Greenfield's Point of View - April 2021

The Fragility of Our Supply Chain

This past week, a 1,300-foot, 220,000-ton container ship called the Ever Given caught the attention of the world and underscored the fragility of our global supply chain.

For all that aviation and telecommunications have transformed global commerce over the past century, control of the straits through which the world’s shipping passes is more important now than it’s ever been. For example, about two thirds of the world’s international crude oil trade and 80% of petroleum products move by sea.

I was in high school during the heyday of Dell Computer’s stratospheric rise, and experienced firsthand the way the company cleverly combined online configuration/buying with the implementation of their Just in Time (JIT) supply chain. It felt like I was living through an era of compression of Moore’s Law, and distinctly remember feeling that the CPU and hard drives were always 6 months away from not being able to support the latest computer games. Dell (along with Intel and Microsoft) took the term “planned obsolescence” to a whole new level.

Years later, in operations classes in business school, we studied both Dell and Walmart’s supply chains with awe; how they effectively squeezed efficiencies out of their suppliers. There were dozens of successful business books, consulting firms and HBR cases launched around “Just In Time” (JIT) delivery (and for those Trello users and/or Product Managers in the audience, the word for “Just in time” in Japanese is “Kanban”).

Fast forward to current, and we are feeling the effects of businesses’ embrace of every-tightening supply chains.

Believe it or not, it was ten years ago that the Japanese earthquake and resulting tsunami devastated the northeast coast of Japan with the most powerful natural disaster in Japan’s modern history. Compounding Japan’s predicament was the destruction of several nuclear reactors in the region which supplied electricity to the region. A large area was temporarily evacuated, making rapid reopening of affected industries impossible.

The effects of the earthquake were felt far and wide for those of us in the automotive industry, and I remember meeting with Honda stores that were literally not going to receive new vehicles for 6 months or more. It reminds me a bit of “Chaos Theory” (AKA “The Butterfly Effect”) that suggests that the flap of a butterfly's wings might ultimately cause a tornado halfway around the world. We just got to experience it in real time.

Last year, smack dab in the middle of a global pandemic, used car prices skyrocketed due to a lack of supply, wholesale auction closures, and a shortage of new vehicles due to both factory closures and supply-chain issues. All this while consumer demand for vehicles somehow remained strong.

This year we’re once again experiencing a skyrocketing of used car prices, which isn’t expected to return to normal until at least the fall. Auction prices have taken off. Dealers face new car shortages due to a global dearth of microchips. Consumer demand is being stimulated by the US Government sending checks directly into consumer bank accounts and the target of having 200 million people vaccinated by the end of April. To add insult to injury, increased vacation and business travel has rental car companies scrambling to react to a shortage of cars, which means we won’t be seeing the supply of rentals entering the auction channel this year; a supply of inventory that dealers (and wholesale auctions) count on.

I believe that our general embrace of tight supply chains will have an even greater impact on the automotive industry in the future. Circling back to the Ever Given, keep in mind that the flow of goods by sea accounts for 70% of total international trade, and that Chinese companies hold stakes of close to 65% in the world’s busiest ports.

Battery Technologies

For the record, I have nothing against China. In fact, I’ve traveled the country extensively, have spent months there at a time, and love the people, the countryside, the culture, and the food.

But, if you haven’t been paying attention, China has been buying up the world’s supply of battery inputs in an effort to control the supply chain. According to data released from Benchmark Mineral Intelligence, Chinese chemical companies accounted for 80% of the world’s total output of raw materials for advanced batteries.

Just as a quick primer, there are a few key inputs into batteries:

Rare Earth Elements

Rare earths are a group of elements on the periodic table with similar properties and are used in a wide range of consumer products, from iPhones to electric car motors, as well as military jet engines, satellites and lasers.

China is the world's largest producer of rare earths. While accounting for roughly 30 percent of the world's total reserves, the country produces about 85 percent of the world's rare earth oxides and approximately 90 percent of rare earth metals, alloys, and permanent magnets. Having control of these elements puts China at a powerful position.

Nickel-Cobalt-Manganese Cathodes

Nickel-cobalt-manganese cathode chemistries currently dominate global lithium ion electric vehicle battery production.

Cobalt is widely used in electric vehicles as well as computer and consumer electronics. The Democratic Republic of Congo (DRC) happens to be the source of more than two-thirds of global production of cobalt, and eight of the 14 largest cobalt mines in the DRC are Chinese-owned and account for almost half of the country’s output. China’s influence dominates cobalt processing with Chinese companies controlling about 80% of the cobalt refining industry, where it is turned into commercial-grade cobalt metal.

While China only mines 6% of the globe’s manganese, it is this chemical refining step in the supply chain where China has the significant advantage, with 93% of production.

Graphite

In addition to rare earths, the manufacturing of lithium-ion batteries depends on some key materials like graphite, the material used in pencil tips. China produces more than 60% of the world’s graphite. Which means that Beijing has a lot of influence on global pricing of the commodity.

World Lithium Reserves

China is among the five top countries with the most lithium resources, but it has been buying stakes in mining operations in Australia and South America where most of the world's lithium reserves are found.

China's Tianqi Lithium now owns 51% of the world’s largest lithium reserve, Australia’s Greenbushes lithium mine. In 2018, the same company also paid about $4 billion to become the second-largest shareholder in Sociedad Química y Minera (SQM), the largest lithium producer in Chile.

Another Chinese company, Ganfeng Lithium, now has a long-term agreement to underwrite all lithium raw materials produced by Australia's Mount Marion mine, the world’s second-biggest, high-grade lithium reserve.

Wrapping Up

While I’m no expert in geopolitics, I do believe that electric vehicles are destined to become a larger percentage of all car sales, and that there will be a general movement away from internal combustion engines (ICE).

I will be fascinated to see how the tension between world superpowers plays out, as it relates to battery inputs. At the very least, the Ever Given has helped to remind us of the side effects of running very tight supply chains that leave very little margin for error.

Read the April 2021 Automotive Ventures Intel Report for more.