The automotive supply chain has a capacity problem, but not where OEMs think

CEO at Actify, Inc.enabling manufacturers to build some of the world’s most complex and advanced products.

When asked how he went bankrupt, a character in Ernest Hemingway’s The sun is also rising replies: “Two ways… Gradually and then suddenly.”

Over the next few months, I think that automotive OEMs (Original Equipment Manufacturers) will begin to see the symptoms of the next automotive crisis in the same way: gradually, then suddenly. The symptoms will likely take the form of delayed supplier responses to bid requests, or refusal to bid on programs below a certain revenue threshold, or longer quoted lead times – and while it may be an isolated pair of suppliers at first, I think will soon become a handful, and then eventually an overwhelming majority.

OEMs have dealt with many crises over the decades – from market cycles and labor disputes to various commodity spikes and the current nasty combination of pandemic-related chips/components/raw materials shortages and snappy logistics. But I see a new threat on the horizon, and it’s a direct byproduct of the wave of electrification in the auto industry.

To understand the threat and why savvy and experienced industry executives failed to recognize and prepare for it, we need to understand how automotive OEMs feel about the coming years.

The race begins

For every established OEM and aspiring newcomer, we have entered a period of something like a land rush. The go-ahead has been given and OEMs are out to capture as much of the electric vehicle market as possible. They all plan to become leaders in their target vehicle segments in a few years’ time. No one is going to fail – it’s full steam ahead.

The net result is that the combined OEM community is planning a deluge of new models for which there is no historical precedent. Bank of America Securities analyzed the plans of the major nameplates operating in the US and estimates the number of new models to be introduced from 2022 to 2025 at an average of 60 per year. This is a whopping 50% more than the 20-year average of 40 new models per year from 2002-2021. Another study from ABI Research takes a more detailed look at individual programs with new components worldwide over the next five years and predicts a 66% increase.

Why don’t these huge increases ring alarm bells regarding supplier capacity? Well, from an OEM perspective, yes, more models are coming to market, including a mix of internal combustion, electric and hybrid variants, but the overall unit volume is not expected to change significantly. Many think that the same or comparable production volume should not be a problem. And OEMs have a plan to secure the necessary battery, electric motor, and related EV components to meet their needs — so everything’s fine, right?


Stretch the chain to the breaking point

You can see a supplier, like any manufacturer, as a technical side of the business and a production side. The capacity of the production side is (loosely) defined in volume output. However, the technical side is different.

The work required to estimate, cite, design, develop, validate and put into production a component is about the same carelessly of the number of units to be produced. It’s a labor-intensive 6 to 12 month process, however you cut it. So a supplier’s ability to launch new things depends not so much on machine tools and production capacity, but on human capital: experts in business development, engineering and program management.

When the OEM community collectively asks the supplier community to design, develop and launch many more new components, I predict that the supply chain will break – meaning OEMs will not be able to buy all the components they need to fulfill their ambitious new model launch plans.

No signal, but there are steps

There is no “supply chain signal” pointing OEMs to this problem. There is no dashboard with flashing red lights and a readout that indicates suppliers’ launch capacity is maxed out. Suppliers don’t warn their customers that they can’t handle new contracts – until it’s too late. And that’s a shame, because there are solutions that can be implemented, but they take time and effort to implement.

First, OEMs can look to the past to see how they have achieved amazing just-in-time processes with suppliers on the production side. It is a logistical wonder that thousands of components flow to OEM factories every day to be assembled into new vehicles.

The engineering side is different, but some of the same principles of simplification and standardization of processes and communications could significantly reduce the burden on suppliers.

Here are three suggestions for OEMs to consider:

1. Use a standard CAD format. Today, OEMs often use multiple CAD brands within their design and engineering teams. In the future, they may require CAD software vendors to output a common, vendor-neutral file format. This would both simplify operations for suppliers and eliminate translation errors.

2. Use a single format for reporting refundable supplier costs. Each OEM establishes its own procedures for specifying and verifying refundable supplier costs, such as the purchase of tools and fixtures. It’s analogous to how health insurers each have their own procedures for reimbursing medical expenses, and it causes more than just a bureaucratic headache. The procedures are designed to make reimbursement difficult. An industry-wide common process, hopefully designed to speed up the payment of justified costs, would ease a burden on suppliers.

3. Make automation a priority. Largely because of the lack of standards, vendors have developed complex processes for managing the development and launch of component programs, which are largely non-automated. Spreadsheets, email, phone calls and meetings remain the norm, while most other parts of the business have long been served by modern technology.

OEMs and suppliers need to step outside of their day-to-day customer-supplier negotiation and reporting roles and work together to make their joint engineering work much more efficient. There is huge reach and huge cost and efficiency potential for both parties. And there’s no better time than the looming crisis to make it happen – because the clock is ticking. Business Council is the leading growth and networking organization for entrepreneurs and leaders. Am I eligible?