Auto suppliers are slashing R&D. That could turn into a big problem.

TRAVERSE CITY, Mich. — Automotive suppliers are slashing R&D and engineering budgets in response to intense cost pressures, but doing so could come at their own peril — and that of the industry.

Some of the world’s largest, most tech-savvy parts producers have hit the brakes on spending in part because of electric vehicle launch delays and a dim outlook for returns on investment.

Aptiv is cutting engineering spending by up to $100 million this year, while Magna International targets its engineering operations for a $200 million reduction. BorgWarner said it will cut its previously planned R&D in half, and Continental is pulling back R&D dramatically as it evaluates a spinoff of its automotive group.

The cuts are being made to protect balance sheets amid less-than-anticipated demand for EVs in North America, but they could jeopardize some of the progress made over the past three years, industry experts say. U.S. automakers are leaning on suppliers more than ever in their quest to make affordable EVs and secure a long-term future.

“I think the risk is we lose that momentum in EVs and software that we’ve been doing for the last three years to get to where we are today to be able to launch the EVs,” Collin Shaw, president of the Original Equipment Suppliers group at MEMA, told Crain’s Detroit Business. Crain's Detroit Business is an affiliate of Automotive News.

“I fear we take a pause and that globally the rest of the world continues that investment. You look at China specifically, that’s a risk for us.”

Risk has been a central topic here at the CAR Management Briefing Seminars. While the Detroit 3 wrestle with the risk of fast-rising Chinese automakers, suppliers are weighing the possibility that their investments may never pay off.

There’s strong consensus that burning cash on EV-related R&D in the North American market would be unwise. Restraint on capital spending and returning cash to shareholders are the favored policies for suppliers for now, as recent quarterly reports show.

“It’s important we position ourselves for the trends in our industry and the challenges that our customers are dealing with,” Aptiv CEO Kevin Clark said on a recent call with investment analysts. “As we look at some of those slowdowns, we have scaled back investment in certain areas, in areas like high voltage electrification, in areas like smart vehicle architecture. We haven’t completely stopped but slowed.”

Aptiv cut 1,000 salaried employees this year as part of a global head count reduction. Magna is also consolidating.

“This year alone we are taking actions at more than 40 divisions to restructure, consolidate or wind down operations,” Magna CEO Swamy Kotagiri said on a recent earnings call.

The financial strains and risks of the past three years have tested automaker-supplier relations, spilling into pricing disputes that in the most extreme cases have turned into lawsuits.

Automakers such as Ford Motor Co., which issued a “call to action” to suppliers this year, are demanding cost reductions from suppliers and pressing them for EV solutions at the same time.

Speaking at the event Aug. 7, General Motors President Mark Reuss said the automaker’s success is tied to a healthy relationship with suppliers, and he underscored the importance of strong R&D activity in the U.S.

“We’re in it together," Reuss said. “We have got to win and make things that win globally. It’s important for our company. It’s important for our national security that we have the R&D, the industry, the supply base and the markets that lead the world. If we aren’t doing that here, it’s going somewhere else.”

Partnerships are forming in the supply chain, from automakers down, in unprecedented ways as companies look to defray capital risks and accelerate product development, said Neal Ganguli, automotive adviser at global consulting firm AlixPartners. Three or four years ago, suppliers of all types were throwing money at EVs, inspired by government incentives and bullish forecasts on how EV sales would grow.

“Now the buck is changing direction, so the suppliers are retooling, rethinking their spend,” Ganguli said. “Is the advancement of the overall technology in the United States going to slow? Potentially.”

The EV pullback should not be confused with where experts agree the market will eventually go. That’s why R&D investing, from EV powertrains and thermal systems to software, is more important than ever, Ganguli said. But suppliers are ultimately constrained by what their customers demand.

Said Ganguli: “The suppliers are in a constant state of ‘Where do I spend, given the cost pressures of the industry right now?’”