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Auto Suppliers at a Crossroads

Dec. 10, 2019
The pace of automotive technology won’t pay off for a decade or more. Suppliers share how they're handling the disconnect.

If there were a contest for unhappiest people on the planet right now, automotive suppliers might be right up near the top. The economy continues to move at a steady clip, but stark divisions in the global auto market make it difficult for components makers to know what to prioritize for the here and now, and how to position themselves for the future.

Two thirds of passenger vehicle sales in the U.S. in 2019 were either pickup trucks or SUVs, all of them gas-powered and fuel-hungry. Meanwhile, in the rest of the developed world, electrified vehicles are a priority, and suppliers are expected to foot the bill for the innovation that enables them. But those vehicles aren't selling in any critical mass yet, so the payoff isn't there—electric vehicles currently account for only 1.8% of vehicle sales in the U.S, and 17% globally. And autonomous vehicles, which require an even bigger leap of faith and funding, are currently proliferating on some mythical island inhabited by hedge-fund managers and professional futurists.

Vast spending on new technologies—$90 billion globally through 2017, according to a Reuters analysis, with suppliers footing the lion's share—but no payoff in the foreseeable future and uncertainty when and where tech will take off. No wonder U.S. supplier sentiment is solidly in the pessimistic category, with large suppliers the most pessimistic. Only about 33% of suppliers are optimistic for Q4 2019, according to the Original Equipment Supplier Association (OESA)'s Automotive Supplier Barometer, dropping from 43% last year.

So what's an automotive supplier to do? Keep pumping out those widgets for the foreseeable future until the combustion-engine universe implodes? Invest in Industry 4.0 to stay relevant with customers and optimize production? Cast bets on innovation?

Really, the biggest question at this point is what suppliers should stop doing to free up resources for new technology, said Bill Foy, senior vice president of R&D at Tier I supplier Denso, at a recent conference. "And those are the real big decisions that top management has to make," he added. "'What are we going to stop doing because we're going to do more of this?' The challenge is timing."

The priorities are different for large vs. small suppliers, but when talking about the shifting landscape and the uncertainty that goes with it, automotive leaders—at automakers, at suppliers, and at the institutions tracking them—continually bring up the importance of three things: developing and strengthening relationships with complementary companies, being on the lookout for the right opportunity, and moving quickly when the opportunity presents itself.

China as Trendsetter

For the most part, automakers believe in electrification and to some degree the autonomous shift. They just don't know how far off mass acceptance is—10 years? 25?—or how they are going to make it happen. The consensus tends to be 10 to 15 years for electric to hit critical mass in the U.S., and at least 10 additional years for vehicles that truly drive themselves. U.S. suppliers typically plan 5 to 7 years out, so tech that's 10 to 15 years before it's fully realized is too far off. 

Meanwhile, OEMs are pushing hard for an electric and, to a lesser extent, autonomous future, closing plants and laying off workers around traditional combustion engine production and "old" corporate structures that can move glacially. General Motors, Ford, Audi, Volkswagen, Nissan and Daimler all announced cuts to swaths of their workforce in 2019 (the standard bloodletting for these announcements is 10% of the global workforce) to make room for the shift.

Of course, before the 2016 U.S. presidential election, the path to electrification was tidier, with rigorous fuel economy standards in place: 54.5 mpg, on average in an automakers' fleet, for cars and light trucks by 2025. All-electric vehicles, like General Motors' Chevrolet Bolt, could free up emissions credits for big gas-powered vehicles in the lineup that wouldn't hit the 54.5 mpg threshold.

But beginning in 2016, that path took a detour: A new administration in the White House and a new Congress declared the standards unrealistic and put forth a plan to freeze average mpg to 2020 levels (37 mpg) and removed consumer incentives for buying electric vehicles. With cheap petroleum imported from Canada and shale oil abounding in the U.S., gas prices have remained low—and are expected to stay low for the next five years—eliminating the high cost of gasoline as a financial incentive for consumers to buy electric vehicles.

Guillaume Devauchelle, vice president of innovation at French global automotive supplier Valeo, says his company looks to China rather than the U.S. as the automotive trendsetter because it's one-third of the total global market. "And China has a very clear policy toward electrification."

Devauchelle estimates that 25% of vehicles sold in China will be all-electric by 2025, and 50% by 2030. Europe is on the same track, he says. In the U.S., "we don't see clear national guidance or decisions; we see different positions from one state to another. It might be the most uncertain zone worldwide," he says.

Only a fifth of Valeo's revenue comes from the U.S. market, making it easier to follow the lead of Europe or China than it might be for a supplier who depends more heavily on the States.

It's also easier to justify investing in innovation if change will come faster in your primary market: Valeo strategizes 10 years out and invests 15% of sales in R&D, compared to an average of 4% for U.S.-based suppliers, according to OESA.

The French government owns a 7% stake in Valeo, which provides some stability and innovation dollars. "European auto manufacturers are moving very quickly, and I'm sure that the government is very much involved in the planning," Denso's Foy said. "In the U.S., the government push to go there isn't there." But movement elsewhere, he says, "ultimately it's really naturally going to force that global aspect that [Denso is] bringing to technology."

Where's the Infrastructure?

The uncertainty around U.S. electric vehicle standards and incentives is only one electrification standstill. Another is the lack of any wholesale plan for an EV charging infrastructure. In the U.S. with all the billions of dollars being invested in EV innovation, and all the electric models that people aren't buying (except Tesla's), no investments, private or public, are happening in the charging infrastructure (again, except Tesla' Supercharger network).

"At the end of the day, we're so concerned with 'Does it pop around every corner?'" Bryan Reimer, research scientist in the MIT Center for Transportation and Logistics, said at the suppliers' conference. But the money for electric infrastructure "isn't even on the drawing board in the U.S. We're creating supply really quickly, but we're not fixing the infrastructure. And the supply problem is low cost compared to the infrastructure problem. So as we look forward, we need to balance the investment for the supply of the EVs with the investment in the infrastructure."

Sig Huber, senior managing director at Conway MacKenzie and former global director of purchasing at Fiat Chrysler, calls the lack of a charging infrastructure, "the number one problem" in the shift to electrification, with consumers wary of purchasing vehicles they can't use like their gas-powered vehicles that they're able to refuel without a second thought. "There's not much government or regulatory activity on that front right now, and I don't think there's enough private money to independently build that infrastructure," Huber says. "That's going to be slowing things down in the U.S."

In Europe, by 2025, "it will be very difficult to have a vehicle that is not at least a very, very strong hybrid," says Nigel Francis, CEO at Manufacturing USA's Lightweight Innovations for Tomorrow and a former vice president of advanced engineering and technology at American Axle. He sees a seven-year lag in the U.S. if the current stricter regulations stay in place, pushing strong hybridization to 2032 in the U.S. "and that is way, way past the planning time."

Francis predicts that in 10 years, fossil-fuel-powered engines will still command 75% to 80% of the U.S. automotive market, and more efficient fuel-injected engines and mild-hybrid innovation, like engines with stop-start technology to save on fuel, is the way for U.S.-focused suppliers to go. Yes, he says, innovation dollars have increased for electrification, taking away research dollars for fossil-fuel propulsion, but powertrain still receives more than half of R&D funding.

He thinks the U.S. OEMs intend to go down the electric truck path, but it's going to be a long haul. A breakthrough needs to happen with advanced-generation electric batteries, which require 100 times more mass (and the space in the vehicle to go with it) than gasoline engines.

At a U.S. Department of Defense vehicle show earlier this year, one of the U.S. auto companies displayed an electric Halo vehicle that was in development. It had a range of 250 miles like a gas-powered pickup, "and when you open up the cover on the load bed, it was completely full of batteries," Francis recalls. "It involves filling the whole pickup bed with batteries. Why would you have the pickup, because you've got no luggage space?

Francis' advice to suppliers is to invest in teams getting feedback/voice of the customer from the OEMs and Tier I suppliers on what their priorities are for the foreseeable future. "Because there will be limited growth that will require your help, you'd be far better off aligning yourself to the real customer, rather than running around trying to predict the future," he says.

With Tier II and Tier III suppliers who don't have the resources to make innovation strides alone, much of this alignment can happen through engineering teams, says Huber. "The trick for them is, 'How do they stay close enough to the technology trends that Tier Is are working on, but not break the bank on R&D costs until the actual direction of the design of these systems are firmed up?'"

The smaller suppliers that are in a good place, Huber says, "are the ones that are staying really close to the trends. They're understanding from a technical standpoint what the path is, but they're able to manage their investments accordingly. Others are more passive and are working specifically on the parts they have now. And I think those are the ones that could have risks of being passed over when things do start to be more clear."

Tier II suppliers, he says, need to actively seek out relationships with the Tier Is and "be the value-added player," collaborating on projects and sharing how product could be "designed differently from a production standpoint in order to produce more efficiently or perform better."

Any plant upgrades to make way for new technology should also be made with caution. "A lot of these advancements are many years away from being commercialized, and the suppliers can't be making large capital investments now," he says. "By staying in a close collaborative relationship from the technical side, they can use that information to identify gaps in their own processes or facilities that will need to be addressed in the right time."

Many suppliers aren't maximizing the tech they already have. According to a 2019 survey of 120 automotive firms, 80% of them suppliers, from the Center Automotive Research, fewer than 8% are fully using their existing sensors "to send data to a unified corporate business system that integrates data from operations, HR, finance and sales. … Firms who are adopting [automation] do not seem to be using the equipment to its full capability. Instead, companies tend to use automation to substitute for the shortage of workers they are unable to find at wages they are willing to pay."  

Autonomy Is Far Out

At the OESA conference in November, the general mood around autonomous vehicle technology was that the hype around it reached its peak in the mid-2010s thanks to enthusiasm from Wall Street and auto companies wanting to boost their stock value. The fervor has settled, fully autonomous vehicles are a long way off and the real money to be made is around advanced parking and safety technology, convenience features and vehicle connectivity and data. Agriculture and mining have made strides in autonomy, but successes in those "geofenced" environments don't translate to passenger vehicles and all the unexpected conditions they encounter on the open road, from drunk drivers to bomb cyclones.

Both Rymer and Foy said that Level 4 autonomy (fully autonomous) won't make sense for several decades, with Rymer adding that "Level 2 autonomy (advanced driver assistance) is the growth point for me."

Bob Graham is head of prototype and testing at components supplier Crystal Group, a 250+-person company that specializes in rugged, secure computer hardware for vehicles that through liquid cooling and heat transfer won't burn up in intense conditions. In addition to serving the military and the construction industries, since about 2016 Crystal Group has been partnering with Intel to supply the automotive industry with superpowered computers that can withstand extreme weather and road conditions.

Graham says what he's seen with his automotive customers indicate they still have one foot in the tinkering stage with autonomy. "They're trying to figure out what they really need to make an autonomous vehicle operate," he says. "So what they're doing is they're specifying everything. We're giving them units that have just ludicrous amounts of computing power. Like 10 home PCs in one box. We're talking about a computer that sits in the trunk of a car that draws 4000 watts* of electricity." 

The auto customers are over-specifying the computer hardware, "so they can attach 14 to 16 high-definition cameras, five channels of lidar and several channels of radar. And over time, they might find out, okay, when that dog ran out in front of the vehicle, which was the first sensor to see it, which was the second sensor, which was the third … if 16 sensors saw that dog, they might eventually say, well maybe we don't need all 16—we only need eight, or four. They don't know exactly what they need."

Crystal, like any savvy supplier, is seekng a short-term win: Once automakers figure out what they're doing in autonomy, they won't need such huge computers. At first, Graham thought the auto customers might wind down in 2023, but from talking to his customers, it's looking more like 2026.

Making Big Ideas Work

So how do you plan, while still sticking with the past? Over at Denso, "a severe cultural shift" is happening, says Kara Grasso, vice president of strategic operations at Denso and the former leader of sales strategy at Fiat Chrysler. The 70-year-old components maker recently invested $100 million in mobility startups and announced three priorities: increasing performance in electrification and autonomy; realigning its organizational structure to move faster on innovation; and adding value through partnerships inside and outside automotive. 

The role of Grasso's department, which she created last year and has 54 people, is to accelerate strategic planning in the U.S. market around new technology—"become more agile and quicker in the way we're making decisions and deciding what investments to pursue or what technologies to align with, what customers."

Collaborating differently can be a tall task, she says, "because from a resource perspective, you're really working with, you know, a big team of engineers that are used to our traditional way … Moving from powertrain-specific growth into electrified roles is a big shift."

Meanwhile, nontraditional partnerships are happening at Denso—with Honeywell for electric propulsion systems for the electric vehicle market,  and mobility software company Ridecell and the city of Dublin, Ohio, on smart mobility projects.

Grasso says her team's challenge is to find ways to commercialize the "big ideas" they're developing in tech. "And I should say there is also a component of maintaining strategy toward the traditional business as well … to make sure the next 10 years are moving in a competitive way. It's a really delicate balance." Her team members must align the needs of customers in the U.S. market with the faster-moving global strategy  coming from company headquarters in Japan. 

"One of the biggest learning points is how not to be burdened by big bureaucracy because we are such a large company with a lot of procedural and cultural guidelines, and how to shift that focus to proof of concept, new business model research and idea generation that can lead to, again, some kind of commercialized idea," she says. Almost everyone on her team is a "career Denso" person, "so they have to really shift their minds and have a much more diverse approach to the way that they're operating every day. A lot of the challenge is around, 'OK, we have this business idea. We've done the research. We're innovating and now we have to get this off the ground and do it quickly.'"

Valeo's strategy has two priorities: The first is being a market leader in developing electrified engines that reduce C02 emissions, from 12 to 400 volts with 48 volts being the sweet spot for now, and the higher voltages being developed with Siemens. The second, advanced sensors for autonomous driving developed in partnership with computer vision company Mobileye, include "image stitching" that brings camera views from the four corners of the car together into one comprehensive 360-degree cocoon so there are no blind spots, and scanner lidar that creates a map of surroundings in order to anticipate obstacles and have the steering, acceleration and brakes operate autonomously as needed to increase safety.

"We always work 10 years out," says Devauchelle. "We do believe we know where we are and where we want to be." Getting there is not a straight path, "so we design very precisely, in terms of steps. These steps will bring us additional markets or market share or benefits, which pays for the development of the next generation." In 2000, for instance, Valeo entered the autonomous arena with remote parallel parking. "The first step was to learn how to exit from the parking place, and then once you know how to park in and park out, then you don't need a driver to be in the car to park the car," says Devauchelle. "And then when you know how to do remote parking, you can offer valet parking (like Mercedes-Benz E-Class), and then based on that you can automotize some parking lots" and then you can offer fully automated lots for rental car companies. And then moving up from the low-speed parking maneuvers, they can develop autonomy on the low-speed urban highway.

Devauchelle says that although Europe is outpacing the U.S. in some ways, the U.S. "has a very unique ability to jump on innovation." At the 2019 Consumer Electronics Show, Valeo introduced technology called XtraVue that uses the image-stitching technology to meld camera views, so when a vehicle is pulling a trailer, the driver sees an unobstructed view of what's behind the trailer. "We were showing this innovation at CES, and within a few weeks we got an order from a major OEM which is Ford," he says. Days later, XtraVue was featured in a Superbowl ad.

The lesson here? Things move slowly in this industry. Until they don't.

*Volts was corrected to watts here.

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