The transformation of first-tier suppliers is strategic. Amidst the attack of "incremental suppliers" and incubation suppliers, multinational first-tier suppliers are trying to find their new position.
Article/"Automobile Man" Qi Ce
By the end of March, the 2022 financial reports of the world's top 20 multinational Tier1 (first-tier suppliers) have been released (excluding Japanese companies, due to different fiscal year deadlines).
Compared with the previous year, most Tier1 revenue in 2022 has increased, from -4.4% (Magna) to 63% (Frea). Most companies’ revenue has increased. It has returned to the level before the epidemic; but the net profit has diverged, from -383% (Frea) to 202% (Visteon), which is a very wide span.
The ranking order of the top few has almost not changed, with Bosch, ZF, Continental, Hyundai Mobis, Magna, and Freya still occupying the top five. After splitting or selling off part of their business, Aptiv, BorgWarner, and Schaeffler have seen their revenue rankings decline.
The speed of transformation determines the level of profitability
When releasing financial reports, many Tier 1 companies often explain the reasons for the decline in profits. For example, geopolitical issues have led to rising raw material and energy prices, unstable production plans at OEMs, labor constraints, and investments in new businesses, all of which have dragged down earnings.
In recent years, Tier1’s cost structure has indeed changed significantly. Everyone is transforming in the direction of electrification, and some are going well and some are not.
Magna’s revenue fell slightly in 2022, but its net profit fell by 66%. Magna’s explanation is still due to investment in electrification and assisted driving. Lear, whose profits fell by 12.3%, also gave a similar explanation.
On the contrary, some suppliers have already started their electric business, which has become a new growth point for the company's business, and their financial reports are much better. Weipai Technology, which was split from mainland China in 2021 (revenue increased by 8.6% and net profit increased by 119%), will receive 14 billion euros in new orders in 2022, 3/4 of which will come from the electrification field.
After BorgWarner implemented the "buy now and sell later" operation on the fuel system business, its electrification business has grown rapidly. In the past, the "four major" businesses were fuel injection + gearbox + turbocharging system + exhaust gas treatment. King" is transforming into three new businesses: hybrid + electric drive (three-in-one motor, reducer, and inverter) and functional configuration (system integration and thermal management).
From 2021 to the end of 2022, BorgWarner has made five consecutive acquisitions, all of which have been successful. The criterion is whether the acquired assets will help in the direction of electrification. Through a series of acquisitions, BorgWarner has gained new capabilities in the battery, electric drive and charging businesses. In addition to Bosch, which has deep roots and started electrification early, it is this American company that has quickly formed new business profitability.
Even Lear, which mainly focuses on interior decoration business, is also closely following the new business. 75% of its backlog of seat orders comes from electric vehicle customers, and its electronics and electrical business also has a backlog of US$1 billion in orders. For Lear, recruiting was a problem. Lear claims that 50% of its business has been electrified. Even for products like seats, the demand for new energy and fuel vehicles has also diverged.
Suppliers believe that the turmoil in the global automotive supply chain over the past three years will subside. Facing the challenges of the operating environment in 2022, being able to stabilize operations and start making money in new businesses will allow multinational Tier 1s to start looking forward to growth in 2023 and 2024.
Is it really harvest time next?
The sense of participation in “Three Electrics” is low
Compared with the previous fiscal year, the revenue of most multinational Tier 1 companies in 2022 is mostly reasonable, but an undeniable fact is that Compared with the era of traditional fuel vehicles, today's multinational Tier 1 control has declined.
In the field of three types of electricity (battery, electric drive, and electronic control), multinational Tier 1 companies are trying their best to squeeze in. However, batteries are out of business at first. CATL's revenue level, if placed on the multinational Tier 1 list, would temporarily rank third, very close to second place ZF, and it will definitely surpass the latter in 2023. It’s just that few public opinions regard CATL as Tier1.
The motor electronic control market is relatively small. Electric motors are purchased from third parties. Usually the first-tier multinational Tier 1 companies dislike this market because of its lack of market share. In fact, among the top 20 motor suppliers in domestic OEMs’ procurement lists, none of them are multinational Tier 1 suppliers.
We can make some lists: Wolong Electric Drive, CRRC Times, Dayang Motor, Star Semiconductor (motor control), Zhenghai Magnetic Materials, Kaizhong Precision, Nidec Corporation (Japanese company), UMC, Inovance United Power, Inbor, Solar Energy, Juyi, etc. are either incubated by car companies or operating across borders.
The only foreign company here is Nidec, but its scale is not large (revenue is about 5.3 billion yuan), and it makes motors and optical devices. There are almost no traditional giants here.
Electronic control is divided into two parts: one part is for the battery company to make an overall PACK solution (including software) and sell it to the OEM; the other part is also the mainstream practice, that is, the OEM makes the electronic control part by itself and sells it to the OEM. The electronic control hardware is integrated into the PACK, while the software runs in the on-board computing center (some manufacturers also deploy cloud monitoring systems).
Since we don’t make batteries, electronic control is more difficult to get involved with.
Hybrids still rely on old customers to pay the bill
Although OEMs are increasingly inclined to handle the "three electrics" themselves, Bosch still provides motors, inverters, and thermal management systems (Excellent for batteries). As always, Bosch claims that the standardized design and stable quality of these products can allow OEMs to reduce development costs and quickly produce complete vehicle products.
ZF’s gearbox is very famous, but not many people know that ZF is the first supplier of mass-produced hybrid power modules in Germany. Compared with fuel vehicles, mild hybrid and plug-in hybrid systems have begun to have different requirements for engines and transmission systems. ZF can provide customers with a complete set of hybrid power components. BMW and Audi are big customers in this part of the business.
In the pure electric field, ZF actually condescended to make a "central electric drive" for small and medium-sized electric vehicles. It should be pointed out that these products are rarely purchased by domestic OEMs, and are still purchased on a large scale by Germany's "Royal Three".
ZF’s chassis system (although the chassis tuning of electric vehicles has its own characteristics) is still universal. This area still retains a strong influence in the domestic high-end market (customers may not buy it, but they will ask their suppliers to find ways to reverse it).
Generally speaking, ZF’s electric transaxle and integrated electric drive system can still compete, but they cannot compare to the dominance and industry prestige of gearboxes in the era of fuel vehicles.
Schaeffler has also made similar developments. Schaeffler's classic product is the P2 hybrid module, but this hybrid solution is basically not popular in China. Series-parallel hybrids are more popular in China, and range extension is becoming popular.
The in-wheel motors developed by Schaeffler are relatively inferior and are rarely favored by domestic OEMs. Evergrande wanted to develop this technology back then (but the actual product was unknown), but later the project was aborted due to well-known reasons.
“Tier0.5” and “Tier1.5”
In the traditional automobile supply system, most of the fuel vehicle power systems belong to suppliers.
Not only that, from complete computing and domain controller reference design platforms to supporting software, functional safety testing and verification, traditional Tier1 has a huge say. Its development progress determines the research and development cycle of the model, and its bargaining power is almost always the same.
In the current era of electrification and intelligence, the traditional Tier 1 packaging solution has begun to fall out of favor. Customized, personalized, customer-oriented and service-oriented supply models are becoming a new trend. The way supply chains operate has changed.
Therefore, someone proposed the concept of "Tier0.5" last year. In the new energy era, OEMs have done part of Tier 1's work, leaving part of the latter's business vacant. Tier 1 is not out of the game, but must transfer part of its technology integration rights to the OEM. In this way, OEMs' self-research and diversified ecological cooperation have become synonymous with "revolution".
As traditional OEMs promote two integrations (technology integration and supply chain integration), new energy production capacity is rapidly expanding, and the market weight of new forces is moving downwards. However, technology integration was first advocated by new forces, and it is now being advanced more deeply, which can be regarded as leading the trend.
Under this situation, Tier1 relies on its technology accumulation to find new orders in automotive auxiliary systems, electronic systems, chassis and other electrified systems. Therefore, the sign of successful electrification transformation for Tier 1 has never meant an increase in voice, but a reduction in voice to find a position in the new supply chain.
There are also some Tier 1 companies that have taken a half-step back and started doing mixed business between Tier 1 and Tier 2, and have also achieved good results. In the electrification industry chain, if the term "Tier0.5" is true, then there will also be "Tier1.5".
800V high-voltage charging is gradually being decentralized from high-end cars and becoming a new competitive factor. High-voltage charging requires the vehicle's battery modules, semiconductor devices, motors, and even the vehicle's electronic and electrical architecture to match. Rather than tinkering with old systems, new high-voltage platforms should be developed.
Aptiv provides architecture-level solutions for electromagnetic compatibility design of electrical connectors and E-E architecture. Aptiv claims that it can only provide connectors and shielded wires to adapt to the OEM's charging system (Tier2 role), or it can provide full vehicle electromagnetic compatibility design and a complete set of charging modules (Tier1 role).
In February this year, Aptiv provided the latter solution to Jidu Automobile. In March, Aptiv established an electrical connector engineering center in Wuhan, preparing to expand its business as a Tier 2 company.
These two trends have blurred the boundaries of supplier classification, which in itself shows that the original supply chain system has begun to be deconstructed and reorganized.
Flexibly respond to software challenges
The centralized self-research of software and joint development with partners have contributed to this trend. Like OEMs, Tier 1 does not have a big problem with application software development. The difficulty lies in the middle layer software. This is the key to decoupling software and hardware, and is also the prerequisite for cross-platform deployment of software systems.
As for the partners, they basically all have IT backgrounds.
According to Xu Zhijun, who has just finished his term as Huawei's rotating chairman, they intend to be an "incremental supplier."
The implication is that we do not compete with customers for business, and we try to avoid competing head-on with traditional Tier 1s. Instead, we provide solutions to the new needs that have just emerged in the industry, when it is not easy for everyone to get started. . This is the core capability for software suppliers to enter the automotive industry.
Of course, it is difficult to measure this kind of thing. Some IT manufacturers follow the example of traditional Tier 1 and provide system-level solutions. They hope that the OEMs will follow the prescription, purchase directly, do a good job in docking, and get on board.
However, this system is not the subsystem or subsystem made by Tier1 before, but the whole vehicle software and hardware system (the application layer is smart cockpit, autonomous driving, as well as software and related to the underlying E-E architecture) Data acquisition/control system), can be regarded as a "large system" and also forms a complete ecosystem.
If these are provided, the OEM will really only have to make shells. This is a big taboo, and is even worse than Huawei's expansion of "incremental business" being boycotted by joint venture OEMs, such as Baidu's Apollo Project.
The one that knows the most about traditional OEMs is the multinational Tier 1, headed by Bosch. Bosch said last year that it can sell software separately, hardware separately, or software and hardware together.
On the surface, this is to adapt to the diversified needs of OEMs; in fact, it just proves that it has no ambition. Since it can provide open hardware and cooperate with the OEM's software (don't worry about where the software comes from), the OEM doesn't have to worry too much about in-vehicle function control and data collection being taken away.
Bosch is committed to building full-stack technical capabilities of "hardware + underlying software + middleware + application software algorithms + system integration", but when selling, it can be sold separately, or you can choose among them. Subsystem combination. Of course, the price is that the OEM must handle system cascade debugging on its own.
We have seen that Bosch will integrate the software research and development part into the same department in 2022 and establish ETAS (ETAS), which is mainly engaged in software business. Its business includes basic software, middleware, cloud services and R&D tools.
Similar practices include ZF and Continental, which jointly invested in the software startup Apex.AI. The latter develops a middleware operating system (Apex.OS) and allows customers to customize it.
ZF also reached a cooperation with KPIT in 2021 to jointly develop modular middleware solutions, and on this basis will superimpose autonomous driving, system safety, motion control and electrification management systems.
In addition to new forces, this provides a unified solution for second-, third- and fourth-tier car companies. Even if the first-tier OEMs want to develop the operating system themselves, Tier1 can provide development tools, certain components (software packaging functions), or jointly develop with the OEMs. All in all, the figure is very soft.
Tier1's new investment can provide a standardized outlet for OEMs whose development capabilities cannot keep up with the pace of their products, allowing customers to quickly transition to reliable central computer architecture and shorten the development cycle.
It seems that multinational Tier 1 is seeking to compete with "incremental suppliers" for business. This situation would be unimaginable even if we go back two years.
In the global mainstream market, the traditional fuel vehicle business is shrinking year by year. This niche business is increasingly being eroded. The response of multinational Tier 1 is investment transfer. They pour a lot of resources into new businesses through capital operations such as splits, acquisitions, and alliances.
In fiscal year 2022, most traditional Tier 1s have begun to gain market share and profits from new businesses, but they are still unstable and have not yet become the company's main source of profit. Next, the focus of profits will continue to shift to new businesses.
New energy vehicle parts may be a market that will continue to grow in the next few decades, so the transformation of Tier1 is strategic. In the new energy industry, amid the attacks of "incremental suppliers" (most of whom have IT and 3C backgrounds) and incubation suppliers, multinational Tier 1s are working hard to find their new position.
As for whether multinational Tier 1 can still have the same say as before, judging from the current situation, I am afraid that history cannot be replicated. Of course, we have only seen the initial stage of this process, and it is difficult to predict whether the future automotive supply chain will follow the current trend in a straight line. Copyright Statement: This article is an original manuscript of "Autobot" and may not be reproduced without authorization.
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