As a business technique, vertical integration first emerged in the 19th century. It was a term coined by Andrew Carnegie to describe the structure of his company, U.S. Steel. He had purchased almost every aspect of the supply and distribution chain his company relied on. The primary reason for this was to ensure consistent delivery of materials and distribution and an overall lower cost of doing business. These motives remain attractive to companies embarking on vertical integration today, and one of the primary reasons a company will vertically integrate with a supplier is to manage transaction costs.
Does it make any sense for the Electric vehicle manufacturer?
It may. Tesla's move to an environmentally sustainable, secure source is seen as a win-win for the industry and for investors. However they were driven because of supplier problems, and have spent a fortune on integration. Time will tell if its a good bet for them.
What we have learnt from dealing with Asians is that they have spent considerably less on vertical integration and have got back much more. China especially has built a complete value chain with a high percentage of locally produced components being incorporated into foreign cars produced in China.
Although the electric vehicle industry is in its early stages, thanks to its firm foundations in terms of key raw material extractions, battery production and infrastructure for vehicle manufacturing, China has the foundations to build a similar
value chain of electric vehicles. -Wang and Kimble, 2011
Only time will tell if it’s a good bet. GM, when they designed the Bolt EV, elected to outsource the battery and drivetrain to LG. Clearly they think that’s the right decision at this time.
The Vertical integration Story of BYD
BYD Co Ltd is a Chinese manufacturer of automobiles, battery-powered bicycles, buses, forklifts, rechargeable batteries, trucks etc with its corporate headquarters in Shenzhen. It has two major subsidiaries, BYD Automobile and BYD Electronic and was founded in February 1995.
BYD has grown to become a major manufacturer of automobiles, battery-powered bicycles, buses, truck, forklift, rechargeable batteries, most notably mobile-phone batteries.
The success of BYD was also largely attributed to its ‘‘imitation-based innovation’’ model advocated by Chuanfu Wang. As a CEO with engineering background, Wang requested that all the engineers of BYD learn how to dissemble cars first. BYD even allocates a budget for purchasing these best designed and made cars such as Benz, BMW and Toyota for the engineers to dissemble, imitate, and then, possibly innovate.
For any creation of a new product in this world, 60 % is based on public literature, 30 % on existing samples, 5 % is on material factors, and only 5 % comes from an independent R&D. - Chuanfu Wang
BYD adopted many non-patent technologies and how to mix these non-patent technologies became BYD’s innovation.
Based on such a model, BYD has made a great breakthrough in R&D and produced a compact car model BYD-F3 that is the first model entirely-made-in-China, first released in Sep 2005 and now with sales over 100,000 units in China. BYD followed that up with a new hybrid car model F3DM released in Dec 2008.
F3DM was equipped with the ‘‘iron cell’’ (Lithium Iron Phosphate) which was independently developed by BYD and has been awarded more than 700 patents which BYD has applied for.
BYD used an advanced R&D platform to become a leading vertical integrator in rechargeable batteries.
BYD recognised that the imitation-based innovation may help BYD’s growth to a certain extent, but cannot help maintain their leading position in the market in the long run. As Chuangfu Wang stated, BYD’s ultimate goal is to build an advanced R&D platform, where technologists and component manufacturers can come together to integrate, instead of just merely imitating. Indeed, what truly helped build up BYD’s leading position in the market place is its vertical integration across rechargeable batteries, new-energy-powered automobiles, and new energy industries based on their unique advantages in the battery technology.
Iron cell batteries was widely considered a great technology breakthrough, and that’s also one of the reasons why many global companies haven’t made significant progress in the electro-mobile industry yet, simply because they haven’t developed such advanced batteries.
To investors, the attractiveness of BYD is its leading position in several important new-energy-related industries . To entrepreneurs, BYD is an example of how one company can use a platform to align engineers and realise advanced battery technologies using this old-fashioned vertical integration model.
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