Automakers Move Back to Vertical Integration for Supply Resilience

Until the past few years, automakers had increasingly moved away from the concept of “not invented here.” From the 1970s to 2010s, automakers went from creating 90% of the intellectual property in their vehicles to only about half. During the past decade, those manufacturers have increasingly made venture capital investments in startup companies in hopes of finding the next big breakthrough. Now, as the transition to electric propulsion accelerates, the industry is shifting back to vertical integration for key systems in search of resilience. 

After decades of outsourcing ever larger subsystems to suppliers such as Bosch, Continental, ZF, DENSO, and Magna, automakers relied on supplier partners for their early forays into electrification. This was driven in part by the relatively small vehicle volumes, which didn’t justify a manufacturing investment by the automakers. Suppliers, on the other hand, could achieve scale by supplying variations of components to multiple customers. 

As development of new engines and transmissions winds down, automakers are rapidly bringing development and production of motors, batteries, and other systems back in house. With the launch of its new compact Maverick pickup with a standard hybrid powertrain, Ford is producing the motors at its renamed Van Dyke Electric Powertrain Center north of Detroit. The motors for next year’s F-150 Lightning electric truck will also be sourced there, and General Motors will be producing the motors for its new Ultium platform EVs in house. Other automakers including Volkswagen and BMW are on the same trajectory. 

Manufacturing battery cells for EVs is another element of the plan for automakers to take control of their own destiny. As EV sales grow, everyone will be looking for performance advantages and ensuring that they have sufficient supplies. Volkswagen, Stellantis, General Motors, Ford, and others are making multibillion dollar investments to produce hundreds of gigawatt-hours of cells annually. While motor production is mostly being handled in house, cell production is being handled mostly through JVs with other cell suppliers. 

Automakers Begin to Take Charge of the Supply Chain

Taking charge of the supply chain to improve resilience is one of the key drivers for these changes. The auto industry has faced severe challenges over the past 2 years, including the current semiconductor shortage. This challenge has been exacerbated by the previous ad hoc approach to electronic architectures. Multiple suppliers would provide various vehicle features, each with their own electronic control unit and software. This situation made managing updates problematic and any single supply disruption could have cascading effects on production, as we have seen in the first half of 2021. 

During a recent interview, Ford CEO Jim Farley said, “We’re insourcing software. We used to give that to our suppliers. The 70 modules to control an F-150 5 years ago—all the software was owned by someone else.” Part of that effort includes selecting the chips that the software will run on and handling integration and ongoing updates internally. Instead of relying on suppliers providing dozens of chips based on older process technology, Ford will develop new compute platforms based on modern chip architectures, an approach being adopted by competitors as well. 

Automakers are not entirely giving up on suppliers. They are actually increasing their investments in startups. But as the traditional Tier One suppliers begin to divest operations building internal combustion components, many who had hoped to pick electrification business with OEMs will increasingly have to look to upstart manufacturers for those opportunities. Magna has invested in Fisker and will build that startup’s first vehicle, the electric Ocean SUV, beginning in 2022. The industry is evolving rapidly, and every company will have to adapt or risk losing market opportunity.