Humbled by 2021, Auto OEMs, Suppliers Gird for Next Year’s Challenges
Humbled by 2021, Auto OEMs, Suppliers Gird for Next Year’s Challenges
Dec. 1, 2021
It was a year like no other, but will 2022 be more of the same? Manufacturers talk about how they responded to supply chain snarls and talent shortages–and what they anticipate being their biggest hurdles ahead.
Holy lugnuts, it’s been a year for the automotive industry. If the 2010s were all about reaching for the stars, the 2020s have been about mad-dashing around shop floors and into Zoom calls. They’ve been about puttying up leaks in faulty systems and processes neglected during boom years.
Manufacturing facilities shut down at the beginning of the pandemic; then pivoted to make ventilators, vaccine swabs and masks; then gradually reopened for vehicle production.
But it wasn’t just a matter of turning on machines and bringing everyone back to work. Some workers chose not to return, taking early retirement or reconsidering their career options. COVID absences put additional strain on staff hustling to meet deadlines. Demand for automobiles tanked, then gradually recovered, then exploded as production fell short.
Supply chains have been tossed, tangled and turned inside out. And don’t even get us started on semiconductors (rest assured, we will address that critical topic).
Predictions for the new year feel like fluff and frivolity when automotive OEMs and suppliers are dealing with serious shortages and trying to keep their workers safe.
So in lieu of grand forecasts, let’s hope for the best: That in 2022, the auto industry will have more of the same, but better. That the supply chain problems will run their course. That innovation will motor ahead, not only in EV and tech, but also in more stolid yet all-important areas like manufacturing processes and supplier relations.
IndustryWeek talked to OEM and supply chain leaders and observers about the state of the industry and their outlook for 2022 and beyond. We heard about lots of headaches, and forward motion. Each section below describes a challenge but also talks about how auto manufacturers are addressing it.
Manufacturing, and especially automotive manufacturing, has always been complex. Of late, the skills for dealing with that complexity have really been put to the test. It’s a good time for those who love a challenge—and are ready to roll up their sleeves and tackle it.
In early 2021, pent-up demand for new passenger vehicles greatly exceeded forecasts (36% actual increase vs. 7% to 10% forecast). Lauren Pittelli, principal and founder of industry consulting firm Baker Logistics, says that automakers’ sudden zeal to bulk up inventory created a bullwhip effect where everyone progressively overestimated the product they needed, and relatively small increases in demand at the consumer level became magnified deeper into the supply chain. Truck and port labor shortages increased backups and delays.
That, combined with elaborate customs rerouting from busy ports to faraway alter natives, could add weeks to a container’s journey/layover, and also created another problem: container shortages in Asia, where production was just starting to pick up, but the goods couldn’t be shipped because the containers were held up at ports overseas.
Willam Crockett Jr., vice president of Tanaka Precious Metals—which supplies to the electronics, semiconductor and automotive industries—is seeing his company’s product bound for Bay Area ports or Tennessee’s air cargo hub being rerouted to Hawaii, adding delays. “It’s going to different airports, I guess to alleviate some of the backlog,” he says, adding that inexperienced customs agents, recently hired to process that backlog, may be contributing to the issue, being unfamiliar with the finer points of Harmonized Tariff Schedule shipping codes.
With waterways strained, some companies turned to air shipping, but fewer passenger planes flying because of COVID air travel restrictions has also meant much less air cargo space, Crockett says.
Companies that can pay exorbitant prices via air or water (Pittelli mentions Home Depot chartering boats, while a brake manufacturer she works with also looked into that) can jump the line, while the rest get bumped.
“At some point, air charters were competitive—you could afford them,” says Pittelli, but they shot up in a very short time. “That’s a sort of escalation that is just unpredictable. I’ve never seen it like this before.”
With bottleneck routlette happening around the world, the snarled supply chain will unwind, “bit-by-bit and section-by-section,” predicts Pittelli. She sees supply chain backups and shortages, and the high rates and squeezed capacity that go with them, continuing through at least the middle of next year—and that’s without more COVID variants to shake up things further.
A Manufacturer Responds
When the pandemic hit, “the world shifted,” observes Wilm Uhlenbecker, president of Tier One automotive supplier Brose North America. The disruptions COVID caused, taken individually, may have been finite, but they also broke open bigger issues—in labor for sure, and in the supply chain—that were problematic in a system held together with extra work and deft troubleshooting.
Pre-pandemic, supply chain problems had a beginning and an end, with firefighting in between: “Maybe a plant was in an area of an earthquake, or there was a fire in a facility, or a tool broke,” says Uhlenbecker. “But it was normally, from a timing perspective, a very limited event. It could have been a disaster event, like the flood in Germany, but limited. And then you either build up or you have other capacity. You can shift, you get approval to dual source and you work with your supplier—and if required, your customers.
“Now it’s different. Because it’s not going away.”
Uhlenbecker sees the relationships between OEMs and suppliers shifting in a positive direction to adjust to the ongoing persistence of supply chain problems. Where before OEMs and suppliers would put together an on-the-spot task force to work through and resolve a specific issue, now “we have a permanent task force. We have permanent, regular almost daily calls with some of our OEMs to manage the complete supply chain” and decide, early in the value chain, which SUV or sedan or pickup will take priority with the parts (especially semiconductors) that are available, he says.
Brose, which manufactures automotive doors and liftgates as well as interiors and drives, also works with startup automakers in the EV space. Uhlenbecker says startups have a more give-and-take relationship with their suppliers, which he sees as an opportunity for working differently, recasting relationships with traditional automakers.
For example, “I have pushed the organizations I’ve led to work with Tesla because they challenge you,” says Uhlenbecker. “They have become more and more a regular OEM, but what they’ve kept is speed and agility.”
With a legacy automaker, he says, “normally you have a quotation coming in. And then you have to go through the whole different phases, and your SOP (standard operating practices) might be three or four years from now. With a Tesla, it can be a year or even less because they don’t wait until they do a midcycle action or the end of a program. If they feel there’s a good part and you’re a good supplier, they bring you in the middle of whatever they produce right now. They have a completely different mindset. And that’s the mindset we have to adopt.”
CHALLENGE 2: Continuing Semiconductor Shortage
Two words: “flippin’ disaster.” In March 2020, as the pandemic raged, automakers shut plants, slashed forecasts and canceled semiconductor orders. With excess supply on hand, semiconductor manufacturers began looking for other customers—and soon found them in consumer electronics, which had seen an uptick in demand from the citizens of the world newly marooned at home, ordering new phones and upgrading their personal palaces with smart devices.
Consumer electronics “took all of the wafer capacity, and now the automotive industry has to wait because they share the same supply chain,” says Crockett. Even as prices rise, electronics companies are to some extent willing to negotiate with shipping companies to keep their premium berths.
Production and assembly capacity is limited, overwhelmingly, to factories in China and Taiwan and constrained by the same worker and materials shortages plaguing other manufacturing operations around the world. Texas Instruments has announced plans to build the first of two wafer fabrication plants starting in 2022, but wafer production is not expected to start until at least 2025.
Even if chipmakers wanted to increase capacity tomorrow, “the issue now is equipment lead time,” says Crockett, noting that the current wait for delivery of semiconductor production equipment is six to nine months.
Daniel Davenport, senior director of automotive at consulting and information technology firm Capgemini, says another disadvantage that traditional automakers have in securing semiconductors is that they are working off of “slightly outdated” chips. To upgrade in some cases requires redesigning and recasting vehicle systems.
“Semiconductor plants really don’t want to restart old systems,” says Davenport. “They want to move into the now. That could be a problem, and it could also be an advantage for any of these [EV] startups designing their systems from the ground up.”
The current installment of the semiconductor shortage may re- solve by the end of 2022, but further crises await as chip demand proliferates with vehicle electrification and more connected and autonomous features.
Brose’s Uhlenbecker says that while semiconductors currently hold about 4% of the value of a new car’s bill of materials, predictions that it will rise to 20% of BOM by 2030 do not seem off base, as the number of semiconductors in EVs vs. basic gas-powered cars are “much bigger than a factor of 10.”
“I believe there needs to be a concerted effort to really understand what the demand will be in the next five years, and then build it up,” Uhlenbecker says. “What will we as an industry globally need, in 2023, 2025, 2030? And then who’s investing in it? These are sig- nificant investments suppliers and governments have to make.”
Mark Granahan, CEO and founder of iDEAL Semiconductor, a Bethlehem, Penn.-based power semiconductor startup, predicts the global semiconductor market, now around $425 billion, will be “close to a trillion dollars as we move into the next decade.”
If automakers are unable to get the chips they need, they will look to sub in lower-end chips in some vehicle systems, degrad- ing performance, predicts Granahan. “There’s a lot of sleight of hand,” he says, drawing a parallel to the hand tools industry converting to lithium-ion technology, but then subbing in older technology in its lower-end brands when the emergence of EV battery manufacturing suddenly created a “huge supply issue.”
A Manufacturer Responds
Though shortages are hurting everyone, Mike Bloomgren, senior vice president at automotive supplier Molex, can’t help but feel a twinge of satisfaction watching the semiconductor shortage ruffle OEMs’ feathers. He’s used to the big auto companies calling the shots and suppliers scrambling to make it happen.
“Part of me smiles because I think the automotive industry is getting what it deserves,” says Bloomgren, who drives Molex’s transformation strategy. “I think chip suppliers are saying: ‘Hey you guys said “stop” a year and a half ago.’ And we pivoted, and we sold our capacity to cell phone people, laptop people, monitor people. And you know what, they’re also willing to pay more. And now you come back and say, “Hey, I want my supply.” ‘Well, we sold your capacity. And if you want it back, you’re going to have to pay more.’”
Bloomgren guesses chips will be his own company’s biggest challenge in the next year. Molex is a Tier One and Two supplier of connectors, cables and antennas. But he also sees the semiconductor problem working itself out in the course of 2022, with billions of dollars of investment in new manufacturing and assembly capacity in the United States and elsewhere.
For the time being, however, “it is impacting weekly schedules,” he says. Customer orders that have to ship by Monday change on Friday, as the availability of chips change, and with it, the vehicles that can be manufactured and the supplies needed. “It creates that tension in the plant. It’s, ‘I gotta shift from making these to these or stop or start.’ Those are daily battles, and we’re anticipating that’s going to go on for the next year.”
Something’s got to give. “We’ve intentionally decided to carry more inventory, so that we’re able to respond to these shifts in demand on shorter notice,” he says. “But, I mean, we’re having serious discussions with our customers. We’re trying to say, ‘We’ve got to share this—you want me to respond quickly, but I just can’t add another line over the weekend. So, I have to carry inventory. So, that’s a cost that has to be shared.’
“They haven’t thrown that [idea] out. But I will tell you that they’re not opening their checkbooks.”
CHALLENGE 3: The Need for More Manufacturing Flexibility
Supply shortages, especially in semiconductors, have caused more stopping, restarting and switching of production runs.
More consumer choice (the number of U.S. car models is expected to double by 2025) plus a precarious balance between internal-combustion engine (ICE) and electric vehicle platforms is creating demand for parts and production lines with more flexibility.
Aluminum supplier Constellium, with the help of British government funding, is working with BMW and Volvo on more flexible design and manufacturing capabilities for EV battery boxes, in both low and high volume. The production lines they are designing have the same basic processes for each box but with adaptable equipment can manufacture a range of sizes and quickly scale up or down as demand dictates.
“This will lead to a lot of variance in the weight of the battery, the cost of the battery,” says Martin Jarrrett, global director of automotive structures and industry business at Constellium. “It also helps to de-risk the supply chain. As demand and components availability fluctuate, you’re much less reliant on a single model.”
Parker Hannifin, which supplies components for automotive manufacturing equipment, has prioritized developing flexible components adaptable to a variety of machines for a range of uses. “A lot of our customers have been challenged trying to find more flexible platforms to use,” says Brad Manwaring, global industrial market manager at Parker. “And that’s been a huge feature of what we’ve been doing: creating machines that are easily transferable.”
CHALLENGE 4: COVID Is Still Here/Labor Shortage
Not all workers returned to their manufacturing jobs after the first waves of COVID. Some took early retirement. Some saw wages rising in other sectors and found jobs there.
“We are competing against companies like Amazon, for example,” says Uhlenbecker, noting that Brose has seen considerable labor attrition since the pandemic, especially in Michigan. Amazon has fullfillment centers near Tuscaloosa, Ala., and in and around Detroit, both areas where Brose USA has flagship plants.“I just talked to someone who started there, and they’re making a $4,000 signing bonus and $21 per hour for working 12 hours a day, three days a week,” says Uhlenbecker. “And you know, that’s pretty good. We already had increased our hourly wages in our plants, because we had to attract people. And so, this will increase the labor cost [further].”
Uhlenbecker calls the worker shortage “a lingering situation.” COVID is not going away, and companies need to be flexible with work-from-home arrangements. That is feasible for white-collar workers but not for Brose’s shop-floor workers with tight timelines and last-minute customer asks.
Jason Puckett, president of Toyota Motor Manufacturing Alabama, said in an email that he doesn’t see the labor situation “ever going back to pre-COVID times … The workforce has higher expectations with hours of work, flexibility and the work environment.”
Brose is boosting opportunities in its apprenticeship programs—aiming for the right skill sets for high-quality jobs in all of its workforce—and automating in strategic areas including welding, mobile maintenance, preventive maintenance and digitalization of machines to gain data.
At Molex, Bloomgren says the adoption of remote work technology has brought opportunity for recruiting electronic and software engineers not just in the Detroit area, but on the East and West coasts. “We’ve got a number of software people up in Canada as well, in the area where BlackBerry used to be.”
In June, Toyota Alabama moved from temp-to-hire for production roles to a direct hiring model and raised its starting wage to $19 an hour, while “continuing to improve benefits, perks and the team member experience,” says Puckett. “We have moved toward skilling up our team members and doing more projects internally, ourselves. This increase of skill will help us as we move forward with future challenges and opportunities.”
He adds that “with the challenges … concerning the workforce, the supply chain and the future electrification of mobility, our team members will be the future. We need to attract and retain the best diverse talent. We need to offer to continue their education and development to meet the needs of the future.”
CHALLENGE 5: EVs Emerging
Electric vehicles got a boost in 2021 with the Biden administration backing alternative-fuel tax credits and promising to invest $5 billion in federal dollars to boost the sparse U.S. charging infrastructure. Tesla hit a one-million vehicle annual production rate in the third quarter. Ford and General Motors have put their weight behind an electric future with battery partnerships, announcements about all-electric lineups and new production and R&D facilities focused solely on EVs (including Ford’s Blue Oval, GM’s Factory ZERO).
Steve Patton, Americas mobility sector leader for consulting and financial services firm EY, says “duality of growth is needed” for OEMs and Tier One suppliers to support existing ICE production while investing in the R&D needed for an electric future. “The balance is important to make sure current operations are able to fund future needs,” he says. EV startups that will lead not only have a strong product idea, but also “solid plans around fiscal discipline, ecosystem partnerships, business infrastructure, customer support and regulatory compliance.”
Both Uhlenbecker at Brose and Bloomgren at Molex think their companies are in a good position to straddle the ICE and EV worlds. Molex’s connectors and cables have new applications in EVs as well as traditional vehicles, and an innovation challenge will be fitting more in a smaller space. In 2018, the company acquired antenna maker Laird and with it, technology that has applications in vehicle connectivity and smart device integration.
“[EVs] are absolutely a growth market in the standpoint of just our standard connector content,” says Bloomgren. “The value almost doubles.” Power connections in electric motors require larger connectors with higher current. “The [power] volume of that connector is bigger, so the dollar value goes up, four or five times.” More cameras, radar and lidar on a vehicle require more connections, too. In another area of the business, Molex is working with audio manufacturer Bose on developing sensors that cancel out road noise (electric vehicle drivers notice more road noise because there’s no gas engine to drown out the sound of tires rolling on asphalt).
At Brose, Uhlenbecker is philosophical about the future. At the Global Leadership Conference recently, he says, much discussion centered on how to run two businesses within one: a conventional business run as efficiently as ever, “but getting some money out of it.” And a startup, with a different mindset and organizational structure. “We fortunately don’t have that extreme situation.” The spaces Brose plays in translate to EVs perhaps even better than to ICEs, says Uhlenbecker. And the EVs bring new ways of working.
He returns to Tesla, as forecasts in automotive tend to do: “They work a lot of things in parallel and expect that also from the supply base, understanding that there can be risk. Because they understand that, there can be an open discussion: ‘It’s not your fault, we just have to find a solution.’ It’s a very different approach. And I believe you will see that more and more from our OEMs.”