EDITOR: | April 13th, 2018 | 6 Comments

The supply chain for electric vehicles could be the mother of all bullwhip effects

| April 13, 2018 | 6 Comments

Jay Forrester wrote in his 1961 publication, Industrial Dynamics, about the now infamous bullwhip effect when small shifts in customer demand for products result in distorted responses from actors further upstream in the supply chain.

Many MBA students around the world are introduced to Forrester’s breakthrough procurement theory by playing the beer simulation game, developed by MIT. The lack of predictability in customer behavior can have wild responses four or five steps further upstream in a supply chain, resulting in huge delays to increased demand.

The disconnect between finance, mining companies, car battery manufacturers, automakers and consumers could result in the mother of all bullwhip effects over the next decade. Battery makers, while in agreement that the days of the internal combustion engine (ICE) are numbered, are still on the fence regarding the exact proportions of materials used in new projects. Carmakers, on the threshold of releasing their first ranges of electric vehicles (EVs), are hopeful that customers will not turn their noses up the price tag of EV cars. And this new supply chain is relying on mining companies to be able to deliver much higher quantities of targeted raw materials key to EV technology. Mining is waiting for Wall Street to bankroll that charge.

“The multi-billion dollar projects are off the table, even with this story coming through,” Colin Hamilton, managing director of commodities research at BMO Capital Markets, said at the recent CRU-Cesco conference in Santiago. “This is why we have a gap on the supply side.”

Not helping the matter is the continuously evolving technology going into EV batteries. Will vanadium prove to be a better material than lithium in large-scale batteries, for instance? Can nickel sulfate become an effective replacement to cobalt? Are hydrogen fuel cells (HFC) totally out of the picture? While there are very few HFC-fueled cars in the world, they tend to be located in areas such as Silicon Valley and Bay areas where R&D decision makers live.

This could prove to be a massive influencing factor in the phasing out of ICE. Copper mines, especially when talking about greenfield discoveries, run incredibly deep and can take a decade to develop from discovery to production when taking into account permitting, finance and construction, according to CRU. Even a lithium salt deposit can take several years to develop.

The gap might, however, be at the tipping point, Hamilton said. It’s probable that lenders will show more interest in big mining projects 6 or 12 months from now, when the incipient shortages from mining start to get more noticeable.

As InvestorIntel reported from the CRU-Cesco annual meeting of the copper industry in Santiago, now is a great time to get into exploration. The tide is changing, and there is a big consensus surrounding the fact that the copper market is heading for shortages. Many companies working on mining projects targeting supplies to the EV industry will present their projects at InvestorIntel’s Buds, Batteries and Blockchain (BBB) conference in Toronto between May 3-4, 2018.

Those shortages might also extend to lithium. While many lithium projects are underway in both Argentina and Chile, the market might be underestimating how quickly those companies can supply chemical-grade lithium needed by battery manufacturers, said Daniela Desormeaux, a lithium expert.

Government policy is holding back the development of some of the biggest deposits in Chile, said Jose Jara, a researcher at Chile’s Catholic University. Jara suggested that the current government should consider offering special contracts to involve private mining companies in Chilean lithium projects instead of waiting for a lengthy congressional debate to structurally open up the industry to lithium project investment by foreigners. Expect Wealth Minerals Ltd. (TSXV: WML | OTCQB: WMLLF) to benefit from a policy change in the Pinera government.

Like in any bullwhip motion, the EV revolution will be determined by consumers. Nissan’s EV business development manager, Luis Felipe Clavel, said his company has largely addressed consumers’ concerns over EV distance range as the new Leaf model will travel 600 kilometers in one go. Wide-scale EV adoption now ultimately lies with cost, he said.

“I think the big thing now is the cost,” Clavel said. “At Nissan we have to satisfy a necessity for most of our customers to get from Point A to Point B in the cheapest way.”


Matt Craze works with New York-based management consultancy 10EQS and is the founder of Spheric Research, a firm dedicated to global seafood industry research. Matt ... <Read more about Matt Craze>

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  • The supply chain for electric vehicles could be the mother of all bullwhip effects – Tech Check News

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    April 14, 2018 - 8:06 AM

  • John

    Interesting, not a single comment about rare earth mining. Considering the pretty much every EV vehicle will be loaded with permanent magnets, wouldn’t that be one of the big impacts on the supply chain?? I am in the electronic manufacturing business and already the supply of common parts like capacitors is drying up. We have up to a 40 week wait for a very common part but can’t get it because all the car manufacturers have bought all the stock! Its a clear sign of what’s coming.

    April 15, 2018 - 10:29 PM

    • Matt Craze

      Hi John, thanks for your interesting comments. Great insights from where you’re sat, thanks for sharing those. If you check out my bio page on editors, I’ve written a couple of articles about REEs recently.

      April 16, 2018 - 5:40 PM

  • Jack Lifton

    Procurement theory does not seem to take structural limitations on supply into account. There is not enough accessible cobalt to meet even the most conservative projected demand for EVs in 2025. Alternative fuel systems such as hydrogen would take decades to develop just for the fuel production and distribution. The ICE will be the power train of choice for many more decades.

    April 16, 2018 - 9:17 PM

    • Tim Ainsworth

      Totally agreed Jack but they won’t look much like the ICE drive trains we know today but smaller, shorter stroke, high thermal efficiency engines stripped of all mechanically driven accessories such as A/C, fans, water pumps, etc, which will be spun off to electric drives. Apart from the high voltage hybrids like Honda Clarity, claiming 40% thermal efficiency ICE, look to the rapid development of 48V Mild Hybrid, forecasts suggest they will be out selling BEV & PHEV combined by 2025 > electrification of ICE.
      Ability of auto OEM’s to innovate has been grossly overlooked amidst the hype, Mazda claiming 60% thermal efficiency in a model set for release next year:
      Mercedes Benz will be offering two platforms 48VMH with each future model range, incorporating Mitsubishi’s PMM inline ISG that drives incredible innovation like electric superchargers that spool to 70,000rpm in 0.3 seconds, boosting energy efficiency and eliminating exhaust driven turbo lag.
      Next few years should be more than fascinating, chances are the average ICE will be carrying a lot of NdFeB.

      April 29, 2018 - 10:43 AM

  • Joe O

    Welcome Back Jack,
    have missed your insights would love to pick your brain on alot of stuff!
    How is LEXI moving along?

    April 17, 2018 - 6:26 PM

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