Suppliers prioritize flexibility amid whiplash
Automotive suppliers are embracing flexibility as automakers downshift their electric-vehicle plans and reemphasize hybrids in response to the slower-thanexpected uptake of zero-tailpipe emission vehicles.
It’s a delicate balance. Suppliers say they know they’ll have to invest for EVS eventually, but they also know they can’t tie up too much of their capital and risk overcapacity. Likewise, they need workers with the skills for a new set of technology; they also need the workforce to produce the gasand diesel-powered vehicles making them money now.
Automakers in recent months have announced billions of dollars in cut EV investments, nixed programs and delayed launches. Although EV sales are growing, the industry hasn’t yet jumped from the early adopters to the early majority with charging infrastructure availability, EV affordability, charging speeds and grid reliability among consumer concerns.
General Motors Co. last week reversed its decision to drop hybrids in North America, saying it plans to add some plug-in models to its lineup because of the increasingly stringent emissions standards proposed for the end of the decade. Meanwhile, Ford Motor Co. Chief Financial Officer John Lawler said this week that the company expects hybrid sales to grow 40% this year, up from 20% in 2023.
“Someone portrayed the change in the EV market as Darwinian,” Ford CEO Jim Farley said on an earnings call. “That could be a slow, evolutionary change. But we think this has been a seismic change in the last six months of last year that will rapidly sort out winners and losers in our industry.”
That’s why suppliers need to be adaptable: “If you go EV, you’re going to have some trouble maybe with top line and bottom line,” said Pete Denk, president of Eaton Corp.’s mobility group.
“If you stay in combustion, the customer is getting nervous that you’re not going to be their partner 10 years from now. For a supplier, the strategic maneuver or necessity is that you just stay balanced and be ready for whichever way it goes.”
Last year, Americans bought a record 1.2 million EVS, according to estimates from Kelley Blue Book, a Cox Automotive Inc. company. Fourth-quarter EV sales set a record for both volume and share: 317,168 and 8.1%, according to KBB.
The quarter’s EV sales increased 40% year over year, which is notable growth but smaller than what was seen in previous quarters. For example, EV sales saw a 49% gain in the third quarter, and a 52% year-over-year increase in the fourth quarter of 2022.
Hybrids, not including plug-in versions, accounted for 8% of the market in 2023, up from 5.5% in 2022, according to data from Edmunds.com Inc. Meanwhile, EVS claimed 6.9% of the market in 2023, up from 5.2% a year prior. Edmunds’ analysts forecast EV market share will hit 8% of total new vehicle sales in 2024.
Suppliers always have taken a “haircut” on the volumes automakers expect, especially with EVS, said Mark Barrott, who leads the strategy and mobility practice at accounting and business advisory firm Plante Moran PLLC.
“It doesn’t take a lot for a supplier executive to be skeptical of an EV volume forecast,” said Barrott, adding that executives do see a long-term path to an all-electric future.
But right now, “you’re getting very strong messages from the
marketplace that the pure BEV adoption is less aggressive over the next two or three years than forecasted by the OEMS, so the suppliers are taking an even more conservative view to the volumes.”
Introducing a hybrid option into the mix, he continued, could have the “potential to divert capital from the plans that you thought you were moving forward with. It adds another level of complexity and level of tension or burden to the suppliers that maybe didn’t think they were going to see from GM.
“On the face of it, (it’s) a very potentially consumerfriendly decision that GM is making. But it puts the industry in a bind.”
‘Can’t screw that one up’
At Eaton, light- and heavy-duty vehicles last year accounted for roughly 15% of $23.2 billion revenue, with e-mobility representing about 18% of its vehicle business. The Irelandbased supplier produces components from valves, brakes and transmissions to e-powertrains.
Given the variety, capital planning can be tough, Denk said. Investments in manufacturing facilities can take a year to a year and a half.
“We can’t screw that one up,” he said. “You have got to be ready for when they say go, but you don’t want to be wasting money.”
Two years ago, the talk was EV sales would accelerate swiftly in three to five years, Denk said. Those expectations have moderated. That means some plants that may have been anticipating a ramp-up to three shifts are still operating at two. Eaton is keeping in close communication with its automaker customers to determine the latest it can move on things like ordering a tester, installing a line or expanding a plant.
“If it was 12 months ago, it was run like hell: Get, go, and move, and move, and move it,” Denk said. “Now, it’s a little more like, OK, we can wait until April, let’s wait until April.”
Eaton’s $16.2 billion electrical business, which includes EV charging infrastructure and power management solutions for residential and commercial applications, provides a glimpse into what’s contributing to that. The company last year committed to more than $750 million in North American manufacturing, including work to support the energy transition.
Eaton’s products use power distribution systems to lower the total cost of ownership and use energy most efficiently. A lot of pieces, however, have to come together to support increasing proliferation of charging access points, said Paul Ryan, Eaton’s general manager of connected solutions.
“It really needs a coordinated approach,” he said. “It needs installers. It needs utility support.”
On the mobility side, the company is also leveraging the ability to convert one plant between ICE and EV components. In one of its facilities, it’s shifting from gears to inverters, which convert direct current to alternating current.
“That’s ultimate flexibility,” Denk said. “We want to keep on pushing that and even using our footprint that we currently have versus expanding much.”
With the company ready to move when the time comes, Eaton also is focusing on how it can stay agile with its talent, he said: “We don’t want people leaving the company, because they’re not sure what their future is. That’s the ultimate loss for us.”
Two years ago, it seemed as though workers producing valves would have lost their jobs by now or be facing that soon. But they’re still making valves and are expected to be doing so for a while, Denk said. However, Eaton wants to train those employees to make an EV component and switch them based on what needs are.
For example, employees at its proving grounds in the south-central Michigan city of Marshall will transition to testing EV parts, too, as they continue testing supercharger, differential and valvetrain components.
Likewise, engineers working on engine superchargers know a majority of what they need for the EV side. The company has brought in experts on inverters and battery disconnect units to teach them how to make those, and in return, share their years of experience in building parts for complicated, highly regulated vehicles.
“You need to marry those two together,” Denk said. “That’s where the real weakness to me is. Capital’s tough, but people is where our leadership mission is in the next couple of years.”
‘Prepared to help’
Likewise, the ZF Group, a transmission manufacturer, has graduated thousands of workers over the past couple of years from its E-cademy that combines virtual and classroom education to train employees on the new technologies.
Its decades of experience in traditional gearboxes facilitated its move into hybrid transmissions like those used in plug-in 4xe Jeeps. The same motor and inverter families can go into a hybrid or an EV, creating a natural hedge, said Martin Fischer, president of the Americas at the German supplier.
“We can use the same investments, the same technology at the same plants, and finally, equipment for supplying to both models,” Fischer said. “That’s our strategic way to deal with the uncertainty.”
The company this month is expected to make an announcement regarding a commitment around flexibility to meet this region’s market needs, spokesperson Tony Sapienza said.
Fischer said the company has had discussions with automakers as they put greater focus on hybrids: “We’re prepared to help,” he said, noting many plug-in hybrids now have the range to cover many Americans’ daily commutes to work.
“We sell convenience with electric functioning of the PHEV. It comes with all the good performance that an electric motor would have, so it’s not powered as vehicles when you only drive electric,” he said. “But then there’s also the flexibility (if) you want to go up north on a longer trip. You can fill up gas, and you have no limitations, and you tow your trailer, your boat or whatever you want to tow, and you can do that without limitations.”
The uncertainty became an opportunity for Edison Manufacturing and Engineering Inc. in Port Huron, said Brandon Bartneck, vice president and general manager. The company is focused on engineering, manufacturing and supply-chain management for smaller volume vehicles.
The company that began in 2020 was built upon changeability and capital efficiency: “With fragmentation, emerging markets and new technology adoption, no one knows the ramp-up rate,” Bartneck said. “We take the approach that if there’s uncertainty, you value flexibility and want to wait as long as you can. It’s not that we’re opposed to setting up and making more long-term infrastructure development. We wait until we think it makes sense.”
That can mean leveraging less costly assets like software, the people the company recruits and customer support services, too.
The hold-off isn’t reflected just in traditional automakers but in startups, as well, Bartneck said. A two-year timeline to meet volume targets may look closer to six years now, and investors seem increasingly understanding of that.
“We’re seeing a more realistic ramp curve,” he said.
Leaders at Canada-based Martinrea International Inc. anticipated the transition to EVS would be slow, so as the supplier added EV work for products like electric motor housings and battery trays. Those leaders “negotiated the best we could for volumes,” CEO Pat D’eramo said in an interview.
“There’s a litany of reasons why you could argue why it’s slower than anticipated,” D’eramo said of the EV transition. “Bottom line is, it’s slow.”
Martinrea’s product line is 80% agnostic to electrification, D’eramo said. A leader in producing metal parts, assemblies and modules, fluid management systems, and complex aluminum products, Martinrea makes a variety of lightweight structure products, including frames, knuckles, control arms and links. The addition of more hybrids could be “a potential opportunity, depending on what the OEMS decide to do,” he said.
D’eramo thinks if they could go back, automakers would have transitioned into hybrids “much more aggressively” and then into EVS.
In the 39 years he’s been in the business, he’s never witnessed a jump into new technology like the one to EVS.
“I hope that the industry can survive it OK,” he said, adding he has concerns it could put some automakers or suppliers “in distress if it doesn’t happen quickly enough.”
“Most of us have concluded it’s going to happen. It’s all about the rate and can some suppliers who really jumped in hard survive the bridge between now and then,” D’eramo said.
Martinrea was “pretty smart about” the transition, he added, but it had the products that allowed for that: “Some suppliers don’t have as much flexibility. So they had to say go or no go.”