Electric vehicles could transform role of tier 1 suppliers in manufacturing

With the global automotive industry experiencing stagnating volumes and simultaneously transitioning to electrified powertrains, automotive tier 1 suppliers are facing a squeeze. Many will see lower manufacturing volumes and will need to look carefully at ways to reduce factory and labour costs.

However, automotive suppliers also have an opportunity to play a larger role in the manufacturing process for their OEM customers.

Our latest report, ‘Automotive Tier Supplier Profit Analysis’ (download free here), explores how some suppliers are responding to the erosion of their margins by taking over more parts of the automotive value chain. That includes transitioning to ‘full service’ supplier relationships, such as ‘build-to-suit’ processes with automotive OEMs, alongside more standard ‘build-to-print’ services.

This may mean tier suppliers providing even more complete systems, such as ‘turnkey’ powertrains, entire interior suites or complete vehicle prototypes, with services that include design, engineering and production. The recent Sony Vision S prototype displayed at CES, for example, was designed and built by Magna.

When suppliers take over more aspects of manufacturing, they also take over more supplier and inventory management. This control can help them to simplify and standardise manufacturing and logistics processes. As electric powertrains have fewer components than traditional combustion engines, we anticipate that OEMs might seek to further outsource a simplified manufacturing process to focus more on developing core technology.

Evidence of this approach is already visible for niche models and electric vehicle startups, with contract assembly suppliers like Magna Steyr and Finland’s Valmet Automotive seeing rising production volumes of electric vehicles. Other startups, including Canoo in the US, have already said they would use contract manufacturing suppliers to handle all parts of the manufaturing and supply chain process.

In some cases, however, it may be tech companies and suppliers who use OEMs as contract assemblers. Chinese EV startup Nio already outsources manufacturing to state-owned carmaker, JAC. In a new joint venture to develop and build electric vehicles planned between FCA and Hon Hai – a division of Foxconn which produces iPhones – the smartphone manufacturer has suggested it would be responsible for design, supply chain and components, and not manufacturing. FCA, in this case, would be an engineering and assembly provider. In which case, it would appear that the balance of power in the value chain could significantly shift. 

“The future automotive market is really unclear, and we have the risk of spending a lot of money for developments that will never reach mass production. So that’s painful.”

Denso executive (download full report)

Masters of complexity

Whilst suppliers may ultimately benefit from a simplified production process, in the coming years most tier 1s, like their OEM customers, will have to grapple with supplying a profusion of powertrain technology. According to our forecasts, no single powertrain type will become dominant in the 2020s but will diverge across combustion engines through to various types of hybrids, pure battery electric, and other alternative energy powertrains, whether natural gas or hydrogen fuel cells (download our full powertrain forecast here).

Faced with a variety of changing regulations, government incentives, and competing technologies, automotive suppliers are just as unsure about which powertrain types will prevail as consumers are. A Denso executive interviewed for our supplier report summarised it to us as such: “The future automotive market is really unclear, and we have the risk of spending a lot of money for developments that will never reach mass production. So that’s painful.”

Few if any tier 1 suppliers could afford to risk betting on one particular technology and must instead hedge their bets across powertrain types. That approach will increasingly filter down to manufacturing, where suppliers and OEMs increasingly have to produce a large variety on fewer vehicle platforms and often on one production line.

Such variety creates significant manufacturing and supply chain complexity, from maintaining multiple types of tooling and production equipment, to managing additional SKUs, parts and material inventory. Such complexity puts even more cost pressure on suppliers who are already struggling with margin compression.

However, overcoming this complexity will prove to be an advantage for suppliers. Those which can employ the necessary engineering and manufacturing, together with software expertise, are likely to emerge as the stronger players overall.