How Automotive Suppliers Can Prepare For And Survive The EV Revolution
Forbes Business Council publishes article by Actify CEO Dave Opsahl
CEO at Actify, Inc., helping manufacturers to build some of the world’s most complex and advanced products.
A slew of automotive companies has put stakes in the ground as to when they’re going electric. General Motors said it will stop making emissions-producing vehicles by 2035. Volvo announced that it will only produce electric cars by 2030. Not to be outdone, Jaguar announced it will be all-electric by 2025.
This is all very exciting for automakers and consumers, but what does this shift mean for the automotive suppliers that aren’t geared toward electric vehicles (EVs)?
The simple fact is that there are far fewer precision parts required for an EV than an internal combustion vehicle. An internal combustion car has about 2,000 components in the drive train alone and hundreds more in exhaust systems, fuel systems and other internal combustion-related systems.
Those all go away with EVs. So, what will happen to the companies that make those components?
Weighing All The Options
Automotive suppliers for those parts have a couple of paths they can choose to walk down. As their existing market shrinks, one option is to seek out new business opportunities. After all, fields like aerospace and defense and the medical device industry still require precision manufacturing. But it’s easier said than done to transform yourself from an automotive supplier into a company with its own portfolio of industry-specific products. It’s just an entirely different business, and most suppliers simply aren’t equipped to transform themselves completely.
Alternately, they can try to turn themselves into a general contract manufacturing company. The only problem with that is that the contract manufacturing industry is pretty well-served already and has well-established global players, so they can’t automatically punch into that market either.
A third and more likely option is to stay in the market for internal combustion engine parts. But the competition for those programs is only going to increase because there will be a smaller number of opportunities for suppliers to chase after.
As it becomes a tougher marketplace, suppliers need to be more competitive for the business that is available to win in the automotive supply chain and that puts a premium on their ability to execute programs really, really well.
Success Requires More Than Spreadsheets
As the CEO of a company that offers automotive program management apps, I’ve observed that program management is a challenge for suppliers today. Typically, a supplier responds to an RFP from automotive company X — often on very short notice — to produce a certain number of components, manufactured to certain specifications and delivered within a certain timeframe.
Once it wins the contract, it has to figure out how to successfully execute the program. In other words, it commits to price and delivery before figuring out production flow and the particulars of how it will actually produce the component to spec and still make money.
Usually, there’s a six- to nine-month gap between when the contract is awarded and when the part goes into production. During this time, there’s often a flurry of change orders going back and forth between the automotive original equipment manufacturer and the supplier. This window of time before the part goes into production is where the supplier “wins or loses” and determines whether the program is going to be a success.
Although you’d think most suppliers would have sophisticated tools and processes to manage this phase, program management is essentially being held together by duct tape and string in many companies. For the most part, suppliers are managing massive programs on spreadsheets that are manually updated. However, updated tools and processes around program management can be helpful, particularly as the shift to EVs takes place.
Grabbing A New Slice Of The Pie
While better program management is necessary for successfully executing programs around the shrinking number of internal combustion components, it’s also necessary for successfully capitalizing on the opportunity that the rise of EVs presents.
From the supplier perspective, the total number of vehicles isn’t going to change that dramatically over the coming decade, but the mix will change, transitioning from majority internal combustion to majority electric.
Seemingly every week, there’s a new OEM popping up (Lucid, anyone? How about Rivian?). There’s an opportunity here for suppliers to establish relationships with these OEMs and grab a new slice of the pie. Any time a supplier can add an OEM to its roster, it can be a huge increment to its business, generating recurring business for years into the future.
Of course, every automotive company is a little bit different in how they operate. Tesla works differently from Ford, which works differently from GM. From a supplier perspective, that means more customers to manage, more vehicle models to deal with and more programs to oversee.
Taking on these new customers layers additional complexity on top of the situation. Historically, suppliers could quickly respond to an RFP and make an initial bid to the OEM by relying on the institutional knowledge and expertise of people who have been working in their companies for decades, allowing them to create a fairly accurate ballpark estimate for what a program might cost.
However, when they get a new customer or have to produce parts for new types of vehicles that they haven’t built before, they have zero institutional knowledge to fall back on. Suppliers have the chance to grab new EV business, and updating their program management can help steer this new opportunity in a profitable direction.
A Bridge To “What’s Next”
The good news for suppliers is that they can see this seismic shift in the automotive industry coming. The internal combustion engine isn’t going away overnight; there’s a long tail on the transition out of gas- and diesel-powered vehicles, which gives them time to react.
At the same time, there’s a lot of new opportunity around the industry’s shift toward EVs. As suppliers plan for what’s next, an emphasis on better program management can provide a way to secure their position in this exciting new future.