Electric vehicle boom beckons, but many suppliers wait

Automakers have big plans for electric vehicles, but the supply chain upon which their ambitions rest is another story.

Ford plans to invest $11 billion in a fleet of 16 battery-electric cars and 24 hybrids or plug-in hybrids around the world by 2022. General Motors, which offers two plug-in vehicles in the U.S., plans to launch at least 20 full-electric and fuel cell vehicles globally by 2023. Volkswagen said it will produce more than 30 EV models by 2025, with electric vehicles accounting for up to 25 percent of total sales.

But North American suppliers remain cautious about their customers' rollout timelines. Despite the automakers' announcements, consumers haven't shown a willingness to buy EVs in large volumes. Plug-ins represented just 1.2 percent of U.S. sales in 2017, according to IHS Markit, and industry forecasts don't envision the share surpassing 5 percent of the domestic market until 2022.

For the supply chain that will be critical to producing the expected wave of EVs, the future is a question mark.

"There's quite a lot of talk about an S-type curve in EV adoption, similar to smartphones," said Brian Daugherty, chief technology officer at the Motor & Equipment Manufacturers Association, the trade group that represents more than 1,000 parts makers. "But I think it's going to be more of a slow, steady increase driven primarily by government regulation."

Suppliers must decide if and when to invest in EV product capacity.

"Right now, you have an industry that's sort of stuck between the market and what they see from their clients," Matt Stover, an analyst with Susquehanna International Group in Boston, told Bloomberg. "They see Tesla with an enterprise value of $70 billion, and they see what their clients are awarding to them, and they say, 'Wow, something doesn't make sense here.' "

If the automakers' EV forecasts don't materialize, suppliers, which must spend billions of dollars on EV production capacity, will have profitability problems. That's leading to debate in the supply chain on how much capacity to invest in at this early stage.

"Does a supplier build capacity for 100,000 wire harnesses, or 50,000, or 500,000?" Daugherty asked. In many cases, he said, suppliers have created too much capacity for the number of full-electric vehicles sold.

The challenge is whether suppliers can make the necessary investments affordably and whether the demand will be there, says Reid Wilk, an auto analyst with PwC.

"Generally, when the OEs make a call, the suppliers invest the capital to be in position to support," Wilk said.

"The question now is do the suppliers believe the OE forecast, or are they going to shortchange the forecast.'

Warning

Daimler warned in its annual report about the impact of the shift to electrified vehicles on supplier profitability. Mercedes-Benz expects to electrify its entire lineup by 2022.

"Due to the planned electrification of new model series and a shift in customer demand from diesel to gasoline engines, the Mercedes- Benz Cars segment in particular is faced with the risk that Daimler will require changed volumes of components from suppliers," the automaker's report said. "This could result in over- or under-utilization of production capacities for certain suppliers. If suppliers cannot cover their fixed costs, there is the risk that suppliers could demand compensation payments."

Electrification is among Tier 1 suppliers' top priorities, noted Michael Robinet, managing director of advisory services at IHS Markit.

Automakers are not abandoning internal combustion engines, but "there is a sizable reallocation of resources toward hybrid and battery-only EVs," Robinet said. "Think of it as an expansion of capabilities. It's not either-or — it's 'and.' "

Electrification will have disruptive supply chain implications, many acknowledge.

EVs have a third fewer parts than gasoline-powered vehicles, given the absence of complex transmissions, engines and exhaust systems. Suppliers have fewer products to sell for EVs than for vehicles with internal combustion engines.

Electrification also creates new risk by luring new players into the automotive supply chain. With weight management being a major factor for EVs, material suppliers in the aerospace and defense industries might see an opportunity in automotive, PwC's Wilk said.

"You're going to have a shift," Wilk said. "You'll be going from internal combustion engines to motors and actuators."

With EVs, a large part of the value of the car is transferred from the engine to the battery. That creates opportunities for technology businesses such as Samsung, LG Chem and Panasonic to grab a large share of the auto supply chain business.

The shift to EVs will "take away some of the core intellectual property areas that automakers and traditional auto suppliers have built up over a long time around internal combustion engines, particularly diesel engines," said Colin McKerracher, an analyst at Bloomberg New Energy Finance.

Future positioning

Some suppliers are responding with strategic acquisitions and in-house r&d. Tier 1 suppliers are prepping their factories to churn out e-motors and inverters alongside transmissions and cylinders

Denso, for instance, is investing $1 billion to turn its Maryville, Tenn., parts complex into a major source of components for EVs, hybrids and autonomous cars. The investment will enable Denso to localize production of three product lines it now makes in Japan: EV inverters, radar components and data control modules for future vehicles with connectivity.

"The EV market is a pillar of our growth for the future," said Bill Foy, senior vice president of Engineering at Denso International America.

BorgWarner, meanwhile, has been expanding into EV and hybrid parts, including transmissions and drive modules for electric cars and turbochargers and clutches for hybrids. The supplier has made two acquisitions in recent years worth about $1.3 billion to develop products for electric powertrains.

"We are definitely prepared for the wave of electrification," BorgWarner Vice President of Marketing Scott Gallett said. "We have entire electric vehicle propulsion systems in production in different parts of the world."

BorgWarner expects to boost revenue from EV and hybrid parts to about 12 percent of total revenue in 2020, from around 1 percent at the end of 2016.

Rather than making bets on any one technology and trying to time the market, BorgWarner is spreading its investment across powertrains — internal combustion, hybrid and electric.

"We are not going to worry too much about the mix," Gallett said. "We are going to make sure that we've got products that support all three propulsion systems, so we can be sure that our business grows no matter how the market evolves."

Globally, Bosch is investing about $450 million annually to develop EV components and technologies, including electric motors, e-axles and power electronics.

EVs are a "strategic area" for Bosch, noted Sujit Jain, president of Bosch's Powertrain Solutions North America business. "We aim to lead the global market for electromobility that will emerge after 2020," Jain said.

To get there, Bosch reorganized its automotive business, which accounts for 60 percent of the company's annual revenue. The supplier consolidated its gasoline, diesel and EV components and battery management businesses into a single division. Doing so improves collaboration and reduces inefficiency and cost, Jain said.

"The idea is to support customers in a holistic way," he said. "Whatever powertrain solution they need, we are able to provide now."

Bosch is working on several development projects in North America with traditional automakers and startups that are 12 to 18 months from commercial EV production.

"As we get these programs ramped up, it will absolutely be necessary for us to produce these vehicle components locally," Jain said.

He declined to say whether the EV component manufacturing would be consolidated in existing plants or require greenfield development. Bosch makes EV battery packs in Springboro, Ohio.

"It all depends on the volumes and the competence we need," Jain said.

AK Steel, the only North American producer of electrical steel used to make EV motors, expects to ramp up electrical steel production, potentially as early as 2020.

"When it comes to new electrical steel products, we have had more conversations about automotive electric motors in the last six months than any other topic," said Eric Petersen, AK Steel's vice president of research and innovation. "We have different investment options [to boost production capacity] ... that could launch as early as the 2020s."

Meanwhile, AK Steel is investing in r&d. Backed by a $1.8 million U.S. Department of Energy award, the supplier is developing a new kind of electrical steel that could boost motor efficiency by 30 percent.

The material will allow the motor to spin at higher speeds more efficiently, enabling greater driving range on a single charge. Test production of the new material will begin this summer, with plans to develop motor prototypes next year.

The transition to widespread full-electric vehicles will be a long one. And along the way, parts of the powertrain will go electric while still requiring internal combustion engines. Robinet predicts that 85 percent of vehicles in North America will have an internal combustion engine driving the vehicle or powering an electric motor through 2040.

The market will be blended for the next decade or so, noted Jim Harkins, director of Denso's Electrified Systems Engineering Division.

"There's going to be a range of electrified options from the micros, to hybrids, to plug-in hybrid," Harkins said. "All of those require an internal combustion engine before you really step into the range-extended or battery electric."