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GM and Volkswagen are expanding their battery supply chains as part of the electric vehicle push

Car manufacturers are trying to control more of the electric vehicle supply chain, are entering into new partnerships with raw material producers, and are investing in facilities to produce chemicals for batteries.

General Motors Co.

GM 0.86%

, Volkswagen AG

VOW 1.86%

and other major auto companies have invested heavily in joint venture factories to ensure their own supply of batteries for electric vehicles. Now they also want to expand further in order to reduce costs, secure coveted components and exercise more control over battery quality and performance.

Tesla Inc.

TSLA -1.27%

was among the first to invest more in EV battery manufacturing, measures that helped the electric vehicle pioneer become the world’s most valuable automaker. The pressure from automakers to control their supply chains also comes from the fact that a semiconductor shortage has hampered vehicle production.

In the past few weeks, Volkswagen and Stellantis NV announced agreements to freeze supplies of lithium, the silvery-white metal that, due to its electrochemical properties, is ideally suited for high-performance batteries in electric vehicles.

Lithium prices are rising as demand for the main component of electric car batteries grows while driving a broader trend away from oil and gas. However, mining the metal is time consuming and potentially environmentally harmful, and plans to produce more have sparked protests. Photo: STR / Getty Images, Oliver Bunic / AFP / Getty Images

GM announced in early December that it would invest in a new North American factory with Korean steel and chemicals maker POSCO to produce cathode materials, a critical component of the battery that accounts for a large portion of the cost.

Volkswagen is planning to build a similar own cathode material factory with the Belgian materials company Umicore TO

.

The moves indicate an industry that is adopting elements of vertical integration again, a strategy that has its roots in the early days of the auto industry when some manufacturers owned or took over much of the supply chain required for production. Ford engine Co.

at one point owned mines and a steel mill.

Tesla vehicles in front of a factory in Shanghai. The electric vehicle pioneer has developed into the most valuable automobile manufacturer in the world.


Photo:

Barcroft Media / Getty Images

The change also comes as electrification threatens to disrupt the industry’s normal hierarchy between automakers and their suppliers, analysts say.

Traditionally, automakers have been able to improve their profitability by pitting suppliers against each other. With only a handful of companies making the highest quality batteries and chemicals, automakers have reduced their pricing power. Relying solely on suppliers to develop your battery technology would be like not building your own engines, said Thomas Schmall, VW board member and chairman of the company’s parts business, earlier this year.

Ken Morris, GM’s director of electrification, said at the company’s investor day in October that getting more of its battery supply chain in-house is key to meeting the future profitability and environmental goals set out for investors. In addition to the cathode material factory, GM also signed a contract in the summer to invest in a geothermal production project for lithium in Salton Sea, California.

“Vertical integration will help us do this faster, cheaper and more sustainably,” he said.

The global auto industry is aggressive in its efforts to sell more electric vehicles, with some major auto companies spending billions of dollars to expand their offerings. In addition, governments offer incentives to stimulate production and sales while tightening emissions regulations. According to analysts at Morgan Stanley, plug-in models are therefore expected to account for half of all new vehicles sold worldwide by 2030.

Yet these vehicles require a radically different supply chain than the one that has been built up over decades for gasoline-powered cars and trucks.

The strong shift towards electrical engineering has raised concerns about whether companies can source enough high quality materials to make batteries and other components that are central to meeting future sales goals.

Executives say controlling more supply chain production can help protect companies from future price hikes and bottlenecks. The disruptions related to the Covid-19 pandemic and recent semiconductor shortages are pushing the automotive industry further in this direction and causing manufacturers to reduce their reliance on global outsourcing.

“Everyone wants to secure the supply chain and not repeat the very painful experience of the shortage of semiconductors,” said Mathias Miedreich, CEO of Umicore.

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In the past few decades, automakers have largely turned away from vertical integration, outsourcing parts manufacturing and relying more on external suppliers to provide components. Vertical integration can be capital intensive and risky, and in the past automakers have struggled to bring new skills such as software development in-house, resulting in delays and lost revenue.

When Tesla invested more in its battery manufacturing capacity, it did so in part out of necessity. It took huge amounts of batteries to achieve its goal of making affordable electric vehicles for the mass market. To meet its own needs, Tesla built its first Gigafactory, a joint venture with the Japanese battery manufacturer Panasonic Corp.

which opened in 2016.

Years later, almost every major automaker has mimicked Tesla’s approach and invested in its own joint venture battery plants. To offset risks associated with upstreaming, automakers enter into partnerships to share the cost burden on projects and leverage the expertise of companies that are already active in this area.

“The pressure to integrate is great,” says Ulderico Ullisi, an analyst at the market research company Rho Motion. Those who fail to do so risk becoming overly dependent on battery suppliers for the most expensive technology in the car, and ceding margins to them.

According to analysts, the production of lithium-ion batteries relies heavily on China to refine and produce important inputs. That dependency increases shipping costs and leaves automakers – especially in the US – exposed to geopolitical risk, they say.

“Right now there are materials and inputs in this value chain that zigzag the world,” said Anirvan Coomer, executive director of GM’s global electrification supply chain. “We see an opportunity in making the value chain much more sustainable and leaner.”

Lithium-ion battery production relies heavily on China to refine and produce key inputs, increase shipping costs, and expose automakers to geopolitical risks.


Photo:

STR / Agence France-Presse / Getty Images

Write to Ben Foldy at Ben.Foldy@wsj.com

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