The New EV-driven Regional Supply Focus

March 1, 2022

The recent flurry of investment announcements focused on the conversion of North America’s light-vehicle production to electric-vehicle propulsion has been head spinning. No less than 20 announced battery plants are in the planning stages with a further round of yet-to-be-announced facilities expected to arrive later this decade. While strategies toward electrified propulsion differ between OEMs, virtually everyone is on the EV bandwagon.

This rapidly rising rate of EV commitments has many suppliers re-examining their future strategic plans with an eye on ensuring their organization can catch the wave − or survive a swifter decline in both combustion-engine and planetary-type automatic transmission volumes through this decade. In previous columns I’ve outlined whether a supplier should consider the sectors they are currently active in as being EV-positive, EV-agnostic or EV-negative. This determination and subsequent actions by each supplier to optimize the overall strategy are critical to future survival.

Along with the massive shift in technologies, the value stream and program cadence, a new supplier/OEM footprint is emerging. It’s evident in the proximity of new battery plants to the light vehicle assembly plants they are feeding now and in the next few years. Gone are the days when engine and transmission facilities were not required to be logistically close to the final assembly plant. Due to economies of scale, there are scores of examples where major powertrain components travel between continents.

This will not be the case with the positioning of battery plants. High volume (over ~150k/year) EV final production facilities require propulsion battery assembly within two to three hours’ transit time to limit logistics risk and cost. And it’s not just battery supply that is being rethought: OEMs see the need to increasingly regionalize a significantly greater slice of future light vehicle sourcing. Major component systems such as seats, door panels, overhead systems, class A (exterior stampings), front/rear fascias and a host of others will continue to require a close logistics connection no matter what type of propulsion.

Add in battery assembly and the ability to build new sourcing structures for drive systems, power electronics and charging systems and it becomes clears that a transformation is emerging: OEMs have the rare opportunity to construct a new supply ecosystem.

The current system is the result of decades of successive sourcing decisions driven by investment incentives, labor contracts, final customer logistics and other factors. By comparison, the new EV-driven regional focus will increasingly compartmentalize major component supply, reduce logistics risk as well as the currency/tariff risk that is ever-present in the industry. North America’s major regions of the Great Lakes, U.S. Southeast, Southwest/Northern Mexico and Mid-Mexico will increasingly compete for investment. The dynamic underscores the need for regional collaboration between states and provinces to drive the agenda.

A rise in EV investment and subsequent volume places pressure on traditional ICE-serving supply chains. Especially in powertrain volume, OEMs are already carefully and selectively winding down their current facilities over time, keeping an eye on capacity utilization. Operating a slew of facilities on one shift as volumes decline is not an effective solution. OEMs will increasingly seek regional/local supply where these make sense from a logistics-risk perspective. As such, Tier 1 and 2 suppliers whose businesses thrived within the current IC engine ecosystem will need to accommodate the new EV landscape.