09.29.22
| 7 min read
Technical Article
In recent articles, we’ve discussed approaches to heat treating ICE vehicle vs. EV components and the intricacies of seating components in the evolving automotive industry.
However, the changes we see in heat treating are a small part of larger industry shifts that are occurring. In this article, we’re taking stock of the current automotive industry and how the mass transition to EV is changing supplier relationships and restructuring the automotive supply chain as we know it.
Global Supply Chain of Today
To better understand how our supply chain is changing, let’s take a closer look at the traditional model used widely across global ICE vehicle manufacturing today.
Over the past few decades, the automotive supply chain has become increasingly complex to accommodate new functions and features in cars. The state of constant change created the need for carmakers to find economies of scale and led to a tiered supplier structure that culminates with the OEM. In this structure, Tier 1 suppliers feed directly into a single assembly process, which is traditionally completed in-house.
However, this traditional supply chain structure has revealed its many shortcomings throughout the pandemic, with severe disruptions and shortages caused by extreme weather, capacity limitations and geopolitical disputes.
While most of the automotive industry continues to use this model, we see carmakers and suppliers moving to change that, most notably using their transition to EV as an opportunity to address supply chain woes. And battery suppliers are leading the way.
The Future Automotive Supply Chain
Electric car sales are accelerating at full speed and the race to net zero is well under way. According to an International Energy Agency report, global public and private spending on EVs doubled in 2021 compared to 2020 sales, and we’re on track to continue that trend in 2022.
This increase is driving demand for increased battery production and in turn greater need for raw materials to make them. Business is booming, but the supply chain is in a precarious state. Securing every aspect of the supply chain, from raw materials suppliers to consumer purchase, is more important than ever.
Automotive and battery manufacturers looking to reshore and centralize their supply chain in the US are supported by the country’s large investments in the EV industry to secure raw materials sources. Carmakers like Toyota, Honda, and Ford have made significant investments to ramp up EV production in their US facilities, along with Piedmont Lithium and Cirba Solutions (two leading battery manufacturers), and more are expected to follow suit.
One major challenge manufacturers face today is the ability to keep up with the rapidly growing demand. Ongoing chip shortages and limited manufacturing capacity have made it difficult to fill orders. To help fill the gaps, some suppliers are expanding their capabilities.
Many battery suppliers in particular have advantage in becoming vertically integrated to help manufacturers quickly increase capacity, and in turn, are positioning themselves as a secondary OEM within the supply chain—or a split supply chain.
Within this supply chain architecture, carmakers assemble the body of the car but outsource the propulsion platform assembly to vertically integrated battery suppliers. This means that battery suppliers are responsible for dealing with Tier 1 suppliers that provide the systems for the propulsion platform. This, along with the fact that internal combustion system and drivetrain manufacturers are no longer a part of the picture once ICE vehicles are phased out, will significantly decrease the number of suppliers that carmakers work with.
Battery manufacturers and raw materials suppliers are also entering the battery recycling industry and are developing a logistical strategy for recovering post-consumer batteries for refurbishing and recycling.
Companies that focus on producing traditional ICE vehicle drivetrain components will need to innovate or diversify their offerings to stay in business. In September 2022, California became the first state to ban new ICE car sales after 2035. Assuming that other states will follow suit, ICE manufacturing will slow, but EV and ICE vehicles will share the road for a long time.
Will the Automotive Chip Shortage Ever End?
Materials and supply shortages are still an ongoing problem in the global supply chain, most notably the semiconductor shortage.
According to Network Computing, the average lead time for automotive semiconductors, or mature-node semiconductors, in early September 2022 was still around 27 weeks, the longest it’s been since the pandemic started. The question is, what is causing this disruption? And will it ever end?
Many things have contributed to the shortages we’re experiencing today. Extreme weather is one big factor—fire, floods, water contamination, power outages all disrupt the delicate semiconductor production process. Another is geopolitical circumstances that cause raw material bottlenecks and shipping delays. However, the biggest contributor has been the change in demand for automotive semiconductors has affected the entire semiconductor industry.
When the pandemic hit and the world went into lockdown, consumer buying trends changed drastically. According to a McKinsey report on semiconductors, wireless communication and PC demand grew as people were spending more time at home, and the demand for automotive applications was the only one that saw a decrease.
This change in demand caused semiconductor manufacturers to pivot, changing their process to accommodate more sophisticated chip development for tech devices. Even though the demand for automotive semiconductors has recovered, these manufacturers haven’t been as quick to change back to the mature-node processes required for automotive. The extreme shortages we’re facing today are largely due to this lack of manufacturing capacity.
Expanding capacity is the solution, but doing that is easier said than done. Some automotive manufacturers and semiconductor manufacturers aren’t expecting to catch up with demand until at least 2024.
Reshoring to Become Leaders in EV
Global supply chains took a big hit during the pandemic. Lead times, labor and material shortages, and tariffs have all been pushed to their limits and many manufacturers are looking to alternative supply chain structures to relieve some of the pressure and make operations more efficient.
A McKinsey study from 2019 estimated that one- to two-month disruptions were being experienced by the global supply chain every 3.7 years. At the time, this was a significant finding—one that seemed like a worst case scenario for businesses around the world—but that was before the pandemic hit. Today, we’re all too familiar with the serious implications that come with relying on offshore parties.
Reshoring and localizing is becoming an especially important move for car manufacturers wanting to gain a competitive edge in the early days of EV. On top of the risks that come with offshore production—long lead times, product quality issues, territorial disputes—entering a new market is inherently risky for business. In this pivotal moment, implementing a distributed manufacturing model can reduce turnaround variance, give car manufacturers greater supply chain security and a better chance at becoming leaders in EV.
Navigating the Limping Supply Chain: How Heat Treaters Can Help
All suppliers in the automotive chain play an essential role as OEMs transition to becoming EV focused. For heat treaters this means ensuring efficiencies of scale, fast turnaround and unfaltering quality, along with having strategies in place for capacity planning and contingency planning. All of this gives car manufacturers the foundational stability that’s needed to survive the industry’s constant state of flux.
If you’re looking for a high-capacity heat treating partner that can provide security and resilience in today’s supply chain and scalable solutions for tomorrow, reach out to a Paulo expert today.
