Honda’s big bet on Canada could point the way to a new supply chain strategy for the auto sector.
While Honda was making a splash last week with its $15-billion plan to build electric vehicles, batteries and their components in southern Ontario, executives in Japan were delivering their own message on investor calls. One factor behind their decision to produce batteries in-house and buy locally in Canada was their projection that it would bring their EV production costs down by 20 per cent. Honda said its Canadian operations would be a model of a “highly profitable” and “comprehensive” value chain, CEO Toshihiro Mibe said at the launch event in Alliston, Ont.
A twenty per cent savings would be a major coup at a time when automakers are stressing over how to lower EV prices. The Canadian investment will also be a high-profile test of Honda’s vertically integrated supply-chain strategy, which is unique in the auto business but which is now gaining traction among Honda’s competitors.
A global shift: Automakers in North America have taken different paths in recent years. Companies like Ford and General Motors have historically had tiers of outside contractors, like Magna and Martinrea, who bid to make and supply their parts, said Robert Handfield, a professor at North Carolina State University who has done interviews at Honda’s factories, headquarters and suppliers as part of his research.
Tesla, on the other hand, has shaken up the industry by in-sourcing its manufacturing. In part, that’s because CEO Elon Musk pushes engineers at his companies to MacGyver their own parts to cut costs. But, notes David Johnston, program director of the master of supply-chain management program at York University’s Schulich School of Business, Tesla has also been forced to use internal production to perfect emerging technologies that few outsider suppliers offer.
More automakers are following Tesla’s lead, and the approach of Chinese battery-maker-turned-automaker BYD, by integrating and controlling their supply chains through ownership, joint ventures, or joint projects like GM’s work with Lithium Americas.
But companies like Ford have also struggled with manufacturing their own EV parts. Decisions to get into new businesses, like battery-making or mining, can trim expenses but are also a risk, since they take automakers outside their core competencies, said Oliver Montique, analyst of trade, supply chains and mobility at the Eurasia Group.
Spending control: So, weak dollar and government subsidies aside, how will Honda use its Canadian investment to cut costs, given its $15-billion up-front spending—Canada’s biggest-ever auto investment, and Honda’s biggest in North America? It must build EV assembly lines, a new standalone battery plant and two joint venture battery-component factories, and recruit and train a workforce before production starts in 2028.
Handfield said Honda differs from other automakers because of their “buy where we sell and sell where we buy” approach, which sees them prioritizing long-term relationships with suppliers and sending in its own engineers to help suppliers meet yearly cost-reduction goals.
With more auto companies cutting costs, and testing joint projects and in-house battery production, Honda’s supply chain integration in Canada will be watched closely across the industry.
“The Honda way is really joint product development,” Handfield said. “The parent is always there for the child, but then always also challenging them to improve all the time. It’s a very unique type of relationship.”
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