How Suppliers Can Hedge Their Bets on the EV Transformation

There is no denying that the electric vehicle transition is forcing the automotive industry to evolve by 2040. Suppliers across the value chain are feeling the impact. However, several factors ultimately will influence each supplier’s unique risk exposure – including which automakers they work with, their facility location(s) and which components they produce.

Although suppliers are in varying stages of the transition, each one can benefit from implementing three distinct checkpoints along their transformation.. No matter where on the journey, successfully reducing risk during the transition requires suppliers to develop a sound business strategy that protects ICE-derived profits while investing in EV tech, and optimizing an operating model.

Checkpoint 1: Develop a Business Strategy

The transition starts by defining a sound business strategy. The challenge, of course, is that suppliers are being forced to place “bet the farm”-type commitments despite substantial market fluctuation regarding the pace of consumer adoption.

OEMs are expected to introduce a record number of new EV models to the market by 2030 – both EVs and hybrids to meet regulatory targets in addition to internal combustion vehicles. Consequently, suppliers must develop and launch new EV components while continuing to maintain product lines for ICE and hybrid vehicles. The magnitude of this transition means suppliers also need to reimagine their perception of risk while, for example, OEs are delaying some EV models that suppliers are already invested in.

Traditional risk management thinking asks, “What are the risks to my business strategy?” Given the uncertainty surrounding the industry transformation and what is at stake, suppliers instead should try to determine, “What are the risks of my new business strategy?”

Reframing the question can help suppliers see potential pitfalls in their strategies and adjust them before the plans are operationalized. After all, if there are pitfalls in the strategy itself, it is difficult for a supplier to successfully establish an operating model and optimize it.

Another key benefit of developing a sound business strategy: Suppliers better position themselves to obtain outside financing. Financing can help undercapitalized suppliers make investments vital to keeping pace with the future of mobility and remaining competitive.

Checkpoint 2: (Re)Establish an Operating Model

Once the business strategy is defined, suppliers can then develop a plan to operationalize and support it.

In some cases, the strategy will entail a product revolution. In other cases, it might be more of an evolution. Regardless, sound management fundamentals are critical; suppliers need to account for any capability gaps to determine the potential success of their planned course of action. For suppliers to align operations with a new strategic direction, the fundamentals of operating models – namely procurement, production and distribution – must be in place and must be flexible.

Many suppliers will need to source new materials for their EV components, which means re-evaluating their supply chains. Often, these new materials will require suppliers to update production facilities and processes. Additionally, suppliers must establish a robust order-to-cash process, which may be challenging when uncertainty remains around EV production benchmarks.

Checkpoint 3: Optimize the Operating Model

To enhance their operating models and initiate EV component production, suppliers should be investing in resources that move them to a balanced portfolio of products. This may mean investing in R&D to bring new EV products to market. Alternatively, it may mean divesting themselves of resources that no longer align with the new business strategy.

In the optimization phase, it is crucial for actions to minimize risks related to the supply chain.

To strengthen optimization efforts, suppliers may want to:

Savvy suppliers know that OEMs will continue to press them on price, quality and innovation regardless of powertrain direction. Therefore, it will be essential to continuously explore opportunities to create efficiencies and optimization.

Seize the EV Future

The time has come for suppliers to place their bets on the EV transition. Although it’s a significant challenge, there are ways suppliers can mitigate the risk and turn it into a profound opportunity for growth and innovation. Developing a sound business strategy and operating model – then continually optimizing the operating model – can help suppliers not only survive but also thrive in the EV future.

Mark Barrott (pictured, upper left) is a partner with Plante Moran's mobility and automotive practice.