New Keys to Success

The landscape feels stable now, but what’s next?

March 14, 2024

Michael Robinet

Balancing production between EVs like this Kia EV9 and internal-combustion-powered vehicles will be a key for the industry. (Kia)

Much has been written about the extraordinary vehicle production and market environment of the past four years in North America and beyond. The plethora of negative impacts from COVID, chip availability, scarcity of labor, inflation, shipping disruptions and union/OEM disputes can all be boiled down to what’s best described as an “operational hell.” Everyone is happy to put this all behind us.

The dawn of 2024, at least for North America, has enabled some stability from a volume perspective as the industry slowly rebuilds inventory and adjustments are made to the pace of BEV volume buildout over the next couple of years. This should offer some familiarity and a welcome breather from the highly unpredictable environments we’ve seen since late 2019. That being noted, there’s a question in the air about the new, inexperienced challenges that might lurk around the corner.

As one carefully peers ahead, what are the levers of success for the supply base? Are they the same as in the past or have recent events, the addition of several new OEM (and supplier) players and the secular shifts towards new propulsion forms changed the playing field? Let’s outline a handful of core considerations that apply to virtually every supplier as they build strategy.

The Crossover — New vs. Old

The industry has or will be launching several new BEV-only or “multi-energy” platforms through this decade. At issue will be the underlying volumes OEMs need to drive improved economies of scale (and therefore lower costs) versus the ability to sell these profitably given consumer acceptance.

As outlined a couple of columns back, this ongoing balancing act of required production volumes (necessary for OEMs to drive scale) and forecasted production volumes (consideration of real-world market dynamics) drives suppliers to renew their focus on program-level profitability and capital efficiency. If a BEV program is delayed or reduced, you can bet that, in most cases, an ICE-focused entry will fill the gap. Mastering BEV delays vs. ICE extensions will be key for suppliers this decade.

Operational Efficiency

To achieve economies of scale as we transition to new BEV-format platforms and eke out more volume from existing ICE structures, suppliers must be flexible and operationally efficient.

Using a “less is more” philosophy is key. Where in the past an organization may be somewhat looser with capital and resource allocation, strong volumes can hide inefficiencies. One should not count on this past luxury. Hard choices may increasingly be required in an environment of accelerated volume instability and the relatively high cost of capital our industry faces.

Trade, Tariffs and Labor Costs

Building for several years, though propelled by COVID and recent inflation flareups, are rising labor costs. Before last year’s UAW and Unifor agreements, suppliers were already feeling the impact of higher hourly costs, poor labor availability and the requisite cost of quality with high turnover. Virtually no company has been immune from rising costs and altered benefit structures that impact overall costs. For many, increased automation is the only answer.

New trade regulations (U.S. IRA), specific tariffs (like the 25% parts tariff on China-sourced products) and a host of other protective tariffs add to the hurdles companies must overcome going forward. Though many are well-intentioned, obstructions add to the cost of doing business with fewer options as several regions turn inward.

While many of these obstacles are re-emerging from the past, together they portend a new ecosystem that must be navigated. Smart suppliers will have Plans B and C ready if the situation demands alternatives. To paraphrase my hockey coach, suppliers should keep their heads on swivels.