Electrification Brings Supplier Value Closer to Home
A more regionally focused industry structure is emerging with new implications for economies of scale.
Various aspects of life and business come full circle. While I’m not waiting for bell bottoms from the 1970s to make a triumphant return, the automotive industry is quickly returning to its roots. One reason for this is that a more regionally focused structure is emerging. It extends from a product’s final design through sourcing. The impact on our industry will be significant.
This is a sea change from decades Done ago, when the industry was a cluster of regional OEMs – some championed by national governments driven to build a local automotive industry and consumers who took pride in buying domestic brands. Virtually every car company fit this mold and many countries’ governments became active sponsors of some of them. The U.K.’s British Leyland and Rover Group, Chrysler in the U.S. and Nissan in Japan were all nurtured to some extent by their home countries. Even today the French government owns 15% of Renault and holds a 6.2% stake in Stellantis.
Most of the OEMs grew mainly within a region. Their production, design and supplier sourcing were suboptimal. And while Ford and General Motors both had significant operations in Europe for several decades, these entities were regional outposts with their own structure, production capabilities and design.
Why the history lesson? As trade walls came down (NAFTA, EU etc.), consumers wanted better products for less. Increasing scale economies, sharing best practice processes and using common components and systems where possible had significant advantages. Most governments discovered that it was better to be part of a global automotive industry versus fostering an inefficient local version.
In the 1980s many OEMs tried to bring global scope to their portfolios, aiming to lower costs and improve flexibility. There were a couple of ‘world cars’ (i.e., Ford Escort) and global platforms (GM-Delta) which started the ball rolling. But it took a couple of cycles to drive the point home. Success came with the Japanese OEMs in the 1980s when they began exporting their production scale for compact and mid-size sedans. Honda, Toyota, and Nissan led other OEMs in scaling up, using common platforms, in North America and Europe. Virtually every successful
multi-region, mass-market OEM built their offerings in multiple regions, driving global scale at the vehicle, powertrain, and system level.
As companies focus much of their energy, technology, and capital on the transition from ICE to BEV over the next decade, automotive production and component sourcing will become more regional. Governments have surmised that there is massive opportunity in incentivizing not only local output of battery electric offerings — build where you sell — but also drawing in the upstream supply chain. This now includes EV batteries, an enormous value addition. Never let a good propulsion disruption go to waste! Introducing industrial/trade policies such as the U.S. Inflation Reduction Act and aggressive emission legislation in major markets such as Mainland China, the European Union and the U.S. will propel this shift.
While governments may wish to take a victory lap given the massive battery cell, e-motor and other recent investments, BEV production was going to spur a much different sourcing and logistical footprint anyway. Local sourcing of battery cells, pack structures, traction motors, power electronics and related vehicle electrical content is necessary to drive cost and risk out of the supply chain. Global sourcing for ICE powertrains (engines from Germany or transmissions from Japan) is giving way to a supply chain with a length measured in hundreds of miles not thousands.
The new structure will have fewer architectures and propulsion variants, which alters the future of economies of scale at all levels. While technologies will have global applications, BEV propulsion will spur more value sourced closer to home.