Tier vs. Direct - EV Manufacturing Cost

Traditional Automotive Manufacturing is 70% tier and 30% direct, while the top Electric Vehicle Manufacturer in the world, Tesla, is the opposite. What does this mean for legacy auto and start-up electric vehicle efforts?

Automotive suppliers can be broken down into three tiers. Tier 1 suppliers are the direct supplier to the OEM, providing products and components for the assembly of the car. Tier 2 suppliers provide components for the raw materials used by tier 1 suppliers and also provide components to platforms that don’t have specific requirements on brand or supplier. Finally, Tier 3 suppliers are subcontractors to tier 2 that provide services like development of designs, process improvement, etc. All three tiers are essential in creating a successful automotive production line and supplying vehicles to customers.

What are the major parts/costs of electric vehicle manufacturing?

1. Materials - This includes steel for the frame or castings, aluminum for the body panels, plastics for the interior, plastics for fascia and panel attachments, all things fasteners, thermal fluids, and hydraulic fluids.
2. Manufacturing Equipment - Auto plants are like the United Nations, with roads and languages that differ from one another. Major auto manufacturers invest billions in assembly and manufacturing lines, yet can still incur large losses for their first runs of vehicles. These difficulties have been a hard lesson for many EV startups, who are now learning from the mistakes of others.
3. Interior - The inside of the car includes your seats, steering, infotainment or IP (instrument panels), air bags, and a thousand tiny parts from the headliner to the Oh Shoot! handles.
4. Exterior - The outside of the car includes stampings, bumpers, lights, tires, and everything needed to attach them to the car.
5. Power and Drive - Electric vehicles (EVs) consist of a battery and torque drive at their simplest level. However, the cost of the battery pack, inverter package, power electronics, charging ports, and engine can be significant for most manufacturers, with many electing to buy these components from a tier. Chips and Batteries will also play a big part in who comes out on top in the market.

According to Ultima Media, top tier auto parts suppliers had an average margin of 5-10% in 2018. This is operating margin, not the markups used for the parts they sell to their manufacturing clients, often resulting in far higher costs than if the auto manufacturer made the part themselves. Balance sheet based Tier 1 corporations require a gross margin of at least 45% on average, creating additional cost pressures for automakers who rely on these tier suppliers.

Tesla's 70% direct approach versus the Big 3 in Detroit being 70% tier reliant may explain why Tesla has the highest gross margins in industry history. This direct approach allows them to control their supply chains and mitigate costly delays or mistakes made by tier suppliers, especially when their EV products line are new to their plants.

As suppliers strive to make electric vehicles more affordable for buyers, this issue is set to become a major topic within the industry. Innovations such as full underbody castings and customizable power packs could lead to some legacy companies going out of business or transitioning into a tier 1 supplier like Magna International, who rely on others for batteries and software. They'd be left with the hardware or just making the car itself.

For more tier information, check out this report: https://www.automotivelogistics.media/download?ac=283779

Thanks for reading!

Ryan Bostick