Rise of electric vehicles threatens to decimate smaller suppliers

There is no place inside an electric vehicle for the transmission parts Production Saw & Machine Co. has produced the past 50 years.

In the automotive transition to EVs, there is no long-term future for the Clarklake, Mich.-based supplier, said its owner and president Jeff Vancalbergh.

Like hundreds of other small machine shops and suppliers throughout Michigan facing the same uncertain fate, Vancalbergh has two main options: He can keep the engine business running until it sputters out, overtaken by EVs, which many experts say is a foregone conclusion. Or he can totally rebuild the engine business around electric motors or new industries, but that would be a costly undertaking with fierce competition and no promise of success.

"It's a family business," Vancalbergh said. "I'm second generation, and third generation is here in the building, looking to take over. Looking to take over what, I'm not sure … Not sure if there's gonna be anything to take over at this point."Automakers and tier-one suppliers are investing billions of dollars to develop and acquire new technologies to secure a future in the industry. For smaller companies that lack funds and technology, the existential threat of electrification looms large.

"We live and make a living in that internal combustion world," said Matt Carr, president of Livonia, Mich.-based Storch Products Co. "The idea of switching to fully EV will devastate the supply chain here in the Rust Belt."

Global sales of electric vehicles reached 6.6 million, or 8.6 percent of all new car sales, last year — more than double the market share in 2020, according to the International Energy Agency. EV sales are projected to eclipse internal combustion car sales in the next decade, which has set forth a mad scramble by automakers to prepare for the transition.

Suppliers must fall in line to survive in the industry. Tier 1 giants with roots in the internal combustion engine, such as BorgWarner Inc. and American Axle & Manufacturing Inc., are doing so by spending hundreds of millions of dollars to acquire and develop EV technology.

Further down the food chain, companies like Production Saw & Machine don't have the money or technology to guarantee a stake in that future.

"Two years ago, I didn't think this was a possibility," Vancalbergh said. "I can look out in the factory and see, this part number dies in this year, this part number dies in that year, and there is nothing behind it. I don't have quotes out there for '23, '24 and '25."

Craig Carrel, president at Albion, Mich.-based Team 1 Plastics, has come to terms with that fact. He knew more than half of the injection molding company's business was in the ICE engine, but after taking a harder look recently, he was surprised to learn it is more than 80 percent dependent. The way Carrel sees it, the company must do all it can now to start weaning itself off a dying technology.

"We've been in business 34 years, and this is like the third big push for EVs in that time, but this one seems more real because every automaker is making a push," Carrel said. "You just start running the math, and there's going to be less suppliers if we go to full EV futures."

One way to make the switch has been to incentivize the company's sales team to go after nonautomotive business.

"It's a slow process," Carrel said. "But the numbers don't lie. We've woken up a little."

Diversification has long been a priority for many automotive suppliers, but Carrel and his counterparts across the state say it's become a necessity. By no means is it easy, added Carr, from Storch Products.

"We'd have to hope that lightning struck twice," Carr said. "We built a model that lasted 70 years for crying out loud."

Michigan has around 170,000 direct jobs in manufacturing, its largest sector, with a total of 950,000 jobs, or 20 percent of the state's labor force, tied to the automotive industry, according to data from the state. A recent study commissioned by the state found that more than 300,000 EV-related jobs are up for grabs over the next 10 years if manufacturers are to meet their ambitious projections.

"The sense of urgency on this is these investments are occurring at a great rate to meet those 2030 production goals," said Steve Bakkal, senior vice president of strategy, planning and external affairs at the Michigan Economic Development Corp. "Absolutely it's urgent for us because this isn't just an investment into an existing assembly plant or existing ICE plant. These are new opportunities."

What's to be gained in the EV transition is clear, but what will be lost is not. Michigan is home to more than 2,200 small and medium-size suppliers, most of which have some dependence on ICE vehicles. What will happen when that business is stripped away is a question that governments and data research firms around the world are trying to wrap their heads around, said Glenn Stevens, executive director of MICHauto.

"A lot of the Michigan supply chain is built around internal combustion engines," Stevens said. "We're looking at a 120-year-old industry that's been built around a gasoline powered engine that now has a huge shift in technology that will be obsolete that at some point."

Around 85 percent of Production Saw & Machine's business — ring gears, sun gears and pinions — is tied to transmissions. Vancalbergh said if he intends to keep the business alive, and its 165 workers employed, he needs to move to military, aerospace, agriculture or "wherever we can find a new niche."

"The unfortunate part is I think we're gonna have a bunch of company," he said. "Everybody that makes parts for transmissions and engines, they all gotta be looking for work. The writing is on the wall. Is everybody else going out to knock on the same doors as I am?"

Gas engines are not going extinct overnight. There will still be a need for aftermarket service and traditional drivelines in heavy duty vehicles after EVs take over the market, Stevens said, but the volume of business for traditional suppliers would be a shell of what it is now.

From a parts production standpoint, EVs won't come close to replacing gas cars. ICE engines are composed of more than 2,000 parts — 100 times as many as an EV motor, according to Congressional Research Service, a Washington, D.C.-based public policy research institute.

Michigan has among the highest concentration of production capacity for engines and transmissions, which account for more than one-third of the overall value of a gasoline-powered car, said Dave Andrea, principal at Plante Moran. Unlike ICE engines, EV motors can be relatively generic among makes and models, with software being the ultimate differentiator. That means less work for manufacturers.

"It's a huge transition, and it's a huge economic development risk for the state of Michigan," Andrea said.

That risk is biggest for the lowest tier suppliers, said Kristin Dziczek, policy adviser at the Detroit branch of the Federal Reserve Bank of Chicago

"I think the bottom line is that everything is changing," Dziczek said. "My worry about smaller firms that don't do a lot of their own R&D, that don't have a proprietary product of their own — they're build to print. They're dependent on volume. The volumes on the ICE side will be shrinking and not all of them are going to be ready."

There is still business to be had in EV parts, but the pie is much smaller with the same number of companies clawing for a slice, according to the industry observers.

That makes Vancalbergh wonder if pursuing EV quotes is even worth it. Production Saw & Machine has landed some EV component supply contracts, including on the Ford F-150 Lightning, but they have come with challenges.

Generally, EV parts require far more precision, which would require investing millions of dollars in machine upgrades if Vancalbergh were to take on more EV business. Additionally, the order volumes are at least for now a fraction of those for ICE engines. A contract for an EV part typically ranges from 30,000 to 150,000 parts per year, whereas ICE orders are 600,000 to 2 million, he said.

"We've turned a number of jobs away for the EVs that just don't fit," Vancalbergh said. "There's no way for me to get to point A or point B."

The traditional engine continues to keep suppliers afloat — for now. The automotive industry sold 14.9 million light vehicles in the U.S. last year, according to Cox Automotive, with nearly 90 percent of them gas powered. The demand for ICE engines has yet to decline sharply even as demand for EVs grows, making for a calm before the storm for suppliers, analysts say.

With gas car sales steady, from 2015 to 2019, revenue at Production Saw & Machine grew by 30 percent to $20 million, before the COVID-19 pandemic hammered sales and profitability, Vancalbergh said. This year, revenue is expected to be between $16 million and $17 million, with no way to go but down, he said.

Storch Products rode a similar wave of growth. In fact, its backlog of business has never been bigger. The company is on pace to sell twice as many magnetic conveyers, its core product for ICE engine parts, as last year.

"People are panic buying," Carr said. "People are folding up left and right. The OEMs are just trying to get an order in."

Carr knows that peak is also a cliff.

"Revenue will go down," he said. "It will shrink. It has to shrink …"

The automotive industry has seen this story before. Electrification has threatened to upend the industry many times over the past century. A few years ago, it seemed as though the takeover of autonomous vehicles was imminent until that technology faded to the background. EVs are not on that same path, said MICHauto's Stevens.

"This is a whole different ballgame with electrification," he said. "There's a lot of debate about what the adoption curve and demand curve is going to look like, but this is something that is happening."

Storch Products' search for a future outside of automotive has not been fruitful. In response to the COVID-19 pandemic and personal protective equipment shortages, there were loud calls by federal, state and local policy makers to onshore production of those supplies. Storch Products used the pandemic as an opportunity to enter health care, as did other manufacturers such as Troy, Mich.-based Cadillac Products.

They learned that health care is one industry with even more red tape than automotive. Cadillac has been unable to get its gowns inside Michigan hospitals. Storch's Airotrust — an air filtration system marketed as a "mask for buildings" — also failed to gain traction, even after the state approved a $10 million grant for airborne pathogen controls that would have allowed Michigan's 10 largest health systems to implement the systems at no cost to them. The grant expired April 1 with no letters of intent from hospitals.

"Not one hospital. We can't believe it," Carr said. "That was our transition for this company."

Carr said he will take on as much EV business as he can while looking for new ways to diversify, knocking on the same doors as Vancalbergh and hundreds of others in the same situation. But, taking a cue from BorgWarner and the other big players, he's not ready to turn his back on ICE just yet. The rise of EVs still has to happen first.

"There are many that are waiting to see if this sticks," Carr said.