SMART MANUFACTURING “Tier .5” suppliers - new relationships with carmakers
While the auto industry previously was comprised of automakers and their Tier 1, Tier 2, and Tier 3 suppliers, a new type of vendor is emerging that has an even closer relationship with vehicle manufacturers.
Anyone who’s familiar with the auto industry knows that most carmakers are referred to as “original equipment manufacturers” (OEMs) because they’re the ones that build automobiles (original equipment) using parts and systems from what are known as Tier 1, 2, and 3 suppliers.
Tier 1 suppliers are large enterprises, often employing tens or even hundreds of thousands of people, that supply parts and even whole systems (such as drivetrains) of autos, usually to a very small number of (or even just one) car manufacturers. These Tier 1 suppliers themselves typically have relationships with numerous other firms that supply components of these parts and systems; these other firms are known as Tier 2 suppliers, and they often have additional customers that lie outside the auto industry. Besides Tier 1 and Tier 2 suppliers, there are Tier 3 suppliers, which supply refined or shaped materials (such as pressed steel or glass windshields) or sub-components (for instance, individual screws or bolts) to Tier 1 or Tier 2 suppliers, or even directly to OEMs. There are those in the industry who argue that there’s a fourth tier of suppliers—those companies that produce the raw materials that comprise the refined components and sub-components sold by Tier 3 vendors—Tier 4 suppliers, if one wants to label them this way.
Enter: Tier .5 suppliers
Beyond all these entities, however, a new type of vendor is emerging: those that are closer to automakers than even Tier 1 suppliers. Whereas in the past, Tier 1 suppliers would simply take orders for parts and assemblies they already made, now some of these suppliers are collaborating directly with automakers on the conception, design, and value creation of parts and automotive systems, to the point where these suppliers are becoming irradicably integrated into the research, development, and manufacturing processes of vehicles.
What was in the past a clear-cut, discrete relationship now is much less dissoluble. New questions now arise regarding which party is responsible for which auto part or system, who should be credited for a part or system’s success or failure, and which entities own and should receive profits from underlying intellectual property. As cars become more intelligent, automakers are increasingly relying on partners that may be developers of code and software used in auto electronic control units (ECUs) or are suppliers of digital services to end-users.
These so-called “Tier .5” suppliers are necessarily of even greater importance to automakers than traditional Tier 1 suppliers. Consulting firm Plante Moran argues that more than ever, an OEM’s operating profits and competitive strengths are tied to the health and advantages of its relationships with its suppliers. In North American auto manufacturing, for instance, Plante Moran claims that in recent years, as select Tier 1 suppliers transformed into Tier .5 suppliers, some automakers improved their relationships with their suppliers, while others did not. Among the carmakers that improved relationships in the last several years were Toyota, Honda, and General Motors, while carmakers that saw relationships deteriorate included Fiat Chrysler and Nissan.
Plante Moran also argues that for Tier .5 suppliers to benefit in the future, they will need to better understand the dynamics of OEM relationships to customers, be more flexible with their high-capacity production processes, and have better access to capital markets.
In an ideal world, a Tier .5 relationship can profit both an OEM—which can keep a closer eye on and learn from a supplier—and the supplier itself—which can secure a stronger partnership with its OEM customer. But with certain technologies, the pace of change is so fast that suppliers may have the upper hand over OEMs; in these instances, OEMs may be forced to start looking at certain Tier 1 suppliers as Tier .5 suppliers going forward.
Tier .5 suppliers for EVs
“All companies have now announced the next generation of electric cars, and with that, it will also fundamentally change the entire supply chain as well as procurement in a very substantial way,” stated Marcell Vollmer, chief digital officer of software and IT firm SAP Ariba.
To this point, it may be no surprise to hear of electric battery suppliers getting into the auto-building business (such as China’s BYD) or at least getting much more tied into the manufacturing process than ever before. In the future, it will no longer be enough for a supplier to just make batteries; the batteries for electric vehicles (EVs) are such critical components that suppliers may now need to be engaged in much of EVs’ prototype and development processes and may even need to take into account marketing plans of OEMs when building their batteries and/or electric drivetrains.
A recent article in the Wall Street Journal showed that China’s dominance in the area of batteries has put it in an enviable position as far as negotiation with OEMs. China—which is and will remain for the foreseeable future the world’s largest market for cars—is also the world leader in lithium-ion battery production. The Chinese government had demanded that automakers that wished to sell EVs in China (and qualify for government subsidies) use Chinese-made batteries.
CATL as Tier .5 supplier
The world’s leading producer of lithium-ion batteries is Contemporary Amperex Technology Limited (CATL). Thus, CATL—which just announced plans for a new USD5.1 billion EV battery factory in Indonesia—was in an ideal position to turn itself from Tier 1 supplier into a Tier .5 supplier. This mandate gave not just CATL advantages from a vendor perspective, but China as a whole an advantage over other nations from an auto manufacturing perspective.
Recently, CATL has been in talks with Tesla CEO Elon Musk. Tesla, which had been relying on batteries from Japan’s Panasonic and South Korea’s LG Chem, has turned to CATL as a strategy to diversify its battery suppliers, particularly for its vehicles made in China. In fact, it’s fair to say that Panasonic, LG Chem, and now CATL are Tier .5 suppliers to Tesla.
“What we do is try to bring innovations to the structure and chemical system, which will enable Tesla cars to drive a longer range at a better cost,” said Zeng Yuqun, founder and chairman of CATL. “Elon talks about cost all day long, and I told him to be assured that I would have solutions. We get along well; he’s a fun guy.”
In 2017, CATL announced a strategic partnership with Valmet Automotive, a Finnish contract manufacturer of cars and EVs for customers including Daimler, Porsche, Ford, Saab, and Opel. As part of the partnership, CATL acquired a 22 % share of Valmet. In 2019, CATL made a strategic cooperation agreement with Volkswagen under which CATL will offer not just batteries to VW, but battery development, recycling, and secondary-use services. And in August 2020, CATL announced a major agreement with Daimler to work on future battery technology together with the German automaker.