UAW Strike, Supply Chain Turmoil, and Their Role in the EV Journey

[Transcript]

Jan Griffiths: 00:03

Welcome to the Auto Supply Chain Prophets podcast where we help you prepare for the future in the auto supply chain. I'm Jan Griffiths, your co-host and producer.

Cathy Fisher: 00:13

I'm Cathy Fisher, your podcast host. Our mission is to help automotive manufacturers recognize prepare for and profit from whatever comes next in the auto supply chain.

Terry Onica: 00:23

I'm Terry Onica. Your podcast host will be giving you best practices and key supply chain insights from industry leaders.

Jan Griffiths: 00:29

Because the auto supply chain is where the money is. Let's dive in.

Jan Griffiths: 00:37

Hello, and welcome to another episode of the Auto Supply Chain Prophets podcast. Let's check in with my co-host Terry Onica. Terry, how are you today?

Terry Onica: 00:46

I'm doing great today. How are you, Jan?

Jan Griffiths: 00:48

Good. What exciting things have you been up to lately?

Terry Onica: 00:50

Well, I did a 25k plus 15 miles. So I've never run a 15-mile race before. But 13 friends went up and it was in Big Rapids, Michigan. So, it was a lot of fun.

Jan Griffiths: 01:02

That is an accomplishment indeed.

Terry Onica: 01:04

Yeah, I had a friend do 50 miles.

Jan Griffiths: 01:07

That's a lot. But a lot of it has to do with mindset, right? It's about putting your head in the right place. When I interviewed Nick Norris, former Navy SEAL. He was telling me about that because he does the rim-to-rim thing. 53 miles, I think it is. He said it's all about mindset. So when you start to talk yourself out of it, that's the time to keep on pushing.

Terry Onica: 01:26

It's mindset and good training.

Jan Griffiths: 01:28

Yeah.

Terry Onica: 01:28

Absolutely. Good training, good nutrition. You can do it.

Jan Griffiths: 01:31

Yeah, I love it. I love it. Well, I have been up to my eyeballs in strike activity, seeing what's going on with the UAW and the big three and studying every single aspect of it. And the way it's all playing out. That brings us to our guest today. Because today we have a thought leader in the new mobility space. It is the one and only Paul Eichenberg. Paul, welcome to the show.

Paul Eichenberg: 01:57

Thank you very much. Glad to be here.

Jan Griffiths: 02:00

So let's get your take on the strike. Let's get right in, shall we, Paul, what's going on from your perspective?

Paul Eichenberg: 02:06

Well, so my forecast would be the strikes gonna go through at least till Halloween. I think for a couple of different reasons. One, I think it's mainly because we're now just starting to see their issues surface that are really what I believe to be at the core of the strike. You saw over the weekend, the CEO of Ford, Mr. Farley, talking about the issue, I think, in the most open manner, that is possible. And that is the issue of EVs. And what I would say, my sense is at the heart of the issue, and I've talked in other shows about this, the heart of the issue comes down to the battery facilities and the union's desire to unionize those facilities for a couple of different reasons. But most importantly, because that's the future of the industry. And if they aren't tied to those vehicles of the future, they really don't have as strong of a future. What we started to see in the news this weekend, which is really the first sign that this is a core issue for both parties, is the fact that they started to discuss those battery facilities, and specifically, Mr. Farley talked about the fact that the facilities, these new battery facilities aren't even built. We're a long ways away from needing labor. And there's no reason to bring this issue onto the table here today. You know, and then he goes on to say, "Hey, we've addressed the work week, we've addressed the salary, we've addressed a number of different factors here." But at the end of the day, what's at the heart of the matter for both parties is, do they get the right to really unionize these battery JVs? And specifically, in Ford's case, they've got a Korean partner, SK Innovations. GM's got LG as their partner and then Chrysler's got a partnership with Samsung, again, another Korean company. So what you have is you have this union desire to feel we've got a future in the automotive industry. We gave up a lot in 2008, 2009, 2010 when we had the downturn, and if we're going to assume that we can build a growing UAW, we have to be right at the forefront of the future of the industry. And that's in those battery facilities.

Terry Onica: 04:46

Paul, when this strike is all over. What's this going to mean for the OEMs and the suppliers?

Paul Eichenberg: 04:53

Until then, I see some of the headlines today, our suppliers are looking for relief. When you look at the level of the strike, of course, gets big headlines, they're striking all three OEMs. At the same time, they're really negotiating the three for the first time together and trying to see what they get the best deal, leverage one against the other, and see what they can pull together, which is a unique tactic, but they really haven't started to hit the core operations of the OEMs. And what I mean by that is, they haven't hit the Yukon, the Suburban, the Silverado pickup trucks, these large core platforms that are very profitable for an OEM like GM, they've avoided those types of activities. I think what you're going to start to see is more car plants, which are going to be the next focus of the strike, which again, will create some challenges, but it's not DEFCON 4, like striking, you know, the heart of the profitability of the OEMs, whether it's the expedition, the navigator facility, the F-series, these type of vehicles, Ram trucks, these will be the last sort of move of labor to really inflict pain on the OEMs. And I think you're gonna see this ratchet up of activity that you're going to see. But it's going to be, again, where there's higher inventory levels aren't as consequential, because is the get to the end, that's when you're going to see the union go all out a shutdown of the OEMs, potentially, which could happen in the next two, three weeks. And then there will be a real push because they feel they're close enough to get to a resolution. That's what I think you'll see in this. So for suppliers, it's going to be a disruptive month. And like it said, some of them are already asking for relief. And I think specifically some of those suppliers, who are already been disrupted by electrification, already down on core volumes, especially powertrain components, this is going to be a dicey time for the OEMs to manage with their supply base and, you know, manage this difficult negotiation. But you've also got to remember, the UAW only has about $800 million, which is probably a couple of months' worth of salary, or, you know, wages to pay. So, as a result, that's why they're taking the type of approach that they are.

Jan Griffiths: 07:41

You know, and you said it, it may not be DEFCON 4 for the OEMs. But I fear that in the supply base, it is, we are on the ragged edge with some of the suppliers, if you happen to be a supplier that has the bulk of your business in those plants that are now on strike, you're in a very precarious situation. We know that these tier twos have suffered from COVID-19 from the chip crisis, and we know they've had difficulty getting labor. And now they're going to have to lay people off. And then there'll be faced with a start-up. And we all know how this plays out, right? When this strike is over, the OEMs will be, "Oh, come on, go go go, go go, go go go." And then this is not a machine you just turn on overnight. So what are you thinking, Paul, in terms of the challenges with the startup, when we get back after all this is over?

Paul Eichenberg: 08:35

It comes back to a situation where the ramp-up can be just as challenging as the situation that you have down for those types of reasons. And if you go back to the chip shortage, the chip shortage was really a product of that ramp down. As the OEMs turned off the chip producers, the chip producers said okay, well, there's an industry over here that is ultimately going to use my capacity. So we'll just move it from the automotive industry to some other industrial. And that's what created the chip shortage. So you risk that type of situation where you've got limited capacity. There is such a need for capacity when it comes to so many different standard semiconductors that are used across multiple industries. So when they get switched off in our industry, other industries will take that capacity and, in some cases will pay premiums for that. And that's the risk that you have going forward. So could this create another chip crisis? It absolutely could. Now there are some OEMs like General Motors who have been paying for capacity upfront, paying a year in advance to organizations like On Semiconductor and Infineon and others to be able to make sure that they have the supply chain in place. But I don't know that those strategies are being deployed by all three OEMs. So in this case, again, this could be an issue that arises, or just think about the supplier that doesn't have that type of relationship in place that has to turn off their supply, these are going to be the hiccups that you're going to see as a result of the startup going forward.

Terry Onica: 10:31

Paul, looking into the future. One of the things that always concerns me, and I wonder how much the OEMs and tier ones are looking at this, but the lower tiers of suppliers that are really reliant on the Internal Combustion Engine only and they don't have a strategy for the future. What do you think about this? Do you think the OEMs and tier ones are looking at this? Or what should they be doing about that as we shift to EVs?

Paul Eichenberg: 10:55

So, good question. And the answer is yes and no. Some of them are really looking at this and making this a big issue, and some of them are ignoring the issue. And what I would say is an example I'd use is Mercedes, or Daimler at the time back in, I think it was the 2018 annual report, came out in the annual report and said, "Hey, with this transition that the industry is going to go through from vehicle, you know, from the Internal Combustion Engine to EVs and electrification, we are planning for supply chain disruption, you know, we've built this supply chain over the past 100 years, we've got to build a new supply chain for the next 100 years." And what they started to do is set up a bank of money, a fund to basically support bankruptcies. And they saw bankruptcies coming in two forms. One, just like you're talking about the organizations that do the 800T casting or the, you know, forging supplier, or the guy who's making plastic, you know, functional black plastic components for engines, these types of suppliers are really are going to handle the brunt of this transition. And they're at risk. If you think of forgings, forgings, are critical components that go into engine transmission. And there's a real risk that, you know, they're capital intensive. And as a result, there's a real risk as we get to this year to 10% of the industry being electric vehicles, you start to come to a tipping point. And that tipping point that you start to see is a high capital intensity, limited labor. But these components start to get sideways because they're not, these aren't 10-12% margin components, these are 6-7-8 percent margin components. So when you have the added burden of lower volumes that you've got to depreciate your equipment over, here's where you start to get really sideways. So you start to see bankruptcies on that side of the equation. But you also see technologies taking off, and just the investment can't be put in place fast enough. And for some of these technologies, they're huge capital investments to build supply chains and to put those in place. So for an OEM like Mercedes today, Daimler back then to really have the foresight to say, hey, we've got to start setting money aside, so we don't create our own supply chain in shortage issues. They're really they were really at the forefront of that. I think you're seeing other OEMs start to take that approach. A few years ago, I met with the OESA Purchasing Council and gave them a presentation as far as this lurking issue that we're talking about right now, as far as the second-tier and third-tier suppliers around the Internal Combustion Engine, and used the example of what Mercedes was doing, to build a fund and a bank of money to really support these bankruptcies, and ask for a raise of hands of how many suppliers are doing the same. And nobody raised their hands. And I think this is still an issue for suppliers today, in which they really haven't started to do much financial planning as far as how do they support this issue going forward. So I think the OEMs are starting to address it, but I think it's still an issue to be addressed by the suppliers.

Terry Onica: 15:01

Paul, if I'm a tier one, two or three, and I don't have an EV strategy yet, is it too late? Or what should I be looking to do?

Paul Eichenberg: 15:11

Well, I would say it's not too late, but it's getting to the late innings of the game. So this is something that I think when we started to talk about this five, six years ago, that's not going to happen. And now, 10% of the vehicles here in the US are electric. And we're going to approach 30 to 35%, by the end of the decade. So I think what you have to be doing is you have to be developing those strategies today. To start to say, "Hey, what's going to be the best outcome for me?" Now, in some cases, that could be, oh, we're going to divest in other industries. For others, it could be we're going to transform into EVs. I'm speaking at a conference, at the end of the week for surface finishing. Surface finishing is used for everything from chrome plating to coating for powertrain components and fasteners. So a lot of coatings go into the vehicle. But there's a space that's being disrupted as a result of electrification. Many of those suppliers are looking at it, oh, this is an opportunity. And we're a second generation business, we realize we're going to be 20 years, we have to embrace this, we have to transform. Others? They're just at a stage where they don't have the energy. And maybe now's the time for them to divest. So there's going to be a number of strategies you can deploy, but now is the time to figure out, hey, do I have the energy to diversify? Do I have the energy to transform? Do I have the might and the financial ability to be a consolidator? Or, in the end, is this the best time for me to exit and divest? And those are the basic strategies that you're going to see in this is what really tier ones and the OEMs should be doing is to facilitate discussions with these types of suppliers to get an understanding of what is your strategy, and what are you going to do. And if you was one of these impacted suppliers, you're not having those conversations with your customers, you should be and you should be figuring out where you fit in their supply base because it's going to be critical to your decision-making. So this is the type of conversation that should be going on throughout the whole automotive supply chain.

Jan Griffiths: 17:31

And you know, Paul, the last time we had you on, you talked about leadership, right? And it's going to take a leadership, it's going to take a leader with the right mindset to first of all recognize the level of transformation that's taking place, the speed, the agility that's required behind it, to really drive the organization to have these kinds of discussions that you're talking about, quite frankly, I don't see that out there. I'm sure there are pockets, but I don't see that this transformation is happening. Let's get everybody together. Let's talk about all our stakeholders to talk about our people. Let's talk to our suppliers. What does this thing look like in the future? What do we look like five years from now? 10 years from now? I'm not feeling the passion behind it, Paul, maybe I'm wrong. Am I wrong?

Paul Eichenberg: 18:21

Yeah, no, I don't think you're wrong. And I think part of it is been what's the industry been like for the past 30 years. So you think there's a number of executives who have come up through the industry over the past 30 years? And what's been the mode of operation for suppliers over that 30 years? How do we get lean? How do we get efficient? How do we squeeze every dime out of what we're doing? Supply chains have become very mature. So everybody knows where they're getting their components, when etc. And I even look at it is this you look at pre-COVID, volumes for the industry could be forecasted within 2-3%. So you knew, oh, we're gonna get 95,96,97 million vehicles globally, very accurately, that can be forecasted, because this was a supply chain that hadn't developed it, you know, hadn't really dealt with any type of disruption or anything. So the executives who built those supply chains are the people who have just built this machine into this very lean, effective supply chain. Now, what are you dealing with? You're dealing with things people didn't see five years ago. Like I said, when I was talking about EV five years ago, people couldn't see it, because they're used to shorter-term planning. This is a big disruption that's changing the supply chain completely. And those executives who built those supply chains and that very steady state are not prepared to deal with the size of the disruption that has taken place. And that's why organizations like ours, really help support them to understand what that means. I had a conversation earlier this morning, you know, the Model S, the Tesla Model S had three kilometers of wire harnesses. The model Y has 100 meters, you know, when you go to have a skateboard design, you really much more efficiently can wire the vehicle. Now if you're adding Software-defined vehicles, and you're adding electronics, this is counterintuitive. But this is happening. And it's not just Tesla, but Ford and GM are adopting the same strategy. So if you look at, oh, I'm in the wire harness business, oh, you know, we're going to have more and more electronics, and we're going to have more and more of this. That's not the case. It's changing dramatically. And you've got to be able to step back, study what's happening and why. And then understand what does that mean for my segment of the industry? And what does it mean for my business? And I think that's that shift from the steady state, very mature supply chains to where we are today. And the level of disruption is really something that, over the past 30 years, the industry hasn't been preparing executives for.

Terry Onica: 21:44

Paul, how what does the supply chain look like in the future? How is it different from today? And if I'm in procurement today, what do I need to do to transform to this new supply chain? What action should I be taking?

Paul Eichenberg: 21:55

Just look at some of the megatrends that we have now in the industry and what's taken place. So obviously, if you're an OEM or you're a supplier, and you're in the EV value chain, you've got to be investing heavily. One of the things that's interesting here, I had a conversation with General Motors in their Venture Capital Group a few weeks ago, and basically what they said, we have no venture capital for software-defined vehicles, we have no venture capital for autonomous vehicles. All that our venture money is going towards is building this battery value chain. It's materials development, it's building that value chain, look at the singular focus. Now you'd think, oh, an organization like GM, they've got autonomy to be thinking about, and they've got Software Defined vehicles, they see themselves really over the next few years, just having a singular focus in building this value chain that shows you how critical that is. So it's that same sort of singular approach that is going to be warranted by other OEMs. But then also by Tier one suppliers. And now think about we have the Biden administration, just a year ago, came out with the Inflation Reduction Act to build an EV supply here in North America. There is heavy incentive by all the OEMs to get tax incentives for consumers to buy their vehicles when they comply with local supply of not only the materials but then also the components that go into those batteries. Huge incentives. So the OEMs are driving toward that, what should the supply base be doing? Same thing? How are we going to build a local supply chain to really support this? And there's been some great things that have happened since the Biden administration came out with that news. For instance, just a week ago, the largest lithium deposit in the world was discovered in Nevada. And there's a large lithium deposit in Arkansas and Oklahoma, and they're finding them all over as a result of this necessity to build a local supply chain. So what should the OEMs, what should be major suppliers, and the tier two suppliers be doing? They should be really focused on the supply chain of the future. And what do we need to do to participate in this manner to really be able to support the industry of the future?

Terry Onica: 24:40

I'm glad you brought up the IRA Act. I'm wondering what are your thoughts around the impact of that. Is globalization going to continue, or is it gonna contract? What are your thoughts around globalization?

Paul Eichenberg: 24:52

Well, I think there is an element of globalization that's already contracting. And you know, I think it's clear that we're in a new geopolitical environment today, specifically, with emerging superpowers like China, that is really having an impact on the supply chain. And one of the areas that we've seen that is in the area of semiconductors. So building on some of the activities of the Trump administration, specifically with Huawei, the Biden administration has started to not only look at individual organizations, but they've started to look absolutely at artificial intelligence and advanced semiconductors. And really, what is the backbone of a lot of these capabilities that are starting to emerge from superpowers, like China, are technologies that are built off of US Semiconductor technology? So, as a result, you have changing supply chains, and you have the Biden administration coming out about a month ago, saying, specifically, we're going to limit the supply of these types of systems and components to China. And as a result, it really creates a unique conundrum for suppliers doing business in that area. And if you think about it, you have like, for instance, Mercedes, is using Nvidia, AI chips to build their self-driving capabilities off of and even just level two, level two plus type of systems level three systems, they're utilizing that type of capability. Now think about it. What if you can't supply that type of component into China, because of the limitations that are put on there? Now, as a supplier, now, as an OEM do you have to start to create dual strategies, you know, strategies, specifically for a market like China, because of what you've got to limit as far as the technologies that you can use? And I can't let you use the latest chip in that market for this reason, or I can't develop a self-driving system for that market, because it uses this technology, these are going to be the type of issues that are going to start to emerge as a result of the global tensions that are taking place. But then also, you know, just the issues that you have with globalization and national security, which is a huge national security concern. And thus, it's going to limit the supply of certain technologies into that market. So I think this is where globalization is today. And I think, as a result, of course, the Chinese have created an early lead when it comes to electric vehicles, and specifically when it comes to battery technologies. And that's why you see such an effort being put in place to set up our own independence and set up our own ability to create these types of products and these types of materials here in North America.

Jan Griffiths: 28:15

Paul, what is the one piece of advice that you would give leaders out there in the tier one, tier two supply base right now, supply chain leaders, CEOs, and C-suite executives in the supplier space? One thing that should be on their minds that they need to be thinking about right now, beyond the strike?

Paul Eichenberg: 28:35

Well, I think what we're in the midst of is a 20-year cycle of disruption. You have to recognize that this is a very different time going forward than what we had previously because such a robust supply base has been developed. So when we're thinking about the supply chain in these types of individuals, who are leading these organizations, what you have to be thinking about is where is disruption going to come from and why? And then how do I start to put together scenarios to plan so that when those things happen, I'm prepared; I know how the organization is going to react, we're prepared to handle it much better than what others and an example I would use for this is looking at how GM handled the semiconductor situation much better than others did. In part of that was because they recognized it could happen. And in advance of COVID, they were paying suppliers a year in advance for supply to guarantee that they had access to the supply. That type of thinking really has to come to the forefront of the supply base in order for these organizations to really continue to flourish in this environment of heavy disruption.

Jan Griffiths: 30:12

And there it is, Paul Eichenberg, thank you very much for joining us today.

Paul Eichenberg: 30:16

Yeah, thank you for letting me join you here today.

Jan Griffiths: 30:23

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.