Tariffs, EV Struggles, and Policy: Can Auto Suppliers Keep Up?

[Transcript]

[00:00:00] Jan Griffiths: This is the Auto Supply Chain Prophets podcast, and we are on a mission to bring you the latest insights and thought leaders leading the charge on supply chain transformation in our beloved automotive industry. This podcast is powered by QAD and AIAG. I'm Jan Griffiths, your host and producer. Let's meet your co-hosts.

[00:00:27] Jim Liegghio: I'm Jim Liegghio from AIAG.

[00:00:29] Terry Onica: I'm Terry Onica from QAD. Let's dive in.

[00:00:36] Jan Griffiths: Hello, and welcome to another episode of the Auto Supply Chain Prophets Podcast. Let's check in with my cohost, Terry Onica. Terry, what you been up to?

[00:00:44] Terry Onica: Well, we hit Fred Coe on last November, and we had talked about that EDI survey that's going out to thousands of auto suppliers. We all know EDI is a big deal in the industry and so we're currently wrapping that up, and I hope by the April timeframe, we'll have the results of that for everybody. So, stay tuned.

[00:01:01] Jan Griffiths: Yeah. And we'll put a link in the show notes because if you want your voice heard and to have an impact in shaping the future of EDI, now's the time to do it. Alright, let's check in with my other co-host, Jim Liegghio from AIAG. Jim, what you been up to?

[00:01:16] Jim Liegghio: Well, Jan, we've got a lot of events planning underway right now at AIAG. We've got a full slate of events this year, 2025. It's gonna be very, very exciting as our events always are. There's a lot happening in the industry. We're looking forward to bringing that information to our audiences. Events have been getting better and better year over year. So, we've got a Forced Labor event in the spring coming up, and then we've got our Midsummer Supply Chain Summit, which is fantastic. Downtown Detroit this year, new venue for us. We've got a charity golf outing coming up, which benefits children with cancer through Camp Quality—one of our partners. And then, later in the fall, we have our banner two day, October Quality Summit, early October. And then, we round out the year with Customs and Trade Town Hall, and we have an event in Mexico again this year, a supply chain event in Mexico for the third year in a row, which has just been a spectacular event the past couple of years. So, a lot to talk about. Looking forward to rounding out these events this year and getting into it with our membership out there.

[00:02:06] Jan Griffiths: Wow, a lot going on. I bet you that Customs and Trade Conference is gonna be real interesting this year.

[00:02:12] Jim Liegghio: Yeah. Too bad it wasn't next week, but we'll have something to talk about in November for sure.

[00:02:16] Jan Griffiths: Well, I'm exhausted. I am truly exhausted with the tariff talk. One minute it's on, one minute it's off. As you know, I work mostly with suppliers in the supply chain. What do you do? What do you not do? We can't change supply chains in the auto industry that fast. So many things that we have to consider, and from a leadership perspective too. Leaders have to provide calm to the chaos. And this is a very difficult time. It's a very challenging time. And that's why I am thrilled to have on the show today our favorite Chief Strategist, Paul Eichenberg. Paul, welcome back to the mic.

[00:02:55] Paul Eichenberg: Thank you very much. I'm glad to be here.

[00:02:57] Jan Griffiths: Paul, so much going on in the auto industry. Where do we even begin? Give us the three big drivers of change, of disruption, of what's happening in our world right now? What are the three?

[00:03:12] Paul Eichenberg: Yeah. I think for the typical supplier, there's three major changes that we're seeing: First is centered around the tariffs. It's this move from the trend towards globalization that really, in my career here in the industry, has been the focus of the past 30 to 40 years. It's globalizing the industry. So, the industry is now globalized, and now with tariffs we have this more protectionist mindset or a more of a regional mindset, which is really driving a tremendous amount of change in the value chain and how the industry operates. So, I'd say that's the first thing, this move to local.

The second thing is the regulatory environment. And there's two areas there of real change that's taken place in the regulatory environment: First, we have everything that's happening around EVs and the move towards electrification. So, the shift from the Internal Combustion Engine to the EV.

That's a global trend that's taken place, but obviously here in the US, we have the impact of the new administration and the move of the administration to protect the fossil fuels and the powertrain associated with that. So, that's one impact that we have in the immediate regulatory environment.

And the other activity we have in the regulatory environment, which is, again, based here in the US, more so than what you see in other economies, but this softening regulatory environment and what it ultimately means for autonomous vehicles. So, when I look at the three major changes, first it's the move towards localization and the impact of tariffs. Second of all, it's the shift towards electrification. And then, finally, the third thing is the regulatory environment around autonomous vehicles.

[00:05:09] Jim Liegghio: Okay. Looking forward to getting to autonomous vehicles a little bit later on. Paul, really curious to hear your take on that in just a little while. Meantime, you know, it's noticeable that the EV topic in general is kind of a hot potato, right? Adoption rates seem to be down, again, depending on who you ask and who's interested. And the early adopters, obviously, they've adopted, right? So, we're kind of in that law to begin with, but where do you see the EV adoption curve right now where we sit? What do you think for the short term and let's say midterm outlook, what does that mean for that market?

[00:05:39] Paul Eichenberg: Yeah. Well, I think one of the things that is still significant is obviously what's happening here in the United States. Since the Trump administration has made their announcements, and obviously we've had the inauguration and the registration has started their activities. Still, there's quite a forecast for electric vehicles here in North America. So, if you look at the forecast, if you look at S&P, if you look at some of the other forecast tools that you have available in the industry, still they're expecting 30 to 35% battery electric vehicles by the end of the decade. So, what do you have going on here? You have, over the past four or five years, you have this big shift taking place. You have GM that came out five years ago to say, "Hey, we're planning for an all-electric future." They haven't changed that. They're all electric future comes in 2035. So, they've got a portfolio of products that they're pushing into the market that really has a lot of momentum around it. And it's not just them, but it's Toyota, it's Hyundai. It's Ford. It's all the OEMs have this dramatic push that's taken place, and it's again, not just here, but it's in Europe and it's in China. China is moving very quickly towards 50% of their vehicles being some type of electrification, whether it's a plug-in hybrid or a battery electric vehicle. They're very aggressively moving towards battery electric vehicles, and by the end of a decade, they could be as much as 60% of their market could be these battery electric and plug-in hybrid vehicles. So, a high-level electrification there. And Europe is very aggressively moving in the same direction. Right now, there's a lot of discussion going on with EU about will there be a softening of the fines that are associated with that as the OEMs are aggressively moving? But I think when we step back and we look at, well, what's the macro trend? What do we think is really gonna happen in all these major economies except for maybe the United States? By the end of the decade, you could easily see 50% of the market being these battery-electric vehicles. And for our suppliers that are impacted by that, that is a significant issue that the suppliers have to deal with. And I just share this from my experience over the past 10-15 years for my time at Magna, my time working with other suppliers. Even five years ago, suppliers were making a tremendous amount of money around internal combustion engine components. Now, in North America where you have 10% of the market being battery electric vehicles, you have more than 20% in Europe. As you have that, the efficiencies of making those parts are no longer there for the supplier nor is the supplier have enough volume on the electrification side to really be making money. So, the industry is really in a difficult time, difficult because suppliers find it very hard to make money at this stage of the transition. And the transition could be drawn out longer as a result of these policy and the shifting policy back and forth between ICE and battery electric vehicle. That would create a very costly scenario for suppliers moving forward. So, this is a huge issue for suppliers to deal with. It's well known that the OEMs are going through administration and say, "Hey, we have to be more aggressive when it comes to electrification." Not only for the impact on the suppliers, but their own impact. Feeling, "Hey, this is the global direction. We have to be tied to that global direction for our own competitiveness, to build scale, and to build our own competitiveness." So, these are the issues that the industry is dealing with when it comes specifically to the regulatory environment around electric vehicles.

[00:10:09] Terry Onica: So, Paul, how do you see the regulatory environment changing for electric vehicles?

[00:10:14] Paul Eichenberg: So, I think what we're gonna see when it comes to electric vehicles is a change around the IRA, which was the Inflation Reduction Act and was a major element of the Biden administration's push towards electric vehicles. And there are really a couple of different elements of that. There was, first of all, credit that went to the individual who was buying. The electric vehicle and that incentive was broken down into an element that went into early adopters, but then also for the OEM that had a supply chain that was local when it came to things like battery production and power electronics, et cetera. So, there's a very good chance that goes away. But there was two other elements of the IRA, one was around building infrastructure. First, the infrastructure to localize those supply chains, and the other was the infrastructure around charging. In the infrastructure, specifically in localizing that supply chain here in the United States or within friendly economies, I think is more than likely gonna stay. And the argument for that, at this point in time, is a lot of that infrastructure is going into Republican-leaning states, like for instance, Georgia, and Tennessee, where there is a lot of infrastructure going in around these new energy jobs, specifically to build battery plants for specific OEMs and then a supply chain that's not only supported by the OEMs, but also supply chain that's supported by these new suppliers.So, as a result, I think what you're going to see is again the elimination of this credit that's associated with first time buyers, but you're going to continue to see the infrastructure investment is the economy shifts to these new energy type of jobs.

[00:12:38] Terry Onica: Paul, you made an interesting point. What do you think about the structure for charging? Where do you think that's gonna go right now?

[00:12:44] Paul Eichenberg: I think, again, it may not be an investment that's going to be as aggressive as maybe what you had under the Biden administration. It continues to be a growing market. And again, if you're gonna have an industrial policy that supports these new energy or new energy economy, that's something that's gonna have to follow with it.

So, I think it all depends on does the current administration. If they honor the idea of the infrastructure that's going in place around the battery, the local supply chain, et cetera, for these electric vehicles, I think you'll see the charging infrastructure piece of that will stay in place also as a result of just the industrial policy that's coming from the new administration.

[00:13:39] Terry Onica: So, what I'm hearing from you, the ship has sailed, we're gonna get some headwinds, but the ship's gonna keep sailing. We're already vested in the direction.

[00:13:48] Paul Eichenberg: Yes, exactly.

[00:13:49] Terry Onica: So, Paul, where do you see the demand's gonna be. So, in the automotive industry, for years, all my career, we complain about demand volatility, right? But we're gonna see it again. Suppliers are already seeing it. What advice would you give to suppliers out there? Do you think the demand for EVs is gonna stay stable? Do you think hybrids are gonna go up, internal combustion engines, or they're gonna go down? What do you really think will happen? What advice can you offer on how demand's gonna look?

[00:14:19] Paul Eichenberg: So, I was working with a supplier and an investment bank. Investment bank is helping the supplier go to market and this particular supplier makes ICE components. They don't really make any EV components. And as a typical process, what an investment bank will do is say, "Okay, take your business plan, model it out using S&P as a forecast tool, and then layer on top the new business and the new business opportunities that you have." And no surprise to me, no surprise to the investment bank, but a big surprise to the supplier and the family owner that was selling the business is as they layered out their sales, their sales are on a natural decline, and they have no opportunity for new business. And the reason being is because the OEMs are not designing new transmissions and they're not designing newer engines, and as a result, those suppliers are in a steady decline. Now, this is something Terry, obviously, you know, we've been talking about for the past 7, 8, 9, 10 years. But still the reality is just now starting to sink in with suppliers because they're seeing, "Hey, the OEMs are not rushing out to build new engines." Again, it's a difficult time. It is a difficult transition. And there's not a rush by the current OEMs to say, "Hey, we've gotta be developing new internal combustion engines for new transmissions." And I don't know if this is gonna be an environment where the OEMs say, "Oh, you know, we're gonna shift from this idea of this all electric future." I think it's too early in the game to really be able to predict, will the OEMs go out and spend the billions of dollars to go and potentially create a new engine? Or a new transmission? And I had a conversation with the CEO of one of the four largest commercial vehicle producers here in the United States. I asked him this question earlier this summer, and he just does not see a shift in the industry going back to the internal combustion engine because just EVs are so much more efficient. So now, this is a CEO with a global organization. He sees the industry from a very different vantage point, but from his vantage point, he said, "Hey, the industry is gonna go through a costly transition even for class eight vehicles to electrification, but those vehicles are just much more efficient." And as a result, it's gonna be a costly transition but he sees that as where the industry is going, and doesn't see significant investments in alternative powertrain or alternative systems. Now, again, it's early, but that's where I see things going right now. And I guess if I could add one other thing, and this is sort of going back to the tariffs. Toyota produces the RAV4 in Canada. The RAV4 is the largest volume vehicle that they produce here in North America, but shipping it into the United States, that's gonna have at least a $10,000 tariff on that vehicle. Now, they have large facility that they've got at Cambridge in Canada. Are they going to go ahead and say, "Oh, well, the billions and billions of infrastructure that we've invested there, we're now going to duplicate that even a thousand miles from Ontario into Michigan or somewhere in the Midwest."? Are they gonna make that investment in billions and millions of dollars? Understanding that, hey, this polarizing environment that we're in may be shifting back and forth. And right now, I can tell you from the conversations that I've had at the OEMs and at the suppliers right now, everybody's in a wait and see. See how this is negotiated. See if this becomes a negotiating tactic for the administration. But again, it's not like people are just going to be making these large investments and break down this global supply chain that's been built because of what it's been invested in it and the economy of scale that's been achieved, and then the cost associated with reduplicating it on a regional or a local basis.

[00:19:38] Jan Griffiths: Paul, I'd like to go a little deeper into the idea of globalization, and now we're very much regional. We're talking about regionalizing; we're talking about nearshoring; we're talking about bringing products back. And like you, most of my career was spent low cost country sourcing. And I remember walking into rooms where the badge of honor was, "What percent of your spend is in China?" And now, of course, that is absolutely not the case. But here we are; tariffs are knocking on the door. They may or may not be here in the next month or so. But what advice do you give Tier One companies who are not as far ahead in the localization strategy as perhaps they should be? What can they do now that this is almost imminent? What do you tell 'em?

[00:20:32] Paul Eichenberg: Let's think about it on the level of complexity, so it's not just low-cost country sourcing. I think the real issue for the larger Tier Ones is what's happening with China and the United States. Even before this Trump administration, the Biden administration and the original Trump administration all took a policy around semiconductors and the sale of semiconductors. And we're seeing this play out right now as far as the impact it has on artificial intelligence. So the drive towards artificial intelligence and the semiconductors that are used to produce that technology is a matter of national security. So, I think when you look at it from a standpoint of national security in both administration, so the Biden administration took a little movement that the Trump administration had and started to ban a number of different levels of semiconductors and other associated photonics and technologies going into China. And as a result, when you're producing things like self-driving vehicles.

Now, think about it as a supplier, "Hey, I am   Mobileye and I'm producing self-driving technology, and I'm selling that to multiple OEMs who don't have scale." The great thing that somebody like Mobileye could do or Bosch or Active, what they can do is they can sell that technology across borders, across OEMs to be able to build scale into that technology. But when you can't take the same semiconductor that you're building that technology around in a market like China, which is the largest car-producing market in the world and is very aggressive looking for these self-driving technologies for a number of different reasons, that is a huge strategic challenge that you have to deal with. And it doesn't only impact autonomous vehicles, but it also impacts electrification.

So, when you're looking at that as a supplier, this is probably, for me, the paramount issue you have to start to deal with is how do I create multiple developments for multiple markets based on access to technology as a result of that? I think that's the first state, and I would tell you my instinct is because of what you can see across multiple administrations, whether it's Democratic or Republican. There is this policy that's gonna stick from administration to administration. I don't know that that's gonna be the case when it comes to producing things like wire harnesses and moving from markets like China to Vietnam to Malaysia because there's just a lower cost of manufacturing and labor associated with those markets. I think. It's too early in the game to be able to look at it that way and say specifically what's gonna happen as a result of that.

[00:24:02] Jim Liegghio: Paul, you touched on a lot of different themes. Obviously, they kind of coexist, and they're influencing each other, right? You've touched on autonomous a little bit. You've talked about low cost sourcing and moving sourcing from country to country, kind of evading the tariffs in a way. Talk a little bit more about autonomous. We haven't heard a lot about that these days, largely due to the headlines dominating everything else, but talk a little bit more about autonomous and maybe how some of these policy changes might affect the next two to four years of autonomous development in your view.

[00:24:27] Paul Eichenberg: I think what you're gonna do is you're gonna find an environment that is a loosening environment for the push of technology. And I think this has always been the Tesla argument that, hey, if you're gonna break through a major barrier, there's gonna be a cost associated with that. And I think for Tesla and for others, there's going to be an environment which is a loosening of the regulatory environment that just allows for more of these vehicles to be on the road. So, you have full self-driving that's being pushed, for instance, with Tesla later this year into Austin where there's this vision of these fully autonomous vehicles just, sort of driving around communities.

So, this is the push, and I think you are going to see an environment where there's going to be more of these types of vehicles on the road. So, whether you worry about it from a safety standpoint or you are looking at it from an adoption standpoint, I think it's safe to say there will be more of these vehicles on the road. Really, before the end of the year and over the course of the next three or four years.

[00:25:48] Jan Griffiths: Paul, with all of this going on right now, where do we go from here?

[00:25:52] Paul Eichenberg: Well, I think we're moving into a period of real chaos and uncertainty, and I think that's how you started this. I go back to, like we were talking about earlier, if you go back to the nineties with the whole idea of lean manufacturing and the idea that "Hey, continuous improvement, how is this industry is going to operate," And as you realize, the move to ERP systems and everything that we talk about around the supply chain, the whole idea has been building consistency so that you can easily forecast where things are gonna go and how you just continuously improve on where we are as an industry.

To be honest, this level of disruption, I mean, let's take the past 10 years and the move towards economists and the move towards electrification and the move towards centralized compute. These are huge technology disruptions that the industry is still dealing with. And we talked about earlier, we have a huge chasm to cross as we move in these significant changes in technology. It's a hard environment to make money in, but now we're adding a new type of disruption, more political or polarizing of the industry. And I think what you're going to see is, oh, people have talked about autonomous and electrification, and all these big technology disruptions that we're dealing with, but now we gotta start thinking of this polarization that we have in the industry, which is really the breaking down of these global supply chains as we've known it.

And as a result, what companies need to do is really start scenario planning around these scenarios and what's gonna happen and what's likely to happen. To start to be much more aggressive to understand how are they gonna win in this constantly changing environment. And I think if I can leave a bit of advice for anybody at this point in time, it's just that how do you start to put together scenarios and how do you start the forecast where things may be going, and then as you see, the direction going one way or another. Then, you really got an opportunity to put together a strategy that's going to hopefully give you an advantage moving forward.

[00:28:43] Jan Griffiths: I totally agree. I think, scenario planning, it's gonna force you into scenario planning, whether you liked it or hated it. You're gonna have to do it. The other thing too, it's gonna force you to get transparency into the levels within your supply chain like never before. If you can't see down into that supply chain and where these products are coming from, you can't do scenario planning because you don't know what the impact the tariffs will be. So, I think that it's gonna force us to do things that we probably should have done a long time ago.

[00:29:16] Terry Onica: And I also think too, in the auto industry, for many, many, many years now, we've been at the best when our backs are against the wall.

[00:29:23] Jan Griffiths: True.

[00:29:23] Terry Onica: Have come fighting back. And so, I'm really looking forward to seeing some creative minds out of this opportunity, 'cause whenever there's a change, there's an opportunity to change. And so, yes, I'm really looking forward to seeing somebody come up with that major change that we need in this industry. I think now's the time we're gonna see it.

[00:29:43] Jan Griffiths: And that is a perfect way to close today. Paul, thank you so much for joining us.

[00:29:48] Paul Eichenberg: My pleasure. Thank you.

[00:29:50] Jan Griffiths: We love to hear from our listeners, reach out to any one of us, our contact information is in the show notes. And if you want to dive deeper into our content, check out our website at autosupplychainprophets.com.