Steve Katz:

Hi, everybody, and thanks for taking time out of your busy schedule to listen in on our Hillco Global Smarter Perspective Podcasts. As return listeners know by now, I'm your host, Steve Katz. And if this is your first time with us, well then welcome. We're glad that you could tune in.

Steve Katz:

Our discussion today is centered around the mobility market and what's taking place as the industry transitions from internal combustion driven vehicles to EVs, electric vehicles. Specifically, as it relates to challenges for both auto manufacturers and suppliers. And to talk about that, our guest today from Hillco Performance Solutions, which is part of Hillco's advisory platform, is Jesse Glossinger. Welcome, Jesse.

Jesse Glossinger:

Thanks, Steve. Really happy to be here and share some of my thoughts about what's going on in the industry.

Steve Katz:

Great. Well, we're certainly glad to have you on. Let's jump right in. Jesse, in the past, as design styles and engine configurations changed, suppliers were able to maintain stability, right? But now we're entering an entirely new era with the shift to EVs. Can you give us an overview of what's going on in the market right now?

Jesse Glossinger:

Yeah, absolutely. So really there's an unplanned obsolescence of sorts occurring across the inner workings of the automotive industry and supply chain, as the car itself embarks on an unprecedented transformation from a human-guided combustion engine propelled machine to more of a connected, autonomous, and electrified mobility device. So that really breaks it down into those elements.

Jesse Glossinger:

So as the shift occurs, the business model that delivers this new form of engaged mobility to the customer is transforming as well. So even though EVs make up only a small percentage of total vehicles on US roads today, and it is growing, but still very small right now. It's clear to most that the heyday of the ICE vehicle industry is likely coming to an end in the not too distant future.

Jesse Glossinger:

And that's due to, a big part of it, government policy on climate change, advancements in battery technology, advancements in charging times. Those types of things are driving that to grow the EV share of market. Then you have General Motors previously committed to making a 35 billion dollar investment in electric vehicles and autonomous vehicles.

Jesse Glossinger:

They said they were going to introduce a minimum of 30 EV models through 2025 in addition to making substantial EV investments. Yet Ford Motor Company, who just recently announced plans to restructure into three different business units, one for ICE, one for EV, and one for commercial.

Jesse Glossinger:

And then you've got Volvo. They revealed aggressive plans to transition to an all EV company by the year 2030. Volkswagen has proclaimed that its mission is to become the world's largest manufacturer of electric vehicles. And then all sorts of other automakers will eliminate new vehicles with gasoline and diesel engines entirely over the next 15 years or so. So the landscape is really shifting. And it's not just for consumers who will drive all these new vehicles, it's also for the suppliers to the market itself.

Steve Katz:

Yeah, it certainly seems that way. I mean, you just named a lot of the legacy manufacturers. You're seeing all these new companies evolving, Rivian, Lucid, hitting the market with great technology, good-looking vehicles that have extended ranges.

Steve Katz:

So let's dig into what you're saying there. What are some examples of what specifically has to change from a parts perspective to make this transformation occur? And we know there's far less moving parts in an EV than there are in an ICE vehicle? Aside from that, what has to change, and how does that impact suppliers?

Jesse Glossinger:

Yeah. So for large manufacturers transitioning to these new platforms, also the companies that supply them and the infrastructure that supports the use of the vehicles that they create, the impact's going to be significant. So take, for example, suppliers of components on ICE power trains, such as catalytic converters, exhaust assemblies, gas tanks, to name a few of the big ones. In a world of electric vehicles, these parts aren't going to exist. So what does it mean for the future of their businesses? Overall, the number of components in a battery-electric vehicle powertrain is roughly seven times less than the internal combustion engine counterpart.

Jesse Glossinger:

You mentioned that a bit just now. So that's going to have a substantial impact. And what does it mean overall? It means there's definitely disruption on the way to many of the suppliers that have been doing business for years.

Jesse Glossinger:

And in many cases, if not most of them, to the products they've been producing and supplying to the industry. And because of where the industry is headed in terms of the driving experience and the shift towards shared mobility, the things like Uber and Lyft and autonomous driving with Waymo and Argo AI, and the likes of those are doing, we believe that differentiation strategies are going to have drift away from the more traditional power and performance prowess that the automotive industry built itself on in previous decades. It's had to go more towards things like effortless customer experience, smart technology, those types of things that are less about mechanical engineering, more about engineering experiences, and software and tech.

Steve Katz:

Yeah. It makes a lot of sense. So if I'm hearing you right, seems like there's a bit of a silver lining here, right? Cause there are new opportunities, right alongside the loss of the certainty that's associated with the way that things have worked for years. Am I hearing that right?

Jesse Glossinger:

Yeah, that's correct, Steve. While challenging this disruption that's going to happen presents growth opportunities and really for the savvy suppliers, particularly those who are acting quickly and getting out ahead of this, the experience of these companies in serving the evolving needs of the auto manufacturers and their ability to innovate over the years to keep pace bodes well for the future existence. Furthermore, because legacy OEMs on a global basis are proceeding towards an EV future they're really looking at maintaining critical revenue streams and profit margins from their existing internal combustion vehicle lineups, suppliers do have some time in which to evolve. And you also think about this from a global perspective mass adoption rates of EV’s in regions like India, Asia, Africa, they are likely to be well behind what's going on now in China and Europe and to a lesser extent in North America. So that's going to preserve a market for ICE componentry in those regions. So it presents an opportunity for suppliers who have tools that they can convert and shift towards those developing markets away from the developed market world. And they're going to have a little more runway,

Steve Katz:

Right? There's this crossover period where you're trying to make most out of that while you're transitioning, but the clock is still ticking, right? You've got these leading auto manufacturers that have committed to the aggressive timelines you mentioned earlier. And I would think that places a lot of pressure upstream on these suppliers to follow generally similar and aggressive paths. While they're trying to maintain that business, they still have to be making progress towards what's coming. Maybe you can talk a little bit about that for us.

Jesse Glossinger:

Yeah. You got it pretty much right there, Steve. In essence, it's going to require them to follow a relatively parallel path to ensure both that their current revenue streams and their own future existence is insured as the EV market heads towards an anticipated a roughly 16% share of the total US market here by mid-decade, according to the auto forecast solutions. I'm sure there are various projections out there given the degree of variability in the business of projecting EV growth rates roughly where we might be here in the next few years. So successfully bridging that period between current and future state of the industry is going to require that manufacturers and their supply chain partners not only develop new EV platforms, the componentry systems, and software, but also to do so while continuing to update existing ICE models and even introduce new ones in order to maintain market share and their profit targets.

Jesse Glossinger:

F-150 is not going away anytime soon, you got the electric vehicle version of it that's coming out now. Even the gas version of the F-150 is not going away anytime soon, nor are other OEMs, full-size trucks, and SUVs. This need has by necessity led to a blended manufacturing model with new or retooled plants coming online to handle the transition. Due To the continued long-term relevance of their components from some suppliers, braking, steering, lighting system manufacturers are generally considered as well-positioned to remain an integral part of an EV-driven automotive feature. Others such as drive train, exhaust engine components, and other suppliers, great risk of obsolescence. Here to the extent of their own innovation and ingenuity will likely determine whether they evolve with the industry or ceased to play a part in its march forward. Might some of these suppliers' components be adapted to help EV batteries, ventilate and control the temperature of passenger compartments, help carmakers solve other challenges associated with delivering EVs with comfortable passenger compartments and long-range capabilities?

Jesse Glossinger:

Right now you drive EV in the north and in the wintertime, you use your heat, in the summertime, you use the AC, it's going to have a substantial effect on your range. So what can some of these suppliers do to help solve that problem? Additionally, as we've already seen with EV only car companies, such as Tesla and Lucid, and to a certain extent with makers that have used EV models, including Audi, Jaguar, Ford, and GM, software and electronics are replacing most of the mechanical components utilized in legacy vehicles, as I mentioned through here. So along with this shift comes the need for a completely different vehicle architecture and one that doesn't rely on a labyrinth of wires and cables running all over the place linked in dozens of independent control units throughout the vehicle to collectively operate all those systems. So instead of that, fewer more powerful control units are already being utilized to bring extensive functionality to the vehicle's feature-laden software stack and firmware-driven systems.

Jesse Glossinger:

So while the need for these new, more computationally powerful CPUs creates opportunities for some suppliers, sizable reduction of distributed wiring and cabling throughout future vehicles reduces opportunity for others. You know, these two examples, among many other changes that are taking place as part of the EV evolution, illustrate why it's so critical right now for those across the supply chain to determine what role their businesses can play in the future mobility and what steps they will need to take now to ensure that they're able to do so effectively.

Steve Katz:

Yeah. Wow. A lot of good info in there. And I think you can picture in your head, the difference between these vehicles and as you're talking about that labyrinth of wires, I can now imagine the shift that's taking place and to get the manpower associated with all that wiring. I know a lot of that is still while some is done robotically, a lot of it's still done manually. So lots of impacts across the industry, both in terms of not only technology, but labor needs as well. So lot to consider there. Well, this is interesting stuff, but we're unfortunately just about out of time. So last question. As we look ahead with the industry, what do you feel are some of the biggest challenges and risks associated with this transition that we've been talking about for manufacturers and suppliers?

Jesse Glossinger:

Listen, manufacturers are struggling to overcome the engineering constraints associated with what has traditionally been heavily siloed development approach. And as the technology complexity of vehicles increases the need for their systems to be developed from a more holistic architecture standpoint also becomes more critical to achieving success. Two cases in point. Tesla is taking control of development of its own custom self-driving semiconductor chips, while Volkswagen is building a massive software development infrastructure to serve its various brands. With this in mind, we expect to see others take steps aimed at more fully controlling the production and integration of electronics and other components, systems, and software in their vehicles. This has really been brought to the forefront with what's going on in the supply chains of chips within the last two years. So strategies for accomplishing this will vary, but may well include more formalized joint ventures and partnerships with certain suppliers as well as potential acquisitions of others.

Jesse Glossinger:

There's no question that the automotive industry is on a long march toward a future, which will no doubt look and operate much differently than what we experienced today. While fully autonomous transportation for the masses where vehicles are in constant communication with the road they're on, and the cars they're driving alongside, that seems to be a long way off. Particularly across the country, perhaps in more isolated urban areas, that'll be sooner rather than later, but for the masses, it's going to be a long way off most likely, but the transition to electrification is happening now and must be addressed on a more immediate level. Auto manufacturers and their suppliers must figure out a way to reinvent not only the products they bring to market but the way in which they ensure their timely arrival and suitability to involving consumer appetite for environmentally friendly, convenience-oriented mobility.

Steve Katz:

Yeah, it is, when you think about it, almost overwhelming to imagine what's going to happen in the next 10 years, right? So great insights. Listen, on a personal note, I'm very engaged in what's happening in this market. I've always been a huge auto enthusiast, attended all the auto shows with my father growing up in Chicago. And I honestly can't wait to see how things shake out in mobility. So this gave me a lot to think about and absorb, and I'm sure that they're pretty much the same for our listeners today. So thanks for joining us, Jesse. Really enjoyed it. Thanks again, really appreciate it.

Jesse Glossinger:

My pleasure, Steve. Really happy to be on the podcast today.

Steve Katz:

And can you tell our listeners how they can best get in touch with you?

Jesse Glossinger:

Sure. So email or phone is fine. My email is jglossinger@hillcoglobal.com. That's J G L O S S I N G E R @hillcoglobal.com. And my phone number is (847) 201-6499.

Steve Katz:

Okay, perfect. And listeners, if your business or a business in your portfolio is involved in the manufacturer of legacy combustion engines, vehicle components, or emerging EVs, please do not hesitate to reach out to Jesse for his perspective. I know as you could probably tell from how engaged he is in this conversation here today, that he'll be happy to take the call and share even more of his thoughts as they pertain to your specific situation and your challenges. And we hope as always that this Hillco Global Smarter Perspective Podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. Until next time for Hillco Global, I'm Steve Katz.