The automotive industry stands at an inflection point. Manufacturers are navigating a profound transformation wrought by interconnected regulatory pressures, geopolitics, supply chain and inventory challenges, and the environmental imperatives prompted by climate change. Amidst these shifts, value chain management has emerged as a critical tool to steer automakers towards sustainable and compliant practices, particularly in the transition to electric vehicles (EVs).
The auto industry, already among the most heavily regulated industries in the US, faces added complexity from new regulations, be it the Uyghur Forced Labor Prevention Act (UFLPA), Inflation Reduction Act, or the Carbon Border Adjustment Mechanism (CBAM). All of this is paired with navigating climate change and environmental mitigation, reputation management, security, supply chain shortages and challenges, and the overarching goal of delivering high-quality vehicles at affordable costs.
While automakers' supply chain teams were once solely responsible for overseeing their company’s direct operations, they are now increasingly expected to monitor and manage indirect activities throughout their extended, multi-tier value chains.
This, however, presents a strategic opportunity. Through value chain management, automakers can emerge through this period of industry transformation as more effective, sustainable, resilient, compliant, and competitive businesses.
The Electric Vehicle Acceleration
The transition to EVs can be traced to the Toyota Prius, debuting in the early 2000s, with the Nissan Leaf following soon after, in 2010. Even popular culture embraced the trend, as seen in Pixar’s “Cars 2,” where the character Miles Axlerod, a former oil magnate, transforms into an EV and alternative energy advocate. Tesla further propelled the movement with its 2012 Model S, addressing consumer concerns with its extended range, prestige, and luxury appeal.
With growing interest and cultural cachet, EV adoption rates are growing. Globally, there has been a 35% YoY increase in EV sales between 2022 and 2023, according to the International Energy Agency. In the US, however, 2023 EV sales constituted only 7.6% of total US vehicle sales, according to Kelly Blue Book, indicating significant hurdles in market penetration despite public and private sector targets. The Biden Administration aims for half of all vehicle sales to be electric by 2030, aligning with similar goals from BMW, Volkswagen, and Stellantis, which oversees brands like Peugeot and Dodge in Europe and the US.
The entire automotive industry, from EV-focused startups and traditional manufacturers to their extensive network of suppliers, is facing significant cost and manufacturing pressures. This is a global challenge, affecting manufacturers and suppliers across North America, Europe, and Asia. The pressure is particularly acute from Chinese competitors, who are now producing cheaper and higher quality vehicles. The EV industry's challenges are exacerbated by its dependency on China across the entire value chain—from mining critical materials to refining and ultimately assembly of batteries.
This complex scenario creates unique value chain management challenges for what has become a rapidly growing vehicle category. These challenges extend beyond the large original equipment manufacturers (OEMs) to their suppliers, many of whom have substantially fewer resources. These suppliers often struggle with communicating their compliance, sustainability, and resilience efforts to multiple large players in various formats and frequencies, creating a need for more streamlined attestation processes.
The complexity of the EV transition is amplified by a volatile global trade environment and an increasingly intricate regulatory landscape across different regions. These factors continue to evolve rapidly in response to geopolitical tensions, domestic policies, and environmental concerns. Compounding these challenges is the fierce competition from Chinese automakers like BYD, which benefit from substantial state subsidies that far outstrip support provided by governments elsewhere. While various countries have implemented or are considering protective tariffs to level the playing field, such measures have limited efficacy in the long term. This uncertain and dynamic environment demands that companies across the automotive value chain remain highly agile and adaptive. Success will likely hinge on developing innovative strategies that go beyond relying on governmental protections, potentially including advanced supply chain management techniques, strategic partnerships, and accelerated technological development.
These challenges call for innovative approaches to supply chain management, including the use of advanced technologies and data analytics. Despite these hurdles, the EV transition also presents opportunities for companies that can effectively manage complex value chains. Evolving technologies, government incentives, and economies of scale provide automakers and their suppliers with various levers to pull when it comes to setting more competitive pricing and building resilient, sustainable supply chains over time.
Working Within Industry Challenges from Parts to Policy
The auto industry, long accustomed to navigating complex regulations, now faces unprecedented challenges as it transitions to EVs. At the heart of these challenges lies a deep-rooted dependency on China across the entire EV supply chain, from mining critical materials to refining and ultimately assembling batteries and components. This dependency, coupled with the overall complexity of global supply chains, creates a foundation of vulnerability and risk.
The EV transition introduces two primary areas of supply chain challenges. First, electrification requires new materials, components, and manufacturing processes, many of which are concentrated in China and other geopolitically sensitive regions. Second, the increasing digitization and reliance on advanced electronics and software in EVs introduces new vulnerabilities and dependencies in the supply chain.
These supply chain challenges are under significant stress from multiple factors. Regulatory pressures play a significant role, with legislation like the UFLPA prohibiting imports of goods made with forced labor from Xinjiang, a region crucial for EV battery production. The Inflation Reduction Act further complicates matters by incentivizing the sourcing of battery components from non-Chinese sources. In Europe, the EU's Carbon Border Adjustment Mechanism imposes carbon costs on imported goods, adding another layer of complexity to international trade in the automotive sector.
Environmental concerns also weigh heavily on the industry. According to the Environmental Protection Agency, greenhouse gas emissions from transportation (including aircraft, ships, rails, and cars) constitute approximately 28 percent of total US greenhouse gas emissions, making it the largest contributor among all sectors. From 1990 to 2022, the transportation sector saw the greatest absolute increase in GHG emissions compared to any other sector, putting immense pressure on automakers to reduce their carbon footprint.
Operational challenges further compound these issues. Recent semiconductor shortages exposed critical vulnerabilities in the industry's supply chains, highlighting the need for more resilient and diversified sourcing strategies. The complexity of modern supply chains makes transparency and traceability difficult, as evidenced by instances where automakers inadvertently purchased components from suppliers flagged for forced labor use.
In response to these challenges, there has been a surge in US clean energy manufacturing investment, rising 325% from Q1 2022 to Q1 2024, as reported by Foreign Affairs. However, this growth alone is not sufficient to address the multifaceted challenges facing the industry.
Value chain management has emerged as a critical solution to navigate this complex landscape. By implementing comprehensive value chain management strategies, automakers can enhance visibility across multiple tiers of suppliers, ensure compliance with complex regulations, mitigate environmental and social risks, and improve supply chain resilience and adaptability.
Emerging technologies such as artificial intelligence (AI) and machine learning are enabling more effective value chain management, offering hope for more transparent and ethical production processes. These technologies facilitate supply chain monitoring, predictive analytics for potential disruptions, and enhanced traceability of components from source to final product.
As the auto industry continues its electric transformation, success will depend not only on technological innovation in EVs themselves but also on the ability to effectively manage these complex value chains. The companies that can balance regulatory compliance, environmental sustainability, and ethical sourcing while maintaining profitability will likely emerge as the leaders in the new era of automotive manufacturing.
Value Chain Management as a Roadmap to Resilience
The unprecedented supply chain pressures facing the automotive industry are compelling enterprises to know, manage, and actively collaborate across their value chain in ways they've never had to before. This shift is not just about adapting to new challenges, but fundamentally transforming how businesses operate and interact with their entire ecosystem of suppliers, partners, and regulators.
For compliance, this new approach means developing a comprehensive understanding of every tier of the supply chain. Automakers must now trace components back to their origins, ensuring that each step of the manufacturing process adheres to increasingly stringent regulations. This involves continuous monitoring and verification—from raw material sourcing to final assembly—to prevent issues like the use of forced labor or environmentally harmful practices.
In terms of resilience, value chain management enables automakers to identify and mitigate potential risks before they become critical issues. By maintaining visibility across the entire supply network, companies can quickly identify bottlenecks, anticipate shortages, and develop contingency plans. This proactive approach allows for rapid adaptation to disruptions, whether they're caused by geopolitical events, natural disasters, or sudden market shifts.
Sustainability efforts are also significantly enhanced through comprehensive value chain management. Companies can now make informed decisions about their environmental impact by analyzing the carbon footprint of their entire supply chain. This allows them to strategically align with suppliers who have lower emissions, thereby improving their overall environmental performance and meeting regulatory requirements like CBAM.
The collaborative aspect of this new paradigm is particularly transformative. Automakers are moving away from working in isolation and instead sharing information about risky suppliers or best practices for sustainable manufacturing. This industry-wide cooperation, facilitated by value chain management tools, allows for more effective identification and mitigation of shared risks and challenges.
Moreover, these changes are not isolated to supply chain departments. They are gradually being embedded into traditional business processes and systems, including procurement, product lifecycle management, and beyond. This integration ensures that value chain considerations become an integral part of decision-making across all levels of the organization.
By implementing comprehensive value chain management, automakers can achieve a unified and more cost-effective approach to regulatory compliance and reporting. They gain the ability to automatically screen shipments, products, and suppliers, catalog activities, flag potential risks, and communicate effectively with regulators. This approach builds transparency in an otherwise opaque global market, fostering commercial resilience, consumer trust, and regulatory goodwill—all critical factors for an industry undergoing such profound transformation.
Value chain management builds transparency in an opaque global market, creating commercial resilience, consumer trust, and regulatory goodwill for an industry that depends on all three.
The Future and Frontiers of EV Supply Chains
The future of EV supply chains hinges on automakers’ ability to innovate sustainably and responsibly. We’ve seen this evolution before: passenger safety and related quality control were once platonic ideals that are now considered table stakes, and the changes wrought by value chain management are following a similar path.
Consider how the Federal Motor Vehicle Safety Standards include the roof crush safety test, a technical standard that all automakers must comply with in order to sell their product. This was issued in the 1970s, following an increase in the number of accidents related to the structural integrity of vehicle roofs, consumer pressure and advocacy groups, and the founding of the National Highway Traffic Safety Administration. Value chain management, and the visibility provided as a result, could be the auto industry's next-generation version of safety regulations, a cost of entry and expectation from governments and consumers alike.
Prescriptive regulations around forced labor and sustainable resources will likely take a similar path, dictated by societal pressures, continued litigation, thought evolution, industry standards, and global regulations. The Inflation Reduction Act already requires proactive due diligence, stating that there will be a range of ramifications for inaccurate or omitted reporting.
The EV transition is not only ushering in new ways of building cars but also new ways of thinking and working. Value chain management stands at the center of this transition, and can provide the linchpin for automakers’ strategic success, growth, and evolution into a more sustainable and resilient industry.
