How EVs changed automaker-supplier contracts

The electric vehicle volume bust has changed the way parts manufacturers negotiate with automakers, in some cases making for more flexible supply contracts.

Many automotive suppliers were left with stranded capital and big holes in their budgets after investing in EV programs that did not pan out. That financial burden is at the forefront for suppliers when quoting new business and signing EV deals with OEMs, according to industry executives and experts.

While production volume guarantees are still virtually nonexistent, some automakers are granting other concessions not typically seen in contracts, said Michael Brady, executive partner of Warner Norcross + Judd LLP’s Detroit office who specializes in automotive supply.

“The standard OEM position is we don’t guarantee any volumes, but based on the supplier, based on the business relationship and the leverage the supplier may have, they may get other concessions that help them recover capital expenditures if volumes don’t reach a certain level,” Brady said.

Quoted volumes have always been somewhat of a make-believe figure, even on traditional internal combustion engine or hybrid programs. Automakers overshoot projections, which makes the program more attractive to suppliers, thus eliciting a pricing competition. Auto suppliers, in turn, filter those promised volumes through their own internal calculations before bidding.

The difference with EV programs is that volumes have been nowhere close to what was quoted by automakers or expected by suppliers. In some cases, automakers have no choice but to share some of the burden. The bigger the supplier, the more leverage it has in contract talks, Brady said.

More than a year ago, Lear Corp., one of the world’s largest auto suppliers, started serious dialogue with automakers related to EV volume, CEO Ray Scott told Crain’s Detroit Business in a recent interview.

“We have opened up a lot of different dialogues and communication lines with our customer to make sure we’re not deploying capital that is not going to be used,” Scott said. “We have those type of relations where we can have those honest discussions around what the volume is going to look like and then how those commercial agreements will help each party make good decisions.”

Lear invested in programs to supply automakers with battery disconnect units, high voltage wiring and intercell connect boards. The company has indefinitely paused plans for an $80 million plant 40 miles North of Detroit that never got off the ground. It was supposed to supply Orion Assembly, where General Motors has twice pushed back production of its electric pickup trucks.

Scott declined to comment on specific customers but said discussions have generally been positive because automakers will need suppliers to come through once EV volumes do ramp up, as experts predict will happen.

“It’s much more flexible than a traditional negotiation, and we have those discussions frequently,” he said.

Auto supply behemoth and Lear competitor Magna International Inc. is also taking a harder look at EV contracts. The company invested heavily in EVs and said earlier this year it expects 10 percent less revenue in 2026 due to lower-than-expected volumes. The supplier took a $400 million revenue hit due to the collapse of EV startup Fisker.

CEO Swamy Kotagiri said on a call with investment analysts earlier this year that the company would pay closer attention to contract details and guarantees, especially with new entrants.

“It’s not different to how we go about every program,” Kotagiri said. “We look at the viability of the product, the financial strength at that point when we are looking at the company. We look at all those things and assess the risk factors. Terms and conditions … are very important.”

Investment analysts are also watching closely. For suppliers, there’s a general expectation that EV programs yield similar returns on investment as internal combustion programs, said Luke Junk, senior research analyst for Baird. Building in clauses to hedge against low volumes has become necessary to protect the business.

“We have a number of companies that we follow who have explicitly told us that it’s a focus to make sure those clauses are included in EV-type product contracts,” Junk said. “It’s been a common approach within the supplier universe to build in the ability to recover capital or to recover costs to the extent that volumes fall outside of a predefined band relative to the investment that’s being made by the supplier.”