Electric Vehicle Batteries Drive Investment

Other Automakers Follow Tesla’s Lead

In 2016, Tesla (TSLA) partnered with Panasonic (PCRFY) to build a gigafactory that produces batteries for Tesla vehicles. The move was made largely out of necessity, given that Tesla wanted to mass-produce affordable electric vehicles, and demand outpaced what could be produced by existing suppliers. Now, General Motors (GM) and Volkswagen (VWAGY) are taking similar steps in order to better control their supply chain.

Analysts note this is similar to the vertical integration that was once commonplace in the automobile industry. For example, Ford Motor Company (F) once owned both mines and a steel mill, leaving the company largely insulated from shortages and fluctuations in price.

Semiconductor Shortage Is What EV Makers Want to Avoid

EV makers are still grappling with semiconductor shortages brought on by pandemic-related supply-chain issues. In order to overcome this type of obstacle, more companies are partnering with existing suppliers to take control of their supply chains.

Analysts note that these partnerships limit risk and lower the capital costs. In some cases, automakers are also partnering with companies to secure raw materials like nickel, cobalt, and lithium.

Industry executives indicate this trend not only helps profitability, but also sustainability. Partnerships that keep more production in-house will help companies meet the environmental goals that they have outlined for investors. As more factories open in the US, there’s also hope that the EV industry will be less reliant on global shipping, and therefore less susceptible to geopolitical issues.

Diminished Pricing Power Forcing Automakers to Bring Operations In-House

For years, automakers sought to increase their profit margins by pitting various suppliers against each other, even splitting off parts-making divisions and relying on outside companies for key components. This proved to be a problem when it came to electric vehicle batteries, given that so few companies produced them. One industry executive went so far as to say EV makers outsourcing battery production is similar to them not making their own engines.

Investors are taking notice of this trend. For example, a South Korea-based battery supplier’s upcoming IPO could be the largest ever listed in Seoul. LG Energy Solution provides batteries to Tesla, GM, and Hyundai (HYMTF). Even if shares trade on the lower end of expectations, the deal is likely to raise the equivalent of over $9 billion, which would surpass South Korea’s current record IPO set by Samsung Life Insurance in 2010. Demand for EVs is beginning to grow and automakers are rushing to be at the forefront of this trend. In order to do this, many are changing the ways they do business.

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