Auto suppliers regroup to position themselves for the future in the wake of myriad disruptions
For the last few years, the auto industry has been on a roller coaster filled with dramatic ups and downs as well as sharp twists and turns. While much of the topsy-turvy ride has been fueled by COVID-19 and the “new normal” aftereffects, numerous other factors are at play too—led by the growing transition to electrified propulsion systems.
Light vehicle sales peaked in the U.S. in 2016 at a record 17.5 million units, then held steady at just over 17 million vehicles for the next three years before crashing to 14.5 million in 2020 in the initial wake of the pandemic and industry shutdowns. While strong demand triggered a surge when production resumed, the recovery has subsequently been stymied by the ongoing chip shortage and other supply chain disruptions, as well as economic and geopolitical uncertainties.
It could be a while before the industry tops 17 million vehicles again. Light vehicle sales are on pace for about 14.2 million units this year, with about the same level forecasted for 2023.
“We don’t see a rapid recovery like we did after the slowdown of 2006 and 2008, because the pent-up demand isn’t the same,” noted Paul Thomas, executive vice president of Mobility Solutions in the Americas for Robert Bosch GmbH, which is the world’s largest automotive supplier. It will take longer to rebound back to high sales levels this time around both in the U.S. and globally, Thomas opined, but quickly characterized the view as realistic rather than pessimistic.
Despite the recent chaos, automakers and their retail dealers have enjoyed healthy and, in some cases, even record profits. General Motors Co., for example, posted an all-time-high adjusted-EBIT (earnings before interest and taxes) of $14.3 billion last year on sales of $127 billion, which was up 3.7 percent over 2020 levels.
Ford Motor Co. and other automakers have enjoyed similar financial success, even though they aren’t selling as many vehicles. The reason? It’s a simple matter of supply and demand: With fewer vehicles on dealer lots due to the semiconductor shortage, average transaction prices for new vehicles topped $46,250 in August—an 11.5 percent increase from a year ago and the highest on record, according to IHS Markit, which is now part of S&P Global.
But it’s a different story for automotive suppliers, many of which incurred sizable losses in 2020 before rebounding somewhat last year. That’s because automakers are demanding cost reductions, while lower-tier suppliers have had to raise prices as costs for materials and logistics escalate.
“Suppliers have been getting squeezed the last few years,” attested Martin French, managing director of Berylls Strategy Advisors. “It’s been tough: First, they were hit by COVID and disruptions in production and workforces, now it’s chip shortages and OEMs picking and choosing where they ship product,” he elaborated. “And they’re getting crushed by OEMs to reduce costs. Tier one suppliers are really caught in the middle.”
The changing market dynamics have pushed OEM profit margins higher than those of their suppliers, according to AlixPartners, which noted that the reverse is typically true. Among the contributing factors cited for the recent trend are declines in manufacturing efficiency and long-term contracts with fixed pricing that make it difficult to recoup cost increases.
It isn’t all bad news. In fact, some suppliers—including top tier ones and a growing number of new technology companies—are positioned well for the future.
“The players who moved quickly and looked at their portfolio will be the winners,” French said. “They invested and divested to set up their operations for the future,” he added, citing BorgWarner Inc. as an example. The Auburn Hills, Mich.-based supplier has refocused its efforts in recent years toward electrified powertrain systems through product development and acquisitions, including the $3.3 billion deal in October 2020 to buy Delphi Technologies.
French expects further consolidation among suppliers as the market shifts toward electric, connected, and autonomous vehicle technologies. In general, larger suppliers—with annual revenues of at least $2 billion—will survive, he said, but there will be a “big war for talent, especially software engineers.”
There is also somewhat of a regional shift in the global supply base. French noted that U.S. and Chinese companies are gaining ground on their German and Japanese rivals. German companies such as Bosch, Continental, ZF Friedrichshafen, and Hella have dominated Berylls’ “Top 100 Largest Automotive Suppliers Worldwide” list in recent years.
But new entrants specializing in emerging technologies such as advanced battery systems and fuel cells are on the rise. China-based battery supplier Contemporary Amperex Technology Ltd. (CATL), for example, nearly tripled its sales in 2021 to catapult into the top 10 ranking.
Meanwhile, the looming energy crisis in Europe threatens to send Germany into a deep recession and further short circuit suppliers, French cautioned.
Trying to navigate all the chaos underscores the importance of having strong, collaborative relationships, said Dave Andrea, principal and automotive strategist at Plante Moran. The Southfield, Mich.-based consulting firm’s annual Working Relations Index, indicated increased tensions, especially when it came to resolving cost disputes.
“When you have all these non-scripted actions, there is no playbook. You have to rely on who can you call and who’s going to return the call,” Andrea said, noting that Honda and Nissan improved their relationships with suppliers last year while those of other OEMs worsened. “Even with all the disruption, you can have good relationships.”
In fact, some suppliers claim their customer relations have never been better, driven in part by necessity.
“If it doesn’t kill you it’s going to make you stronger, and I think the auto industry is as strong as it’s ever been,” asserted Denise Gray, who heads external affairs and government relations for LG Energy Solution Michigan Inc., a subsidiary of South Korean battery giant LG. “It may not look that way from all angles, but when it comes to perseverance, innovation, and working together globally, I think the industry is as strong as it’s ever been.”
Dave McLenaghan, vice president of sales and marketing for Mitsubishi Electric Automotive America Inc., agreed. “Going through this entire situation, customers have been very good partners. This has really brought everyone together. … Everyone had to find their way,” he said.
McLenaghan said current transparency levels between MEAA and its customers are an all-time best for his 26-year career with the Northville, Mich.-based supplier, which is part of Japan’s Mitsubishi Electric Corp. “Problem solving is higher than it’s ever been,” he added, but noted that doesn’t mean it’s been easy. “It’s a necessity that we work very close because we need to get product from A to B,” which he concedes can require a lot of effort in working with OEM partners to “move mountains.”
The chip shortage and other disruptions are forcing greater transparency throughout the supply chain and questions the viability of just-in-time (JIT) delivery as recent part shortages have thwarted production plans.
“Last year, because production schedules were so fluid, it exposed any issues of misalignment of functional areas,” Andrea explained. In some cases, he said, production schedules were changing on a nearly daily basis, which put suppliers in a bind to fulfill contractual obligations.
“Yes, there will be more safety stock through the value chain—the real issue is who pays for it? When a supplier quotes a piece-part price, they look at all the development work, tooling, and capital costs, which includes inventory. At the start of a program, if you don’t calculate that in, it can add up,” Andrea warned, adding that terms and conditions need to be well defined.
For the most part, suppliers and analysts agree that adding inventory is a short-term fix, but they don’t think dropping JIT altogether makes sense.
“The move away from JIT will be temporary,” said Shaun Twomey, director of Americas strategy and sales and marketing for ZF’s Commercial Vehicles Solutions unit. “The benefits of JIT are far too great,” he added, noting that if a company adds inventory, it needs to do it intelligently, identify risks, and understand which components are mission critical.
Over the last two years, we’ve taken 100 percent of the slack out of the supply chain,” McLenaghan added. “So today we’re effectively running a lot of expedited freight for everything. … As soon as we get semiconductors in, we’re putting them in products.”
As the U.S. operations of a Japanese company, MEAA had a long supply chain. It used to work on a week or two weeks of finished goods and a couple weeks of work-in-progress (WIP), according to McLenaghan, who suggested that there’s more of an appetite now for something longer.
“Customers would love for us to carry 90 days of WIP from a semiconductor standpoint, which today is impossible because the supply is just not there.”
This reinforces the need for cooperation throughout the value chain. “I didn’t used to know who my tier two, three, and four suppliers were,” McLenaghan said. “Now I know them intimately down to tier four.”
Increasing visibility of lower-tier suppliers helps reduce risks, said Alan Amici, president and CEO of the Center for Automotive Research in Ann Arbor, Mich. While it’s impossible to eliminate all risks, he noted that shortening the supply chain, dual sourcing, reshoring, and better communication and transparency can go a long way to reducing complexity.
“In the long run there will be advantages to transparency, such as sustainability and fair labor practices,” said Amici, who previously was a long-time executive at Fiat Chrysler Automobiles and Tier 2 supplier TE Connectivity. To help account for price fluctuations, Amici suggested quarterly cost adjustments for semiconductors and volatile materials, similar to the approach Ford uses for its aluminum-intensive F-150 pickup trucks.
Transparency and open relationships also have been critical for newly formed powertrain specialist Vitesco Technologies Group AG, which was spun off from Continental AG in September 2021. “We need to understand where the risk points are,” stated Sandy Stojkovski, CEO of Vitesco North America.
“Deep collaboration with customers, shortening our supply chain, and making sure resiliency is built in, such as having multiple sub-suppliers for a given component, are very important.”
Vitesco is a microcosm of sorts of the supplier industry. The company’s launch was delayed about two years due to unfavorable market conditions that were worsened by the pandemic—Vitesco’s sales fell 12 percent in 2020, it’s last full year under Continental.
The impetus for the divestiture, Stojkovski explained, was to allow Vitesco (formerly Continental’s Powertrain division) to better focus its resources as a separate entity rather than being an unprofitable cog in a 45-billion-euro mega-supplier. “We can better serve the powertrain market by being totally focused, faster, and smarter,” she said. “It’s a win-win.”
Now the Regensburg, Germany-based company is racing full speed ahead in a new direction: electrification. Although Vitesco has been involved in electrification technology for more than a decade and currently is working on its fourth generation of such products, components for hybrid and full-electric vehicles still account for less than 10 percent of its business today.
That’s about to change in a big way. Through the first half of the year Vitesco already has won 8.3 billion euros of new business, of which 81 percent is related to electrified vehicles—including a 2-billion-euro order from Hyundai Motor Group.
“We’ve certainly faced a lot of challenges over the last couple of years,” Stojkovski noted. “Now it’s the Russian-Ukrainian war, labor shortages, energy shortages, inflation, you name it.” But, she added, “Our logic (for the spin-off) has proven correct.”
Next up, the company plans to consolidate its current four business units (Electronic Controls, Electrification Technology, Sensing & Actuation, and Contract Manufacturing) into two divisions: Powertrain Solutions and Electrification Solutions.
It’s not just Vitesco. Most suppliers are pivoting to support the aggressive rollout of electrified vehicles. In the U.S., the move is fueled by a combination of surging consumer demand, technology advances, and a growing recharging infrastructure. In addition, President Biden signed an executive order last year that calls for half of new cars and trucks sold in 2030 to be zero-emission models, including battery electric, plug-in-hybrid, and fuel cell-powered vehicles.
LG has been working on electrification for decades. The difference now is that the technology has progressed to the point where it’s not cost prohibitive, Gray said. Although some government assistance is still needed, she pointed out that companies now can thrive with EVs and electrified products in their portfolios.
“If you just read the headlines, everyone is talking about their new products,” she said, citing General Motors, Ford, Stellantis, Volvo, Volkswagen, and Tesla. “So, in the ’24-’25-’26, timeframe, you’re going to see a ton of new, beautifully crafted vehicles that will be compelling to the buying customers,” she enthused. “It’s very exciting.”
For its part, LG is launching production of battery cells through its Ultium Cells LLC joint venture with GM at facilities in Michigan and Ohio, and is considering adding another one in Indiana. The company also is working with Ford and Stellantis.
“There are a ton of resources devoted to electrification,” added MEAA’s McLenaghan, noting the company’s capabilities in 400-800-volt components.
At the same time, he said, development of internal combustion engine technology is “kind of static.” From an engineering standpoint, he said, MEAA is split between “old” and “new” technology, but nearly all of the development efforts are centered on the latter while the focus for old tech is on maintenance and purchasing. “The hard part is balancing and phasing them in and out. … Everyone is trying to position themselves for the future.”
Bosch is taking a different approach. While electrification will play a major role in the company’s future, Thomas said Bosch’s existing “core business” will continue to be a primary focus for the majority of the company, with a growing emphasis on integration, modules, and embedded software. “We’re very balanced, Bosch is still developing solutions for ICE. Both will continue for an extended time.”
Even if projections for increasing EV adoption rates pan out in coming years, Thomas pointed out that there are more than 280 million vehicles on the road in the U.S., most of which use traditional power sources. “It will take some time (to transition to EVs).”
As part of the transition to electrified vehicles, automakers also are developing new electrical/electronic architectures that will feature a handful of domain controllers in place of as many as 120 decentralized controllers used in the latest high-end luxury vehicles, Amici noted. The centralized approach could use as few as three high-powered controllers (one each for propulsion, driver assistance, and cabin/infotainment), which would significantly reduce costs and simplify the validation process.
“It will really change the way the industry does business,” Amici predicted, noting that large Tier 1 suppliers and OEMs will increasingly compete with each other to provide the technology.
The new EE architectures also lend themselves to the concept of a software-defined car, which Bosch’s Thomas equates to a smartphone on wheels. Such systems enable hardware to become more standardized with software becoming a vehicle’s main interface with consumers and the infrastructure.
Bosch’s goal is for every one of its products (including transportation and non-transportation ones) to be connected to the Internet of Things, which Thomas said could happen by 2030. In vehicles, this would allow real-time data to be accessed by OEMs, suppliers, and third-party service providers when appropriate.
Another possibility is to connect vehicle data to the factory floor as the next step in Industry 4.0, which could enable on-the-fly production adjustments to improve safety and lessen the effect of potential warranty issues.
Bosch already integrates field data from vehicles into its product design process, and now is looking to communicate directly to the factory. Bosch also has added artificial intelligence (A.I.) capabilities on more than 800 production lines at 50 powertrain facilities worldwide to help operators detect and prevent manufacturing anomalies.
“I do think it will help us on the manufacturing side,” Thomas said. “Whether it’s with artificial intelligence or predictive analysis from connected devices, or just raw data based on the number of activations of the unit before it needs replacement or irregularities you see from the operation that you could tie back to manufacturing floor.”
Industry 4.0 also is playing a big part in ZF and Vitesco’s operations. Vitesco, which has been developing connected manufacturing systems for several years, plans to use the technology as it converts existing facilities to produce electric powertrain systems.
“We’re matching the expertise of our plants with the new products,” explained Scott Williams, who heads the company’s North American operations. While there are a lot of similarities, he said the challenge is dealing with high-voltage applications.
Vitesco aims to add digitalization, advanced automation, and the use of A.I. to allow plant equipment to make decisions on their own. Williams, who was a plant manager for 12 years, said the goal is to work smarter not harder. To this end, the company is deploying an army of cobots to enhance safety and reliability, while eliminating automation complexity. Some of its plants already have as many as 150 cobots, which increasingly are used in conjunction with value-added machines as well as simply to move parts, Williams noted.
“Industry 4.0 is a continuous mindset, a concept of making use of the cloud and an end-to-end process for managing data,” Twomey added. This includes sharing information with the supply chain to manage and prevent “future shocks.”
ZF’s definition of a smart factory, according to Twomey, is self-learning and seamlessly connected information centers. The supplier is pilot testing its digital manufacturing platform concept, which allows data to be shared over the cloud, at its Diepholz, Germany, facility in partnership with Microsoft and PwC Germany. The goal is to reduce changeover costs, improve worker efficiency, and enhance inventory, performance, and quality.
Suppliers must continue to invest in such smart manufacturing systems to stay competitive and meet customer demands, French said. He pointed to Tesla as a benchmark, noting the EV leader invested in huge presses and manufacturing dies to simplify its processes and reduce parts complexity.
It’s all part of the continuous improvement process as the auto industry transitions to next-generation technologies, evolving supply chain dynamics, and adapting to challenging market conditions.
“We’re looking at mobility in a different way,” Thomas asserted. “It’s no longer just auto parts, or manufacturing the best quality and quantity. It now involves the full value stream, (which is) becoming more important as you develop and manufacture products.”
The value chain is no longer a straight line, he added, explaining that it’s becoming more vertical—or three dimensional—including multiple suppliers and partners, with “inputs from the bottom, top, and Z-axis.” As an example, Thomas said OEMS may expand into minerals and how they are mined, while Bosch has effectively become its own supplier and partner by launching silicon carbide production for semiconductors in late 2021.
LG’s Denise Gray, who has held senior executive positions at GM and several top suppliers, takes a longer-term view. Suppliers may be “facing a new set of circumstances, but they’re not unfamiliar,” she pointed out. “The auto industry has been trying to get better, faster, and cleaner for decades—and it has during my career.”
Noting that her mother is still alive to remind her that there is “nothing new under the sun,” Gray said it all comes down to some basic home training that’s still relevant: respect of person, communication, education, and hard work.
At the same time, though, she acknowledges the “amazing strides in automation, smart manufacturing, and an enhanced workforce.”
Carmakers and suppliers need to improve their relationships with each other to better cope with various challenges facing the industry, according to Plante Moran’s annual Working Relations Index (WRI).
Now in its 22nd year, the WRI survey of 673 sales reps from 436 Tier 1 suppliers in North America indicates that supplier partnerships are more critical than ever during rapidly changing market conditions. Manufacturers depend on strong relationships to provide operational flexibility, manufacturing launch support, risk mitigation, and product differentiation, said Dave Andrea, principal and automotive strategist at Plante Moran.
“Tension rose between OEMs and suppliers as the auto industry grappled with unprecedented challenges,” Andrea asserted, pointing to ongoing supply chain shortages and production volatility, the transition to electric vehicles, logistics constraints, and increasing raw material costs, as well as dealing with COVID-19. “(And) the tension will only worsen if the issues aren’t resolved.”
The study polled respondents about their relationships with Ford, General Motors, Honda, Nissan, Toyota, and Stellantis, which was formed last year from the merger of Fiat Chrysler and France’s PSA Group. Toyota finished first again with a rating of 345, followed by Honda (334), GM (287), Ford (242), Nissan (219), and Stellantis (128).
The overall average for the six automakers fell slightly again this year to 259 and is down nine points from 2013 levels, with the top three companies posting gains for the period while the bottom three companies suffered losses. Stellantis’ score this year was the lowest WRI ranking in more than a decade, due in part to drastic changes to its purchasing terms and conditions that were eventually reversed after a new purchasing chief took over.
A common problem among all OEMs is the increasing time it takes to resolve cost disputes—including piece-part and tooling issues—much of which is driven by inflation and material shortages. This led to rising input costs and a decline in profitability as production volatility drove volumes down, according to the study, with smaller suppliers impacted the most because they don’t have the wherewithal and resources to absorb costs and mitigate customer conflicts.
Promptly resolving such issues will allow buyers and sellers to focus on quality and smooth product launches, the authors noted.
Improving working relationships will be critical as the industry shifts from traditional vehicles to EVs. Strong partnerships can minimize costs as OEMs phase out ICE programs, and clearly communicating technology roadmaps with suppliers will help them navigate an orderly transition to other products, industries, or even ultimately exiting operations.
The key to mutual success in OEM-supplier relations is trust, which Andrea said is based on three factors: setting realistic expectations; delivering on commitments; and sharing information. Meanwhile, local autonomy and decision-making authority can speed the dispute resolution process.
“OEMs really need to focus on more transparency and better communication,” Andrea said. “They need to better align purchasing, engineering, and manufacturing to achieve the same goals … these processes must become more agile and streamlined to benefit both the OEM and supplier.”
The good news, Andreas said, is that all the identified problems can be resolved. “Look how fast and successfully automakers switched to the production of COVID face masks and respirators. When there’s corporate commitment, things get done fast,” he continued. “And if resolved, automakers will be more profitable, improve vehicle launches, reduce warranty claims and recalls, and (be) better positioned to transition to EVs.
Big changes also are coming to the commercial truck market.
“If you look at the next 10 years, the industry will go through a transformation that we haven’t seen in the last 40 years,” ZF’s Twomey declared, identifying three major trends: electromobility, connectivity, and advanced driver assist systems (ADAS). And ZF, through its 2020 purchase of Wabco, is targeting all three under the newly named Commercial Vehicle Solutions (CVS) division, which is said to be the world’s largest supplier to the commercial vehicle market.
Twomey predicts that 35-45 percent of new medium- and heavy-duty trucks in the U.S. will be either battery-electric or fuel-cell-electric models by 2030. The penetration rate for buses will be even greater, approaching 75 percent, by that time, he added.
At the same time, more than three-fourths of new trucks are expected to be outfitted with SAE Level 2 ADAS (multiple driver-assist features that still require human monitoring) compared with less than 15 percent today. To this end, CVS has launched its new autonomous driving open platform technology (ADOPT) to enable the control of various vehicle actuation systems, which Twomey said will speed development and implementation while reducing OEM R&D costs.
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