How electric vehicles are transforming supply chain dynamics

[Transcript]

Jan Griffiths: 00:03

Welcome to the Auto Supply Chain Prophets podcast, where we help you prepare for the future in the auto supply chain. I'm Jan Griffiths, your co-host and producer.

Cathy Fisher: 00:13

I'm Cathy Fisher, your podcast host. Our mission is to help automotive manufacturers recognize, prepare for, and profit from whatever comes next in the auto supply chain.

Terry Onica: 00:23

I'm Terry Onica, your podcast host will be giving you best practices and key supply chain insights from industry leaders,

Jan Griffiths: 00:29

Because the auto supply chain is where the money is. Let's dive in.

Jan Griffiths: 00:37

Hello, and welcome to another episode of the Auto Supply Chain Prophets podcast. Let's check in with one of those prophets, my co-host, Terry Onica. How are you doing, Terry?

Terry Onica: 00:48

I'm doing great, how about you?

Jan Griffiths: 00:50

Good, good. It's been an interesting time. I'm so glad that the strike is over. And I don't have to be in the local media every five minutes. That's great. What have you been up to?

Terry Onica: 00:59

Well, actually, I got interviewed by plastics, machinery, and manufacturing this week about the strike. So, what happens, you know, what's next with the strikes and what my thoughts were. And I'm worried about the next big disruption that's going to start hammering is the lower tiers of the supply chain. And those as we transition from ICE to BEV, like, who's watching them and who's making sure that they're all going to make it, right? As their volume starts to decrease, and they don't have anything to replace it, what's going to happen next? So, I share a lot of the same concerns you have Jan about the lower tier.

Jan Griffiths: 01:32

Yeah. And even though we're recording this at a moment when the strike is over, the impact of that strike has yet to be seen. We haven't seen the full impact to the supply base yet. And that's happening right now. But let's turn our attention as you said, you're talking about the transition from ICE to BEV and somebody who is clearly at the forefront who has his eyes on the future. But his feet very much grounded in reality of what's happening in the world of the automotive supply chain. And that is our very own, Michael Robinet. Michael is the Executive Director at S&P Global Mobility. Michael, welcome to the show.

Michael Robinet: 02:19

Thank you. It's great to be aboard.

Jan Griffiths: 02:21

We love having you.

Michael Robinet: 02:23

You know, I've been listening to the podcast and a lot of great topics. So, I'm happy to contribute.

Jan Griffiths: 02:29

It's perfect to have you on because as you know, the title of this podcast is Auto Supply Chain Prophets, P R O P H E T S, and you're a bit of a prophet, aren't you? Because you're always looking forward into the global forecasting and global updates. So give us a bit of a macro view of what's happening in this transition from ICE to BEV.

Michael Robinet: 02:54

Well, in your earlier comments, you mentioned, you know, this whole idea of disruption, and frankly, we've had extraneous for disruptions for the better part of four years now; it started with the GM strike and the UAW in the fall of 19. And it's been a crescendo ever since it's been COVID, then chips, then a little bit less chips than inflation, then Russia-Ukraine, and you name your other calamities, they've all come along. And then of course, we had this labor disruption with the UAW and actually a very short one with Unifor, as well up in Canada, this fall. And like you, I'm happy that we're beyond that. So, I was chatting with a client the other day saying, while all these disruptions are behind us, the collateral from them is what we're gonna have to deal with going forward. And certainly, there are many of them: labor availability, labor economics, other forms of economics, working their way through the supply chain, higher cost of capital in all capitals, two, or two and a half, almost 3x what it was two, or three years ago. So, making capital decisions is much more important to the enterprise than ever was before. So all these factors kind of worked in and then you add in this ever-present, ICE to BEV transition and whatever that slope looks like. It's a critical time from a strategic perspective for not only the vehicle manufacturers but tier ones. And as Terry, you mentioned earlier, tier twos and tier threes that may not have that transition strategy. So it's a heady time in the industry.

Terry Onica: 04:27

What are you projecting, as far as you know, when we're gonna see a lot of BEV vehicles in the market? And what does that look like globally?

Michael Robinet: 04:35

To be completely honest, Terry, it's shifting a lot, and it matters by region and matters by segments. So China is moving ahead the regulatory structure, but also a lot of their domestic manufacturers are very focused on moving battery electric forward. So it's less of a hybrid structure and really more of a full battery electric structure. So there's going to be some bits and starts as they work through that. Europe they're moving in a similar direction, but I think the one factor that's finding its way into this is affordability. We could wish that people want to buy better electric vehicles, but if they're not priced appropriately or don't have the right total cost equation for the customer, well, that's a problem. And we're starting to see that in Europe and but also starting to really see that in North America. So to answer your question is sort of multispeed, what we call the major markets of China, Europe, and North America, each one working at its own speed, each one having its own regulatory environment, its own customers that want or don't want to accept battery electric. So we kind of mix that all together, and then you'll find different answers. But suffice to say it is difficult from a perspective of so many factors have to work their way into this, both strategically customer environment, and the grid all have to really line up for this to go perfectly. And frankly, I think we've seen it will not go perfectly.

Terry Onica: 05:59

One of the things I was wondering about is I remember back years ago, we were waiting for that 100 million units per year.

Michael Robinet: 06:07

We almost got there.

Terry Onica: 06:09

We almost got there, right? We almost got there; it was so close. What do you see in the next 5, 10 years? Where do you think we'll be at?

Michael Robinet: 06:17

It's a good question because affordability, and I brought that up earlier, it's really going to find its way and even in China, to be honest, as affordability. It's kind of a little bit of chicken and egg. Can we get battery cost down enough to bring that total vehicle cost down to maybe what we've experienced in the past from an ICE-level perspective? Now we have to look at total cost of ownership, things like what's the cost of fuel versus the cost of power, and all of those factors. But in certainly, that initial cost of the vehicle is critical. And that is holding the total market down. I think anybody that tells you different is wrong. It is affordability and this incredible inflation that we've seen lately, and hopefully starting to abate a little bit. But that's mixing its way in as well. And that is going to damp down demand somewhat from an affordability perspective. So, are we going to hit 100 million? I have looked at our longer-term forecast, so past 2030. I think we're close to it, if not just over it. But you know, the days of maybe 110 or 115 are well behind us, and the market will not support that.

Terry Onica: 07:20

One other thing I'd like to get your opinion on, too, is the autonomous vehicle. We heard a lot about that again, probably five years ago or so. But it's gotten really quiet. What's the latest update on autonomous vehicles and where they're headed?

Michael Robinet: 07:32

I think that vehicle manufacturers are using autonomous capability to improve the driving experience and improve safety. So rather than the government mandating you need to make your vehicle safer by making the crash structure better, or the like, they're increasingly government and other authorities are going to start to think about how can we use sensors and cameras, and Lidar and all those other factors, all those other capabilities to make sure we don't get into the accident in the first place, and therefore maybe reduce the cost and the weight of some of these vehicles going forward? So, to answer your question, if you think about sort of the SAE levels, you know, 1 2 3 4 5. And we're sort of one being, you know, cruise control, and two and three, having an adaptive cruise, lane keeping, lane adjustment, and the like. I think that's where the manufacturers are going to focus most of their time, I would say over the next decade is really what we call Level Two, a Level Two plus. Level Three means that the vehicle starting to make decisions. And I know of a lot of OEMs that are that aren't willing to cross that bridge just yet from a legal perspective and a liability perspective. So I think you're gonna push level two as much as possible. But essentially, that's where we see autonomy, at least as an organization. At a 30,000-foot level. That's where we see most of the focus going.

Terry Onica: 08:57

When we look in the future too, concerned about the lower tiers in the supply chain, just as we switch to from ICE to BEV. But also a lot of the OEMs are looking at vertical integration, owning their own supply chain. What should you do if you're a lower-tier supplier? What is the impact of all this going to be on the supply chain?

Michael Robinet: 09:17

It is significant because I would say that a lot of tier two and tier three suppliers knew that battery electric was coming in. And you mentioned ADAS earlier and ADAS is a factor. But it's really, frankly, from a structural perspective. It's really bad. It's really bad or electric that really alters the structure and the ecosystem and in the industry. They had been sort of hearing about it and at 16 and 17, we had some great times in 18, so kind of out of sight, out of mind. And then 19 came along early part of the 19, no problem. Hey, maybe we should start thinking about this; we're hearing about some of these battery plants, and some OEMs are making some overtures, and then the strike came, the 2019 strike, and then COVID. Then we all got basically moved into short-term firefighting, but a lot of tier twos and tier threes, they have their own issues to deal with and thinking about how do I, as a supplier, find a way to transition into the battery electric world, if I'm not going to be in natural evolution already, I'll have to put that on the back burner. And now, here we are in 2023. And kind of it's come up very, very quickly. So I, too, am very concerned about twos and threes, now we have to be careful not to lump them all together. So we characterize suppliers as being BEV negative, BEV agnostic, and BEV positive. And as you will know, twos and threes fall into those categories as well. Sometimes they can transition their work or their capabilities into other industries, maybe moving medium-heavy truck, off-highway, industrial, defense, or aerospace. I mean, those are the kind of the classic destinations that a lot of these suppliers look at. But nobody's got volume like automotive, like light vehicle automotive, nobody makes half a million of something every year. I mean, eyes light up when you hear about those numbers. In aerospace, where you're building a small, small fraction of that, it's a different manufacturing mentality. So twos and threes, again, a lot of them that are very focused on, let's say, BEV negative areas. Yeah, they certainly, if they haven't transitioned yet, that's a problem.

Jan Griffiths: 11:18

You talk about the volume. And that's interesting. Do you see in the future, Michael, that the idea of volume production as we know it today, brands, as we know them today? You know, I remember when I started in program management, it was on an explorer launch and a ranger launch. And we loved it right? Because the volumes were huge. It was wonderful business. But do you see a point in the future, as we transition to mostly BEV, that the players are going to change and the OEMs will change? And as we see more entrants into the OEM space, I mean, BYD, VinFast, you know, there's tons of them out there, right? Do you see that landscape changing, so the volumes will be lower, but there'll be far more choices for the consumer because there will be more OEMs? Do you think that's a possibility in the future?

Michael Robinet: 12:20

I think we're gonna see a mix of new players, new entrants, as we call them, and some of the traditionals that are that are going to be able to, let's call it transition appropriately. But I don't disagree with you that there may be some larger traditional Western players that don't make the cut. Like we've also seen with the new players coming in, you have absolutely got to be well capitalized, you know, someone that comes in and says, I've got a couple 100 million dollars, and I want to start a car company. And you know, you almost don't have your breath going well; that's, frankly, your music; just give everybody your money now because this is a long, long process. And even with the faster development times of BEVs, it's still a long process to work through safety and reliability and building an assembly plant building a supply base, building all that sourcing. As you guys well know, it doesn't happen overnight. It is such a process. So I would say that, on the volume side, it is an interesting point; you're seeing the vehicle manufacturers, at least the smarter ones, they're basically saying, You know what, I'm only going to have a couple of E-motors, I'm only going to have a couple of battery types. Because I want to build in scale, that's the only way I can get the cost out of this thing is building in scale. So I would characterize sort of the bottom of the vehicle, or, you know, basically sort of the wheels on down, they'll try and colonize as much as they can there. So battery cells, charging structures, things like some of the electronics, even the thermal, they'll try and standardize as much of that as possible. So they can save money. It's the top hat, where frankly, there's less money involved in the other doors and glass and other components, but they're more easily changed. And so to answer your question, I agree, you're going to see more top hats, fewer volumes of, hey, here's the Explorer, and there's going to be half a million of amount on the market. It's probably going to be more Explorer this and Ranger that and some other types of nameplates that kind of make up all of that. But underneath, it's got a lot of commonality because that's where the OEMs save money. That's where they save money.

Terry Onica: 14:27

When you look at the forecast in the future, who are you seeing that are going to be the major players in that volume if you look at the next five years? It's interesting now because you got the Teslas and the BYDs that are doing a great job. You've got the traditional OEMs that are catching up. Who do you think the volume is going to be coming from in the next five years?

Michael Robinet: 14:47

I've seen a couple of factors there. I'm going to go off in a minute and then come back to this, but the fact that the China market is evolving so quickly is having a significant impact on the Western manufacturers. So, you know, when a BYD and a SAIC and Geely and you know NIO and all these, you've got these domestic Chinese players that are doing very, very well, some not as well, but they are gaining share very, very quickly as they gain that share; it's the Westerns that are taking it on the chin. So the fact that we had a lot of Western OEMs, either in Europe or North America, and even to a lesser extent in Korea and Japan, that we're able to trust upon China to be that steady eddy. Oh yeah, the volume is good. We're doing okay. There's a good amount of innovation. You know, we were driving some volume, we're gaining some economies of scale, as they have challenges there that will absolutely impact their home markets, either here or in Japan or Europe, whatever the case may be. So, that is providing a little bit of a break for some of the Western OEMs. So, it is going to continue to be a challenge in terms of who their major players are. But certainly, the BYDs of the world are kind of on the backs of other China, others like Geely, which, as we well know, is Volvo but have added a lot of other brands and capability. They're going to continue to do very, very well. Others like SAIC and some of the newer upstarts Xiaopeng in the like, you know, again, dependent capitalization, but, there's a lot of them are well on their way, and they're gonna start to move up into that top 10 characterizations and with China declining from a Western perspective, that's going to put a bit of a break on some of the more traditional players in terms of their overall global volumes going forward.

Jan Griffiths: 16:34

Do you think BYD is going to come in through the back door through Mexico? If you've been to Mexico lately, BYD is everywhere. In Europe, I was in the UK earlier this year, and BYD was everywhere. And then a company that I know and love with my British heritage, and my first sports car was an MG, an MG Midget. And MG is now Chinese-owned, I think it's SAIC. And MG has an SUV model that in the UK is everywhere. In Mexico, I was shocked to see an MG dealership and that car taking off in Mexico. Is there a concern that manufacturing will be in Mexico and will come into the US?

Michael Robinet: 17:20

To double up on what you just said with the most recent labor agreements? If you're an OEM and you're saying, well, I need a brand new facility, I've looked around, I don't have anything that meets my needs. Where are they going to look? Yeah, Mexico is going to be an actual location. The Chinese brands are doing very well in Mexico, they're gaining, and they have some natural entry points. And especially from an import perspective, because you don't have the same tariff structure that you have between China and the United States. China is definitely going to make some inroads, the only way that they're going to be able to gain volume in the US and Canada through NAFTA is by building here in North America and also putting batteries here and even some of the critical inputs. So they'll make some inroads in Mexico, but to really build any volume in the US and Canada, it is really going to have to come from domestic manufacturing, importing is going to be difficult. And you know, you talked about backdooring. And there has been some backdooring in the past, but people now know what it is. And there they can pick up on it kind of quickly. So coming in through Korea or coming in through some other location into the US, the OEMs have kind of picked up on that and therefore will push back where required. So it's going to have to be a domestic manufacturing footprint that does it and I don't put it past them. I think it's very real over the next five to six years.

Terry Onica: 18:38

Looking out over the next five years. Anything that you want to tell our listeners about that they should be watching out for?

Michael Robinet: 18:46

It's a great point, I and others in our company have been telling our customers for some time now. BEV launches are going to be lumpy. I can't find a better word to describe it. To be honest with you, I had someone when my company said oh, you should say bumpy I don't like bumpy I like lumpy, better. Lumpy being nothing's gonna go to plan. And despite all the great work that OEMs and suppliers do to try and get these launches going, everything's new; new platform, sometimes new plants, new propulsion system, new supply base, new processes to put it all together. New. New. New, New. New. Anytime you folks know really well, time, anything's new. That's a synonym for an all-you-know-what. And that's exactly what happens. I've been at this for a little while. I remember Bobby walking on to the floor of the auto show, I think in 98, January, maybe January 98 to launch the new Grand Cherokee and add a bag of parts dropped on the stage and said these are the only parts that are common between the old Grand Cherokee and the new Grand Cherokee. And everyone in the media they're all clapping. Oh, this is wonderful. Congratulations. And a lot of it's in the back going oh, have no idea what you're in for. In our industry, you want to carry over whatever you can. And because it's already been proven, you don't have to go through the whole process of proving it out, you've already done that. And it's unknown. And then when you launch BEVs, there are almost zero knowns zero. So everything's new. And I think that these launches are going to be very difficult. They're going to be elongated, I hate sip, the OEMs are going to tell you X, you probably should plan on why, just because it is what it is.

Jan Griffiths: 20:29

The DNA of the supply base is vastly different. As a recovering supply chain person, I'm used to dealing with traditional automotive suppliers. You start to bring in electronics, suppliers software, a totally different ecosystem, and it isn't ecosystem, it's not a traditional, I'm the buyer, you're the supplier, I'm gonna buy this, these are my terms and conditions, you know when if you don't like them who knows where it's gonna go, those days are gone. We don't want to admit that, but they are. So recognizing that the supply base DNA is vastly different. And it will need a different type of leadership, a different type of buyer. That's something that I think suppliers have to focus on. And I'm gonna go to a point that Terry always talks about, and that is, when you talk about launches, making sure that the supply chain that every step of that part number is locked and loaded. And you've gone through the due diligence. Terry, I mean, you know more about this than I do. But what are some of the things, Terry that tier one and tier twos really need to look at as they launch BEVs?

Terry Onica: 21:41

What we always recommend is making sure you're doing scenario planning, right? Looking at the various scenarios that can happen, because as Michael was talking, I was thinking, you've got lumpy BEV, which means people are still buying ICE, right? So if you're in the ICE, you're gonna expect a really bumpy ride as well. You're gonna have two different kinds of directions, but how they impact production, and how many they're going to make is going to be really difficult to figure out, so you're gonna really have to stay on top of it.

Jan Griffiths: 22:11

I think there are three things to this, you're right, it's the forecasting, you know, having a tool and understanding scenario planning. And thirdly, plan for every part. And I know, you know, people are probably listening to this going, Oh, we do that already. I don't think so. We'll be wrong. But really going through every step and making sure that part on that supplier is set up in the ERP system and ready to rock and roll. We miss it so often we skim over that when we launch new programs, we don't give it the attention it deserves. In a BEV world, it's going to be far more important.

Michael Robinet: 22:46

Jan, to your point, what's interesting, we tell clients, and you've been at this for as long as I have. You walk into a supplier and the supplier shows the OEM, watch I can build for an hour at the rate that you want. And everything's good. Oh, great, that's great. And everybody walks away, they go up dinner, have a couple of drinks, and go home. Oh, check that box. Great. That's all done. In the BEV world, because of critical inputs and all these new processes, you maybe will run for an hour. But can you run at that same rate for 10 straight weeks? I think that running at rate running at the peak capacity is going to be a much different animal in the BEV world than it has been. Now Tesla's been able to figure it out. But they've been at it for a long time. And they made a lot of mistakes. We all know about some of the manufacturing issues that they've had to overcome. And it's been lumpy, and it will continue to be. I think one other factor that Terry, you mentioned, is this whole idea of this insourcing, we did some analysis. And in the ICE world, we're about 65% supplier value add, that's kind of the way we think about it, the number has been 70, let's just call it 65 for an average, not counting advertising, and marketing and all that kind of stuff, it's kind of the manufacturing cost of the vehicle. When we go over to the bedside, because you know, OEMs have said, well, we're going to make our own e-motors. And we're actually going to make some of our own electronics, or, you know, charging structures and the like. And of course, now we found friends to make batteries with. Now that number goes down to probably around 45%. The supplier doesn't have the same leverage that they did in the ICE world versus the BEV world. That is another message that gets lost a lot. And everybody said, well, that's somebody else's problem, because that's 10 years from now, and I'll be retired by then. But it is going to be a problem. There's no doubt.

Terry Onica: 24:37

It's a double whammy. And I hope that executives at all levels of the supply chain are thinking about that it's coming. I'm worried because I don't see a lot of discussions about it, at least when I'm out talking personally with organizations and automotive suppliers about it and I just really wonder how that's going to come crashing down on us.

Michael Robinet: 24:58

Yeah, I think to your point, and now, Jan, you came from the sourcing world as well. You know, there's all this discussion that we've had really difficult relationships, and I'm gonna be trying to be careful what I say. But we've had difficult OEM-supplier relationships, whether it's the Plante Moran study or whatever else you can get to see it in the industry, with the incredible labor economics we're gonna face over the next three to four years, I find it hard to believe that those relationships are gonna get any better. I really find it hard to believe especially, and also with the amount of capital that suppliers and OEMs but suppliers too, are being asked to devote to programs that quote-unquote, haven't been proven. That's another issue as well. So, it's going to be interesting next couple of years. Yes, for sure. From an OEM supplier relationship perspective,

Jan Griffiths: 25:44

Certainly, there are challenges. But there is also opportunity. And that is one thing that we are great at in this industry is taking on challenges and we are resilient every step of the way. And to close this out Michael today, one piece of advice that you would give to the automotive supply base in one short sentence, what would that be?

Michael Robinet: 26:10

Do whatever you can to diversify your customer base and operational efficiency, whatever you make, make it as well as you can. So it's better than the next person.

Jan Griffiths: 26:20

There it is, beautiful. Michael, thank you so much for joining us today.

Michael Robinet: 26:25

Thank you both it's been a pleasure.

Jan Griffiths: 26:31

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