The auto industry is bleeding from a dearth of semiconductors, used for example in heads-up displays, sensors, cell phone integration, and to enhance engine performance.
According to AlixPartners, a consulting firm, the global chip shortage will cost automakers US$100 billion in lost revenue this year and affect the production of 3.9 million vehicles.
The chip crunch is attributed to a number of factors. The pandemic prompted semiconductor factories to shut down early last year, particularly in Asia where the majority of processors are made. By the time their economies started to re-open, there was already a backlog of orders to fill.
Then, chipmakers were swamped by unforeseen demand, not only for new cars but personal computers and gaming consoles which also run on microchips. Adding to the demand surge, wireless providers clamored for chips to power new 5G networks. Current vehicles have anywhere from 30 to 50 chips in them.
Losing control over such a vital link in their "just in time" supply chains has caused automakers to look at developing direct relationships with semiconductor manufacturers, something they were reluctant to do in the past because it meant being financially liable for such agreements.
"These things are shocked into existence," said Mark Wakefield, co-leader of AlixPartners' global automotive practice. "Now the risk is real. It's not a potential risk of losing production to semiconductor shortages."
Fortunately, there is a template for them to follow -- when automakers had supply agreements with producers of palladium and platinum. After a price rise in those raw materials, used in catalytic converters, it prompted them to take a more direct approach to the sourcing of their raw materials.
The same thing is happening now with lithium and graphite -- metals that are essential to lithium-ion batteries, which power electric vehicles, grid energy storage systems, and consumer electronics such as smartphones and power tools.
Volkswagen has announced it is in talks with suppliers to secure direct access to raw materials for EV batteries, including BASF, a large maker of battery ingredients. The world's second-biggest carmaker is trying to exert more control over key components in its supply chain such as semiconductors and lithium so it can overcome any potential bottlenecks and keep its plants running at full capacity.
The company is also trying to catch up with rivals like Tesla and BMW which have already struck supply deals with lithium producers. BMW has an offtake agreement with US lithium manufacturer Livent and China's Ganfeng Lithium, while Tesla has a five-year lithium hydroxide supply deal with China's Sichuan Yahua Industrial Group.
"We need to move into vertical integration more strongly, procuring and securing raw materials," said Thomas Schmall, Volkswagen's board member in charge of technology.
Schmall said that gaining control of the supply of raw materials for EV batteries, which also includes graphite, cobalt and nickel, is vital to getting a better handle on costs. "80% of cell costs are determined by raw materials. So, it's obvious that one needs to be more engaged."
"We're all in a race. It's about making the most affordable cells and you need scale to do that," he added.
The supply of battery metals will likely continue to be a concern for automakers and battery companies, so long as production is concentrated in the hands of so few players and countries. In 2020, the vast majority of mined graphite came from China, while for lithium, Australia and Chile were the top producers.
Meanwhile, the demand side of the battery metals market just keeps growing.