• Automotive Industry
  • Emissions Reductions
  • Supply Chain
  • EVs
  • Manufacturing Supply

Local for Local Is the New Automotive Manufacturing Paradigm

Sam Abuelsamid
Dec 12, 2022

Guidehouse Insights electric car

Over the past several decades, economic globalization has increasingly pushed a lot of manufacturing offshore to regions where costs are presumed lower—in practice shifting the manufacturing of many goods to China and other Asian countries. To a certain extent, this made some economic sense, but it has significant downsides, many of which have been exposed over the past 3 years. Now many industries, and especially the auto industry, are moving to a “local for local” production strategy, especially with the electric transition.

To be fair, automotive has long maintained more localized production than many industries because of shipping costs, complex supply chains, and a variety of trade restrictions on imports. However, localization has gained momentum lately, and not just because of recent supply chain disruptions. Sustainability is driving this change as much as costs and the need to bring resiliency to supply networks.

Lean Production

Most of the auto industry has for decades leveraged variations of the Toyota Production System, of which a major component is just-in-time (JIT) manufacturing. The JIT model relies on suppliers to provide parts within a few hours of when they will be installed on a vehicle, eliminating much of the inventory stores that used to be kept in plants. This approach reduces costs, and when quality problems are discovered, they can in theory be addressed quickly without having to rework or scrap defective components. This has led to supplier plants being built in geographic proximity to assembly plants.

In the early years of electrification, many automakers relied on suppliers to provide major systems including drive motors, power electronics, and especially batteries. With EVs representing a tiny fraction of overall sales, the capital investment to localize most production didn’t make sense. But as the EV market share has grown, the cost and safety challenges of shipping batteries around the world have led to a rapid expansion of local production. In the past 3 years, over 600 GWh of cell production in North America have been announced, with similar growth in Europe.

Cleaning Up the Chain

Most major manufacturers have announced their goal to neutralize carbon emissions for their operations and supply chain between 2040 and 2050. Many key minerals in batteries are currently sourced from relatively few places and processed in even fewer locations. Extracting lithium in Chile and shipping it to China for processing and then on to North America for cell manufacture adds significant greenhouse gas emissions to the overall lifecycle of the vehicle compared with a more localized supply chain.

For example, extracting and processing battery materials in the regions where cells are produced and vehicles are assembled and sold would help significantly close the manufacturing emissions gap between EVs and internal combustion vehicles. Additionally, local recycling for end-of-life batteries can recover up to 95% of materials and put them right back into the new production process.

All of this will help make future EVs more sustainable beyond just the absence of direct emissions. It will also drive down costs and make the industry more resilient to disruptions from natural disasters, pandemics, and geopolitical tensions. Even if the Inflation Reduction Act had not been passed, the industry has been moving in the right direction, with BMW’s recent announcement of a $1.7 billion investment in South Carolina and Bosch’s motor production launch in the same state as just the latest examples. Local for local production will be a benefit to everyone.