BriefCASE: OEMs’ battery sourcing conundrum

These are uncertain times for the nascent electric vehicle (EV)
industry. There is much to deal with. Changing regulations, tepid
consumer demand, rising price wars and geopolitical uncertainties
are top of mind. Some adjustments in investment strategy will
inevitably be required in these early days, but OEMs cannot lose
sight of a future where their success will depend on the steps they
take now. Key to that future is the prevailing strategy adopted
around EV battery value chains. Unfortunately, there is no single
solution here. Much depends on the individual OEM's appetite for
risk and control and the level of in-house competency and
resource.

Battery sourcing strategy

There are three main components of an EV battery: cell, module
and pack. Automakers can have distinct levels of control for the
value chain of these components. S&P Global Mobility
categorizes OEMs' battery sourcing strategy under four types: value
chain integration, partnerships, system integration and
outsourcing.

S&P Global Mobility forecasts that sourcing under value
chain integration, where the cell, module and pack are manufactured
in-house, will increase from 16.7% in 2022 to nearly 21% in 2030.
During the same period, outsourcing is expected to fall from about
21% to less than 11%.

OEMs are increasingly looking to balance the risk against the
investment required to have a highly vertically integrated battery
supply chain. That is the reason behind a lot of partnerships
between OEMs and suppliers. This trend will gain more momentum
through the end of this decade. Sourcing through partnerships is
expected to increase from 7% in 2022 to 26% in 2030.

System integration, where OEMs manage the supply of one or two
components and source the other components from a third party, is
currently the most popular strategy among OEMs with nearly 54% of
batteries (in gigawatt-hours) sourced in this category. Its share
is expected to fall to about 42% in 2030.

Tesla to increase cell production
capacity

Tesla currently has zero sourcing of packs from partnership or
outsourcing. Tesla is expected to follow this strategy for the
foreseeable future. In 2023, 11% of Tesla's battery demand was
fulfilled in-house. For 48% of the remaining batteries, Tesla
sourced just the cells from cell-makers and for 40%, Tesla sourced
both cells and modules from cell-makers.

Tesla is expected to gradually build its cell-manufacturing
capacity. By 2030, nearly 18% of the lithium-ion (Li-ion) cells
used in its cars will be manufactured in-house. Tesla has been
building capabilities to manufacture its 4680 cylindrical cells in
its Texas gigafactory in the US. Currently, Tesla imports cells
from mainland China and Japan for vehicles manufactured in North
America. However, the automaker is expected to significantly reduce
the share of imported cells in its North American operations.

BYD aims to be a global battery supplier

BYD currently meets the entire Li-ion battery demand for its
plug-in electric vehicles (PEV) through in-house production. In
2023, more than 111 gigawatt-hours (GWh) of batteries were equipped
by BYD in its PEVs. This figure is expected to double in the next
seven years, but BYD will likely continue with in-house sourcing
for all three main components of the battery.

Besides, BYD is aiming to be a global supplier of battery cells.
It is already the second-largest cell manufacturer in the world,
behind CATL. It is already supplying a small number of cells to
automakers such as Toyota, FAW, Hyundai and Tesla. By 2030, nearly
40% of the cells produced by BYD will be delivered to other
OEMs.

Volkswagen to increase cell sourcing through
partnerships

For modules and packs, Volkswagen (VW) maintains a high level of
control. In 2023, nearly 77% of its battery sourcing was of the
system integration type where VW was involved in the production of
the modules and packs. In the coming years, VW will continue
favoring system integration in battery sourcing, but it will also
significantly increase sourcing under partnerships. From about 11%
in 2023, the automaker is expected to meet more than 35% of its
battery demand from partnerships in 2030.

The German automaker has been investing in in-house development
and production of cells, but the focus has been on nickel-based
chemistries. VW is expected to expand the use of lithium iron
phosphate (LFP) batteries in its cars but the majority of the LFP
cells will be sourced through partnerships, or directly from cell
manufacturers.

The sourcing strategies at Tesla, BYD and VW show that OEMs will
continue to have different approaches for sourcing and vertical
integration in the battery value chain. Clearly, there is no
one-size-fits-all solution for this. The three automakers had the
highest demand for batteries (in GWh) in 2023 and will have the
highest cumulative demand for batteries between 2022 and 2030.

Authored by: Srikant Jayanthan, Senior Research
Analyst, Supply Chain & Technology, S&P Global Mobility

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