A2 Global Electronics, CEO, Frank Cavallaro
A2 Global explains how EV manufacturers can mobilize quickly to secure the electronic components they need and mitigate risk in the face of market uncertainty
After a record breaking 2022 for electric vehicle (EV) sales, 2023 is poised to see 35 per cent growth. At the Covid-era’s peak chip shortage, these numbers would have been nearly impossible for chip manufacturers to meet. Over the last three years, manufacturers have been working to satisfy known demand forecasts created by consumer demand, plus federal calls for sustainability in infrastructure and pledges from automakers to have fully electric fleets over the next five years.
Currently, supply can satisfy known demand, save a few long-lead/constrained components. However, the market is delicate and situations can push this balance into a shortage. To avoid pain points, EV OEMs must develop strong sourcing strategies to ensure access to required components.
Scenarios impacting supply and demand
Despite a few, highly specific components on long-lead times, the supply/demand structure for EV components is stable. Manufacturers can satisfy known demand and there is no significant increase in demand to force a pivot of a fabrication plant’s resources. However, two situations can change this.
First is a hiccup in chip production. Chip manufacturers have limited production dedicated to producing EV components and would not be able to pull from other resources to compensate while still fulfilling demand for other industries. Examples include manufacturing difficulties, a sudden natural disaster or pandemic forcing a cessation of work.
Secondly, EV manufacturers’ forecasted demand may be less than the actual demand for EVs. Although theoretically good news for EV makers, it is not so good for their supply chain professionals who will be scrambling to find semiconductors to fulfill new, under forecasted vehicle orders.
In either situation, it would be challenging to increase production capacity despite new global investment in chip production. Though the US and EU CHIPS Acts offer a promising future for component production capacity, they would offer no relief for a sudden shortage that EV OEMs may face. There are three reasons for this.
Fab construction time: Fabs are difficult and time consuming to build and would not be online and operating quickly enough to have immediate impact during a sudden shortage.
Long lead times planning new vehicle models: EV design periods can run five to seven-years before a new model becomes commercially available, so fabs will have to dedicate a substantial portion of their capacity to meet long-term demand rather than current needs.
Profit potential: To earn back the cost of fab production, component manufacturers prioritize production of chips with the highest margins. This typically means cutting-edge technology. However, if another industry has higher profit potential the cutting-edge technology and specific node production will pivot away from EVs. This leaves EV manufacturers in the same, constrained position as they started.
What can EV manufacturers do now?
EV manufacturers cannot afford to be complacent during stable market periods. To ensure they are insulated during future, sudden disruptions, they must have a sound sourcing strategy which includes:
Building a supplier network: Supply chains have become more interconnected. Building a network of resilient suppliers (globally and close to base) gives EV manufacturers options when shortages arise and lowers the risk of disruption if an unexpected event occurs where the bulk of their components are produced.
Developing a short reaction time: Shortening reaction time by recognizing supply chain disruptions and adapting quickly, rather than waiting for it to build, is critical to a resilient supply chain strategy.
Purchasing safety stock: Purchasing extra inventory ahead of time can be challenging and costly, but when planned correctly, safety stock can significantly enhance supply chain resilience and prepare EV OEMs for the next shortage market. Despite the cost, it may make sense to purchase safety stock for the most critical or high-risk components.
Leveraging advanced analytics: Choosing reliable, up-to-date sources for market forecast information and consulting with multiple players in the industry—partners, suppliers, customers, and even competitors—helps gain a holistic approach.