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Fuel for Thought: Automotive supply chain and technology themes for 2023


The end of cheap capital – combined with worsening
macroeconomic conditions, the war in Ukraine, raw material
uncertainties, and the continuing chip shortage – will combine to
mark 2023 as the beginning of an era when demand-side
considerations replace the current supply-side fixation.

Already, we are seeing these conditions impact the burgeoning
mobility startup ecosystem. But in a larger framework, the industry
will continue its pivot away from internal combustion engines
toward electrified vehicles in all formats – as well as the
exploration of connectivity and monetizing the reams of data
produced as the industry seeks more profit pools.

CES 2023 indirectly underscored many of these
conditions and uncertainties. A shirking of nebulous concepts in
favor of production-ready products was predominant. Though visions
of unmanned pods and shuttles made appearances, many brands focused
on very near-term product developments.

For instance, Harman presented a handful of
production-ready products in the in-cockpit experience space, many
of which already have OEM installation wins. Bose brought the next
generation of 3D audio and EV sound enhancement on display through
production vehicles. Blackberry displayed Ivy – this time with
automotive-grade hardware ready to launch with Dongfeng Motors.
These examples paint a picture of companies aiming to make money
today, rather than focusing marketing dollars on abstract visions
of the future.

Suppliers facing mounting pressures

A confluence of factors are challenging suppliers, and many
involve externalities beyond the control of all but the most
resilient.

“The macro environment is not conducive to success for those
suppliers who don’t have a good handle on costs, or a degree of
operational flexibility to manage the headwinds,” said Matteo Fini,
Vice President, Automotive Supply Chain, Technology and
Aftermarket, S&P Global Mobility.

This is especially true in Europe, where high energy costs,
combined with stagnant volumes and rising financing costs, will
create major pressures for suppliers. The risk factors appear
heightened in Germany, where smaller Tier 1 suppliers – those with
revenues between EUR100 and EUR500 million – and Tier 2 suppliers
seem the most exposed.

In recent months, German suppliers Ruester (vibration/damping
products) and Dr. Schneider (ventilation and interior trim parts)
have filed for insolvency; Ruester faced liquidity problems
following two acquisitions and rising input costs. This may become
a theme in 2023.

With soaring energy prices, energy-intensive parts of the supply
chain, such as metal foundries, that were already overstretched
from investments contingent upon a return of pre-crisis volumes
will have to reconsider their priorities for survival.

Semiconductor shortages far from over

Although demand-side softness will bring some relief in 2023,
the structural capacity deficit in semiconductors will take several
years to solve.

A slowdown in other chip-hungry industries like telecoms and
consumer electronics meant some semiconductor capacity in the
sector was allocated to automotive in H2 2022. This will continue
early into 2023.

While there was plenty of investment in added capacity in 2021
and 2022, it takes time to bear fruit. The lead time for equipment
increased from one to two quarters to between two and
two-and-a-half years. The investment and CAPEX boom in 2022 will
not result in significant additional capacity before 2024 or
2025.

“Aggregate demand conditions are deteriorating globally due to
the war in Ukraine, inflationary pressures, and generally
macroeconomics. These conditions may mask the capacity issues in
2023, but no one should be fooled,” said Jeremie Bouchaud,
Director, Semiconductor, E/E and Autonomy practices, S&P Global
Mobility. “The average chip content per car is increasing at an
accelerated rate because of electrification. The capacity deficit
will become visible again as soon as demand from other industries
picks up.”

Analog chips will remain the bottleneck, as the number of analog
chips per car increases faster than the number of MCUs.
Additionally, analog chips don’t shrink as well as SoCs or
microcontrollers. This means production remains on mature process
nodes where there is not enough capacity and not enough
investment.

To mitigate semiconductor risk, we expect that OEMs will rethink
the way electronics are designed in their vehicles. Expect
increasing standardization of chips and reduced fragmentation. We
expect OEMs to insist their Tier 1 suppliers use fewer custom chips
or chips designed for single applications – also known as ASICs and
ASSPs – and use more general-purpose chips.

ADAS, Autonomy and Robotaxis

Though some may see the dissolution of Ford and VW’s joint
investment in Argo AI as a warning sign, the idea of autonomous
taxis will continue forward – especially among Chinese OEMs.

“At the moment, tech companies like Waymo, Cruise, and Baidu are
seen as winning the race. But first-mover status won’t confer much
sustainable competitive advantage,” said Owen Chen, senior
principal analyst for Autonomy in China with S&P Global
Mobility. “The first part is only the technological demonstration.
To deliver a robotaxi future, the much more difficult piece to
execute is the commercialization.”

At issue: Neither investors nor the capital markets will foot
the bill for initially meager ROI. Entering the commercialization
phase, challenges will emerge from robotaxi tech peers like Pony
and WeRide, but also from the OEMs. Tesla and XPENG are targeting
the delivery of robotaxis in 2023, but mobility providers like
Waymo and Cruise (part of General Motors) will still lead the way
in these early years.

The automakers’ advantage? They already are operating a large
ADAS fleet complete with Level 2+ applications. As such, they are
training the software with data that comes free of charge from the
millions of vehicles already on the market. By contrast, robotaxi
tech companies are burning cash to collect data from a far smaller
pool of vehicles on the roads.

Trained software, built on real-life data, is a more scalable
path forward, and will be augmented by simulation to cover edge
cases. However, it has not yet been proven that ADAS on-road
content can be successfully pivoted to L4 on-road deployment.

Considering commercialization and productization issues, cost
discipline and awareness is a bread-and-butter competency of the
OEMs. If Tesla and XPENG can demonstrate this approach in 2023,
we’re going to see more legacy OEMs jostle for position in the
robotaxi marathon. Tech companies like Waymo and Baidu must have
enormous cash reserves to sustain a position in the race before
profits take off.

Luring automotive software talent

Consumers are adapting to the concept of tech-focused
transportation. The pressure to deliver new groundbreaking
technologies will be enormous for OEMs. But with software spend set
to grow at a CAGR of 7.7%, the requisite skill sets needed by OEMs
won’t come cheap.

Furthermore, is the automotive sector an attractive enough
market to attract top talent in the highly competitive software
engineering sector, when facing off against tech companies and
their own supplier base? Already we’ve seen VW’s CARIAD – an
attempt to create a company with big tech behaviors – struggle to
deliver.

“The automotive sector has a couple of obstacles in its path if
it wants to develop its own software ecosystems,” said Dr. Tawhid
Khan, Director, Software practice, S&P Global Mobility. “The
industry is bound by process and legislation, and this doesn’t make
the sector particularly attractive to young software graduates.
Finding a way to attract the necessary talent to the industry will
be key.”

The ROI of connected services

The tumultuous economic and supply chain situations of the
previous few years have put a focus on margin performance by
automakers, which have soared to record highs. But OEMs hoping to
continue those impressive results will struggle as demand for new
vehicles faces headwinds.

The new area for margin growth: add-on features and
services.

These connected services and paid updates can achieve a margin
of greater than 70%, which makes this space incredibly attractive
for an industry seeking cover from the cyclical nature of selling
vehicles. This new revenue stream has attracted the attention of
Wall Street, although projected long-range revenue targets may be
ambitious.

The pre-COVID years involved automakers standardizing
connectivity hardware in regions that don’t traditionally support
higher option pricing, as well as the release of new generations of
telematics control unit (TCU) hardware that will keep a connection
active much longer.

The last three years have seen releases of innovative
service-oriented business models beyond those offered by Tesla,
with leading automakers leveraging the flexibility of these
services to adjust packaging, pricing, and availability of
features.

2023 is expected to be the launching pad for similar features,
with much broader use cases, from mainstream follower automakers.
This development will be critical to moving the concept of built-in
upgradable content from headlines to reality.

Raw materials supply and BEVs

The auto industry’s need to increase annual raw materials
acquisition from its current level of 0.29 Terawatt hours (TWh) of
lithium-ion batteries to about 3.4 TWh by 2030 will place
incredible stress on the sector supply chain.

In addition, the US Congress’ passage of the Inflation Reduction
Act (IRA) in 2022 could reshape sourcing of and add complexity to
obtaining battery raw materials, while near-term inflation could
precipitate strategy changes.

The raw materials deficit, how the industry addresses that, and
the additional implications for sourcing decisions on the carbon
footprint are vital considerations. But sourcing these raw
materials can’t be secured in a laissez faire manner, as ESG
considerations are gathering momentum.

“The IRA has sparked many OEMs and suppliers into tearing up
their battery playbooks for the US market to secure access to
manufacturing subsidies and purchase subsides for their consumers,”
said Graham Evans, Director, Battery, Charging, Propulsion, and
Thermal practices, S&P Global Mobility.

Soaring inflation is putting pressure on consumers, which could
result in an OEM pivot to address the changed macroenvironment.

For example, does this mean a switch to lower-tech battery
solutions (and implicitly lower cost structures) such as
Lithium-Iron-Phosphate cathode chemistries to secure higher
margins? Or could it mean increasing demand for batteries with a
lower capacity and thus compromising vehicle range?

Wireless charging and battery swapping

Presently, only Mainland China has seen any demand for battery
swapping in the electric vehicle space - and that is largely due to
government incentives and geospatial issues in cities that have
driven its success.

Nio, a key player in China, is launching in Europe and has a
handful of stations in Norway – so that market will be an
interesting petri dish for swapping in Europe. In the US,
California start-up Ample is attempting to drum up interest in the
fleet sector it’s targeting.

While BMW and Hyundai (with WiTricity’s Halo), and Volvo (with
InductEV), have already dabbled with wireless charging, widespread
adoption of the technology has the potential to challenge the
current stand-off between battery size and range. The technology
also suits fleet applications well, such as taxis.

“Consumers could charge more conveniently at home, and adopt
‘splash and dash’ behaviors if dynamic wireless charging becomes
widespread,” said Graham Evans, Director, Battery, Charging,
Propulsion, and Thermal practices, S&P Global Mobility. “But
mainstream consumers may not be prepared to pay a premium for such
convenience technology when the industry has already converged on
the charging plug.”

Large-scale swapping has many other barriers in its way: In
addition to the propensity for home charging, there is the lack of
governmental directive, and the need to homogenize battery packs
which would see OEMs and T1s surrender some of their intellectual
property.

Consumer- and restricted-access charging could get a boost from
DC wallbox chargers in the domestic charging sphere. These offer a
middle option between slow AC chargers and the superfast public DC
chargers. Their wider deployment has potential to shift the balance
in the domestic vs. public charging conundrum. Furthermore, there
are models available that facilitate V2G (vehicle to grid)
operation, which could prove more appealing in these energy
conscious and cost-sensitive times.

Euro 7 driving powertrain planning

The proposed Euro 7 emissions regulations carry huge
capital-spend implications for technology fitment on future
internal-combustion vehicles.

The watering down of Euro 7’s initial framework will cause many
OEMs to reconsider the rapidity of their electrification rollouts.
Do the less stringent Euro 7 regulations now make it worth OEMs
investing in one more cycle of ICE updates? Or does it make more
sense for an OEM to focus on electrification, and splinter their
ICE and EV businesses as Renault and Ford have done? And how does
this affect a supplier base ramping up to support E-motor
applications?

“The tightening of electrical steel capacity could also impact
the electrification rollout,” said Graham Evans, Director, Battery,
Charging, Propulsion, and Thermal practices, S&P Global
Mobility. “A shortage of e-steel could mean that a planned product
mix could change in the short- to medium-term in favor of ICE and
hybrid applications, where there’s much less demand for steel, in
particular high specification (extremely thin) electrical
steel.”

Meanwhile, the desire to squeeze more range and efficiency from
existing BEV parameters should prompt more in the industry to
switch to silicon carbide (SiC) inverter technology.

SiC inverters are more efficient, can also run at higher
temperatures and power output for a longer time. The tradeoff is
cost. Major power electronics suppliers such as Marelli,
BorgWarner, and Delphi Technologies have been increasingly active
in this area recently, developing their products and securing
orders – which suggests that we’ll see increasing SiC inverter
adoption in the short-term.

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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.



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