EV Supply Chains: Manufacturers Rethink Production as Costs Near Tipping Point

Prices for electric vehicles are approaching a pivotal moment, where the total cost of ownership – factoring in government incentives – could undercut gasoline-powered cars and trucks. This shift is being driven by a surge in political commitment and funding, according to Stephen King, vice-president of strategy and investor relations at Winnipeg-based NFI Group Inc., a leading manufacturer of buses and motorcoaches. The expectation is that EVs will become more accessible as subsidies and evolving manufacturing strategies converge.

“We’ve definitely seen the political will, and the political commitment there to help customers support the transition to EV,” King said this week at a clean technology conference in Montreal organized by National Bank. “Federal funding is critical for a lot of customers, and we’re in an environment right now where funding has never been higher, so now demand has never been higher.”

Government Support and Strings Attached

Both Canada and the United States are actively incentivizing the adoption of electric vehicles. Canada’s 2022 budget allocated $1.7 billion to the Incentives for Zero Emission Vehicles (iZEV) program, while the U.S. Inflation Reduction Act earmarked US$369 billion for clean energy and climate initiatives, including tax credits for EVs. However, accessing these funds isn’t straightforward.

NFI Group, for example, faces requirements that 70% of its bus components be manufactured in the U.S. To qualify for subsidies. This stipulation, coupled with ongoing supply chain disruptions, presents challenges for EV manufacturers aiming to maximize the benefits of government programs. The company, like many others, experienced significant difficulties securing essential parts over the past 18 months.

“At one point, we had trouble finding everything from fibreglass, to metal, to even bus seats,” King explained. While supply chains are showing signs of easing – Statistics Canada reported a record $46.8 billion in stockpiled goods in the third quarter – the effects of these bottlenecks are expected to linger throughout 2023.

The Return of Vertical Integration

The pandemic-era supply chain chaos has prompted a re-evaluation of manufacturing strategies, with some companies opting to bring more production in-house. Nicolas Brunet, chief financial officer of The Lion Electric Co., another bus manufacturer, noted that relying heavily on third-party suppliers can lead to significant margin pressure and a lack of control. “You end up paying a significant amount of margins to a third party to whom you’re really captive, as a client.”

This trend echoes a strategy pioneered by Andrew Carnegie in the late 19th century. Carnegie’s Carnegie Steel Company, now United States Steel Corp., controlled every stage of steel production – from iron ore mining and coal supply to transportation and manufacturing. This “vertical integration” approach, once common, fell out of favor with the rise of globalization and outsourcing. However, the recent supply chain disruptions are prompting a resurgence of interest in bringing more of the manufacturing process under a company’s direct control.

Taiga Motors Corp., a maker of electric snowmobiles and personal watercraft, embraced vertical integration from its inception. Sam Bruneau, Taiga’s chief executive, explained that as a first mover in the market, the company had to design and produce all its components internally over a seven-year research and development period. “We’ve done everything from a clean sheet,” Bruneau said. “We’ve designed, engineered, and produced everything in-house.” This approach allows for faster innovation and improvements, with the ability to “drive improvements on a monthly basis” rather than relying on external suppliers.

NFI Group is also taking steps towards greater vertical integration, beginning to assemble cells, modules, and battery management systems in-house. This allows the company to remain flexible and adapt to changing market conditions, according to King.

Beyond Supply Chains: Shifting Consumer Mindsets

While addressing supply chain vulnerabilities is crucial, EV manufacturers face another significant hurdle: changing consumer perceptions. Brunet, the Lion CFO, emphasized that the biggest competition isn’t other EV manufacturers, but rather the “status quo.” “Change is always difficult, in any context.”

The challenge lies in overcoming ingrained habits and addressing concerns about range anxiety, charging infrastructure, and the initial cost of EVs. Government incentives play a role in mitigating the price gap, but widespread adoption will depend on convincing consumers of the long-term benefits of electric vehicles.

What’s Next for NFI Group and the EV Sector

NFI Group anticipates continued supply chain challenges throughout 2023, but expects to emerge stronger with improved processes and a more resilient supply chain. The company’s new Customer Acceptance and Delivery (CAD) facility in Winnipeg, officially opened in March 2026, represents a significant step towards full domestic production of heavy-duty transit vehicles, including zero-emission buses, for the first time in 15 years. This facility is expected to increase New Flyer’s production capacity by up to 240 equivalent units per annum by 2027, freeing up U.S. Facilities to focus on the American market. (NFI Group Press Release)

Looking ahead, the success of the EV transition will hinge on continued government support, the resolution of supply chain issues, and the ability of manufacturers to innovate and reduce costs. The industry is closely watching the impact of the Inflation Reduction Act and the iZEV program, as well as the evolving strategies of key players like NFI Group, The Lion Electric Co., and Taiga Motors. The convergence of these factors will determine whether EVs truly reach a “tipping point” and become the dominant form of transportation.