In Depth: How Shift to EVs Risks Sidelining Auto Parts Giants
People photograph a prototype of CATL’s Freevoy Super Hybrid Battery on display at a company event in Beijing on Oct. 24. Photo: VCG
As China’s auto market pivots rapidly to new-energy vehicles (NEVs), the foreign parts-makers that have long held a leading role face being marginalized unless they can reshape their product portfolios.
The pressure on these legacy parts-makers comes from two key shifts — the greater role software now plays in defining drivers’ experience and NEVs’ hardware evolving away from using the parts they are world leaders in making.
From July to November this year, more than half of the vehicles sold in China were either pure electric cars or plug-in hybrids, which fall under the NEV category, according to data from the China Passenger Car Association (CPCA).
This changing landscape is giving China’s domestic suppliers a golden opportunity to become the pivotal players in the country’s automotive supply chain.
Last year, battery giant Contemporary Amperex Technology Co. Ltd. (CATL) (300750.SZ +0.30%) made it onto Automotive News’ annual list of the top part suppliers by global sales. Its revenue of $41.3 billion put it in fourth place, driven by its sales to clients such as Tesla Inc., Ford Motor Co., Nio Inc. and Li Auto Inc., according to calculations by the industry outlet.
In first place was Germany’s Robert Bosch GmbH, followed by German peer ZF Friedrichshafen AG and then Canada’s Magna International Inc.
However, ZF announced in July that it will cut 11,000 to 14,000 jobs by 2028. In September, after reassessing its powertrain technology business, ZF lowered its 2024 revenue and profit targets.
French company Valeo SE’s third-quarter 2024 financial report showed an overall global revenue decline of 5%, with the Chinese market dropping by 12% year-on-year.
But traditional players still have the potential to shore up their position, not only because of their deep expertise in managing supply chains, but also their active attempts to push research and development.
Software becomes central
In the past, automakers and suppliers maintained their own, separate areas of technical expertise, said Xu Huanping, senior vice president of sales and customer development for ZF Asia Pacific.
Suppliers such as Bosch and ZF integrate software and hardware into a single system, such as a braking system. They provide complete packages to automakers, which then integrate these systems into their vehicles as they wish.
Suppliers of critical components can leverage their leading position to strike hard bargains with automakers, said Yu Bin, chief engineer of chassis wire control at Chongqing Changan Automobile Co. Ltd. (000625.SZ +0.51%).
For instance, Bosch can demand a carmaker purchase other products from it as a condition of selling them one product, a business model known as “tied selling,” complained one person working at a car company. He said that buying several products is a prerequisite to access the German giant’s in-demand electronic stability program, which prevents cars skidding as they brake.
However, NEVs have disrupted the status quo.
Rather than being composed of several distributed systems, NEVs integrate a greater number of functions — like suspension adjustment, braking force distribution and steering response — into a centrally controlled single software system, which is usually developed either by the carmaker itself or a dedicated software partner.
The shift from distributed computing to central computing had laid the foundation for what’s referred to as “software-defined vehicles.” This enables automakers to improve product performance through software, which can be developed and rolled out without needing to redesign physical components, allowing for faster innovation and greater flexibility.
This can also allow multiple systems to be coordinated with each other more effectively, achieving previously impossible feats, such as in-place turning.
“The centralized and cross-domain integration of automotive electronic architectures is an industry trend,” said Xu Daquan, president of Bosch China. “Today’s cars resemble a person with a cerebrum, cerebellum and limbs, where systems like braking become mere executors without a brain on their own.”
As the trend deepens, established players are having to relinquish some software development rights to the automakers and their smaller peers, said a research and development chief at another car company.
“We have become mere ‘glorified blacksmiths’ for hardware,” Xu said self-deprecatingly at a Nov. 8 networking event.
ZF, a major supplier of automatic gearboxes, is another established player affected by this change. Its products still outclass any automatic gearbox that China’s homegrown car brands can manufacture.
However, NEV brands like BYD Co. Ltd. aren’t focusing on replicating ZF’s products. Instead, they are finding innovative ways to efficiently integrate their plug-in hybrid cars’ batteries, combustion engines and electric motors that allows for both simpler gearbox structures and better overall performance, according to a person from a car company.
This trend may have contributed to the layoffs at ZF, as its competitive advantage weakens, a technical source from an automotive company indicated.
Also working against multinational parts-makers is the weak performance of some of their customers’ China businesses. Global auto giants’ China joint ventures are losing China market share to homegrown car brands. In October, about 70% of passenger vehicles sold in China were made by homegrown brands, compared with about 60% in the same period of last year, according to data from the China Association of Automobile Manufacturers.
Continuing and rebuilding advantages
To harness the technological innovation boom in China’s auto industry, Bosch’s headquarters has granted its China branch significant autonomy in research and development, Xu said.
Currently, Bosch China has a team of more than 10,000 researchers and engineers working on new products and platforms for global markets, he said.
One area in which multinational auto part suppliers are making efforts to catch up is smart driving systems. The Chinese government aims to achieve mass production of vehicles with “conditional” self-driving capabilities by 2025.
For example, Ireland-headquartered Aptiv PLC, which focuses on developing “active safety” and driver-assistance systems, in October spent 570 million yuan to buy an 18% stake in Chinese self-driving startup Maxieye Automotive Technology Ningbo Co. Ltd.
Likewise, Bosch has worked with a Chinese tech startup to develop and mass produce a range of digital cockpit systems powered by Qualcomm Inc. chips. It has also invested in self-driving specialist WeRide Inc., in a deal that allowed the two to jointly develop advanced smart driving systems.
One advantage that traditional auto parts-makers retain is their deep manufacturing experience, high quality control standards and ability to dwarf smaller peers, said Changan Auto’s Yu.
A procurement manager at a car company spoke highly of the maturity of multinational auto parts-makers’ supply chains, which he said will help them to compete on price.
Multinational auto parts-makers can also find business opportunities in Chinese automakers’ global expansion as they are familiar with the technical requirements for auto components sold in global markets.
According to Tang Haiyi, general manager of Aptiv’s active safety and user experience division in China, multinational auto parts-makers could potentially supply components to Chinese carmakers’ overseas assembly plants in order to meet local industry standards.
Chinese automakers such as BYD and SAIC Motor Corp. Ltd. are already increasing investments in European electric car assembly as a way to circumvent higher import duties. Some are looking to localize manufacturing in Southeast Asia and Latin America, where the market potential for NEVs remains large.
Contact reporter Ding Yi (yiding@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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