CEO at Actify, Inc.helping manufacturers build some of the world’s most complex and sophisticated products.
The EV price war is heating up. Tesla announced earlier this year price reductions for all their models – in some cases up to 20%. Ford soon followed suit lowering the price on his popular Mustang Mach-E vehicle.
Part of the effect was to spark interest and make EVs even more mainstream. While this momentum may seem like something to cheer on on the surface, it can be a bit of a double-edged sword for the auto industry. Given thin margins for both automotive original equipment manufacturers (OEMs) and their suppliers, they will have to find a new way of doing business if they hope to effectively manage this price-cutting wave of activity – otherwise both parties may struggle to effectively take advantage of the opportunity.
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Pinched to the breaking point
Faced with growing public demand for EVs, OEMs are unlikely to want to give up any of their already reduced profit margins that price cuts have eaten away at. As a result, they will likely revert to the same old playbook they’ve been drawing on for years when it comes to leveraging their profitability: asking price concessions from their suppliers.
The problem here is that suppliers have already gone to great lengths to manage programs not only 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 must take place before a single sensor or dash cam is actually spat out by a factory. And unlike the manufacturing side, the engineering and development side is difficult to scale: it’s a people-intensive process that requires professionals with very specific skills.
Moreover, 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 nothing left to offer.
A new approach to mutual success—starting with Standardization
What should OEMs and suppliers do if the old playbook no longer works?
I think the answer is to look at the automotive supply chain more holistically and recognize that success and well-being at one end of the chain depend on success and well-being at the other end of the chain.
One of the ways OEMs can make their suppliers’ lives easier is by coming up with industry-wide standards for information exchange, rather than requiring suppliers to embrace different protocols for each OEM they work with.
How does this standardization become a reality? It requires coordination across the sector. For example, to standardize on a CAD format, AIAG (Automotive Industry Action Group), the industry organization responsible for producing standards for communicating information, would develop a standard that meets the needs of the OEM community. OEMs would then ask their CAD partners (such as Dassault Systèmes, Siemens, PTC and other prominent CAD vendors) to support that standard. This would enable all OEMs applying the standard to communicate CAD information to their suppliers in a consistent format.
A similar procedure could be followed to develop standards around, for example, billable expenses or other aspects of information exchange that support programs in production.
Improving implementation and awareness
Establishing common formats for communicating information could be a thorn in the side of suppliers, but at the same time, suppliers need to become more efficient in the way they run programs. Since suppliers cannot control material prices, and in many cases the prices are imposed on them, this improvement is their last – and perhaps only – resort.
I think the source of the problem here is that many suppliers are building their own solutions using components such as spreadsheets and project management tools, or to borrow capabilities of business systems they already own, such as ERP or PLM. Unfortunately, these business systems primarily focus on manufacturing business models, such as make-to-stock and make-to-order, which differ significantly from the make-to-program model used by OEM parts suppliers.
Suppliers can do a number of things in response. One is rejecting the status quo or incremental improvement in program management processes. Meaningful innovation is needed.
Another is awareness. Automotive suppliers can strive to raise awareness in the industry and encourage technology suppliers, consultants and also their OEM customers to take action and work together for mutual success, leveraging the Motor & Equipment Manufacturers Association (MEMA) to promote their interests to help represent. (Disclosure: My company is a member of MEMA.)
Learning from the past
Ford CEO Jim Farley was in the news with some not too long ago harsh words about the challenges Ford is facing. After praising his predecessor, Alan Mulally, for clearing up much of the dysfunction at Ford during his 2006-2014 tenure, Farley noted, “But the reality is that when you look at the efficiency of engineering, supply chain and production doesn’t change, the way people work – it will grow back, because it did. It’s all grown back.”
There is a lesson here for the auto industry as price wars flare up and demand for electric vehicles continues to grow. If the auto industry doesn’t get its supply chain in order, eradicating inefficiencies and ensuring it can operate at scale and speed, the EV price wars could end with no winners, only losers.
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Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.