Opinion piece by Gopalakrishnan VC – Director Automotive, Govt. of Telangana
Automotive supply chain is one of the most structured, at the same time complex, value chains in the world. It covers business activities between suppliers, warehousing, manufacturing, transportation, sales and distribution. Complete flow of goods – from raw material to the finished product – comes under the gamut of Supply Chain management. Functioning of this heart of automotive machinery has evolved over the years in regulating the inflow and outflow of goods based on consumer demand, new manufacturing processes, new trends in material science, warehousing practices, etc. Transformation this time around is due to technology shift of prime mover from conventional ICE to Electric.
Combustion engine, which carries the highest value, is traditionally produced in-house by the vehicle manufacturer (VM) and its performance quality gives the VM brands their identity. Since electric motor is a different ball game and it has to be outsourced, VMs need to now focus on its inbound logistics and inventory costs as these are not just high on value but also on weight and volume.
Battery technology is the Holy Grail that holds the most value in EVs. Cathode materials like Lithium, Cobalt, Nickel, Manganese and graphite for the anode are sourced from Asia, Australia, Africa and Latin America. Refining, manufacturing of electrodes, insulation, electrolyte and Battery Cell happen largely in China. They have achieved cost and technology dominance, creating a huge barrier to entry. Tier-1s manufacture Modules and Packs which are heavy and bulky. Resulting logistics cost strategizes VMs to locate themselves closer to Battery Pack manufacturers.
VMs need to restructure their core competence and ensure that they are not just an assembly factory. They could look at M&A or a JV with an electric motor or battery manufacturer to reap benefits from owning the technology, apart from staying relevant in the EV ecosystem. Even then, since battery plants are capital intensive, they would create value only at high volumes. VMs would need to book orders from other VMs as well to meet economies of scale. It looks interesting at the moment how things would pan out in this space.
The in-house logistics of VMs would continue to aid assembly line utilisation to match the supply of vehicles to its demand. New mantra of some entrants who started off from a clean slate is to do away with high-volume capital-intensive assembly lines and instead build vehicles profitably at any volume. In-house logistics in this case would adapt to this novel idea to create value. As engines are eliminated, the bodywork is less complex resulting in monocoque chassis. This gets rid of welding and related logistics.
Finished EVs, just as ICE vehicles presently, would be managed efficiently by the VMs and their extended dealer network. With push from different policy makers in speeding the adoption of EVs, and with setting-up of extensive charging infra in all main cities thus eliminating range anxiety, an equally pressing question now is – how would the whole supply chain system fare at low volumes initially? Exciting times ahead!
By Gopalakrishnan VC – Director Automotive, Govt. of Telangana