At a market capitalization exceeding $700 billion, Tesla enjoys a unique financial position among all auto manufacturers to expand its investments in electric vehicles and infrastructure. Special Purpose Acquisition Companies (SPAC) have taken Fisker, Lordstown Motors, Nikola, Proterra public with many other EV car companies rumored to be in the pipeline.
These pure EV manufacturers are leveraging their access to capital to expand their market share at the fastest possible pace — they are limited by operational and supply chain challenges, not access to capital. Investors continue to applaud Tesla’s expansion strategy and pace, yet Wall Street remains shy about extending similar enthusiasm to incumbent car makers, for example General Motors and Volkswagen who have announced ambitious plans in electric vehicles. The result is an accelerating race to deliver electric vehicles with increasing performance, affordability, and choice. We are in the midst of deep disruption to the auto industry.
The entire supply chain feels the pressure to adapt to electrification. In particular traditional incumbent system suppliers (Tier-1) and component suppliers (Tier-2) are positioning themselves for the new reality. Electric vehicles contain fewer components than internal combustion engine (ICE) vehicles, and are relatively easier to assemble. Consequently, the automotive supply chain will change materially as the sales of electric vehicles (EV) dominate over the coming decade. As market forecasts show accelerating adoption of EVs, they also show rapidly declining sales of ICE vehicles putting further strain on the automotive supply chain. Expect that several companies in the automotive ecosystem may cease to exist as independent entities in this decade.
The battery itself remains the most expensive item in an electrical vehicle. The battery includes individual energy storage elements called cells that get assembled into a pack. A handful of cell manufacturers dominate the making of cells: LG Energy Solutions (formerly part of LG Chem), Samsung SDI, cATL, SK Innovation, Panasonic, BYD are the most prominent names. Most cells makers also provide the pack assembly, though some auto manufacturers, namely Tesla and the German auto makers, favor building their own packs. This points to the first tension in the supply chain: should the auto manufacturers allow the cell makers to also build the pack? There is a split opinion among auto manufacturers.
But electric vehicles also require significant electronics and electrical systems making them a very attractive market to the supply chain. These include motors, transmissions, inverters, DC converters, on-board chargers, thermal management systems and, naturally, battery management systems (BMS). Historically, volumes were sufficiently small that the auto makers controlled or manufactured many such systems in house. For example, Tesla, GM, VW control or manufacture their electric motors and transmission systems. Traditional global Tier-1 system suppliers largely sat by the sideline.
Historically, EV manufacturers recognized the importance of the BMS to the vehicle’s performance and safety leading them to keep significant portions of the BMS in house. But volumes were historically small; competition was virtually limited; software and system intelligence were rudimentary. Some auto makers commissioned the hardware to their suppliers (e.g., Hella built the BMS hardware for Mercedes, and LG built the BMS for GM) but kept control over the software. Once again, the traditional automotive supply chain sat by the sideline.
We now see evidence that the supply chain is changing rapidly. With the accelerating pace of EV adoption, auto makers are beginning to reach out to their traditional supply chain for help. GM was the first to outsource its BMS design and manufacture to Visteon. More Tier-1 suppliers are showing active interest in building more portions of the electric powertrain. Expect more disruption in the coming years as auto makers and Tier-1 suppliers assert their respective roles in building electric vehicles.
The fast pace of innovation is further driving disruption. In awarding the BMS to Visteon, GM saw an innovative wireless BMS solution that could shed significant battery weight by eliminating portions of the wiring harness. Rising vehicle specifications place significant emphasis on innovation in the BMS: longer range (400+ miles), very fast charging (20 minutes or less), long warranties (200,000+ miles) are only examples of this new frontier. Fleet operators, such as electric taxis, are asking for bold battery targets, for example, extended warranties reaching 500,000 miles, raising the bar even higher.
Then comes battery safety! In the fall of 2020, Hyundai recalled 82,000 Kona electric vehicles over risk of battery fires. It will cost Hyundai nearly a billion dollars to replace the batteries in these vehicles. LG Chem supplied the battery cells. Hyundai Mobis, Hyundai’s internal Tier-1 supplier, provided the BMS. LG Chem blamed the BMS. Hyundai blamed LG Chem. Battery safety in electric vehicles was now headline news, and the BMS central to the safety story. This is disruption at its best!