EVs Pressure Supplier Value-add

Michael Robinet
Executive Director, S&P Global SAE Foundation Trustee
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Across every tier of the global supply chain, heads are spinning from the pace of change being driven by vehicle electrification. While they grapple with semiconductor and materials supply, labor availability, the cost of developing new technologies and inflation issues, suppliers are finding that devoting time to mapping the road ahead is a challenging priority. Nonetheless, the EV transformation is underway. Norms of how we address the business, which have been built up over several decades, are being tested.

Obvious to many is the competition for engineering and technical talent that currently is most acute in software and electronics design/ engineering but eventually will also be felt in service bays across the dealerscape. In my conversations with supplier leadership, concerns over placing capital at risk and the shift of the relative importance of various component sub-systems are increasingly clear.

As I’ve noted here previously, the decline/elimination of combustion engine, transmission, fuel and exhaust systems from OEMs’ bills of material is far from being counterbalanced by growth and opportunity in propulsion battery, e-drive, thermal and electrical systems. The cold reality is this: Not everyone with ICE-legacy business will be capable or willing to make the transition.

Beneath the waves, however, are numerous other factors with potential to alter the business model for the supply base.

For decades, the North American industry has centered on five-year major revision cadence or 10-year all-new design cadence timing for ICE-based products. Depending on what type of component/system sourced, suppliers could count on dividing tooling, design and machine costs by five years. While the U.S. domestic OEMs were not always on a five-year regimen, strong competition to keep up with the Japanese OEMs and the need to improve fuel economy drove more frequent investment. Battery-electric vehicle platforms are changing the game here.

I expect that BEVs will stretch the time between major design revisions (those that impact vehicle architecture) to 7-8 years, due to the flexibility of making modification in battery chemistry and e-drive packaging. Amortizing fixed costs over a longer period alters the risk equation for suppliers.

The larger OEMs are using the ICE-to-BEV transformation to adjust their value-add equation versus the supply base. In the ICE world, the supplier value-add averages 65-70% of the vehicle value. This climbed over several decades as OEMs spun off non-strategic operations. But as the BEV format rises, OEMs are seeking new modes to protect technology, guarantee supply and drive differentiation for their products. They are adopting design and production of new systems, and in the process, they’re becoming more vertically integrated — bringing in-house competencies such as battery cell manufacturing, production of e-drives and in some cases, electric-charging content.

A key issue for suppliers going forward: OEMs also are increasingly controlling software. These trends are putting supplier value-add under increased pressure.

Gone are the days when OEMs had a platform/architecture for every vehicle size, propulsion format or vocation (role). Some mass-market vehicle makers had more than 10 platforms active at any one time. This added to the required engineering support — driving complexity and dragging on initiatives to reduce part count. In the emerging BEV world, OEMs are rethinking this approach.

It now is apparent that even the largest mass-market OEMs will have three to four BEV architectures with increased commonality in the battery and e-drive space. BEVs offer an increased flexibility to alter vehicle wheelbase and tread width without major platform tear-ups. Customer-facing content in the ‘top hat’ can be changed faster and more efficiently.

Suppliers will be in the spotlight as the entire industry undergoes profound changes related to electrification and automated-driving technologies. Understanding and effectively navigating these impacts will be critical.