Tina Bellon, Joseph White

(Reuters) – Automakers are racing to create battery-powered and software-driven cars to rival Tesla’s (NASDAQ:) Inc. They face a new problem: which technology should they build, and what technology can be purchased from suppliers.

Global automakers are making major changes to become more vertically integrated and do more manufacturing in-house. They have been dependent for many decades on their suppliers for critical parts and managing sprawling production networks in low-wage nations.

However, some automakers are making drastic changes in their traditional build-or buy calculations. Tesla’s successful electric vehicle, which is based on its proprietary technology that it develops and produces itself, has been a factor. One factor that contributed to the financial losses caused by disruptions in supply chains during the pandemic is another.

Vertical integration is the most important thing. Jim Farley (NYSE:) Ford Motor Co. CEO stated that Henry Ford… was correct at a conference earlier in the month. Farley was referring to Henry Ford’s Rouge Manufacturing Complex in Dearborn (Michigan), which took iron ore at one end and produced Model Ts at the other.

Farley stated that the company needed to abandon its initial EV strategy, which was to buy components from the shelves. Ford now wants to manage the supply chain “all the way to the mines that make battery materials,” he stated.

Like the Mercedes-Benz AG, rivals include General Motors Co (NYSE :), Volkswagen AG (OTC :), and General Motors Co (NYSE :). Mercedes bought British manufacturer of high-performance electric cars YASA last year and has retooled a Berlin factory to make motors based upon YASA technology. German luxury carmaker Mercedes opened a factory in Alabama in March to manufacture battery packs for U.S-made electric vehicles. The company also said that Envision AESC, a Japanese battery manufacturer, will be its partner to help build batteries in the United States.

Ola Kaellenius (CEO Mercedes-Benz) told reporters that the company was “deep into sourcing” during an Alabama briefing.

STRATGEY FOR WINNING

Automobile manufacturers are making investments in motors, batteries and mines. This is a break from years of handing over production and development to suppliers. They could then produce electronic components, such as steering controls and semiconductors at lower costs for multiple car makers.

Investors have concluded that Tesla’s strategy of purchasing raw materials, creating its own batteries, and designing its own software, is winning in the world of electric cars. Tesla’s market capitalization soared above $1 trillion over the past few weeks. This is far more than what was reported in Toyota Motor (NYSE:) Corp., Volkswagen (DE) GM and Ford together.

In an interview with Reuters, Peter Rawlinson (CEO of EV startup Lucid Group Inc) stated that while major players know electric cars are the future, they still haven’t widely recognized their need to improve on motors, transmissions and battery technologies. Rawlinson used to be vice president of Tesla’s vehicle engineering department.

According to Sam Abuelsamid, Guidehouse Insights analyst, automaker intellectual property decreased between the 1970s and 2010s from 90% to 50%.

This meant that many automobile manufacturers didn’t have the engineering skills to create their own battery packs, powertrains or platforms for electric vehicles. However, Tesla was able to show consumers how its vertically integrated cars are a success.

“We are building and designing so many more vehicles than OEMs that will be primarily going to the traditional supply source. [execute]Elon Musk, Tesla CEO and founder of Tesla Motors said that catalog engineering is what I refer to it during the 2020 earnings call.

Tesla’s expensive approach to vehicle pricing is a costly one. The company has repeatedly raised the prices of its vehicles in recent years. Musk said earlier this year, “We’re currently not working on the $25,000 vehicle.” Musk had promised to produce a model with a starting price of about $25,000 but he has yet to make that promise. We will at some point. We have plenty to do right now.”

TECHNOLOGY RACE

Executives from the supplier sector said that there’s a big gap in what automakers have to say about their vertical-integration strategies. This is not to mention what happens when engineers are trying to meet time deadlines.

Aptiv Plc chief executive Kevin Clark stated to analysts, February that “there’s a lot narrative about insourcing and vertically integrating,” especially in the area of software. Software development is a major problem for virtually all OEMs we deal with.

Xavier Mosquet is a Boston Consulting Group senior advisor and said that many manufacturers prefer to purchase EV technology because it reduces the complexity and costs of making in-house.

Mosquet stated that there are many automakers willing to buy and continue to manage final integration. He added that it could take years before we can determine the best approach.

Many automakers remain reticent to fully insource EV manufacturing when they still only account for a tiny fraction of vehicle sales.

Today, only Tesla, EV startup Lucid Group Inc and Chinese BYD Co (OTC:) Ltd are completely making their electric motors in-house, according to IHS Markit, followed by Hyundai Motor Co and the Renault-Nissan-Mitsubishi alliance.

For their current electric vehicles, other carmakers like Ford, Mercedes-Benz Group and Porsche are also using suppliers’ electric motors.

Rawlinson explained that an electric powertrain is not something you can buy off the shelves at a high-quality standard. This is a race in technology, and the market does not see it yet.”

Mercedes stated that it will begin making its own electric motors and battery packs in 2024. Markus Schaefer (Chief Technology Officer) said the company works to cut costs by sourcing raw materials direct from miners.