The Battle over EV Value-Add Has Begun
As manufacturing shifts to EVs, OEMs are capturing more value for themselves.
A critical industry transition is underway that some already are viewing as an impending battle. At stake is supplier value-add share versus that of OEMs as light-vehicle propulsion formats shift from internal combustion engines to electric motor and battery power. There’s nothing like a comprehensive industry transformation to shake the status quo. And OEMs sense opportunity to tip the scales in their favor.
Since the 1980s, OEMs have been working through their bills of material (BoM) to evaluate what components and systems make sense to manufacture in-house versus what is more efficient or profitable to outsource. The establishment of super-suppliers Delphi and Visteon were a direct result of their respective GM and Ford parents deciding that they would be better off on their own.
Establishing greater economies of scale through selling outside the usual OEM family helped reduce costs and advance technology for supplier and automaker. Releasing the need to fund capital requirements for ‘non-strategic’ sectors enabled OEMs to focus resources elsewhere. S&P Global Mobility’s research shows suppliers’ share of manufacturing value-add for ICE vehicles to be 60-70% of manufactured cost.
Value-add share from the supply base is a moving target. The current state of business is being driven by new process technology, labor dynamics, more efficient use of capital — and the need to protect intellectual property, mitigate risk and focus product development on what will truly differentiate tomorrow’s vehicle experience. As such, over time most OEMs naturally gravitated to manufacturing only what was strategic: vehicle final assembly, Class-A stampings, engines, transmissions (sometimes) and occasionally other driveline components.
The need to establish a technology/cost edge during this BEV shift is forcing OEMs to rethink their approach to entering and navigating the BEV fray. That edge is critical: an OEM that pays $20 more per kWh for the same battery technology could have a $2,000 deficit to close for a 100-kWh battery. The stakes are serious; several OEMs already have spun off their legacy ICE-related businesses or at least significantly descoped them.
At the core of this shift is the myriad of joint ventures and alliances in the battery-technology space. Depending upon capacity and format, batteries represent 35-50% of BEV cost. <</p>Together with the e-drive systems that many OEMs are or will be building in-house, supplier value-add clearly is shifting into reverse. Rather than commanding up to 70% of the value-add in a current ICE vehicle, suppliers’ share is falling to well less than 50% for future vehicle programs.
We have seen this story before — at least from the Detroit Three and select Europe-based OEMs. Over the years, these OEMs have had checkered success with insourcing design and manufacturing of various vehicle systems, including seating, fuel systems, cockpits and suspension modules. Often it lasted a cycle or two (5-10 years) before they would revert to outsourcing non-core activities to capable suppliers with higher scale and better technology. This time, however, the landscape is different. Global regulations are progressively boxing in the ICE, while the scale of investment in vehicle electrification is dwarfing prior efforts. The electric propulsion system, battery, charging hardware and related software are core to EV DNA and to OEM competitiveness. The industry is on a one-way path and it would take many years to change course.
Asia-based OEMs, with strong alliances to their supply bases (Japan keiretsu or Korean chaebol) will utilize those close connections to jointly delve into the BEV market. Similar to their ICE experience, sharing risk where required with their OEM partners will enable these suppliers to also shift into the electrified world.
Additionally, the BEV insourcing shift allows OEMs to retain more of their employment levels and ameliorate the unions to a degree. But for suppliers, there is a real possibility of lower employment, declining revenue share within the next ecosystem, and increased sourcing risk. OEMs are being careful to avoid vertical integration of key systems which are well outside their sphere of efficient execution. These will continue to be seating, electronics, structures, thermal, chassis systems, interiors, material supply and other systems.
Supplier influence, control — and in some cases survival – are in the crosshairs during this transformation. Additionally, where a supplier resides within the OEM-supplier tiering structure may shift – forcing many to rethink their market approach and structure. In the end, the ICE-to-EV shift is more than just swapping in a battery and e-drive for an engine/transmission. Suppliers on all tiers must redefine their business strategy within the new dynamic. The OEMs already have a game plan.