The inevitable shift to electric vehicles is here and its impact on automotive suppliers will be drastic. OEMs are making major commitments to reduce their carbon footprint and eliminate their internal combustion engine (ICE) fleets. General Motors, for example, has made a commitment to be completely carbon neutral in their global products and operations by 2040 and eliminate tailpipe emissions from new light duty vehicles by 2035. Audi, Volkswagen, Jaguar, Mazda, and Nissan — among others — have made similar promises.

What does this mean for automotive suppliers?

Existing suppliers will have to adapt and start converting some lines to EV parts while balancing their current ICE business, actively managing the transition over time. It will be easier for some suppliers, but for others, their decisions will determine a different fate. According to EY research, 33% of all components in the traditional car architecture will become obsolete; things like cylinder blocks, pistons, and other ICE components will go away. Luckily, the shift away from ICE vehicles is not going to happen overnight, but suppliers must focus on R&D now to keep up with competition moving forward.

Inflation is on the Rise, but R&D Continues

Concerns over the weakening U.S. economy, with rising interest rates and inflation, are causing automotive suppliers to rethink their capital investment decisions and pursue a more agile strategy. There is also a responsibility to keep up with research and development in order to stay competitive and develop components suitable for EVs and more tech-enabled vehicles.

Every quarter, the Original Equipment Suppliers Association (OESA) releases their Automotive Supplier Barometer Index report that measures the sentiments of North American automotive supplier executives. The most recent report (Q3 2022) mentions that the outlook for the third quarter of 2022 fell deep into pessimistic territory compared to Q2 of 2022 due to continued concerns over production shutdowns and heightened concerns over a weakening U.S. economy. Notable takeaways from the report include:

• Over 30% of supplier executives say that their R&D investment will increase in the next fiscal year.
• Electrification is bringing extra challenges for capital investments as the market is relatively unchanged, but investments are needed for both ICE and EV projects.
• EV products need far more innovation support and new investments, compared to ICE projects.
• Some suppliers are even decreasing investments in ICE applications and moving the capital towards EV part development.
• 45% percent of suppliers believe they are ahead of the industry’s pace of innovation while 18% feel they are behind. Both those that consider themselves most innovative and those that are catching up with the pace of the industry are investing in R&D to support the EV market.
• Most supplier executives estimate a recession is more likely to occur in the next 12 months than not. Most feel somewhat prepared if a recession were to occur.
• Production shutdowns due to supply chain shortages and labor availability remain the top threats to the 12-month outlook.

Based on this report, it is clear that automotive suppliers are feeling serious cost difficulties. In a recent quarterly publication, OESA Executive Director of Strategy and Research Mike Jackson says, “Supplier sentiment reflects very real cost pressures due to record high inflation levels and is compounded by concerns over recessionary impacts – yet innovation strategy and sound capital expenditure planning are recognized as key drivers to mitigate such forces and bolster a stronger competitive position.” This indicates that automotive suppliers are indeed feeling the pressures of the weakening U.S. economy but are using R&D to keep up with competition and fight their way through the poor economy.

Digital Transformation for EV Transition

With an increasing focus on safety and quality, more and more OEMs are declaring requirements for a shift away from manual, spreadsheet-based, and paper-based processes while adopting software that tracks production. For example, Ford’s recent FMEA quality software requirements are forcing suppliers to use software that aligns with Foundation FMEA and Part FMEA. The shift to manufacturing software for tracking production not only improves quality but also aids suppliers who are making the transition to EV component production, allowing them to focus on their engineering and R&D efforts, not on manually updating spreadsheets for program management.

Having a reputable digital MES, QMS, or ERP system in place gives automotive suppliers the ability to automate program management, reduce manual errors, and decrease the amount of time it takes to transition a manufacturing line from ICE components to EV parts. Without these systems, automotive suppliers can fall behind and lose customers to other suppliers who are better prepared — with more agile manufacturing production systems — for the complexity of new part development.

Adapting to a Changing Automotive Environment

The combination of a weakening U.S. economy, a major shift in automotive propulsion technology, continuing supply chain struggles, and a market with massive consumer demand creates a challenging path forward for automotive suppliers. Those who are prepared with a strategy can be successful, but they must act now and optimize their strategic investment decisions. Focusing on engineering, R&D, and automation through software adoption will help automotive suppliers while adding the agility needed to stand out amongst their competition, win more business, and succeed through this period of industry disruption.

Discover more automotive benchmarking insights and tips by downloading this special edition of the 7th Annual State of Smart Manufacturing Report.