In 2020, auto manufacturing, like other industries, had to cope with a global pandemic. Plants were closed while new safety procedures were implemented to deal with COVID-19. Still, after factories resumed operation, the industry enjoyed strong demand, especially for trucks. By year’s end, things were humming.
The industry didn’t get to take it easy this year, however. The pandemic remains while new short- and long-term challenges are hitting automakers and their suppliers.
The short-term challenge is a global shortage of semiconductors. That situation has been years in the making and has had an impact on other industries. It has hit the auto industry noticeably hard, causing temporary plant shutdowns. Consulting firm AlixPartners estimates that $210 billion in vehicle production will be lost this year due to the chip shortage, which is forecast to last into 2022.
The long-term challenge is the industry’s drive for electrification. Automakers are shifting to battery electric vehicles (BEV) and away from the internal combustion engine (ICE). One of many issues is how ICE vehicles, mainly trucks, will generate profits amid BEV investments.
“Automakers are managing as well as they can,” Stephanie Brinley, principal automotive analyst for IHS Markit said in August at the Center for Automotive Research’s Management Briefing Seminars near Traverse City, Mich.
“We won’t get back to the 2018 production level until 2024,” she said. “There’s not a lot of opportunity to recover” production volume lost because of the semiconductor shortage. As for the move to electric vehicles, she added: “It’s now when and not if at this point.”
Demand for computer chips is high. Smartphones, computers and computer servers are among the drivers. “There are different levels of semiconductors,” said John Loehr, a managing director at the automotive and industrial practice of AlixPartners.
Makers of semiconductors prioritize the high technology end, where chips get smaller and more powerful. “That’s where the investment is,” Loehr said. “They’re constantly on the lead of technology investment.”
With the auto industry, “There’s not as much investment and developing going into those” chips, Loehr said. “Capacity is not growing very rapidly. Even in those spaces, automotive is not a large market for semiconductors.”
Historically, automakers and suppliers didn’t have to keep a close eye on semiconductors. With automakers, they concerned themselves with certain metals such as palladium, used to make catalytic converters. In such cases, “The OEMs go back almost to the mine,” Loehr said.
On the semiconductor side, “They trusted that industry to run itself.” What’s more, the auto industry has emphasized just-in-time delivery for decades as a way to hold down costs. Parts and systems would be delivered a short time before they were installed in vehicles rather than maintained in large inventories of components.
The semiconductor shortage has demonstrated the drawbacks of just-in-time, Loehr said. “The globally extended, low-inventory model” demonstrates very little resilience when confronted by sudden shocks, he noted.
The chip shortage has forced automakers and suppliers to spend more time and effort managing the semiconductor supply chain. Companies have adjusted to ensure continued production of their most popular and profitable vehicles.
“We are now engaging directly, for example, with the fabs on semiconductors and key points in the supply chain for our critical components, electronic components,” Jim Farley, president and CEO of Ford Motor Co., said on a July call with analysts about the company’s second-quarter financial results.
The executive said Dearborn, Mich.-based Ford is building “closer relationships and more transparent [management] of information.” The automaker, he added, is “providing longer-term forecasts to critical vendors so they can better understand and accommodate our requirements.” Ford also is “scanning for obstacles in our supply chain. Risk mitigation actions include stockpiling of critical parts like semis, dual sourcing and design interchangeability in the case of single sources.”
Mary Barra, CEO of Detroit-based General Motors Co., told financial analysts a similar tale in early August. “We are also putting long-term solutions to de-risk our supply chain,” Barra said. “This includes collaborating with semiconductor manufacturers and continuing to enhance transparency throughout the semiconductor supply chain.”
Barra cautioned the semiconductor situation won’t turn around quickly. “The situation does remain fluid,” she said.
Around the globe, regulators are forcing a shift to electric vehicles, hybrids and other forms of electrification to cut vehicle emissions in an effort to battle climate change. “This is the hammer that’s making it happen,” said IHS Markit’s Brinley.
The industry is making major investments in EVs as a result. AlixPartners, in a report released earlier this year, estimated that announced automaker EV investments rose 41 percent between 2020 and 2021. Now, according to the consulting firm, announced EV investments total $330 billion for 2021 through 2025.
In July, Daimler AG’s Mercedes-Benz unit said all newly launched vehicle architectures will be electric-only from 2025 onward. In 2025, Mercedes will introduce three new all-electric vehicle architectures. The luxury auto brand said it will be ready to go all-electric at the end of the decade “where market conditions allow.”
Other automakers have unveiled EV plans and say that’s the way of the future. GM, for example, has what it calls its Ultium platform, which the automaker says will be the basis for its future EV models. Ford is bringing out EVs that take advantage of established brand names, such as the Mustang Mach-E and F-150 Lightning pickup truck. Volkswagen AG has been introducing what it calls the ID family of EVs, such as the ID.4 SUV.
“We will offer a full range of vehicles and services that make EVs accessible to the largest possible customer base,” GM’s Barra said in August. “I think we’re very well positioned from an ICE portfolio because of the investments we made in new vehicle platforms.”
Said Ford CEO Farley in July, “The demand for our first round of high-volume EVs clearly has exceeded our most optimistic projections. We are now working around the clock to break constraints and increasing our manufacturing capacity.” Farley said the automaker is working with suppliers to boost battery capacity for the Mustang Mach-E.
All of this may not make for a smooth transition.
“These cars are much more expensive,” said Loehr of AlixPartners. An EV may cost $8,000 to $10,000 more than a comparable ICE vehicle. “For the industry, the biggest challenge is the cost.”
There are also manufacturing issues. With internal combustion engines, automakers make their own engines and often their own transmissions. “That whole manufacturing model changes with an EV,” Loehr said. Now, automakers are dealing with battery packs and different architectures. “You need fewer workers to assemble an EV architecture,” Loehr said. “What does this mean for labor dislocation?”
One strategy is to emphasize electrification among more expensive vehicles. “OEMs are trying to figure out how to electrify the premium end of the market,” Loehr said. “It’s legitimate to position it at the premium end.”
There is precedent. The world’s most valuable automaker is Tesla, which began at the high end of the EV market and has been working down toward less expensive models, such as the Model 3.
Tesla has helped make CEO Elon Musk a celebrity. The company has experienced manufacturing issues as it has ramped up output, but it’s on the automotive map in a big way.
“Mr. Musk’s vision for the car has won the day—evident by the likes of GM and Volkswagen rushing to put EVs on the road,” Tim Higgins, author of Power Play: Tesla, Elon Musk and the Bet of the Century, said in an email interview. “With the Model 3, Tesla showed the world that an electric car could attract a more mainstream buyer.
“When Tesla was founded, it was rather improbable that a startup might one day rise to threaten the old guard,” Higgins continued. “There were so many reasons for why Tesla might fail that it was hard to imagine what might happen if it succeeded. Tesla had the benefit of not being tied to a certain way of doing things. It could take a wild bet on an unproven idea of using lithium-ion batteries to power a production car. Compared to a GM or Volkswagen, Tesla had nothing to lose if it was wrong.”
Suppliers are also adapting to the coming EV drive. Bosch said Dutch subsidiary Bosch Transmission Technology BV has developed the CVT4EV transmission concept. It’s designed to help an EV be more energy efficient with improved performance.
CVT4EV takes continuously variable transmission(CVT) technology and applies it to EVs. Bosch already makes components for CVTs for internal combustion engines and has been demonstrating CVT4EV to automakers and Tier 1 suppliers.
Most EVs currently have one forward gear. “EVs at this moment are brought in the market under severe price and cost pressure,” said Dirk van den Heuvel, business development manager for the CVT4EV. That, he said, has meant compromises for speed, towing capacity and other aspects of EVs. “We think by putting in a multi-speed transmission, you don’t need to compromise.”
Bosch in general is developing products for EVs while continuing its ICE business. “Electrification will go beyond the powertrain of the vehicle,” Paul Thomas, executive vice president of Bosch Mobility Solutions, Americas, said at the Management Briefing Seminars in August. “We’ve been investing quite heavily the past 10 years to make sure we have a good portfolio.”
The company has spent $6 billion on electrification over the past decade, with $834 million planned for this year. Bosch also is seeking to collaborate with other companies, Thomas said. “For us, we need partners to help us drive better solutions.”
Overall, automakers and suppliers have a full agenda. Issues include developing more and better batteries as
well as making it easier to recharge EVs. Electrification “covers everything,” said Loehr of AlixPartners. “It’s one of the most significant disruptions we’ve ever seen.”
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