Electrifying the Auto Supply Chain

Dietrich: 00:07

We really can't predict the future because nobody can. What we can do though, is help auto manufacturers recognize, prepare for in profit from whatever comes next. Auto Supply Chain Prophets gives you timely and relevant insights and best practices from industry leaders. It's all about what's happening now in the automotive supply chain and how to prepare your organization for the future, because the auto supply chain is where the money is.

Jan Griffiths: 00:40

And welcome to another episode of Auto Supply Chain Prophets. And with us today is Paul Eichenberg. Paul is known as the guy who turns automotive technology into growth. Paul, welcome to the show.

Paul Eichenberg: 00:53

Thank you very much.

Jan Griffiths: 00:55

Paul, tell us a little bit about your story. What is your story and why this passion for the automotive supply chain and automotive technology.

Paul Eichenberg: 01:05

I am a 30-year veteran of the automotive industry. Most notably, I spent eight years as the VP of Corporate Development and strategy for Magna powertrain and Magna electronics. I was responsible really for three times growth for the business over the course of an eight year period that I was there in that role that really put me at the forefront of the major disruptions that our industry is going through today. In those roles, what I was really focused on is positioning magna much more in the electrification space. With that experience was the foundation of what then became my consultancy. That's the foundation of my background and why myself and my team are so passionate about really taking automotive technology and turning it into growth.

Cathy Fisher: 01:57

Excellent. Paul, we're really interested to understand from your perspective, as we transition, especially into electric vehicles. We see the complexity of the automotive supply chain changing, maybe less complex, maybe complex in a different way. What are your thoughts on the transformation of the automotive supply chain relative to electrification?

Paul Eichenberg: 02:17

Well, I think if we just look at electrification, and the change associated with going from an internal combustion engine to electric vehicle. You've got to look at well, what's happened over the past 30-35 years in our industry, our industry has been driven by one thing, and that's continuous improvement, Lean thinking, lean value chains, etc. So any of the automotive exec that's in a position, a leadership position today, what have they been programmed to do? Oh, I'm continuously improving what I'm doing value chains haven't changed. So one of the examples I would use is, the value chain for the water pump to an engine hasn't changed in the past probably 40 or 50 years. What you have is very mature, we've driven cost out of the system, etc. But now walks in a whole new disruption, a whole new set of technologies. So if we just take, for instance, the value chains associated with a battery pack or battery cells, the engineering around these systems hasn't even started to be optimized. The focus is really how do we get the technology into vehicles? They have very different value chains. Where is all the battery technology being developed today? Really, it's at the, you know, the center of the consumer and industrial electronics industry. And where's the home of those industries? Well, that's in Asia, you have a whole set of the technology that's not being developed here, like you would expect a water pump for an engine. And then the other thing that I would tell you is that you have all the new entrants, so it's not only new entrants, like LG, CATL, or Panasonic, who are bringing battery cell technology. It's new entrants, like what we have, like Tesla, Rivian, Local Motors, Faraday futures, Canoe, you name it, the list is extensive. What we have is these new entrants, and with these new entrants come a whole series of challenges. The complexity for the value chain, based on its immaturity, versus what executives are used to is very mature value chains, really adds a whole new complexities that really most organizations we find, are just not prepared to deal with.

Cathy Fisher: 04:46

That's really fascinating because we hear so much about less parts in the EV vehicle than there is in an ice vehicle. So people think, Oh, the supply chain is going to be so much simpler, but it sounds like what you're really saying is actually there is a complexity to it. And we have to understand it because it's not a traditional complexity. It's a new complexity is that true?

Paul Eichenberg: 05:10

That is true specifically, is you start dealing with these new entrants and these new organizations, what you really find is these organizations like Tesla and rivian, really having huge advantages. For instance, an electric vehicle requires 60% of the manufacturing footprint that internal combustion engine vehicle does. Then another huge advantage that you have is there's no dealer network for these organizations. Volvo's basically said, we're only going to be supplying EVs starting in 2030. And GM has come out and said, Hey, we're only going to be supplying EVs by 2035. Here is a huge advantage that these new entrants have, in addition to their already aligned with that future OEM business model. And we haven't even started to talk about how autonomous vehicles and all the data that's collected from autonomous vehicles will be sold in multiple ways, just like Tesla's doing today. These EVs really are the future of the industry. However, one of the cons that you have in working with them, and this is where you've got to be able to grant them some grace. And that is, they just don't have the business systems that have been optimized for the past 30-35 years. When you start thinking about it from a value chain standpoint, from a supply chain standpoint, the EDI system and our ERP systems work where OEMs release orders and it's seamless through the entire supply chain. But basically, those systems do not exist with these new entrants. They're just building them. They've got huge problems. As far as releases, they have huge problems with forecasting because they don't have their own consistent manufacturing processes, let alone consistent manufacturing processes from new suppliers. The name of the game is disruption, part of the disruption that they bring is a whole new approach to building vehicles. But those value chains haven't spent the 30 years of optimization like you've seen it your traditional OEMs. And I think that's really one of the challenges that exists.

Terry Onica: 07:27

Paul, I think you're spot on. And one of the other things that I see and I wonder, if you agree to is often some of the new startups coming out, they have a prototype and then they have to go into production. And they may have inventors in the upfront process than it gets into manufacturing. And they may not have necessarily all that automotive background going into production. Do you see that as well, too?

Paul Eichenberg: 07:49

Yeah, I do. If you look at an organization like Panasonic. Panasonic has been doing business in the automotive industry for years, so they do have an advantage over companies like LG. LG has formed a joint venture with Magna. Why? They've got value chains that they can leverage from industrial and consumer electronics. That's very valuable in the automotive space. But then in addition to that, what do they need, they need the systems, the discipline, the experience of somebody like magna. If you look at an organization like LG, LG has not only partnered with magna, but frankly, they're partnering with GM. They've got a JV with GM to make battery cells to do that jointly. Here's an example of a Korean company that has really appreciated the experience associated with working directly with GM working directly with somebody like magna to bring that expertise. But that's not going to be the case for everybody. That's not going to be the case with somebody like rivian, or that's not going to be the case with somebody like CATL. Now CATL is forming deep supplier relationships with all of the OEMs. When it comes to battery technology, I think there's going to be different approaches. And this is really where the traditional supplier has to grant these new entrants, really some grace to understand, hey, it's going to be a bumpy road, they haven't spent 30 years optimizing how this should operate. And thus, we're going to have to be just as much of a coach as it is a willing participant because of the opportunities that they bring and how they're really positioned to win uniquely in this future.

Cathy Fisher: 09:39

So it sounds like from what you're describing the supply chain itself is going to be transformed radically. And really, the relationship that OEMs have with the supply base is not going to be what we've seen in the past, let's say two decades where it's been more or less tier one. Hey, you take care of the system and integration and lining up the down to your suppliers all the way to raw material and manage that. It sounds like from what you're saying that the OEMs are getting a lot more involved? And is that really what we're seeing as the direction for supply chain in the future?

Paul Eichenberg: 10:14

Well, I think there is, we've gone back the past 10 years to look at this data. And I think it's important to understand this. And that is the industry really believes that sub $100 per kilowatt hour is a real critical place for battery technology to reach. And part of the reason why it's critical for the industry to reach that level is because that's the point where you start to achieve cost parity with the internal combustion engine, this is really sort of a critical milestone for the industry. If you go back 10 years, it was over $1,000 per kilowatt hour, you had these huge 30 $40,000 type of penalties associated with switching to an electric vehicle. And that's why we had technologies like range extender vehicles, etc. Because just the cost associated with those battery cells were significant. Now, what's interesting is there was a huge research study done by the ICCT, which is a European think tank, which really focuses on green technologies. And what they did in 2017, is they went out, and they surveyed about 30,000 people to say, hey, when does the industry hit this cost parity? When does the industry hit $100 per kilowatt hour. And frankly, back then in 2017, the thought was, well, it's not going to be until 2030. Now, what's interesting is just last year, GM announced at their battery day that actually they were going to retrieve $85. By the end of this year, you had Tesla, same thing, CATL came out and said they've achieved below $65. And then it was last September, that Tesla came out and said, Well, we've achieved $58. All of that is based on technology, which will be put in place here by the end of this year. And the uniqueness about that is think Well, first of all, it's before the industry ever expected it would happen. But what was really the focus of that, while it was the focus on a couple of different things, one chemistry going into this, I would say the most significant part of that was the optimization of the value chain, the engineering the system that went into that, where Tesla, CA TL GM, with LG, working much closer together in partnership to really say, okay, as we start to increase scale, what's the impact of scale? What's the impact of volume? What's the impact of our design, and how we're starting to optimize the design and our manufacturing systems?

Terry Onica: 13:02

Paul, when you look at going from the traditional internal combustion vehicle, and moving to the EV, how many parts are going to go away,

Paul Eichenberg: 13:11

I think this has a huge impact on the value chain, you look at the additional internal combustion engine. And if we think about it, engine transmission, exhaust fuel and air systems, you start looking at that it's about 550, purchase parts on a typical vehicle. And then if you look in an EV, as far as similar parts, it goes down to about 300 parts. But it's really an apples to oranges comparison, because even as you look at the EV, the types of components are just very, very different. These aren't mechanical components. These are transistors, capacitors, you know, they're IGBT modules, which are really power semiconductors. It's cell chemistry that's not used anywhere else in a vehicle. So it's an apples to oranges comparison when it comes to the types of components and technologies that go into it. That's why these 300 new parts are really introducing completely new value chain suppliers. And that's why you have new entrants like Nividia and Qualcomm and Intel coming into the space in a really big way. And that's why you have organizations like LG and Panasonic, who also bring industrial electronics capabilities and scale from consumer electronics, which gives them just such a sizable advantage is they start coming to the automotive industry. And I think this is again, what we've got to recognize is that it's just a completely different landscape.

Jan Griffiths: 14:47

Paul, what is the one action that our listeners can take away from this? What piece of advice would you give them to ensure that their supply chain is ready to succeed in the automotive EV future, one thing.

Paul Eichenberg: 15:03

What I would say as far as one thing for me is as leadership, this isn't something you can assign to a sales guy or an engineer and say, Hey, go figure this out. This is a conservative organizational effort that has to be led from the top. And if you're not really willing to lead this from the top, and start to recognize that the future positioning of your organization, the future growth, the future success really resides with you in solving this problem, then, frankly, you're not the person for the job. You're not the person for the organization, because this is the type of leadership that's required today. It's not something that you can say, ah, you know what, I'm three years to retirement. I'll let the next guy and now you need to retire today. You need to leave today. If you're not ready to stomach this and take this on, because in three years, it's going to be just too late.

Jan Griffiths: 16:01

There it is. Had one beautiful piece of advice. It might be hard for some people to hear that but we all agree with you, Paul Eichenberg. Thank you very much for joining us today.

Paul Eichenberg: 16:14

My pleasure. Thank you

Dietrich: 16:20

Are you ready to find the money in your supply chain? Visit www.autosupplychainprophets.com To learn how, or click the link in the show notes below.