Suppliers Face the Electrified Future

Maintain course or pivot? Consolidate or liquidate? For many suppliers there are forks in the charged road ahead.

Toyota’s recently unveiled bZ4X is a bellwether for suppliers. The concept SUV signals the automaker’s leap into battery-electric vehicles and lithium batteries after more than two decades of dominating the hybrid segment. (Toyota)

Suppliers face critical decisions on a daily basis. Crises come and go. Dealing with erratic production schedules driven by semiconductor supply shortages and coping with rising prices for strategic materials such as steel and resin underscore the cyclical challenges of the auto business. By comparison, other hurdles such as hiring and retaining the right talent are just frosting on the cake.

Then comes battery-electric vehicle (BEV) propulsion and the significant investments and, in some cases upheaval, it demands. For suppliers, the changes that will impact most functional vehicle systems due to the EV trend outline four strategic paths – forks in the road – to follow:

Maintain course: Depending upon the system supplied and aftermarket exposure, select suppliers will witness little change in future sourcing patterns, value add and development timelines for future business. Many though not all interior and exterior systems fit this classification as an example. Even if your business has thus far remained outside the scope of BEV sourcing plans, vehicle lightweighting and other ongoing technology trends are still top of mind.

These suppliers are well advised to watch for storm clouds as their ecosystem can shift quickly. But for those whose business is IC-engine dependent, fear not in the short term: IHS Markit’s recent Vehicles-In-Operation (VIO) Forecast is confident there will still be ICE-powered offerings, predominantly hybrids, in the fleet 30 years from now.

Sell/liquidate: While this path is seemingly drastic, changes to future system requirements given electrified propulsion make this a reality for many. Factors such as global/regional sourcing, upstream and downstream value-add shifts, and BEV-fueled cadence changes may signal to several suppliers that it is time to divest. Alternatively, those suppliers with capabilities in multiple system areas may choose to focus on a reduced portfolio where their competitive position, returns, risk or capital outlay are more favorable.

Given shifts in the relative economies-of-scale for future global BEV architectures, several regional suppliers in system areas heavily impacted by electrified propulsion will need to establish whether to stay or go. Additionally, as OEMs themselves adapt to an EV-centric industry, suppliers can venture into the systems with high growth potential, such as electrified drives and e-motors. Customers may become competitors. Watch for the traditional tier relationships to blur in the future.

Pivot: We see many suppliers choosing to re-invent themselves using several avenues. Some integrate vertically, usually upstream, to ensure supply continuity, capture enhanced value and, in some cases, drive more differentiation. Others are opting for joint ventures or affiliations, to couple existing capacity with new system requirements, reach new geographies, and to share development costs.

Adding electronic content or software capability to a mechanical system is a key play that has occurred in steering and braking. Some suppliers are developing new products while leveraging their existing processes. Companies that machine “traditional” powertrain and driveline components are finding opportunities in e-motors and drive systems within the BEV world.

Double-down and consolidate: Contrarians will try to make lemonade from lemons. Faced with consolidation in their space, they may seek to take out weaker competitors and consolidate capacity to drive pricing. Some are betting that the uptake for BEV offerings will be slower than forecast. If their bets are accurate, they can benefit from consolidation for several years.

Supplier strategy has never witnessed the level of risk vs. reward we see today. Every situation is different; solutions are not simple. But we can expect more forks in the road as the BEV ecosystem develops.