For decades, there has been a tug-of-war between many suppliers and their vehicle-manufacturer customers with respect to future planning volumes. The stakes are significant. Using volumes that are too high drives an extreme capital commitment and risk suppliers to stranded capital and missed opportunities to employ resources elsewhere. Using volumes that are too low means the OEM may miss potential sales and the supplier would be stressed with extreme overtime to keep up. It is a never-ending balance.

OEMs often use internally built ‘Capacity Planning Volumes’ (CPVs) to ensure they capacitize to both their annual and peak volume expectations. These volumes are used as the divisor to understand per-part costs and how tooling, machines, infrastructure and other capitalized items are amortized over the life of the program. Suppliers often utilize third-party views such as the S&P Global Mobility Light Vehicle Production Forecasts to gain an impartial perspective of market dynamics, as well as existing and expected vehicle introductions.

Why the concern now? This financial dance between supplier and OEM has been going on for decades. In the past, there were various commonalities with many systems and components between ICE-based platforms and carryover from generation-to-generation. Suppliers would utilize similar machines, processes and sometimes tooling between components – enabling higher capital utilization and enhanced production flexibility. While there are always new technologies and innovations integrated into a new or revised platform, suppliers would try to utilize existing capital when possible to reduce cost and risk. Consider the following: If a supplier capacitized for a component for two programs from the same OEM at 200,000 units each per year, there could be a potential balance between each program – allowing capacity utilization to even out. The results could be less overtime and lower costs and overall risk levels.

Now enter the EV. With virtually every platform being unique with all-new systems, processes and technologies, suppliers are facing significant issues. Many times, these systems have little in common with components that the supplier is already producing for ICE models. This limits the ability to deploy common capital and resources to service these platforms. All is comparatively new in the EV world. Therefore, the level of risk to the supplier rises significantly, as capital is unique.

There’s one other issue that’s potentially more important when building for BEV platforms: OEMs are trying to reduce the cost-per-component for BEVs to improve affordability and profitability as scale increases. Some assumptions have been, well, somewhat suspect and inflated. Suppliers are being asked to add considerable capacity for BEV components while still holding for peak volumes on the ICE side.

Given the current higher cost of capital (8%+) for borrowed funds, suppliers need to be clever. If there are two 200,000-unit programs with the same OEM, one ICE-based and the other EV-based – chances are there is little capacity in common. Double capacity for the same vehicle segment is a recipe for low profitability and poor utilization. These days, smarter suppliers are seeking the ability to add incremental capital once a program demonstrates a need for more investment.

In the end, the transition from ICE to EV is about more than new technologies and processes. Suppliers need to be keenly aware of the risks assumed as BEV capacity is added. Being on the right program from a volume perspective is critical to supplier viability.