Crisis as a Catalyst for Change: How automotive companies are thinking about and building a resilient supply chain capable of powering a future of electric vehicles

The global automotive industry faces a production loss of 6.2 million vehicles because of disruption in the semiconductor supply chain. It’s another example of how vulnerabilities in a supply chain that is often decentralized and built upon layers of suppliers can grind an entire industry to a halt. The microchip shortage, unfortunately, is also not the first time that auto manufacturers have faced massive production stoppages because of supply chain disruption. A 2012 explosion at a plant in Germany that was one of the largest producers of a resin used  to make fuel tanks, brake components and seat fabrics threatened to cripple global output. Similar disruptions were caused by the tsunami in Japan and a fire at another supplier facility, both in March 2011. 

In response to the chip shortage and like previous disruptions, auto executives are using the crisis as a catalyst to change sourcing strategies and how they mitigate future risk. In fact, according to a survey of 255 automakers and suppliers conducted by FTI Consulting (FTI) and the Automotive News Research & Data Center from June 23 through July 9, 2021, more than two-thirds (67 percent) of automakers and suppliers say they have made changes in sourcing and how they manage supply chains.

In part one of this three-part series, we forecast that the global end-to-end electric- vehicle (EV) value chain could reach $1.2 trillion by 2025 and started building the case for investments in supply chain processes and technology as the industry transforms from one building vehicles powered by gas to one building vehicles powered by electricity.

In part two of this series, we continue building the case that players in the EV value chain need to invest in technology and processes to manage the challenges of electrification. That includes adjusting how and where they source products—particularly important when, like semiconductors, competition for battery materials such as lithium, cobalt and nickel goes beyond the auto industry and sources for those materials might also include geopolitical risk and disruption.

In this article, we explore how automakers and suppliers that responded to our survey are thinking about and building a resilient EV supply chain. Most agree it presents a high degree of risk (57 percent). But, are the changes industry executives are making now enough to shield automakers and suppliers from risk and disruption in the end-to-end EV supply chain?

Survey respondents indicate that the changes they are making to better manage their supply chains will involve some level of reevaluation and reconfiguration of how they source and from whom (Figure 1).
 

Nearly two-thirds (62 percent) say they are making some investments to create more digital connectivity across their supply chains. But 68 percent of those same
automakers and suppliers also indicate that investments in digital technologies that can enhance supply chain visibility and predictability rank no higher than a medium priority. Respondents cite an uncertain return on investment (ROI) in supply chain technology as the primary factor influencing their investment decisions in technologies such as predictive analytics, blockchain and other technologies that create connectivity and visibility across tiers.

Among the companies working to create more connectivity with customers and suppliers, activities related to cross-tier sharing of data were cited most often (58 percent). More than half (56 percent) say they are investing in areas that can enable near-real-time visibility, and nearly the same (50 percent) indicate they are indeed investing in predictive analytics capabilities.

Most automakers and suppliers (64 percent) also say they are making investments to ensure they have the talent to complement the changes they are making in their approach to supply chain management. Experience operating a digital supply chain is the skill most in demand, with engineering, product development, manufacturing and plant operations, and business management and strategic planning also high on the list.

Automakers and suppliers are preparing for a future portfolio rich with EVs. And while we forecast global sales of EVs to total 13 million units in 2025 (up from 2.7 million units in 2020), the internal-combustion engine is not going away. For decades to come, auto manufacturers are going to have to manage a supply chain that supports production of vehicles powered by internal combustion and batteries at a combined global scale of about 95 million units a year. It won’t be easy; most survey respondents (59 percent) say the EV supply chain is significantly different from their traditional internal combustion supply chains.

That opinion is likely based on real-world experience. On average, respondents say a third (33 percent) of their business is devoted to vehicle electrification, and 80 percent say they currently manage mixed supply chains. Most (63 percent) say their organizations continue to build or adjust supply chains to support forecast growth in EV production.

Still, 33 percent say managing those mixed supply chains presents significant challenges. More than half (51 percent) note the different nature and complexities of each supply chain, but many respondents also say the challenges they face are the result of several factors (Figure 2)

Consistent with their broader efforts to manage supply chains (see Figure 1), 41 percent say they are focused on dual sourcing of critical commodities and components to help avert disruptions in the EV supply chain. Thirty-six percent are assessing their suppliers, and on average, about 25 percent are re-sourcing critical materials away from at-risk suppliers or near-shoring critical materials while also investing in people, business processes and technology.

Overall, most survey respondents are taking steps in the right direction to improve supply chain management. But that’s often the case in response to crisis. Our survey also reveals that opportunity exists to do much more and make those efforts more of a priority. The good news is that many are embracing the benefits of technology and preparing for a future with mixed supply chains that are different and present unique challenges.

Only time will tell whether the changes being made now in response to the supply disruptions are enough to support the auto industry’s transformation to electrification. Make no mistake, it’s complex and hard work that can be overwhelming. The alternative, however, is more costly. In our final article in this series, we’ll outline recommendations for supply chain management in the EV value chain and hopefully convince those considering changes that the time to prepare for the 
future is here.