A recent special report from S&P Global Mobility gently asks if the last throttle body manufacturer would kindly turn out the lights.
What’s ahead of the automotive industry is clearly problematic for internal combustion engine (ICE) suppliers. The world is moving to electrification. Expect a shakeout, S&P predicted.
So for how long can those suppliers reliant on gasoline propulsion go on and count on being in business? There’s no use ignoring the 2035 mandate to outlaw passenger ICE vehicles. Guido Vildozo, senior manager of Americas light vehicles sales forecasting at S&P Global Mobility, told attendees of this year’s AIA Canada’s National Conference that the feedback he’s received is that regulators would rather have lower vehicle sales volume than move on the deadline.
Even in a country that is fragmented when it comes to electrification policies — such as British Columbia and Quebec being the only provinces offering a rebate on zero-emission vehicle purchases — the mandate will come into effect.
“So they’re not joking,” Voldozo said of regulators.
But where Canada may differ from the rest of the world is the type of zero-emission vehicle consumers lean towards between now and then. Few countries have weather like Canada so it stands to reason Canadians would prefer to choose a hybrid electric vehicle when looking at all options.
Globally, hybrids represent about 4-5 per cent of any market share in the future. In Canada’s case, that number sits at about 8-9 per cent.
“The main reason behind it is weather,” Vildozo explained. “We know that there’s an infrastructure challenge up north; 5 per cent of the population is in the northern territories [and] in the Prairies. Battery performance is not the same in this kind of weather.”
So Canadians will buy future vehicles with that in mind. “So we now forecast that Canada will actually have the highest plug-in hybrid ratio of any market around the world because of weather conditions here,” he observed.
This doesn’t just cater to areas where infrastructure is lacking but to the fact that last-mile delivery can’t be counted on in a battery electric vehicle if the weather doesn’t co-operate. And that extends beyond parts or grocery delivery.
“You can’t depend on battery electric for an ambulance given whether here or a fire truck, for example, further down the road,” Vizdolo pointed out.
So the existence of PHEV may keep some suppliers afloat for some time. Nevertheless, the ultimate goal is full battery electrification. Will they adjust their business or wither away?
To hear Gino Amador, president of Snap-on Equipment, tell it, it’s time for suppliers to stop being scared.
“What are you all so worried about?” he asked during a session at this spring’s MEMA Aftermarket Suppliers Vision Conference in Chicago.
This is the automotive aftermarket, not the new car dealers group, Amador added. They’re worried about what may or may not happen this year, next year and the year after that. The aftermarket doesn’t need to worry as much because it already knows what’s going to happen.
“That’s sort of baked already. We know how many cars got sold three and four years ago. We know how many cars are coming off of warranty. We know how many cars are in that perfect space of four to 11 years,” he said. “That’s the spot we need to be in. That’s where we make money.”
There are many factors influencing change among suppliers, Amador observed. If you’re the head of a supplier to the automotive aftermarket and you’re not thinking about how you’re going to adapt to that change, you’re facing tough times.
“If you consider the trichotomy of climate change advocacy, of road safety initiatives and trade policy that is at best questionable, for most of you in this room, if you don’t reinvent yourselves, you’re going to have some trouble,” he told attendees of the session Supplier Pain Points: A CEO Panel.
He’s not sure how long companies will have to reinvent themselves; it’s difficult to put an exact number on it. But “stochastic events” will come into play, he said, and every business is different with its own set of variables.
“But I feel fairly comfortable in saying that the event horizon for being deep into change is somewhere in the neighbourhood of 20 to 30 years,” he predicted.
What follows is an edited excerpt from S&P Global Mobility’s special report. It makes mention of the automotive aftermarket — indeed, the aftermarket stands to gain from an ICE-dominated marketplace for many years. As Paul McCarthy, president and CEO of MEMA Aftermarket Suppliers, put it, the industry will enjoy a long, fat tail for years, if not decades to come.
But it starts with acknowledging the future, says S&P’s report. Here are the actions it recommends suppliers take.
The time for denial is over. There are still suppliers of parts related to internal-combustion engines that are steadfast in their belief that the looming (and eventual) shift away from ICE toward any number of battery-electric propulsion formats is just a passing fad.
In their view, scores of OEMs, suppliers, dealers, and infrastructure partners have it completely wrong. That the billions in investment earmarked in virtually every major global market to build a new ecosystem is capital that is misallocated. That years of industry strategic moves and government regulations to position both nations and organizations for success in a battery-electric vehicle future are in haste.
Or, conversely, these legacy players may recognize that change is coming, but their corporate strategy is paralyzed by the surge of electric vehicle introductions.
They will be the losers when the next history of the auto industry is written.
While the pace and timing of this transition will be variable (read: lumpy), working under the premise of, “When, not if,” should be the rallying cry among the supplier base. This existential threat is already separating winners from losers — whether they know it or not.
That’s not to say the shift will be immediate, or that there won’t be strong revenue streams to be had during this transformation. It will be protracted, and there are still tremendous profits to be made in the internal combustion space over the next couple of decades — especially in the aftermarket.
After all, there are 1.3 billion internal combustion cars on the world’s roads today, according to S&P Global Mobility estimates, and they aren’t going to just vanish. Nor will BEVs take a dominant share of the vehicles in operation for many years to come. But the shift is happening.
There are thousands of moving parts in the internal-combustion powertrain; battery electric vehicles have only a couple dozen. As a result, there will be a brutal shakeout and consolidation among engine, transmission, and driveline suppliers in addition to those in the fuel and exhaust systems sectors. The victims will be those who failed to plan ahead and listen to their customers.
As S&P Global Mobility sees it, those suppliers have four strategic choices:
Divest from ICE, and shift to BEV components
Milk the cash cow dry, while shrinking to an eventual shutdown
Double down to become the dominant part supplier
Position to be acquired
Limited strategic options
Even if it were the best of the times, an industry experiencing this sort of transformation from ICE to BEV propulsion would have its fair share of participants throwing in the towel. Add financial pressures and risk dynamics impacting the industry since 2019, and you have a recipe for significant industry turnover.
This frantic pace of change and its inherent risks for capital in a rising interest rate environment, the skills/process transition required, and the advantages gained by innovators and first movers in this new environment is head spinning. Emerging from this unfortunate timing combination of significant competitive challenges will be an ecosystem which will not resemble the one in which we entered this century. Despite the challenges, nimble industry participants — be they OEMs, suppliers or dealers — will leverage this tumult to their advantage.
Early evidence of a looming propulsion transition emerged even before 2019. Both China and the European Union understood (albeit for differing reasons) that legislating vehicle emission reductions through the coming decade was going to upend the competitive dynamics of their home market vehicle manufacturers and the suppliers which served them.
As a result, OEMs will be required to devote a substantial share of capital expenditures to battery-electric propulsion systems and platform structures. They are understandably reducing their focus and resources on traditional ICE systems due to limited payback and slowly abating volumes/utilization.
Some ICE powertrain suppliers may discover they are unable to pivot to a BEV world. One option for entrapped medium-sized suppliers may be to ride an ever-decreasing ICE revenue stream until the business is unsustainable; Wall Street tends to look unkindly on that business model.
Another path is to become the dominant supplier in a niche segment — be it for throttle bodies, ignition coils, exhaust manifolds, or some such — and hope that the aftermarket business is sufficient to keep the business afloat.
While traditional propulsion systems suppliers face these challenges, an opportunity is emerging for others to build new value chains and differentiate innovations and competitive advantages as first movers.
“If you consider the trichotomy of climate change advocacy, of road safety initiatives and trade policy that is at best questionable, for most of you in this room, if you don’t reinvent yourselves, you’re going to have some trouble.”
Think global, source and build local
Though the number of new BEV platforms (all-new structures and processes) has primarily been initiated in China and the European Union throughout this decade so far. North America is catching up quickly. Installation of new, highly flexible BEV platforms is already underway in North America.
According to S&P Global Mobility, 84 BEV nameplates, built at 47 vehicle production lines, are forecast by 2025 — and North American numbers may surge due to benefits incurred under the U.S. Inflation Reduction Act (IRA). For many of these offerings, development and component sourcing occurred years ago.
The emerging BEV production ecosystem has few similarities to that of today’s ICE-focused version. For decades the advantages of a globally rationalized industry were touted as optimal — the tide is now turning.
For instance, the days of efficiently sourcing engines and transmission from over an ocean has given way to propulsion systems (battery cells and enclosures) produced regionally. We are entering a BEV chain based on localism — usually within a couple hundred miles of the final-assembly plant. While this new supply chain was forming well ahead of the recently enacted IRA, financial incentives will drive even greater value-add through the upstream battery inputs (anode & cathode material) within North America.
What’s more, geopolitical risks, potential trade frictions (such as between the United States and China), sustainability and ESG concerns, and growing logistics issues will drive tomorrow’s supply chain even closer to home factories. Suppliers will need to adapt to nearer supply networks, an even-greater concentration on efficiency, and labor stability to build robust upstream chains.Irrational exuberance, overcompensation
There also is a danger in changing course too quickly. What happens to suppliers that go all-in on an electrification push that does not meet expectations?
After all, it’s an industry truism that, if you added up each automaker’s calendar year sales projections, the U.S. market would be 22 million vehicles. Of course, it has never come close to that.
Mike Wall, executive director of automotive analysis, warns that sort of overexuberance in sales projections seen with internal-combustion vehicles could happen just as easily with electric vehicles. And suppliers could end up holding the bag.
“Automakers are making some big production projections. One will say, ‘We’re going to sell 1 million EVs.’ Then the next one says, ‘We’re going to sell 2 million.’ And suppliers are being told to plan for this much capacity,” Wall said.
“If you are a supplier told to plan for a vehicle with 150,000-unit volume, what if it happens to come in at 50,000? Besides altering the basic profit potential for the part, if you amortize tooling and development costs into your piece costs, it will take much longer to recover those costs, if it ever happens. If you are a supplier, you won’t be selling at 100 per cent capacity at job one,” Wall added.
These are important considerations as suppliers venture into the quoting process for any new business, particularly electrified vehicles.
Additionally, going it alone may not be the optimal path. Reacting to new opportunities through alliances and partnerships will be key as the speed of vehicle development rises. A new competitive dynamic will emerge as reliance on past advantages gives way to a new definition of success or failure.
Those suppliers slow to transition to BEV technologies have missed the initial surge. Remember that there are three timelines in the industry:
Development (which occurs up to five years before start of production)
Tooling for production (two to three years before start of production); and
Service/aftermarket requirements once in service.
It’s a harsh assessment, but given the time factors involved, a supplier’s strategic perspective needed to be in play years ago. In an industry built on relationships, the need to break into the BEV supplier base will be frenetic. But BEV propulsion uses a fraction of the parts required for internal combustion, and as a result, more than a few suppliers will be left standing without a chair when the music stops. The level of displacement and disruption will be significant. Planning ahead is critical to survival.