Article written by Joey

Recently, Bloomberg Consulting, a market research company, published a report indicating that three leading players are expected to emerge in the electric vehicle market by 2024. Volkswagen is predicted to surpass Tesla and become the leader in the electric vehicle market, with BYD also expected to produce 1.5 million vehicles annually and become the third leading player.

However, Elon Musk, who is known for his strong personality, disagreed with the report.

While Musk may not agree, the expected predictions from this research are worth exploring. Why is Volkswagen expected to have the opportunity to surpass Tesla, and what support lies behind it? Why is 2024 the expected time for these developments?

The Rising prices of Supply Chain and Raw Material

In the end, the supply chain and raw materials will still constrain the development of electric vehicles. The specific factor that affects prices is the battery and chip. However, as a part of high-end chip supply has gradually returned to normal, and low-end chip self-research has gradually emerged, the difficulties facing the supply chain of electric vehicles are now largely related to the price increase of battery raw materials.

How outrageous is the price of these battery raw materials? For example, the price of lithium carbonate raw materials reached 300,000 RMB/ton in January this year, then jumped directly to 380,000 RMB/ton in February, an increase of nearly one-third. In less than a year, the price of this raw material has increased nearly 8-fold.

Is the supply chain not supporting the development of electric vehicles? Clearly not the case. For manufacturers of these raw materials, the advent of the electric vehicle era is undoubtedly a huge opportunity. However, the problem is that so many manufacturers flooding in at once is also a huge burden for them.

It should be noted that the mature industry with a huge demand for lithium ore is not just the automobile industry. In 2021, a total of 1.3 billion mobile phones were shipped worldwide, which are almost without exception closely related to the demand for lithium battery raw materials (excluding other electronic consumer products closely related to lithium batteries such as laptops). The rapidly developing automobile industry is only a relative newcomer and is not currently at the top of the lithium battery supply chain.

Therefore, adjusting the sales ratio, expanding more profits, has become a good and useful strategy for the upstream industry of battery raw materials to adjust the supply-demand relationship. This has also led to the birth of plans such as BYD, Tesla, self-production of batteries, purchasing their own mines (BYD has already planned to develop six mines in Africa), and even plans to build their own lithium mines.However, is lithium ore really not enough? As of the end of 2020, the global reserve of lithium carbonate was 128 million tons, and the resource volume was 349 million tons. Taking the actual global car sales of 6.5 million units in 2021, if we calculate based on an average consumption of 30kg of lithium carbonate per car, which is equivalent to 195,000 tons, the difference compared to the overall reserve of lithium ore is huge (of course, a certain proportion of consumption is needed to refine lithium carbonate from lithium ore).

Therefore, the current problem may not be that the raw materials are insufficient, but that the explosive growth of the new energy vehicle industry has disrupted the supply ecology of lithium ore, leading to the rise in the price of raw materials.

From the perspective of the new energy market, which is still relatively early in development, companies with strong R&D capabilities such as Tesla and BYD undoubtedly take the initiative in terms of price and the lower cost of self-production compared to traditional automakers that depend on supply chains.

So, what is the solution for traditional manufacturers?

Larger Quantity, Better Price

The simple logic of business is to make money, prioritize making big money, and prioritize making big customers’ money. This can be seen in Henry Ford’s mass production of the Model T over 100 years ago through the assembly line, which turned cars from industrial art and luxury goods to mass-produced products and resulted in huge success.

More importantly, through the efficient production process of the assembly line, the price of cars has greatly declined, making it an everyday item affordable for Detroit blue-collar workers who could buy one with just a few months’ wages. Today, a similar phenomenon is quietly happening in the electric vehicle industry.

Speaking of the Volkswagen and Tesla competition mentioned at the beginning, I also have to mention the plastic brotherhood on the commercial field. In the middle of last year, Volkswagen and Tesla, who were still blowing each other in commercial cooperation through Diess and Musk, seem to have a vague competitive relationship now.

Although Musk disagrees with the idea that Volkswagen may surpass Tesla, this is a phenomenon worth pondering. Why is a traditional automaker surpassing Tesla and BYD, who faithfully practice the first principle, in the research report?Actually, this again involves the ultimate question of whether to do it yourself or find someone to do it. Recently, I have discussed with Honda’s partner in car manufacturing, Sony, who wants to integrate existing supplier resources and build an alliance. The effect of the alliance is to ensure a relatively stable production quantity after forming a certain scale, which can reduce prices and tend to be stable. Although Volkswagen has not shouted out so high-profile, but it has been doing it by traditional production mode for years.

Today, all companies including Tesla are pursuing an order-based production mode. That is, as many cars as people buy to produce. This model actually originated from Taiichi Ohno’s Lean Production System, which can maximize cost savings and avoid supply bottlenecks and financial pressure. But any lean model that is out of volume is just empty talk.

With the large-scale entry of traditional automakers into the new energy competition, the advantage of the original factory’s production capacity has become apparent.

Last year, Toyota announced that it would strive to halve the cost of batteries by 2030. The achievement of this goal not only depends on their investment of 1.5 trillion yen in R&D of new technologies but also relies on the construction of 10 new production lines before 2025. In other words, the manifestation of scale effects is the only way to reduce costs.

In the past, by turning to car-making through some emerging technology companies, electric vehicles with small-scale production and high-end pricing could certainly reduce enterprise risks through order-based production, but it is difficult for suppliers to reduce part costs when not running in large quantities. With the entry of current traditional automakers into the new energy field, this situation has undergone significant changes.

Recently, Volkswagen has made clear personnel adjustments at the senior management level in China. Stabilizing the gradually declining sales since 2019 is one aspect, and more importantly, it needs to find new sales growth points. And electric vehicles are undoubtedly the most important growth point in the future.

Therefore, in addition to adjusting the new architecture and giving greater autonomy to the Chinese market, Volkswagen’s Anhui factory, which was completed only in February this year, has also adjusted its production target. It plans to produce 200,000-250,000 vehicles by 2025, with an expected total revenue of 30 billion yuan. The average price of each car is around 120,000 yuan (of course, it needs to be combined with the profits of circulation and distribution).

But what is certain is that with the arrival of large-scale localized production of electric vehicles, the Chinese market, which already has greater support, demand, and potential for electric vehicles than any other market in the world, will truly have a chance to achieve what was mentioned in the research report – an electric vehicle counter attack against Tesla.

Of course, more than just Volkswagen and Toyota are doing this, including companies that are already producing significant volumes of EVs like Wuling Hong Guang MINIEV, as well as companies like Changan Lumin, Chery Ice Cream, and Xiaomayi that are following their lead. This group of companies, which do not have great demand for lithium-ion batteries or range pursuit, but have large demand for real goods, will undoubtedly gain an advantage in the future lithium-ion battery procurement war.

After all, in addition to running large volumes of microcars, their parent companies at the group level are also producing electric vehicles with different sizes and positioning, and these raw material demands are sure to elicit extra market attention and favor. Large purchase volume of batteries under the same brand will inevitably result in competitive prices and priority supply.

At the same time, we don’t have to worry about the problem of different sized batteries not being adaptable in vehicles. Firstly, nowadays, all manufacturers have started to build their own battery assembly factories, and increasingly Lego-like battery packs are no doubt helping different car models quickly splice together suitable batteries.

Speaking of this, let’s take a look at the U.S. automobile market again. In theory, for the U.S. market, which has been continuously introducing new measures to boost EV sales, this is a great opportunity to attract more people to invest in the new energy and pure electric vehicle markets. However, the fact is that new energy vehicles from automakers such as Ford, General Motors, and even Rivian have also raised prices.

According to J.D. Power’s data, the average price of electric cars in the U.S. reached $54,000 in May, while data from Edmunds.com showed that it reached $60,900. It’s truly one mountain higher than the other.

Why did prices go up? For these automakers, the main reason is that they haven’t reached the level of production. Although electric vehicle sales in the U.S. increased by 89% to 487,500 in 2021, almost matching Wuling Hong Guang MINIEV’s sales, it is obvious that they cannot gain an advantage in terms of battery pack costs or priority of raw material procurement.

Demand and opportunity are equal, of course, different people see different opportunities. For companies like Tesla and BYD, they basically adopt a one-stop-shop approach to solve their own raw material supply problems. They mine their own materials, make their own chips, and make their own batteries. So, it will be a side job for them to produce their own extracted materials in the entire supply chain of making their own batteries.

For more companies relying on the supply chain, diversification is essential.

In 2021, at “NIO DAY”, NIO announced the launch of a 150kWh solid-state battery. In July of that year, NIO entered the shareholder list of a battery company called “WeiLan New Energy”. The function of this company is also very clear, which is to help NIO build higher quality batteries. WeiLan is launching a mixed solid-liquid electrolyte battery for the NIO ET7 model with a single charge range of 1000 kilometers. This mixed solid-liquid electrolyte battery is expected to begin mass production at the end of this year or the first half of next year.

What is more important is that this company’s partners are not limited to NIO. Today, WeiLan New Energy has completed a new round of financing, with investors including Xiaomi Changjiang Industry Fund, Huawei’s affiliated company Habo Investment, and Geely’s subsidiary Geely Blue Plan.

WeiLan New Energy is not the only upstream electric vehicle company that has attracted capital. According to the relevant statistics in the first half of this year, seven new energy companies have become unicorn companies with the support of capital. These companies include battery manufacturers, charging station manufacturers, battery swapping, and solar energy companies. Some companies even extract lithium materials directly from the source.

Once these unicorn companies succeed and drive the collective rise of surrounding industries, they will provide enough data support for the overall upstream and downstream supporting of electric vehicles. The continuous improvement of these industries actually comes from the needs of large groups and powerful manufacturers for the industry.

Obviously, the small-scale new forces that used to build cars only get a small part of the lithium battery production from digital products such as mobile phones and computers, so there is no need to rebuild the supply chain for this volume. However, with more companies joining, these suppliers were caught off guard to rebuild a complete supply chain required for an intelligent electric vehicle, resulting in the current situation of rising battery prices and insufficient chips.

When traditional car companies with millions of production scale and century-old factories enter the market swiftly, this market will inevitably be summoned by demand and reshaped by capital. After this process is completed, the entire electric vehicle industry will enter a truly stable growth period, and the prices of raw materials such as batteries will decrease, and the prices of cars will inevitably decrease.

So, when is the indicative time? I think it’s roughly the point in time when manufacturers such as Volkswagen and Toyota start to leverage, and supporting enterprises grow in large numbers.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.