Challenges and opportunities in the transition to EVs with Alixpartners

This episode is sponsored by DriveItAway. Whether you’re looking to rent, buy, or simply test out an EV, DriveItAway puts you in the driver’s seat. Visit driveitaway.com for more details. OTC: “DWAY”

Links

Connect With Arun Kumar

Learn more about AlixPartners

Transcript

Elena: Hey, Arun how are you this morning?

Arun: Great, Elena. Thanks for having me on the show. It’s fantastic to be here.

Elena: I’m so glad that you’re here. And we have met at many conferences over the years. And I’m so glad that you had the time to chat about EVs and electrification. This is a topic that I’m also very passionate about and you have a wealth of knowledge and as well so I would love for you to talk about your story.

Arun: I started in 1997 after grad school was very interested in working with product design, designing products using models mathematical models. I looked for this great company called out their engineering back today and they produced crash NVH type simulation software and they also have something arm which focus more on helping other OEMs you know, solve difficult problems, also solve some additional capacity, whether it’s new type of analysis that they haven’t done it internally or even sometimes surge capacity. So I did that for about 10 years and worked on some of the coolest vehicles. I’d say it was back in 2003, or four timeframe, I believe. And, you know, we built the whole brand new museum instrument battle, magnesium management, for several days. When you run into a crash, the activity the forces are transferred to the longitudinal array itself the vehicle was crushed, but this one was more transported to the panel. It was connected to the to the body of the vehicle. So it’s a unique design. We worked for the year before and it was a great, great outcome. I’m assuming power that is the thing that’s engineering marvels in my opinion, and since then, there were more vehicles that came up to Cadillac and others and came up with a similar approach to like with magnesium for strategy. After that, I went to an MBA, got my masters,  and I wanted to be in consulting, primarily like a challenge of solving different problems. Different situations. And so I like to at Kearney, the Detroit office, they had a great team of people that are Alix came from at Kearney as well. And, you know, ever since then, you know, worked on a lot of challenging problems, you know, especially as you talked about the later the last I would say seven years or so, it’s been fantastic because we call in this case, two is connected, autonomous, electric and shared. And I got to work on autonomous electric a lot more in the last 7 years. And then the last three or three or four years it’s been a lot about things in the real transition, seeing how OEMs are thinking about capital being deployed, how suppliers are thinking about how they transition from a dominantly internal combustion engine to electrics and then there’s also the actual sales and aftermarket, which I think is wrong in the aftermarket, a little less so because I think we need them more vehicles sold into the car boxes. That’s kind of been my journey and athletes. Fantastic, you know, being a lot of conferences with you and John and just hearing people’s perspectives. I think this is a quote came from Mark Fields. The transformation that we have seen in the last five years is almost equal to the 100 years and what the transformation we’ve seen in the last 30 years of automotive right actually some some change and it’s very positive view going forward is a lot of challenges. But I think the end state is going to be fantastic.

Elena: Absolutely. That’s such a great quote and it paints the picture so clearly of what is happening now. It’s a you know, you can’t go a day without seeing some sort of a headline about EV or something having to do with EV. So very, very interesting times for sure. So I would love to talk about your Bloomberg piece. So you were recently featured in a pretty awesome documentary produced by Bloomberg. Talking about the future of EV. We also had a little bit of the UAW strike in there but depending upon when this episode airs, you know, hopefully the things are progressing there on that side, but really focusing your pieces on you know, the future of EVs.

Arun: As you rightly pointed out, this transformation to EVs is going to have huge impact on how we design vehicles and what happens to the vehicle. So I think the big crux of the matter is that EVs obviously are less complex from an architecture standpoint, and not the engine and transmission. So that’s going to require less labor hours to produce it in our estimate that we did back in 2018, is that EVs will require 40% less labor hours to assemble a similar powertrain which is an engine versus transmission, convert back to a electric motor batteries gearbox that goes with the actual motor. So that has got implications for the labor force, right because, you know, you you see a lot of OEMs kind of trying to get control, vertically integrated components, especially with batteries, right? Now, even bring that into the OEM, it’s still gonna be a lot less number of people that’s required. Especially the marshaling side, right? So that becomes a concern for the UAW and anybody who actually has a decent living in this country, producing, manufacturing, assembling vehicles, right. So that’s kind of a big factor that’s driving a lot of the negotiations. With the OEMs and your W to make sure that there’s more certainty that you know, we’re not outsourcing more jobs to the buyers on the back, and that we’re filling up these plants that eventually will not have an engine or transmission produce right so you see there are three things have gone off one. existing plants are being converted to Eb e motors, electric motors, and battery plants. And then there’s the other end of the spectrum where you’re gonna see some plants that will be eventually shut down because you just have excess capacity that you don’t need anymore. Right. So that is kind of a big piece that, as I talked about this to Bloomberg and some other experts, too, is how is this going to play out? And then what’s the end state is going to look like? I think that’s anybody’s guess at the moment because you mentioned earlier in the article. The EV sales are slow right now, but I mean longer term. We’re kind of wrapping up into the S curve, where you’re going to see more sales as models come about. I still believe that growth is going to come because a lot of orders that are coming in from newbies over the new product introductions, the infrastructure is getting better, not there yet. And then the consumers of Walmart, the idea that hey, you know EVs are not as bad as I thought from chargeability standpoint, or being able to find infrastructure. I think those are the kinds of things that are still to be determined. The crux of the matter is really what he do with 40% less labor required to assemble EV, right that’s kind of the piece.

Elena: Anytime we’re talking about this large electric vehicle ecosystem. We also have to think about square one, which is the production what’s happening at the production level. So then, also to to the entirely other end of the spectrum, which is selling a vehicle like and a lot of people’s mind. Nothing happens until you actually sell that car. You sell that vehicle and it rolls off the dealership lot there. If you had your crystal ball, you know, I’m going to ask you this question. If you had your crystal ball, where do you see the inflection point might be or maybe a turning point for evey sales?

Arun: Reports you looked at the by November of this year, we will hit the million EV mark in the US, which I think is a big milestone in my opinion. So we are seeing growth. And I think I look at this as a bit of a longer term play. Right in the sense that it’s not something that you track sales on track sales on a year over year basis. I think you have to then look at the longer term. Are we going in the right direction, in the longer term? And I think the answer is yes. And I think you know, the State of the Union today is that yes, there is some slowness on the evey sales and I think there’s a lot of other factors too. You know, I think consumers are stretched in terms of being able to buy vehicles. Affordability is becoming an issue. I think we’ve been talking about that for the last year or so. You know, your average transaction price is at 45 $46,000. Plus, you’ve stretched out your payment terms to almost like 70 to 80 months on average and interest rates going up. The real income is not significantly increasing are a big chunk of the population Well, you know, it’s gonna push some and the other thing is also Evie sales have been premium, predominantly concentrated on the prime Asakura has super prime segment, right? So you’re gonna buy so many cars and they’re being watchful and thoughtful. Plus, I took a trip to Europe and I’m sure that a lot of people are taking a trip to Europe and other places because I’ve been concerned the COVID So, I mean, I think this is this is not a long term problem. Because if it is a long term problem that we got a real problem with the investment that we’re putting in, but I mean this this is something that you’ve been through lately by a lot of uncertainty in Congress yesterday that the economy code was pretty strong. 2020 Do us a little bit of lower base. But I mean, I think longer term I do see that. We’re gonna we’re gonna have this like a stock market like oscillations but eventually it is going up and if you look at the penetration of EVs, and we’re one of the early adopters stage, where there’ll be more and more people are doing about EVs, they’re seeing friends and families. You talk about selling the vehicle in the dealer lot. One of the videos, we did a survey last year, one of the prime reasons why people buy movies is because my friend or a family member, and that’s what drives they would go by, I think, I don’t think I’ve seen anybody talk about a I want to wait because I’m not sure but the product liquid products are coming out. Longer term, I still see a positive spin to it.

Elena: I love your perspective on that. And you’re right it is the not peer pressure aspect but it is the the buy in from the friends and family. I mean that if you think about it, that is such a strong influence. I always love your optimism Arun, I love I love the fact that you know we’re Yes, we are in a little bit of a conundrum at the moment but I think you’re right long term. You know, we’re going to start to see some some pretty powerful numbers. So last question I have for you. What are you excited to work on in 2024?

Arun: What is exciting about this the transition, that is that would be Inflation Reduction Act, see the supply chain, fundamentally changing in North America, right? You have to build a supply chain in North America all the way from mining or whether it’s lithium or phosphate or whatever you call it, and then process that capacity. And then, you know, being able to produce the squeak, capital, active materials or anode or whatever that that goes into the batteries. Right. So I think that to me is really interesting because that’s completely new. So we set up a supply chain, I’d say this theory was probably in the 70s and 60s, right? Because when we started looking at models go together, and I talked to a lot of suppliers that are taking advantage of the grants and come to the IRA, not just grants from consumer side but also the manufacturing credits and grants. Right. So to me, that’s a very interesting aspect and we are doing some work with suppliers in that space. We also do a lot of work. Just kind of how do you optimize and how do you improve the profitability of currently AV products in order to supplier or joint venture or whatnot with the OEMs The last thing I’d say is, you know, a lot of suppliers are figuring out how they transition their product portfolio to EPS. And I think if you look at our survey that we did last year, sort of them have a clearer view that I want to get some existing internal combustion engine products and get out and replace that with related products. And then there’s another on the other end of the spectrum and got another thought or let’s say 30% of them have no clue what they want to do, right? Either they are gonna write the end of the ice wave and then just gonna call it a day. So those are the kind of things where you see two ends of the spectrum and kind of walking across that spectrum and being able to put some thoughtful answers and ask the right questions. So wow, we don’t think about that. Maybe that’s an opportunity we should get in and deploy capital. To me, those are things that we’re working on in 2024.

Elena: Well, we will definitely need to do an update episode in 2024. And get an update on all of those projects because I know that you’re going to have some really cool and exciting updates. So I would be remiss if I didn’t give you a chance or room to let folks know how they can reach out to you or how they can learn more about AlixPartners

Arun: So just real quick on AlixPartners. We are a global management, consulting firm. Automotive is in the top three of the largest practices we have representation in North America, Europe and Asia. We have close to 300 consultants, you can go to alixpartners.com and search for our people myself. Just go to the People section you can find all our experts automotive.

Elena: I will also put that in the show notes so it is easily accessible. Arun, this has been a great conversation again, congratulations on the Bloomberg piece. As soon as I heard about it, I was like yes, we have to do an episode now. This is perfect. So Arun, always great to see you and I will talk with you soon.

Arun: Thanks, Elena. Good see you as well. Really good conversation. Good questions. Thank you.