How To Navigate the Battery Supply Chain
Supply chain and inventory management is a critical consideration for any product development project, and it’s no different for electrified equipment.
The good news is that an optimized battery supply chain is less risky and complex than one for ICE-powered equipment (e.g., with fewer dependencies and relationships). You can hire fewer specialists, have fewer line items, and more streamlined operations. Plus, many basic inventory and supply chain management principles, like having reliable suppliers, secondary sources, and maximum visibility, stay unchanged.
But here comes the catch: Dealing with the battery supply chain is a different ball game than handling the web of costly plants, expensive engines, and armies of mechanics required to keep internal combustion engines (ICE) humming.
While the supply chain for electrified equipment is shorter, it heads in a different direction. You can’t make a 1-to-1 analogy to translate inventory control strategy from ICE to battery. The key to survive and thrive in this transition starts with a mindset change.
Understanding the ICE vs. battery supply chain
Here are the key differences you must address as you shift from an ICE to a battery supply chain:
Price elasticity
ICE engines are complex. Only a handful of companies (e.g., Cummins, Caterpillar, Mercedes-Benz, John Deere, Kubota, etc.) make powerful and reliable engines at a price the market will (grudgingly) bear. Then, performing maintenance requires mechanics with a tightly crafted skillset (who can charge a handsome fee) because a simple mistake may cost you a new $50,000 engine block.
Although battery technology is highly specialized, more cell suppliers and simpler maintenance mean a more competitive market. Electric motors are more of a commodity than diesel engines — you can build a product with electric motors from two or three vendors. Manufacturers will create supply chains with second-source or third-source policies to ensure resiliency.
The numerous suppliers also mean there’s no shortcut to selecting your battery solution — you can’t go with what everyone is doing or how things are done. Research thoroughly and negotiate terms diligently as you navigate the Wild West of battery solutions.
Cost distribution
The cost of the energy carrier for ICE-powered equipment (i.e., fuel and tank) is cheap and universal, while the engine is very costly. It’s the opposite in battery-powered equipment — the motors are relatively low-cost, but the energy carrier (i.e., batteries) is expensive. The ongoing fuel costs (e.g., diesel vs. electricity) and maintenance are also quite different.
The differences will affect your pricing strategy and how your customers understand their total cost of ownership (TCO).
Vendor management
After deciding on an ICE, you only deal with one engine vendor and suppliers specializing in components and maintenance for that brand. Also, you’d work with local shops or domestic vendors who share a common language of doing business.
After selecting a specific battery type for your product, you may (and should) buy cells from multiple suppliers. Even Samsung (which produces billions of lithium-ion batteries in its wholly owned subsidiary SDI) supplement cells produced in-house with those from competitors like CATL for its consumer products. Everyone from Apple to ZTE knows not to put all their eggs in one basket.
Additionally, battery cells and components are often manufactured overseas. Product teams need different contacts and competence to adapt to the global business dynamic, navigate cultural differences, understand foreign currency dependency, and work with multiple suppliers.
The battery supply chain isn’t about the lithium or the cobalt — it’s about the people who deal with them. Therefore, vendor selection and management are critical in the supply chain dynamics.
Plan B
ICE supply chains have few, if any, Plan Bs. After selecting a specific ICE manufacturer (often by its reputation), you must design almost everything around the engine. Not so for battery-powered equipment. Besides the flexibility to change suppliers, savvy product teams also have contingency plans to use different battery chemistries.
Let's say you design a product to use lithium cobalt cells. Ideally, you should have a plan to switch to a battery chemistry that doesn’t rely on cobalt, like the iron-based LFP (lithium iron phosphate) variant, with minimum disruption to your production schedule if political instability in the Democratic Republic of Congo (DRC), the near-exclusive source of cobalt, makes access to the mineral problematic.
A software-defined battery (SDB) solution is modular and chemistry-agnostic. It allows operators to mix and match cells of any chemistry into a battery pack. Therefore, it’s the best insurance against supply chain crises for product builders. SDBs also provide an analytics-based solution to handle sub-standard cells, allowing you to dial down the supply’s quality to gain more leeway in a pinch.
Maintenance considerations
Cummins, a major diesel engine supplier, won’t bat an eye selling you an engine piston for an arm and a leg. After all, you won’t trash the $50,000 engine and buy a new one from Mercedes if only one component malfunctions. You’d cry some sour tears and pay the Cummins price, which may range from bloody expensive to extortion.
But you can count on Cummins being around to sell your parts because the ongoing revenue contributes to the company’s profitability and customer lifetime value.
Traditional battery solutions require a careful selection of reliable battery suppliers because just one underperforming cell can impact the entire pack’s performance. Unlike ICE manufacturers, the moment you buy the cells is the only revenue opportunity for a battery supplier. The only incentive for vendors to produce high-quality cells is to uphold their reputation.
If you buy cells from fly-by-night cell manufacturers who trade longevity for profitability, you may end up with batteries that don’t last as long as they should. As such, it’s critical to source from a reputable vendor.
SDBs help mitigate such a risk by ensuring consistent performance and longevity even when cells in a battery pack fail or perform below a pre-defined level. You may also mix and match cells of different chemistries and ages — changing the maintenance cost equation for battery solutions.
Geopolitical volatility
For ICE operators, the biggest wildcard is the price of oil. Unless you’re a major player like a large airline that can hedge against jet fuel prices, there’s not much you can do except to suck up whatever the regional or global markets of crude or refined oil throw at you.
Batteries manufacturing requires expensive materials confined to specific geographic locations. For example, China’s stronghold on LFP technology and the extreme concentration of cobalt deposits in the DRC means you must structure your supply chain to plot your trajectory and mitigate the risks.
How to scale up your battery supply chain
Here’s how to ensure the resiliency and stability of your battery supply chain as you develop your product:
Design your product with a battery pack that works. It just needs to be good enough and cheap enough so that forgiving, friendly, and less price-sensitive customers will buy it. Choose a battery supplier that can get you to this stage the quickest.
After your solution works well enough, find a reputable supplier with a high likelihood of building batteries that last. You may consider two or three vendors to spread the risks.
When you have a working supply chain, streamline the design to bring it one step closer to optimal. Negotiate with your suppliers for a price low enough for you to broaden your market.
After growing to a respectable volume, focus on mitigating weaknesses like the possibility of battery failure or a geopolitically-driven global supply chain crisis.
Consider advanced solutions like SDBs to protect against supply chain uncertainties. For example, if DRC decides to choke the cobalt exports, you can move to another cell type as if nothing has happened.
Consider an SDB solution that allows a modular approach to building battery packs and offers software-configurable output voltages. You can stack multiple blocks to reach the desired power output, stock a single type of battery pack, and use it on different products with different voltage, capacity, and reliability requirements.
Don’t get stuck in analysis paralysis. We can help you make meaningful progress in selecting your battery solution and designing an integration strategy in a day in our new Battery Strategy Workshop. Learn more to see how we can help you build electrified products cost-effectively with cutting-edge insights and deep industry knowledge.
