Make-or-buy strategies for electric vehicle batteries-a simulation-based analysis

The electrification of the powertrain leads to fundamental changes in the automotive value chain. Thereby, original equipment manufacturers (OEMs) have to decide which manufacturing steps to perform in-house and which parts to source from joint ventures or suppliers. This decision on the make-or-buy strategy is influenced by manifold uncertain parameters like technology evolution and market development. Moreover, it has considerable financial implications. We present a novel approach for the financial evaluation of strategic make-or-buy decisions for newly introduced components using the example of electric vehicle batteries. The approach is based on a Monte Carlo simulation with which the net present value of different make-or-buy strategies can be evaluated. In the model, we explicitly take into account (1) the impact of volume uncertainty on the economies of scale, (2) the financial consequences of a technology leap, (3) joint ventures as a form of quasi-integration, and (4) the option to change the position in the value chain over time. The application of the model for sample OEMs shows that make-or-buy strategies for electric vehicle batteries differ fundamentally from a financial point of view, depending not only on the degree of vertical integration but also on the size of the OEM.