A Hard Look at New Sourcing Strategies

April 1, 2021

Michael Robinet

From COVID to chips: Just as the industry was beginning to put 2020 in the rearview mirror, it gets slammed with more supply-chain disruptions. Severe chip capacity issues out of China, Taiwan and Korea have interrupted vehicle assembly at some OEMs. Once-in-a-century weather events in Texas have caused shortages of critical chemical supplies. And global political/trade disputes continue to brew across southeast Asia. While many are arguing for a regional focus to automotive sourcing, globally integrated supply remains front and center.

The current problems are, for the most part, short term. But their dynamics are forcing a hard look at the sourcing strategies built around the increasing volumes of electric vehicles coming in the next few years. Optimists believe that future supply chains for battery-electric vehicles (BEV) will be simpler than those supporting today’s combustion-engine cars and trucks. Simpler design, subsystems and bills of material, right? I’ll argue that’s wishful thinking.

One could make a case that by eliminating the traditional-ICE componentry, primarily fuel systems, exhaust and aftertreatment, and ICE-specific NVH attenuation, the BEV is essentially a simple “skateboard” with a body atop. But such overt simplicity is deceptive. Future supply chains within a BEV ecosystem are destined to become more complicated. They’ll be intertwined with several unconventional relationships and dependencies.

How is that possible? At the root of BEV complexity is the advent of new innovations to enable safe, reliable, and efficient optimization of electric propulsion and related systems. These are expanding the breadth of the supply chain through more software, electronics, charging hardware, and new battery materials. In step with these are the sensor suites, processors and endlessly updated software necessary to support automated-driving functions that are dovetailed with BEVs.

How will this affect relationships up and down the supply tiers? As vehicle layouts, structures and assembly processes change in the BEV transition, some suppliers currently deemed Tier 1 may in the future source into suppliers inserted between them and the OEM. This will potentially alter sales process, the value equation, warranty responsibility and commercial dealings.

Software’s increasing value as a differentiator within the BEV world adds tangential participants and complexity that the mechanical-era players never envisioned. As software changes augment the ability to modify the driving experience through an OTA (over-the-air) interface, its value as a tool to differentiate a brand and reduce cost risk is essential. Smart suppliers understand that tomorrow’s value is driven by the combination of software and hardware working in concert.

The shift to BEVs and the recent microchip crisis are forcing vehicle OEMs to redefine their supply chains. This is already driving significant upstream shifts. Larger automakers including General Motors and VW Group have insourced design and manufacture of propulsion batteries and e-drive systems. Many of the traditional driveline-system suppliers have seen the writing on the wall. They’ve been moving their research and product development toward the new reality.

The speed of innovation, risk mitigation and efficient capital utilization are forcing new OEM-supplier technology alliances. These, and the industry’s supply chains, will continue to keep pace with BEV and AV growth throughout this decade. While new economies of scale will not happen overnight, ensuring adequate supply of automotive-grade semiconductors to keep pace with BEVs and their expanding infrastructure is surely a need that must be met sooner than later.