The Soft Underbelly of The EV Transition
The list of OEMs and suppliers that are splitting their organizations into traditional ICE powertrain and electric vehicle operations continues to grow. Just follow the money, as billions are being devoted to new battery plants, upstream input supply, charge point investment and revolutionary approaches to next-gen vehicle architectures.
Regular readers of this page already understand our view of the key functional systems/components being classified as either EV-Negative, EV-Agnostic or EV-Positive. And as such, how the industry addresses these capabilities going forward from a capital, talent, timeline (speed) and financial-return perspective is woven into every decision going forward.
Case in point is Ford’s recent announcement that it is severing its traditional engine/transmission operations, now called Ford Blue, from its emerging BEV operations, known as Ford Model e. The strategic and tactical split is expected to have a huge impact on every touch-point — vehicle and systems development, technology, production, retail sales and the aftermarket. Other OEMs have formed JVs with existing auto Tier 1s or new industry entrants to enable their transition to BEV from a technology and timing perspective. Additionally, countless Tier 1s have structurally severed or sold off ICE-focused operations/development as OEMs quickly reduce or restructure these operations.
The speed with which OEMs and larger Tier 1s are pivoting towards EVs and the subsequent refocusing of their business structures has been more rapid than expected. While several industry observers, me included, warned of the inevitable shift towards electrification, the sheer commitment behind it has been surprising. The recent S&P Global (previously IHS Markit) Light Vehicle Propulsion Forecast outlines growth to 32% EV output by 2030 in North America with the rate reaching 36% on a global basis. Years of focused development and careful capital planning towards the EV future has pre-determined the fate of ICE operations.
While the industry has not written off traditional ICE operations — which continue to fund development of EV and other advanced technologies, after all — clearly these are on a different trajectory. While several Tier 1s are working through the transition (and most should succeed), there is less flexibility to pivot at the Tier 2+ level. Tier 2+ suppliers, which innovate and build critical sub-systems and deliver key materials and processes or tooling to support ICE programs, may lack the ability to transition in cadence with their customers to the EV-driven opportunities.
Therein lies the ‘soft underbelly’ of the industry’s mammoth transition. Can key suppliers that are integral to the continuation of ICE production survive the reduced volumes (lower economies of scale) and lack of new programs to replenish margins going into the next decade? And there’s another complication: The need to support the ICE aftermarket for 10-15 years after the end of a program. This extended tail already is causing concern for all involved.
Announcements surrounding the structure of EV versus ICE operations will continue as decisions flow upstream into the supply chain. Growing exposure to lower volumes, increased pressure to effectively pay back capital and attract the necessary talent to support ICE supply will dog the industry.
Note to readers: In March 2022, IHS Markit merged with S&P Global. S&P Global is focused on supporting our clients with critical capital decisions and powering the markets of the future.