcing.

S&P Global Mobility forecasts that sourcing under value chain integration, where the cell, module and pack are manufactured in-house, will increase from 16.7% in 2022 to nearly 21% in 2030. During the same period, outsourcing is expected to fall from about 21% to less than 11%.

OEMs are increasingly looking to balance the risk against the investment required to have a highly vertically integrated battery supply chain. That is the reason behind a lot of partnerships between OEMs and suppliers. This trend will gain more momentum through the end of this decade. Sourcing through partnerships is expected to increase from 7% in 2022 to 26% in 2030.

System integration, where OEMs manage the supply of one or two components and source the other components from a third party, is currently the most popular strategy among OEMs with nearly 54% of batteries (in gigawatt-hours) sourced in this category. Its share is expected to fall to about 42% in 2030.

Tesla to increase cell production capacity

Tesla currently has zero sourcing of packs from partnership or outsourcing. Tesla is expected to follow this strategy for the foreseeable future. In 2023, 11% of Tesla's battery demand was fulfilled in-house. For 48% of the remaining batteries, Tesla sourced just the cells from cell-makers and for 40%, Tesla sourced both cells and modules from cell-makers.

Tesla is expected to gradually build its cell-manufacturing capacity. By 2030, nearly 18% of the lithium-ion (Li-ion) cells used in its cars will be manufactured in-house. Tesla has been building capabilities to manufacture its 4680 cylindrical cells in its Texas gigafactory in the US. Currently, Tesla imports cells from mainland China and Japan for vehicles manufactured in North America. However, the automaker is expected to significantly reduce the share of imported cells in its North American operations.

BYD aims to be a global battery supplier

BYD currently meets the entire Li-ion battery demand for its plug-in electric vehicles (PEV) through in-house production. In 2023, more than 111 gigawatt-hours (GWh) of batteries were equipped by BYD in its PEVs. This figure is expected to double in the next seven years, but BYD will likely continue with in-house sourcing for all three main components of the battery.

Besides, BYD is aiming to be a global supplier of battery cells. It is already the second-largest cell manufacturer in the world, behind CATL. It is already supplying a small number of cells to automakers such as Toyota, FAW, Hyundai and Tesla. By 2030, nearly 40% of the cells produced by BYD will be delivered to other OEMs.

Volkswagen to increase cell sourcing through partnerships

For modules and packs, Volkswagen (VW) maintains a high level of control. In 2023, nearly 77% of its battery sourcing was of the system integration type where VW was involved in the production of the modules and packs. In the coming years, VW will continue favoring system integration in battery sourcing, but it will also significantly increase sourcing under partnerships. From about 11% in 2023, the automaker is expected to meet more than 35% of its battery demand from partnerships in 2030.

The German automaker has been investing in in-house development and production of cells, but the focus has been on nickel-based chemistries. VW is expected to expand the use of lithium iron phosphate (LFP) batteries in its cars but the majority of the LFP cells will be sourced through partnerships, or directly from cell manufacturers.

The sourcing strategies at Tesla, BYD and VW show that OEMs will continue to have different approaches for sourcing and vertical integration in the battery value chain. Clearly, there is no one-size-fits-all solution for this. The three automakers had the highest demand for batteries (in GWh) in 2023 and will have the highest cumulative demand for batteries between 2022 and 2030.

Authored by: Srikant Jayanthan, Senior Research Analyst, Supply Chain & Technology, S&P Global Mobility

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