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The supplier of the future, and the need to navigate the electrification of the automotive industry

During the virtual PowerPlex 2021 conference, Erich Bergen, director, and Peter Pearce, principal in Baker Tilly’s supply chain and manufacturing group presented “Supplier of the future: Embracing the new automotive landscape.” In the presentation, they discussed one of the prevalent questions in the automotive industry these days: When will electric vehicles (EVs) officially surpass internal combustion engine (ICE) vehicles in terms of popularity?

The original projections were approximately 2035-40, but the impact of COVID-19 has likely moved this timeline to the left. The inflection point, when EVs become the more common type of vehicle, will now likely be sooner than predicted.

As for the reasons for this shift, we see six overarching themes.

  • Consumer – Generally speaking, the consumer mindset has changed. Pricing has come down and become more reasonable. Total cost of ownership has become more palatable as well. The cost is starting to move into reach for more people. Competition has helped bring down costs too. Plus, EVs allow the consumer to be more involved in the buying process and the designing of the vehicles, which is appealing to many people.
  • OEM commitment – Domestic OEMs are no longer lagging behind the EV revolution. Now they are leading it. One or two years ago, there wasn’t a lot of chatter about what Ford, GM and Chrysler were doing. But in the last year or so, Ford and GM in particular have made a massive investment in this movement. This change has flooded billions into the marketplace.
  • Government – Domestically and globally, governments are pushing legislation to halt ICE vehicle sales in the coming years. US buyers could receive about $7,500 in tax credits for buying electric. Additionally, stringent environmental regulations are pushing people into EVs. Seventeen government bodies across the world have passed laws to halt the sale of ICE vehicles over the next 10 years. Here in the US, the Biden administration has proposed a $2 trillion infrastructure plan, of which approximately 29% will go to EVs.
  • Environment – Environmental impact continues to be another driving force in the marketplace. With ICE and EVs, the manufacturing process produces a similar negative impact on carbon emissions. But when you begin to examine miles driven, that’s when you see a big difference. . . This has an impact on both consumers’ and governments’ desire to transition to EVs over time.
  • New entrants – EV OEMs continue to advance the modern approach to business. Meanwhile, supply chain relationships have flattened, rendering the tiered model outdated. Legacy and labor costs are lower, as well. The focus is now on innovation and improving the consumer experience.
  • Technology – The evolution of technology has been swift. Rapid advancements across battery, in-car, and manufacturing-related technology are happening quickly. Advanced battery development, improved in-car connectivity and entertainment, and improved sensor and safety features such as emergency braking and blind spot detections are a few of the recent EV enhancements that are leveling the playing field.

What does this mean?

As a supplier community, we need to start thinking differently. We need to think outside the box in order to solve our collective challenges. With this in mind, let’s look at vehicle components in three groupings, essentially those that are declining, those that are expected to grow slowly and steadily, and those that are expected to enjoy significant periods of growth:

  • Primary ICE component groupings, such as exhaust systems, fuel systems and transmission components, will continue to level and drop off over the next 5-10 years as demand flattens.
  • Shared component groupings (those that are used by both ICE vehicles and EVs, such as electronics, sensors, and advanced infotainment) will continue to expand as demand increases.
  • EV component groupings, such as HV battery, fuel cells and electric drivetrain, are expected to be the biggest area of growth and investment.

Speaking of groupings, we are also seeing more partnerships between suppliers with Magna and LG Electronics, Redwood Materials and Proterra, and EVgo and Meijer providing a few examples of suppliers joining forces to innovate quicker, cheaper and on a more innovative level than ever before.

Other changes that we are seeing in the new-look supplier business model include the flattening of the supplier tiers, the decrease in OEM governance and operating influence and the increase in manufacturing agility.

What do you need to do moving forward?

Everything that we have discussed so far boils down to one concept – reinvention. How do you need to reinvent yourself to keep pace in the marketplace? What do you need to do to be successful moving forward?

We have highlighted four key dynamics that comprise the supplier of the future:

  • Ecosystem expansion – You need to be proactive in adapting to the changing ecosystem. The shift from ICE to EV is happening whether you like it or not, and other changes such as autonomous vehicles, ride-sharing and car-sharing and the arrival of new, disruptive players in the industry are all part of the industry’s new reality. All of these are opportunities to innovate, transform and expand.
  • Consumerization – Car dealership lots where consumers can only choose from those cars are a thing of the past. The trend now is personal cars, customization of features, major advances in media, entertainment and technology.
  • Rapid product design-to-deliver process – As customer needs change – and that change is occurring faster than ever these days – your integrated design teams need to deploy changes just as quickly. Product design, new technology and market-based research are a few of the areas where information can come quickly, thus prompting the need for quick, consumer-focused changes on the manufacturer’s end.
  • Supply chain for growth – The evolution of the automotive supply chain has been historic in its rapid maturity, particularly when it comes to cost-saving efficiencies. These changes are forcing automotive supply chains to refocus on responsiveness, flexibility and growth.

In short, to become the supplier of the future, you need to keep pace with product evolution, ecosystem expansion and supply chain transformation. The driving force in the automotive industry is consumerization, which more than ever includes simplicity and flexibility. Don’t be afraid to be bold and brave and even to partner with other players, both inside and outside of the industry. And finally, be robust and responsive in your supply chain planning capabilities with a priority placed on enabling growth and resilience as we move forward in 2021 – and beyond.

Erich Bergen
Director, MBA, PMP
Peter J. Pearce
Principal
Peter Pearce is a principal in the consulting practice of Baker Tilly with more than 25 years of experience in the mobility and transportation industry.
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