Why suppliers are critical to reducing the auto industry's carbon footprint

Automakers are vowing to reduce the industry's massive carbon footprint. But their success in doing so will come down in large part to whether their suppliers cut down on theirs.

Tier 1 suppliers "are an OEM's gateway toward the entire supply base," said Michael Karrer, senior vice president of sustainability at ZF Group. "Our [automaker] customers are generally dealing with a small number of Tier 1s. But behind companies like ZF, a huge complexity starts.

"We have over 10,000 production material suppliers that we're dealing with," he said. "We're only reaching our carbon goals if we're bringing that supply chain along with us."

Over the past several years, the quest for industry sustainability and carbon reduction has moved to the forefront of conversations among automakers, their suppliers and subsuppliers. Spurred by tightening environmental regulations and increasing demand from investors and customers to build vehicles in a more sustainable way, many automakers have rolled out ambitious plans to reduce their carbon emissions.

That includes targets for entire supply chains, which account for a large share of any given company's carbon footprint.

Those carbon footprints are indeed large. According to a 2021 report by the World Economic Forum, the auto supply chain is one of eight supply chains that account for more than half of the world's carbon emissions, alongside sectors such as food, construction, electronics and freight.

Some automakers have laid out plans to work with their suppliers to reduce emissions throughout the supply chain. General Motors, for example, asked its suppliers to sign a pledge to meet carbon neutrality targets ranging from 2025 to 2038 as the Detroit automaker aims for carbon neutrality in its global products and operations by 2040.

Mercedes-Benz plans to become carbon neutral by 2039. As part of that effort, the automaker is moving to have the vast majority of its parts suppliers provide carbon neutral components in the coming years.

"If you want to do business with us in the future, you need to have a sustainable business strategy," Mercedes CEO Ola Källenius said last year.

It's an example of how suppliers will have to cut their carbon emissions and become more sustainable if they want to continue to get business from automakers.

"It's only going to keep growing in importance," said Ahmed Elganzouri, sustainability director at Magna International.

That's a message the supply base has heard loud and clear, with several of the world's largest suppliers unveiling aggressive targets of their own:

• Dana plans to reduce its scope 1 and 2 greenhouse gas emissions — those directly emitted by the company and indirectly by energy sources — by at least 75 percent by 2030.
• Forvia has committed to cutting its scope 1 and 2 emissions by 80 percent by 2025, compared with 2019, and plans to reach net-zero emissions across its supply chain by 2045.
• Denso has pledged carbon neutrality by 2035.
• Robert Bosch has said it has been carbon neutral in its scope 1 and 2 emissions since 2020.

But the targets set by many of the world's largest suppliers are just that: targets. There is no guarantee that those goals will be hit. And to help meet them, many companies plan to purchase carbon offsets, which could mask progress in cutting down on emissions.

"We see a lot of net-zero targets by a certain date, but if you dig into it, a lot of carbon credits are being purchased in order to achieve that," said Pat D'Eramo, CEO of Canadian supplier Martinrea International, which has a target of reducing emissions by 35 percent by 2035. "We wanted to focus more on what we can do without carbon credits."

But there's no question suppliers are pouring significant resources into the task.

In December, Dana opened a wind facility in Texas that it said will generate 300,000 megawatt-hours of electricity annually, offsetting all of the company's purchased electricity in the U.S. and Canada. It also has built an on-site solar array at its headquarters in Maumee, Ohio.

Denso plans to get solar power at every facility where it makes sense to do so, said Denise Carlson, vice president of Denso's North America Production Innovation Center. That's proved to be more difficult than planned, however, due to supply chain challenges, she said.

"We're facing a tightening of the supply chain for solar panels," Carlson said. "Getting those foundational elements is taking a little longer than we'd like."

Companies are also scrutinizing their facilities to find ways to reduce energy consumption or become more efficient. Forvia, for example, saw that some of its plants were consuming as much as 30 percent of their peak energy even when a plant was idled, said Remi Daudin, the supplier's vice president of sustainable materials and sustainable transformation.

"That means there are all sorts of parts and equipment that are supposedly idling but still are using a lot of energy," he said. "Just by analyzing in detail what is happening in your plant and making it truly possible to shut down your machines and software in total, you can create quite a good amount of savings."

Bosch has 3,000 projects in place at about 400 sites, ranging from the installation of LED lighting to installing more efficient heating methods.

"We have a self-interest here," said Michel Mittasch, head of sustainability and environment, health and safety for Bosch. "Energy costs money in the end, so sustainability isn't just about the environment. It's also about the economy."

While large suppliers are moving quickly on scope 1 and 2 emissions, reducing scope 3 emissions — those generated indirectly by a company through its value chain — is a heavier lift. That's in large part because getting smaller suppliers to make necessary investments or to properly monitor their carbon emissions can be a tough ask, supplier executives told Automotive News.

"We'd like to increase transparency," Mittasch said. "Most of our suppliers are not able to calculate their carbon footprints. At Bosch, we are able to — but we have more than 25,000 suppliers, and not all of them are aware of their carbon footprints."

Suppliers are hoping to change that.

Bosch has asked 2,000 of its suppliers to report data to the nonprofit Carbon Disclosure Project as a way to gain that transparency. Those suppliers are responsible for about two-thirds of the company's supply chain emissions, Mittasch said.

ZF Group engages with many of its 10,000 production material suppliers, helping to teach small or medium-size suppliers how to decarbonize. It also interacts directly with suppliers of commodities such as steel, which accounts for a large share of the supply chain's overall emissions.

The supplier last year signed a long-term supply agreement with Swedish startup H2 Green Steel to provide it with 250,000 tons of decarbonized steel a year starting in 2025.

"That measure alone will cover roughly 10 percent of our total steel volumes worldwide, which is a start," ZF Group's Karrer said.

The decarbonization cause could be helped if automakers were to agree to some level of standardization in goals and reporting, several top supplier executives said.

"There's a growing need for standardization," said Tammy Snow, Continental North America's sustainability head. "Every customer is using their own definitions, their own measurement methods for measuring carbon footprints and using different data-sharing platforms.

This creates challenges and inefficiencies for all suppliers that have multiple customers."

But standardization is easier said than done. While partnerships have become more commonplace in recent years, automakers tend to resist sharing large amounts of data or sets of practices with their competitors.

Martinrea's D'Eramo believes the collaborative approach auto companies adopted to develop health and safety standards in the early months of the COVID-19 pandemic could serve as a template for how to move forward.

"The OEMs and supply base worked together openly to develop standards that everyone could use to get through the pandemic safely," he said. "Because sustainability is something where everyone's trying to do similar things and answer the same questions, we need to do something like that."

Having common standards across the board could also help to get smaller suppliers moving faster on carbon reduction, he said.

"There's such a huge difference, from $40 billion suppliers to $50 million suppliers, that there needs to be some kind of standardization here," D'Eramo said. "If we can find a way to cooperate — at least for a majority of companies — it would help everyone a lot. You're trying to achieve a social goal here, not so much a competitive goal."

Reducing the industry's carbon footprint is a timely and costly undertaking — but significant progress is already being made.

"If you want a seat at the table to get business, you need to say you're a great company with a proven track record, with great people, the right price, on-time delivery and all those things," said Doug Liedberg, Dana's chief sustainability officer.

"But now you also need to demonstrate that you have the right green energy technology, run your business the right way and show that you're helping to drive sustainability priorities across the supply chain."