CEO at Actify, Inc., helping manufacturers to build some of the world’s most complex and advanced products.
The EV price war is heating up. Earlier this year, Tesla announced price cuts for all of their models—up to 20% in some cases. Ford soon followed suit by reducing the price on its popular Mustang Mach-E vehicle.
Part of the effect has been to spur interest and bring EVs even further into the mainstream. While on the surface this momentum seems like something to cheer, it can be a bit of a double-edged sword for the auto industry. Given the thin margins for both automotive original equipment manufacturers (OEMs) and their suppliers, they’re going to have to find a new way of doing business if they hope to effectively manage this price cut-fueled wave of activity—otherwise, both parties could struggle to effectively capitalize on the opportunity.
Squeezed To The Breaking Point
As OEMs face growing public demand for EVs, they are unlikely to want to give up any of their already-reduced profit margin that price cuts have eaten into. As a result, they’ll likely turn to the same old playbook they’ve drawn from for years when it comes to juicing their profitability: asking for price concessions from their suppliers.
The problem here is that suppliers are already stretched to the breaking point managing programs not just for the new EVs that OEMs are rolling out, but also for their legacy internal combustion engine (ICE) vehicles and hybrids.
Program management involves a complicated engineering and development process that has to take place before a single sensor or dashcam is actually spit out by a factory. And unlike the manufacturing side of things, the engineering and development side is hard to scale: It’s a people-intensive process requiring professionals with a very specific skill set.
Additionally, in many cases, these programs are barely profitable for the supplier. Simply put, this is not an environment where squeezing suppliers for price concessions is a viable option. Suppliers have no more to give.
A New Approach For Mutual Success—Starting With Standardization
So, what are OEMs and suppliers to do if the old playbook no longer works?
I think the answer is to start looking at the automotive supply chain in a more holistic fashion and to recognize that success and well-being at one end of the chain is dependent on success and well-being at the other end of the chain.
One of the ways that OEMs could make life easier for their suppliers is by coming up with industrywide standards for information exchange, rather than requiring suppliers to embrace different protocols for each OEM that they work with.
How does this standardization become a reality? It will require coordination across the industry. To standardize on a CAD format, for example, AIAG (Automotive Industry Action Group), the industry body in charge of producing standards for communicating information, would develop a standard that meets the needs of the OEM community. OEMs would then request their CAD partners (like Dassault Systèmes, Siemens, PTC and other prominent CAD vendors) support that standard. This would enable all OEMs adopting the standard to communicate CAD information to their suppliers in a consistent format.
A similar procedure could be followed for producing standards around reimbursable expense forms, for instance, or other aspects of information exchange that support programs in production.
Improving Execution And Raising Awareness
Establishing common formats for communicating information could remove a thorn from suppliers’ sides—but at the same time, suppliers need to get more efficient in how they execute programs. Since suppliers can’t control material prices, and in many cases have prices dictated to them, this improvement is their last—and perhaps only—resort.
I think the root cause of the problem here is that many suppliers are building their own solutions using components like spreadsheets and project management tools, or borrowing capabilities from enterprise systems they already own, like ERP or PLM. Unfortunately, these enterprise systems predominantly cater to manufacturing business models—like “make-to-stock” and “make-to-order”—that deviate significantly from the “make-to-program” model that OEM part suppliers operate.
Suppliers can do a couple things in response. One is rejecting the status quo or incremental improvement in program management processes. Meaningful innovation is required.
Another is raising awareness. Auto suppliers can aim to raise industry awareness and move technology suppliers, consultants and also their OEM customers to take action and work together toward mutual success, drawing on the Motor & Equipment Manufacturers Association (MEMA) to help represent their interests. (Disclosure: My company is a member of MEMA.)
Learning From The Past
Ford CEO Jim Farley was in the news not too long ago with some tough words about the challenges Ford is facing. After praising his predecessor, Alan Mulally, for cleaning up much of the dysfunction at Ford during his 2006-2014 tenure, Farley noted: “But the reality is, if you don’t change the efficiency of engineering, supply chain and manufacturing—the way people work—it’ll grow back, because it did. It all grew back.”
There’s a lesson here for the auto industry as the price wars heat up and EV demand continues to grow. If the auto industry doesn’t get their supply chain in order, by rooting out inefficiencies and making sure it can operate at scale and at speed, the EV price wars could end with no winners—only losers.
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