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Arun Kumar, managing director in the Automotive and Industrial Practice of AlixPartners LLP, lays out the challenges that automakers face in converting their factories and supply chains to the exclusive production of electric vehicles.
The biggest challenge confronting automakers today is the need to switch to full production of electric vehicles, says Kumar. What’s more, the transition is happening with remarkable speed. “It’s almost like the last five years is equal to what we’ve seen in the previous 100 years,” he says.
At this early stage of transformation, however, the economics don’t favor electric vehicles. According to AlixPartners’ latest Global Automotive Outlook, while investments in electric vehicles have increased by 41% over the past year, and should hit $330 billion through 2025, electric vehicles continue to bear a variable-cost penalty of $8,000 to $11,000 per unit.
Automakers can’t defray the relatively high cost of batteries by cutting costs elsewhere in the vehicle. “That’s why we believe we’re going to see profits on a per-vehicle basis lower than with internal combustion engines,” Kumar says.
As they adjust their supply chains to production of electric vehicles, automakers must make key decisions on sourcing. Tesla has chosen the strategy of vertical integration, producing its own batteries, but other manufacturers could pursue a different path. Instead, they’ll seek close ties with multiple independent battery manufacturers, to ensure continuity of supply while keeping their own capital investments relatively low.
Further challenges will emerge in securing sufficient quantities of semiconductors and rare earth minerals that are making up an increasingly large portion of modern-day vehicles. As consumer demand for electric vehicles picks up, new sources of raw materials will emerge, Kumar believes, “so I don’t think we’ll see a huge problem” with securing the necessary components.
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