EV growth puts battery suppliers into auto industry's top ranks

The faces of the world's biggest auto suppliers are changing — and fast.

As automakers race to roll out new electric vehicles to meet rising demand and government rules, battery manufacturers are rising on the Automotive News list of the world's largest auto suppliers.

The annual list, which ranks companies by global sales to automakers, for the first time features a number of major EV battery makers. CATL, of China, ranks No. 5 on the list, with estimated 2022 global automotive revenue of $33.5 billion.

Companies such as CATL, a manufacturing giant, and Samsung SDI of South Korea (estimated 2022 global automotive revenue of $15.62 billion), have been around for years, producing thick portfolios of consumer and industrial goods. But the awakening of the EV market in China, the U.S. and Europe is now boosting their automotive business.

The list of top suppliers this year reflects a rapidly changing automotive supply chain, as relative newcomers and legacy suppliers alike vie for their slice of the rapidly growing EV market — and as competition heats up.

The arrival of the battery-electric vehicle era is roiling the supplier market. BEVs generally have fewer components than their internal combustion engine counterparts, and many automakers are bringing the development of several of those components in-house, said Michael Robinet, executive director of automotive advisory services at S&P Global Mobility.

Supplier products accounted for about 65 percent of the average vehicle's value in 2022, but that figure will drop to less than half as EVs take hold, he said.

"That's going to be another challenge for the supply base," Robinet said during a recent Automotive News LinkedIn Live session. "They're not going to have the same voice that they had in the ICE world when they go to the BEV world — and the voices will be different."

Unprecedented sums of money are being spent on EV-related investments. According to supply chain consultancy Seraph, automotive companies have committed $860 billion to EV investments worldwide through 2030. About $455 billion of that is being spent by U.S. firms.

Massive battery plants, including those built by battery suppliers, automakers or joint ventures between the two, account for an increasingly large portion of those investments. A new joint EV battery plant by Stellantis and Samsung SDI in Kokomo, Ind., is coming with a price tag of $3.5 billion, for example. An LG Energy Solution plant near Phoenix will cost $5.5 billion.

But while huge battery projects are coming to the forefront of the EV supply chain, legacy parts companies are making investments in new technologies to position themselves for success as automakers look to secure parts for their new electric models.

Robert Bosch, No. 1 again on this year's ranking, with global parts revenue of $50.46 billion, said this year it will invest $1.5 billion in a recently acquired California microchip facility to make semiconductors for use in EVs.

Meanwhile, Magna International, the biggest parts maker in North America, according to the annual ranking, and No. 4 in the world, with $37.84 billion in global revenue in 2022, has committed more than $600 million toward manufacturing capacity for battery enclosures, eyeing rapid growth in that business.

But making major investments for the future while managing significant supply chain challenges and financial pressure in the short term has been a difficult juggling act for many companies, particularly smaller suppliers without the financial resources of the large, publicly traded companies.

Tier 1 suppliers, locked into largely inflexible contracts with automakers, have been squeezed by higher raw materials costs and instability at the lower tiers of the supply chain. At the same time, supplier plant efficiency has dipped significantly, driven by semiconductor shortages and other factors that confounded vehicle assembly schedules and made manufacturing less predictable than before the COVID-19 pandemic.

"Costs have gone up tremendously, there's no doubt about it," Seraph President Thomas Kowal said. "Tier 1 suppliers are stuck in the middle and are being squeezed. They have a contract with the OEM, and until that contract is up, it's hard to ask for [price] increases. There are few alternatives."

Higher costs have eaten into supplier earnings over the past couple of years, a fact that could be masked when looking solely at a company's annual sales revenue.

While sales revenue is at a healthy level at many companies when compared to the pre-pandemic period, profits have lagged pre-pandemic levels at a significant number of suppliers, both large and small. Despite lower volumes, automakers were generally able to reach high profit levels in 2021 and 2022 by raising prices and reducing incentives. But suppliers' costs have remained elevated.

Given the pressure to invest for the future, suppliers are being forced to cut spending in other ways, including laying off workers.

"They're having to reduce costs," Kowal said. "There's no other way to maintain profitability. They're looking at reducing head counts. Most of that happens in [selling, general and administrative expenses] and in engineering. The plants still need to produce."

Higher interest rates also pose a challenge for suppliers, which generally were not able to reduce debt loads to the same degree as automakers during the past few years. According to Seraph, of the 79 suppliers rated by S&P, only 30 percent had investment grade ratings as of the first quarter of 2023, compared with 63 percent of automakers.

"The capital markets for debt, and interest rates on that debt, are a big storm on the horizon," said Mark Wakefield, a managing director at AlixPartners.

Despite the short-term challenges, it's crucial that suppliers find ways to invest now so that they can thrive in the future, Robinet said.

Suppliers that are just now thinking of making EV-related investments have "already missed the boat," Robinet said.

The good news for suppliers: After three years of financial pressure and uncertainty, production schedules are expected to become more predictable as the year goes on and into 2024, Wakefield said. Improvements in global microchip supply are helping automakers build up inventory.

"Suppliers are very sensitive to volumes and the normalization of volume and the steadiness of input costs," he said. "So steadily growing volume with raw material prices being steady helps."