Battery Costs and Software are Critical Success Factors for the Electric Car Industry
Dear Friends & Shareholders,
Two years ago, when Bosch, the German automotive supplier, decided against setting up its own production of battery cells, the automotive world was a quite different one altogether. Bosch argued at the time that despite alleged investments of 20€ billion, it was not possible to catch up with the technical lead of the Asians and the battery cell, in their view, was anyways ultimately a replaceable “commodity”. Behind the scenes, it was rumored that the real reason was that the German carmakers, above all Volkswagen (“VW”), did not want to commit themselves to fixed purchase quantities of battery cells. Back then, the carmakers thought differently than they do today: the brand was the most important, the distribution channel for new vehicles via the dealer network was only accessible to the major original equipment manufacturers (the “OEMs”). The suppliers would continue to be subject to constant price and quality competition and the best products would be purchased at the cheapest price. Joint Ventures (“JVs”) between OEMs and suppliers were rare.
Competitive Situation in the Automotive Market in Upheaval
Since then, the thinking of the leading car manufacturers has changed fundamentally: new management teams are at work and new, financially stronger competitors have emerged. The big Silicon Valley software companies – Google with Waymo, Apple, Uber, are joined by the emerging Chinese competitors such as BYD and Geely, which have the largest sales market in the world in their home market. These are powerful brands that stand for progress and innovation. Western car manufacturers and Toyota are still struggling with the right solutions. Only Tesla recognized the essentials from the beginning and VW now follows with an explicit commitment to electric mobility. This has a significant impact on the future strategy.
Stringent brand management alone will no longer suffice in the future, as younger consumers come up for whom cars are less an individualized status symbol than one of many possible means of transport. Simplicity of use, low costs and permanent network access are the decisive sales criteria for the cars of the next generation. Development cycles are becoming shorter and shorter and the automotive industry will approach the speed of innovation of the Internet industry. As the hardware of the new generation vehicles simplifies (with a focus on batteries and electric motors), the difference lies in the software (autonomous driving and networking) and the battery technology (lifetime, charging time, range, energy efficiency).
Tesla boss Elon Musk was the first to realize that neither software nor battery cells are a “commodity” but the decisive sales arguments alongside design. Tesla is the only carmaker who – together with technology partner Panasonic – covers almost the entire e-car value chain in the Gigafactory in Nevada, from the production of the battery cell to the development of the software. European carmakers are severely lagging.
Internal Know-how and Access to Raw Materials become Crucial
Against this backdrop, two developments make us sit up and take notice and hope that the European car industry will at least be able to keep up in the future:
1. Car manufacturers are opening up to joint ventures – both with traditional competitors and with suppliers. There are several reasons for this: on the one hand, the JV partners usually have more know-how, but less well-filled coffers. On the other hand, these partners also know how to manage progress in areas that OEMs have previously “only” purchased from suppliers. It is not enough to hire 500 new software developers. You have to manage them properly, define goals clearly and measure progress. Here, the automotive industry is lagging far behind the tech giants. When it comes to joint projects, VW probably acts most decisively. In the future, the group will cooperate with Ford in the construction of pickups and small vans. Autonomous driving and electromobility are also possible areas of collaboration. At the same time, VW plans to set up its own cell production facility together with the Scandinavian start-up Northvolt.
2. At the same time, for the first time in its history, the automotive industry is also concerned about the supply of raw materials! While Tesla was the first to conclude long-term supply contracts with lithium producers years ago, VW recently followed with initial letters of intent in the lithium sector and contracts in the field of cell purchasing. However, both car manufacturers now have doubts as to whether the partners will be able to meet their obligations. The logical consequence: take control of costs and production and build your own cell factories (Tesla has already done this) and invest in lithium mines (Tesla and Ford announced intentions last week, VW is rumoured to be investigating this). The other major carmakers will follow suit.
From my point of view a third factor will be decisive: The regionalization of the production value chain to stop the current systemic delays in delivery and reduce costs as much as possible. In practice, this means that it is not enough to set up production facilities for battery packs and cells next to car factories. At the same time, the production of cathodes and the necessary lithium chemicals (such as the increasingly preferred lithium hydroxide) should take place in the same region. Such “hubs” are already being built in China, including in battery development areas in the provinces of Jiangxi and Sichuan. In Europe, we will see similar hubs in ten years’ time. The potential exists for just such a hub in the Great Lakes region in North America where Ford and GM will soon be producing electric cars in nearby Detroit and are building battery cell factories together with Asian JV partners. It would suit them well to buy the lithium they need in the USA and Canada.