An Uncertain Market Has Tesla Dusting Off A Henry Ford Strategy

In the automotive industry, a trend that Henry Ford pioneered a century ago is once again popular.

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It isn't the mass production of a novel technology or the assembly line. Vertical integration is what is returning. Much of the credit goes to Tesla TSLA +0.88% (ticker: TSLA), as it does for many other things in the automotive industry today.

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The practice of owning or controlling various points along the value chain of an industry is known as vertical integration. Such strategy is currently being used by Tesla, the contemporary Ford Motor F -0.25% (ticker: F), General Motors GM -0.97% (GM), and other automakers.

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That indicates a return to an old playbook for Ford. It once mined the iron ore required to make the steel used to make its automobiles. The business had vertical integration from a mine in Minnesota to a manufacturing floor close to Detroit.

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To make steel at Ford's massive River Rouge complex, the ore was transported by ship across the Great Lakes from a mine in Minnesota. Around nine years after the company released the Model T, work on the River Rouge complex in Dearborn, Michigan, which also manufactured tires, glass, and the energy required by Ford to run its plants, began.

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Ford wanted to have as much control over the process as it could at the time because the automobile industry was only getting started. It wanted to make sure it had the components it required at a time when soaring demand made supplies, and how much they would cost, unknown, similar to how car manufacturers are hurrying to increase production of EVs today.

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Tesla is the most recent example. Graphite, a crucial component of lithium-ion batteries, will be provided to the market leader in electric vehicles by the Australian company Magnis Energy Technologies (MNS. Australia), according to an agreement announced on Tuesday.

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Although the graphite deal does not grant ownership, it does offer supply of a crucial resource at a set cost. Also, Tesla has contracts that guarantee lithium supplies and the necessary licenses to set up its own lithium refinery in Texas. The business also manufactures EV batteries at its alleged gigafactory in Nevada.

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Similar actions are taken by General Motors. In addition to having supply agreements with other lithium miners, it has invested $650 million in the mining startup Lithium Americas (LAC). Also, GM is constructing battery plants with LG Energy Solution (373220. Korea) as a partner, and has agreements in place with LG Chem to guarantee supplies of materials for battery cathodes (051910. Korea).

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Ford is constructing huge battery and electric vehicle production facilities in Tennessee and Kentucky. Also, it has an agreement in place to guarantee semiconductor supplies, another essential component of contemporary vehicles.

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When innovations are most recent, there seems to be a stronger push toward vertical integration. Less than 6% of all new automobile sales in the U.S. in 2022 will be electric vehicles, making them still a relatively new technology.

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Vertical integration will eventually become unnecessary. Ford finally sold or closed the majority of its vertically integrated businesses, maintaining just the manufacturing and financing of automobiles.

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Cleveland-Cliffs currently includes the former Rouge ore and steel manufacturing facilities (CLF). Visteon is one of the businesses that once handled Ford's parts business (VC).

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It is almost inevitable that the vertically integrated EV companies currently being formed will split up. The battery components and battery manufacturing facilities will ultimately be owned by separate businesses. Yet, car manufacturers want to make sure they have further control over costs and supplies along the entire EV value chain for the time being.

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After the graphite sale was revealed, Tesla shares fell more than 5%, to close at $197.37 per share, but the decline was due to a decline in the overall market. On Tuesday, the S&P 500SPX -0.45% and Nasdaq CompositeCOMP -0.15% declined by almost 2% and 2.5%, respectively.

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The stock of Tesla has increased for six weeks running heading into this week. In 2023, shares have risen by nearly 60% so far.

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