Electric Vehicle Makers Face Critical Supplier Strategy Decisions
In the rapidly evolving landscape of the global automotive industry, electric vehicles (EVs) have emerged as a transformative force, reshaping not only how people drive but also how manufacturers structure their supply chains. As nations intensify their commitments to carbon neutrality and environmental sustainability, EVs have become a central pillar in the transition toward cleaner transportation. However, beneath the surface of this green revolution lies a complex web of strategic decisions that can determine the success or failure of automakers. Among the most critical of these decisions is how vehicle manufacturers manage their relationships with key suppliers—particularly those responsible for producing the heart of every EV: the power battery.
A recent study published in the Journal of Industrial Engineering and Engineering Management sheds new light on this pivotal issue. Authored by Zhongwei Feng and Yuwen Chen from the School of Business Administration at Henan Polytechnic University, along with Chunqiao Tan from Nanjing Audit University, the research examines the strategic choices automakers face when deciding whether to develop or integrate their battery suppliers. The findings reveal that the decision is far from straightforward and is deeply influenced by a manufacturer’s own capabilities, competitive dynamics, and the economic value of battery recycling.
The study models a competitive environment involving two rival EV supply chains, each consisting of a vehicle manufacturer and a dedicated battery supplier. In this duopoly framework, the researchers explore two primary strategies: supplier development and supplier integration. Supplier development refers to efforts by the automaker to enhance the capabilities of its supplier through investments in joint research, employee training, or process improvements. This approach allows the manufacturer to maintain independence while still influencing supplier performance. In contrast, supplier integration involves a deeper level of collaboration—such as forming a joint venture or acquiring a significant equity stake—where the interests of the manufacturer and supplier become closely aligned, often leading to more coordinated decision-making.
The distinction between these two strategies has become increasingly relevant as major automakers around the world shift their approaches. For example, Toyota Motor Corporation, once primarily reliant on Panasonic for battery supply, formed a joint venture to co-develop and produce batteries, aiming to cut production costs by up to 50%. Similarly, SAIC Motor and Dongfeng Motor partnered with Contemporary Amperex Technology Co. Limited (CATL) to establish a battery systems company focused on research, production, and sales. These moves reflect a broader trend toward integration, driven by the desire for greater control over battery technology, cost reduction, and supply chain resilience.
However, not all manufacturers are moving in the same direction. Tesla, which once operated a highly integrated Gigafactory with Panasonic, eventually shifted away from direct investment in the facility and instead entered into a fixed-pricing agreement with its supplier. This strategic pivot suggests that integration, while beneficial in certain contexts, is not universally optimal. The question then arises: under what conditions should an automaker choose to integrate versus develop its battery supplier?
Feng, Chen, and Tan’s research provides a rigorous analytical framework to answer this question. Their model incorporates several real-world factors, including competition between automakers, the cost of supplier development, and—critically—the role of battery recycling. As EV adoption accelerates, millions of batteries will reach the end of their automotive life in the coming years. According to industry estimates, China alone could see 800,000 metric tons of retired EV batteries by 2025. If not properly managed, these batteries pose environmental risks due to toxic materials and potential fire hazards. However, if effectively recycled, they can be repurposed for secondary applications such as energy storage, thereby recovering valuable materials like lithium, cobalt, and nickel.
In the study, the authors assume that battery suppliers are responsible for recycling, a setup that aligns with current industry practices. Companies like CATL have already established closed-loop systems where used batteries are collected, disassembled, and reused in production processes. This not only reduces environmental impact but also lowers raw material costs, enhancing profitability. The researchers introduce a variable representing the net value of recycling—factoring in both the revenue from recovered materials and the costs of collection and processing—to assess how this value influences strategic decisions.
One of the most striking findings of the study is that the impact of supplier integration is not uniform across all manufacturers. For automakers with strong supplier development capabilities—those able to significantly reduce battery production costs through targeted investments—integration consistently leads to higher profits. By aligning incentives with their suppliers, these manufacturers can eliminate inefficiencies such as double marginalization, where both parties mark up prices independently, leading to suboptimal outcomes. Integration allows for more efficient cost-sharing, better coordination, and ultimately, lower battery costs.
However, for manufacturers with weaker development capabilities, the story is quite different. When such a company chooses to integrate, it may actually reduce its investment in the supplier. This counterintuitive result stems from intensified market competition. Integration by one manufacturer signals a commitment to cost leadership, prompting rivals to respond aggressively. For a less capable automaker, increasing investment in its supplier may not yield sufficient returns to offset the competitive pressure. As a result, it may scale back its development efforts, leading to higher production costs and lower profitability.
This dynamic creates a strategic asymmetry in the market. Stronger manufacturers benefit from integration not only through internal efficiencies but also by forcing weaker competitors into less favorable positions. The study shows that when a high-capability automaker integrates, it increases its own investment and output while simultaneously reducing its rival’s incentives to invest. This “competitive spillover” effect amplifies market imbalances, reinforcing the dominance of leading firms.
The role of battery recycling further complicates the strategic calculus. When the net value of recycling is low—due to high processing costs, low material prices, or limited secondary markets—both manufacturers are more likely to adopt integration. In this scenario, the primary benefit of integration comes from cost reduction in production, making it a rational choice even for less capable firms. However, when recycling value is high, the optimal strategy diverges. High-capability manufacturers still benefit from integration, as the combined advantages of production efficiency and recycling revenue enhance their profitability. But for weaker manufacturers, the high recycling value can actually make integration less attractive.
Why? Because high recycling value intensifies competition. When battery reuse becomes highly profitable, integrated supply chains can leverage their coordination to maximize recovery rates and capture more value. This puts additional pressure on non-integrated rivals, whose suppliers may lack the same level of investment or coordination. As a result, weaker manufacturers may find that the competitive disadvantages of integration—such as increased rivalry and reduced flexibility—outweigh the benefits, leading them to prefer a development strategy that maintains independence.
The implications of this research are profound for automakers navigating the EV transition. First, it underscores that there is no one-size-fits-all approach to supplier management. A strategy that works for Tesla or Toyota may not be suitable for a smaller or less technologically advanced automaker. The decision must be grounded in a clear assessment of internal capabilities, competitive positioning, and market conditions.
Second, the study highlights the growing importance of circular economy principles in automotive strategy. Battery recycling is no longer a peripheral concern but a core component of profitability and sustainability. Manufacturers that can effectively manage end-of-life batteries will have a significant advantage in cost control and environmental compliance. This suggests that future supplier relationships may need to extend beyond production to include joint investments in recycling infrastructure and technology.
Third, the findings caution against blind imitation of industry leaders. While many automakers may look to Tesla or Toyota as models, the study shows that their strategies are context-dependent. A weaker firm attempting to replicate the integration model of a stronger rival may end up worse off, as it could trigger a competitive response it is ill-equipped to handle. Instead, such firms may be better served by focusing on incremental improvements through supplier development, building capabilities over time before considering deeper integration.
From a policy perspective, the research also has important implications. Governments seeking to promote EV adoption and domestic battery industries should recognize that market dynamics can lead to consolidation and inequality among automakers. Without intervention, stronger firms may dominate through strategic supplier integration, potentially limiting competition and innovation. Policymakers could consider supporting weaker manufacturers through targeted R&D funding, shared technology platforms, or regulations that promote fair access to recycling networks.
Moreover, the study reinforces the need for transparency and data sharing in the EV ecosystem. Accurate information on battery performance, degradation rates, and recycling yields is essential for making informed strategic decisions. Industry-wide standards for battery design and data exchange could help level the playing field, enabling more manufacturers to participate effectively in the circular economy.
In practical terms, automakers should conduct regular strategic reviews of their supplier relationships, taking into account not only current costs but also long-term competitive dynamics and sustainability goals. They should assess their own development capabilities, monitor rivals’ moves, and evaluate the evolving economics of battery recycling. Scenario planning and simulation tools can help anticipate how different strategies might play out under various market conditions.
The research by Feng, Chen, and Tan also opens avenues for future study. While the current model focuses on a duopoly with dedicated suppliers, real-world supply chains are often more complex, with multiple manufacturers sourcing from the same battery producer or a single automaker working with several suppliers. Exploring these networked relationships could yield additional insights into competition, risk sharing, and innovation incentives. Additionally, incorporating factors such as government subsidies, trade policies, and technological disruption would provide a more comprehensive view of the strategic landscape.
In conclusion, the shift to electric vehicles is not merely a technological transition but a strategic reconfiguration of the entire automotive industry. At the heart of this transformation are the relationships between automakers and their battery suppliers. As the study demonstrates, the choice between developing and integrating suppliers is a nuanced decision that depends on a firm’s capabilities, competitive environment, and the value of recycling. Automakers that understand these dynamics and tailor their strategies accordingly will be better positioned to thrive in the new era of mobility.
The research underscores a fundamental truth: in the EV age, success is not just about building better cars, but about building smarter, more resilient, and more sustainable supply chains. As the industry continues to evolve, the lessons from this study will serve as a valuable guide for executives, policymakers, and analysts alike.
Zhongwei Feng, Yuwen Chen, School of Business Administration, Henan Polytechnic University; Chunqiao Tan, School of Business, Nanjing Audit University. Journal of Industrial Engineering and Engineering Management. DOI: 10.13587/j.cnki.jieem.2024.05.016