(TNS) — As Ford Motor Co. enters what CEO
Jim Farley
calls the "first inning" of its transition to electric vehicles, it faces a decision that could shape the success of its electric-vehicle strategy: whether to make the battery cells that power EVs.
The
Dearborn automaker so far has opted to buy battery cells from its suppliers, citing the flexibility the supply chain provides as battery-cell technology continues to evolve and the larger production scale that would be needed to justify such a massive investment.
"For now, it makes sense for us not to use our capital there because there's plenty of capacity available,"
Kumar Galhotra
, president of
Ford's Americas and international markets group, said during a recent Barclays automotive conference.
But with the global industry inching closer to an electric future, and the Blue Oval committed to investing more than $11.5 billion in electric vehicles by 2022, that calculus may change. Crosstown rival
General Motors Co. and electric-vehicle maker
Tesla Inc. are all in on producing their own battery cells with joint-venture partners, and experts say every major automaker in the world is likely considering doing the same.
Ford isn't there yet, at least not so much publicly. The Blue Oval is beginning to roll out its first generation of EVs, starting with the Mustang Mach-E this year and electric versions of the Transit cargo van and F-150 pickup truck before the end of 2022.
Yet Farley used the recent Reuters Automotive Summit to hint that a change in strategy is under consideration. The company is "absolutely" looking at going into battery-cell production, he said — an abrupt about-face from the assessment his predecessor,
Jim Hackett
, offered investors just months ago.
"What we're finding is that there's not a lot of capacity flexibility if you buy your batteries from someone else, and so there's a lot of other reasons beyond costs to make a move," Farley said. "It's something we're discussing inside the company, and it's the right time to discuss it. If we discussed it a year ago or two years ago, it would have been too early. If we discuss it in five years, it'll be too late."
Industry experts say they would not be surprised in the least if
Ford were to one day move to manufacture battery cells, likely as part of a joint-venture with a battery maker akin to
GM's partnership with
LG Chem of
South Korea. (
Ford declined further comment on its plans.)
But it's a decision that the Blue Oval, as well as its global competitors, likely will have to ground on a variety of factors including the major costs associated with such a venture, how reliable the supply chain is, how quickly consumers adopt EVs, and logistical considerations such as where they would build new manufacturing facilities.
"The auto companies have not been part of the (battery) supply chain, and they haven't needed to lock up the supply chain, because electric vehicle sales were so small," said
Mike Ramsey
, automotive analyst for
Gartner Inc. "The reason things have changed is because they're going to be selling a lot more electric vehicles, and they can't afford for those batteries to not be there when they build the car."
"So," he said, "I fully expect that
Ford will eventually own its own battery plant."
Labor impact
Currently, fully-electric vehicles make up just a tiny sliver — less than 2% — of new-vehicle sales in the
U.S. But industry experts expect that to change as state and national governments around the world implement stricter carbon-emissions standards, President-elect
Joe Biden
launches a more EV-friendly administration, and momentum builds around tackling climate change.
Automakers are making the same bet. Between the three
Detroit automakers, tens of billions of dollars in EV investments are planned in the coming years.
GM has been particularly aggressive, committing to an all-electric lineup in the future.
A recent
McKinsey Center for Future Mobility report on EV profitability estimates that capital expenditures on battery-electric vehicles will double in the next five years. But the transition away from gasoline-powered vehicles has many concerned about the implications for manufacturing jobs, as mechanically-complex vehicles give way to EVs with far fewer parts and leaner assembly processes that lend themselves to greater use of automation.
Getting into the production and assembly of EV components and batteries would be one way to mitigate some of the expected job losses, though experts still expect a net job loss in the long run.
Ford recently announced new jobs tied to battery assembly and EV production at its historic Rouge complex, as well as retention of jobs at its Van Dyke Transmission Plant in
Sterling Heights as it invests in production of e-motors and e-transaxles.
"We do have to solve for the reality that when electrification becomes 25% to 50% of our industry in the coming years, what are we going to do about the jobs?" Farley said, echoing a concern already voiced by leaders of the
United Auto Workers. "One of the obvious choices is going into cell production, but it's a completely different animal than final assembly of a vehicle or even powertrain."
He added that such a move would require
Ford's workforce to become fluent in entirely new processes and the automaker to commit major cash investments — just a few of the factors the automaker would have to take into consideration should it decide to follow that route of electrification.
The UAW in a recent research paper sounded the alarm about the potential for
U.S. workers to lose out on jobs tied to the EV supply chain. The union calls for a comprehensive national industrial policy that includes government incentives to "promote production of EVs and EV components in the
U.S. Such incentives should be used in a targeted way to promote a domestic EV supply chain and enforce high-road manufacturing practices."
Challenges, benefits
Large automakers such as
Ford already control pieces of their own supply chains, building and assembling parts such as engines and transmissions. But batteries are a different story, and experts say that could pose a challenge as more automakers conclude they need greater control over the supply chain for EV components.
"If we were talking about engines and
Ford said, 'We need to make sure that we can get all the engines we need for the F-150...' that would make absolute sense to every human being," said Ramsey. "Batteries are very similar; it's just that car companies have never been in the battery business."
That's one reason why industry analysts expect that if
Ford does decide to make its own battery cells, it will do so with a partner, as
GM and
Tesla have done — a model that may become the industry norm in the coming years.
"Automotive firms that want to be major players in the future need to own their battery supply chain," said
Ajit Sharma
, a
Wayne State University faculty member who studies the EV supply chain.
Since 2017,
Tesla's Nevada Gigafactory has produced lithium-ion batteries in partnership with electronics company
Panasonic Corp. And
GM last year inked a $2.3 billion joint venture with South Korean battery maker
LG Chem to make its proprietary Ultium battery cells in
Lordstown, Ohio, a move it has said brings speed and cost advantages.
There are benefits to this strategy for auto and battery makers alike. Companies that make battery cells can reduce the risk involved by creating a captive market and sharing capital expenditures with the auto companies, said
Richard Kim
, a supply chain/technology analyst at
IHS Markit. Automakers, too, can hedge risk and "seize the value created in this supply chain."
McKinsey found in a survey that, as of spring 2020, 91% of manufacturers prefer to buy battery cells. Overall, the report suggests that in order for in-house production of battery cells to make sense in terms of manufacturing efficiency and profitability, OEMs would need to reach annual EV production of at least 500,000 units.
"With advances in (battery-electric vehicle) technology, the battery market will likely reach $100 billion in size by 2025," the report states. "As they increase BEV production, OEMs should reevaluate their value-chain strategy, including their make-versus-buy choices for both battery and e-drive components."
The issue of scale is why experts say it's unlikely
Ford will start making its own battery cells in the immediate future. But in a few years, if and when the automaker rolls out a fresh cycle of higher-volume EVs, it's more likely.
"We're going to see an acceleration of EV adoption over the next five to 10 years, and with that, there's going to be a need for more battery production capacity," said Sam Abuelsamid, principal analyst at Guidehouse Insights. "Given where the sales volumes are today and the next two to three years, I think it's a little bit early for
Ford to jump in there. But when you start looking at 2025, then you're starting to get into that timeframe where it's going to start to make more sense."
Meanwhile, in just one example of why greater control of the supply chain may be appealing:
Ford is currently caught in the crosshairs of a trade dispute between competing battery makers.
LG Chem, which supplies
GM and
Tesla, is alleging trade secret theft by
SK Innovation — which supplies
Ford and
Volkswagen — and trying to block SK from producing battery cells at an under-construction facility in
Georgia.
The International Trade Commission is expected to issue a decision on the matter in February.
"You have a limited number of suppliers that you can go to (for batteries), and if the supplier you've chosen is suddenly having some intellectual property issues with a competitor, you have to perhaps start thinking about alternatives," said Abuelsamid.
If the Blue Oval does ultimately pursue battery-cell production, he said, the next questions will be how it will handle such issues as intellectual property rights and financing — and, most importantly, who it will partner with and what technology it will use.
"If they do move forward," he said, "then that's a further sign of their confidence in the EV marketplace."
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