Global automakers are making the transition to electric vehicle (EV) manufacturing. By 2030, while there will still be as many internal combustion vehicles produced as EVs around the world, the growth will be with EVs. This schizophrenic existence is wreaking havoc with the automotive supply chain, especially those suppliers that sell directly to car companies.

These Tier 1 powertrain suppliers must straddle the old world of internal combustion engines (ICE) and a future of EVs, serving a growing range of diverse vehicle architectures as automakers introduce new platforms for their EV models. By 2028, there will be more than 200 individual automotive architectures for suppliers to service globally, a 117% increase from 2020 — all with their own sets of interfaces and designs.

An Oliver Wyman analysis of 15 of the largest global car companies shows that by 2030 annual production volume per EV platform will average around 217,000 vehicles, 35% higher than the average 160,000 per ICE platform. Vehicle platforms are the fundamental mechanical structure upon which car manufacturers design various models. With EVs, automakers are making a conscious choice to concentrate research and development (R&D) on fewer platforms than they had in previous decades for their ICE predecessors. They also are making them high-volume to increase efficiency.

Moving from internal combustion engines to electric vehicles

The plethora is putting a strain on many suppliers and making it harder to remain competitive. Meanwhile, suppliers are contending with increasingly limited resources as raw materials and energy get more expensive — higher costs that they are less able to pass on than those further up the supply chain. As Tier 1s slow down production of ICE components and ramp up EV lines, there is a difficult balance to maintain between short-term cash demands and long-term competitiveness aspirations, especially when battling over precious R&D money.

Where is the strain evident? First, the diversity means it can take longer to bring new products to market and it’s harder to guarantee their quality. Suppliers also find themselves losing business to automakers as the car companies vertically integrate and push their way into the electric powertrain market.

But it’s not a problem they can afford to sweep aside, and hope things get easier. That’s not likely to be the case for at least five years and more likely a decade. If anything, the transition to EVs is speeding up and will be particularly complicated as automakers become more equally committed to both ICE and electric technologies.

Strategies to achieve scale in the evolving EV market

What should Tier 1 suppliers do?  Tier 1s now have a window of opportunity to be successful serving the EV platforms that will hit the factories over the next three to five years.  But they will need to change the ways they operate to capitalize on it. They will, in fact, need to act more like an automaker than a supplier — developing an overview of the supply chain and holistic strategies that provide them more control over all parts of it. 

Here are six recommendations:

1. Take a modular approach to fulfilling needs of the various platforms
   Rather than try to cater to the many platforms, interfaces, and designs, Tier 1 suppliers must develop a product strategy that allows them to produce highly scalable and modular product components, while still being able to satisfy customer-specific interfaces and requirements at the same time.
2. Gain control over the automotive supply chain
   Tier 1 suppliers need to position themselves so they can exercise control over the entire value chain. This can be done through long-term agreements with suppliers further up the supply chain, including deals for raw materials, which enhance supply chain resilience.
3. Develop strategic partnerships with central players
   Tier 1 suppliers should collaborate and create alliances within their supplier ecosystem, such as equipment manufacturers and semiconductor makers, to help achieve better integration and lower total system cost. They can also develop similar agreements with car companies to achieve scale.
4. Reach out to Asian EV manufacturers
   Western Tier 1 suppliers should look to reduce their dependency on Western car companies, given China’s early lead in developing a market for EVs and the extensive number of EV models sold in China. Establishing business with Chinese car companies will help suppliers gain scale and lower costs, and it will provide an opportunity to gain insights into different vehicle architecture approaches. At the same time, global Tier 1s need to broaden their competitive intelligence about emerging Chinese suppliers that may have their own plans to extend their market footprint.
5. Adequate investments in competence centers
   Tier 1 suppliers need to master prototype production for a successful sample phase and product launches. This is a time when developing relationships with equipment suppliers that serve multiple Tier 1 rivals will become pivotal.
6. Leverage operational excellence at high volumes, in new tech
   Tier 1 suppliers need to prioritize achieving volume in production by serving multiple automakers. This will allow them to reduce unit cost against in-house car company limited production.

As they attempt to turn the industry more firmly in the direction of EVs, automakers will also have a lot on the line. They are apt to accelerate their insourcing efforts in response if Tier 1s look like they can’t handle the transition. Failure by Tier 1 suppliers to take charge of the value chain and reduce unit costs is likely to change the EV market landscape into one ruled by highly integrated automakers — or by globally active Chinese suppliers.

Additional contributor: Thomas Schiel.