Supply-Chain Challenge 2.0: Complex Auto Industry Transitions To Electric

The third-fastest growing major U.S. import in the most recent month was batteries like those used in electric vehicles, 75% of which came from China, South Korea and Japan.

Sure, the value of oil and gasoline grew faster among the nation’s top 50 exports — they have been there previously.

But the battery statistic, coming on the heels of the global climate change COP-26 conference in Scotland, recent expansion announcements by legacy automakers, shocking valuations given to nascent electric-vehicle companies, and aggressive incentives by Midwestern states got me to thinking about how the response to global warming will affect global trade.

Here’s how: It will disrupt and transform the North American automotive industry, the largest, most complex and tightly integrated cross-border supply chain in the world.

Companies making the wrong things will lose ground to those making the right things. Manufacturing jobs held by some people will go away. Manufacturing and software jobs will open up for others, possibly in the same locations, possibly in neighboring states, possibly in other countries.

Yes, this will be a global story, as automotive hubs in Poland, Hungary and other countries of the former Eastern Bloc as well as China, Malaysia and other Asian manufacturing hubs race to supply a rapidly expanding global market and as developed countries race to the Democratic Republic of the Congo for the cobalt that is so critical to the ion-lithium batteries required to power electric vehicles.

It’s clear that those who bet on a future working in the electric vehicle industry will fare better than those placing their chips on the internal combustion engine.

Ultimately, the disruption to the industry will be good news. The car of the future will be to the car of today as the cell phone of today is to the landline phone.

Landline anyone?

Short- to medium-term, well, that might be another story.

You might have heard recently that the three largest motor vehicle companies in the United States by market cap were Tesla, Rivian and Lucid. Each was worth more than Ford and General Motors. Rivian, with no revenues, was at one point worth more than even Germany’s Volkswagen Automotive Group.

That’s disruptive, or potentially so. Don’t think that Volkswagen, Ford, GM or Toyota are sitting on their hands. G.M. has promised to go all electric in 14 years, Ford to be at zero emissions worldwide by 2040.

So, as fanciful as those valuations might eventually prove to be for Tesla, Rivian and Lucid, and as fanciful as it might seem that half of the vehicles sold in the United States by the end of the decade could be something other than internal-combustion vehicles, it is plausible.

If the percentage of electric vehicles sold doubles every other year of the next eight years, that percentage would jump from about 3% to 6% to 12% to 24% to just under 50% by 2030.

It’s no wonder that Ohio, Illinois, Indiana and Michigan — once the heart and soul of the world’s automotive industry — are aggressively courting car-battery makers and others in the electric vehicle world through tax incentives. Wisconsin and Minnesota are in on the act as well.

A number of companies are lining up to make batteries in the United States, including an arm of the South Korean conglomerate LG, which plans to invest billions.

While the largest supplier of imported traditional 12-volt car batteries is Mexico, the largest supplier of the much larger, more powerful batteries used in electric vehicles is China.

In September, 35% of lithium-ion batteries, a sub-category of electric batteries which includes cell phone and laptop batteries but which is now led by those for electric vehicles, were from China, up from 27% in 2020.

Year-to-date that percentage is even higher for China — through September, the total is 49.96%, the second highest market share to its 2019 total of 52.72%.

As a United Autoworkers representative testified before a legislative committee in Ohio recently, “As it stands today, most of the production footprint of tomorrow’s advanced automotive technology will be overseas. It is projected” — though I couldn’t determine by whom — that “ by 2029, 70 percent of the lithium-ion batteries that power (electric vehicles) will be built in China and another 16 percent will be built in Europe.”

Given that another race is on, it is not entirely surprising that President Biden has proposed a $12,500 tax credit for the purchase of an electric vehicle, though his intentions were made clear with the provision that those cars be made by union workers in order to qualify.

Not only would that not include those made by Tesla, which today accounts for about half of all U.S.-made electric vehicles, but it would almost certainly raise the hackles of our USMCA partners, Canada and Mexico.

To get a sense of the economic disruption ahead — even without the tax credit — consider the United States’ most valuable exports and imports.

Among the top 10 exports this year are gasoline at No. 1, followed by oil at No. 3, passenger vehicles at No. 5 and the primary category for motor vehicle parts at No. 9. Those four alone are responsible for 13.75% of all U.S. exports out of some roughly 1,265 categories in the U.S. Census Bureau data.

Among the top 10 imports are No. 1 oil, No. 5 passenger vehicles, No. 7 motor vehicle parts and No. 9 gasoline. These four imports are equal to 15.63% of all imports through September, the most recent data available.

But the impact won’t stop at the oil companies like Exxon Mobil, Chevron and Shell. It will flow through to the U.S. oil drilling and refining industries. The impact won’t stop at vehicle manufacturers Volkswagen, GM and Ford, which are investing in EV companies and building their own.

It will flow through to their suppliers.

It will flow through, and challenge, the companies that are manufacturing not only traditional vehicle body parts but those making internal-combustion engines, mufflers, alternators and catalytic converters. It will flow through not only to the makers of passenger vehicles but to those who make tractors to pull trailers.

And it won’t stop there.

It will, of course, affect the retail energy business, by which I mean the corner gas station. Most of our trips are short distance, meaning many of us will be able to charge our vehicles, just like our cell phones, at home at night.

The opportunity lies in reimagining the passenger vehicle.

What happens to innovation when you put a much more powerful battery into a vehicle? That was one of the topics when I spoke recently with the president of Canada’s Automotive Parts Manufacturers Association, Flavio Volpe.

Volpe sees great opportunity for the stretch of Canada on the northern shore of Lake Erie, between Toronto and Windsor, the Canadian city that abuts the American city of Detroit, which he described as an enormous “IT cluster” that positions Canada well.

I would argue it might also be what helps bring back “Detroit” by which I mean all those cities in and around the Motor City that are issuing those incentives.

For an idea of what’s coming, think back to the example of the “utility differential” between the landline and the cell phone, a device for making phone calls versus a handheld computer that does so much more.

Of course, innovations often build upon one another. Expect that in the case of motor vehicles as well, in much the same way that the addition of the camera to the cell phone led to the ability to make bank deposits, download restaurant menus and even create the need for YouTube.

Just as we could not have imagined those when the first cell phones were hitting the market a few decades ago, neither can we imagine the innovations coming to the automobile.

Volpe, from the automobile parts association, and I spoke about the seemingly mundane car seat. For the most part, it’s either made of leather or fabric. Some cars come with seat heaters, some can push cool air on your back.

Now imagine a “smart” car seat or steering wheel, one connected by sensors to powerful computers armed with artificial intelligence capabilities. The obvious addition would be related to health, since we already have that on our watches, allowing our medical professionals to monitor conditions of heart patients or those who suffer from diabetes.

Imagine a steering wheel that could monitor grip strength and, should it become excessively tight in moments of stress, ask if we would like to listen to soothing music or lower the temperature.

As unimaginable new features move throughout our vehicles, we will stop yearning for that V8 under the hood, in the same way that, increasingly, people are doing without a landline at home.

From there, increasingly, we will move toward not only zero emissions but also zero collisions. (Think of all those extra cameras, for starters.) Cars and driving will be safer.

That, in turn, will have an impact on car insurance rates, work required at body shops.

While we won’t need oil changes, we will need software upgrades to add features, fix bugs and enhance security from hackers. We will, of course, also need hardware replacements, too, when parts go bad — but with both hardware and software, we could be notified, as could our “mechanics,” if that term will still apply.

Those of us who are fearful of the future should be concerned. Those of us who inspired by what’s to come will be thrilled.

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