Highlights - Bank of America Global Automotive Summit
BofA Securities held its 2021 Global Automotive Summit from March 30th to April 1st, 2021.
Participants included public and private companies from across the auto supply chain including suppliers - BorgWarner (ticker: $BWA), Lear (ticker: $LEA), Dana (ticker: $DAN), American Axle (ticker: $AXL); OEMs - General Motors (ticker: $GM), Ford (ticker: $F); providers of autonomous vehicle tech - Aptiv (ticker: $APTV), Ambarella (ticker: $AMBA) , Velodyne Lidar (ticker: $VLDR); and wholesale/retail distributors - Sonic Automotive (ticker: $SAH), KAR Auction Services (ticker: $KAR) among others.
Some of the key takeaways from management discussions in the virtual conference include:
Semiconductor shortages affecting the auto industry are expected to last throughout this year, but not all auto suppliers are equally affected - suppliers with large exposure to trucks have been relatively insulated from the supply disruptions
Auto suppliers are getting hit by rising raw material prices, but have mechanisms in place to pass on the price increases to their customers
Suppliers are bullish on the content per vehicle opportunity in BEVs vs ICE vehicles
Legacy automakers are relying on their brand and scale to compete with EV startups that often have a lower cost of capital
In this note, we highlight some of the key management quotes explaining the companies' views on these topics.
Semiconductor shortages have disrupted auto production across the globe — both Ford and General Motors announced in March that they have extended production cuts at their North American plants announced earlier this year, and there is little near-term visibility into when the chip shortage issues would be resolved.
The impact of chip shortages on the industry was a hot topic at the conference as suppliers were asked to comment on the disruptions:
Lear (ticker: $LEA) management said that the impact from supply chain disruptions has been worse than their initial expectations. They expect the shortages to peak in the second quarter and continue through the back half of the year before easing in '22.
...the impact...it's going to be a little bit worse than [initial IHS projections] in both the first and the second quarter. And I think the effects of this, the shortages really linger into the second half of the year, particularly in the third quarter. I think by the time we get to the fourth quarter and into '22, that will largely be behind us.
...the shortage situation will affect everyone, particularly in the second quarter. I think that's going to be the kind of the peak of the problem in terms of the shortage.
Lear expects volumes to continue to remain strong in CY22 and beyond as supply chain disruptions ease up.
I think by the time you get to the fourth quarter and certainly into '22, there's a setup for a nice volume recovery, maybe even similar to what we went through coming out of the 2008, '09 downturn.
BorgWarner (ticker: $BWA) said that while they don't see new product launches being delayed by OEMs due to chip shortages, the bottom end of their guidance accounts for a million vehicles lost in the full year.
...we don't see program delays, new program delays linked to chip shortages...I would say that right now the bottom end of our guide accounts for a bit more than...1 million vehicles lost in the full year. We still think that the second half of the year might be a way for our customers to recoup some of what could be lost in the first half or some of what will be lost in the first half, but that remains to be seen.
Dana (ticker: $DAN) said that the impact from chip shortages was better than expectations as their OEM customers
rationed chips to produce higher-margin trucks and SUVs
, which is a segment that Dana is overexposed to.
So on the light vehicle impact of the chip shortage, we're getting to the end of the quarter, and the impact for us was a bit less than we thought.
We can reference some of the public comments that some of our larger customers have made to intend to preserve some of the truck volumes, particularly in North America, so I think we are a beneficiary of that.
Similar to Dana, American Axle (ticker: $AXL)said that the impact from semi shortages was minimal due to their exposure to trucks.
from a broader spectrum, our primary impact to us, at least as it relates to the semiconductor shortage, is more as it relates to our shipments to our customers as they have taken some downtime on select platforms, more focused maybe on the passenger car, crossover vehicle applications...on a direct supply basis, we have very minimal impact associated with that.
But what is kind of the silver lining for us...is about half our book of business is exposed on the full-size truck platform, and you can clearly see our customers very focused in maintaining solid production schedules as it relates to those platforms...and as I mentioned, a little bit of downtime on some of the smaller platforms we supply. So many of our customers have articulated that they intend to make some of this production up in the back half of the year.
Commodity inflation has been a hot topic in the markets recently, with macro commentators debating how much of the impact from rising commodity prices will flow through to the consumers.
Most auto suppliers said that they have contractual mechanisms in place to pass on the majority of the impact of rising raw material prices over to their customers, albeit with a slight lag:
BorgWarner said that their contracts allow for passing through at least 70% of price increases to their customers.
...we have contractual elements that govern pass-throughs with our customers, we generally are covered at about 70% of pass-through through contractual clauses. Usually, when we negotiate with our customers, we tend to do a little bit better than that. But that's how we're thinking about this.
Lear said that their two biggest raw material commodity inputs, copper and steel, had both seen a sharp increase in prices. They said that they can pass through around 90% of the copper price increase and around 85% of the steel price increase over to customers.
So starting with copper, we've seen about a 40% increase from last year's average price to current pricing...90% of that's on an indexing agreement and is pass-through. The other 10%, we typically buy 3 to 6 months ahead, and so we have a bit of a cushion there heading into this year. We had some of that locked in. But we do expect higher copper prices throughout this year. I think it's a bit of a short-term phenomena. Copper sort of peaked a little bit above $4. It's come back down to $4. And I think over time, it will stabilize and come back maybe closer to where it's run 2016 to 2020, somewhere in that $3 a pound range is what we're anticipating.
On the steel side, steel has probably doubled if you look at the CRU index from last year to this year. We typically lock in our steel the year prior on the portion that we're responsible for. So we buy about 3 billion pounds of steel. 15% of that is raw steel that we buy for ourselves or our suppliers and the balance is on either an indexing agreement or it's in a component where the supplier may be responsible for it. And so that increase in steel has been significant, but it hasn't had a meaningful impact on the first part of the year because we locked in last year. In the second half of the year, we do expect to see increases there. And we factored most of that into our outlook.
Dana said that while they would be able to pass on "a strong majority" of the increase in steel prices over to customers, they would do so with a slight lag, meaning that they face near-term margin headwinds.
We indicated in our original guidance that we expected to have about $50 million of increases in raw material costs. Most of that was steel. While we recover most of that, we're certainly seeing that as a headwind for us. Steel prices have continued to rise in the last 6 to 8 weeks since we were out with this information.
We'll continue to work with our customers on that, but it does put a little bit of margin pressure on us. And also that margin pressure is amplified in the short term as there's a little bit of a lag from when we recover and when we pay to suppliers. So a little bit of a margin headwind for us on steel for the full year, and that has intensified a bit here in the last month or 2.
we largely have recovery mechanisms that are established with our customers that are quite formulaic. Lags last anywhere from a couple of months to more than that. But on average, we're getting most of that recovered within a few months.
American Axle said that they have long-term contracts with steel suppliers which afford them protection from rising steel prices in the near term.
Over the longer term, they would be able to pass on 90% of the change in prices over to customers with a slight lag.
From a direct-to-buy standpoint, that's typically coordinated by the OEM customer, they handle any increases or decreases with that. So that's really not our exposure.
From an SBQ standpoint, we're one of the largest purchasers of that type of steel in the industry and globally, to be frank. So we have some buying power. We typically have longer-term contracts with steel mills. And as you know, steel is tight right now. So we're able to, a, secure supplies that we needed, but also stable pricing going forward for at least the near term as our contracts continue to protect us for that for the course of the year, primarily.
A key component, though, into our steel price is indices. So we also pay spot prices for scrap metal, nickel, moly, things like that, that go into the manufacturing of steel, that indexing related cost, we pass on in the form of a price increase or a price decrease depending on the indexing to our end OEM customers and that's by contract. And we pass on about 90% of that change.
...we feel it's a great risk management mechanism for the company. That mechanically resets pricing depending on the customer, every 30, 60, 90 days. So sometimes there's a little lag between quarters on these type of activities. But over a period of time, pretty much neutral for us.
EV Content Per Vehicle
With the transition to EVs expected to accelerate in the coming years, one of the key questions for auto suppliers was related to their content per vehicle opportunity in EVs as compared to ICE vehicles.
Most of the suppliers presenting at the summit were bullish on their content opportunity in EVs.
Lear said that they had around $1,900 of incremental addressable content per vehicle in EVs for their E-Systems business.
So if you look at an electric vehicle compared to a traditional ICE vehicle, there's about $1,900 of incremental addressable content for us in that space, and that's really broken down into 4 partitions. You have high-voltage wire and connection systems, which is $200 to $400 of content. You have the battery disconnect unit, which is $600 to $800. Battery management system is another $150 to $350. And then lastly, the integrated power modules, which includes onboard chargers and DC/DC converters. And that's another $600 to $800 content opportunity for us.
Dana, which had
that their content opportunity in EV trucks would be 2x as compared to ICE, said that they're now seeing content uplifts that are higher than their initial targets, with "plenty of tripling and quadrupling of content" in some cases.
While we originally thought we were probably going to see the opportunity to double our content, we're seeing some double, but also plenty of tripling and quadrupling of the content as we move from the ICE to the EV architecture.
BorgWarner said that they have a 3x content opportunity in BEV as compared to ICE vehicles.
just to give you an example, a state-of-the-art inverter high-voltage silicon carbide, for example, is pretty much the same content that we have per vehicle in the case that we would sell compared to what we would sell in combustion. Everything we have in combustion, we would sell to that engine. If you compare that power electronics, it's pretty much the same content. So electrification really accelerates the growth for us. We have 3x content in BEV than we have in combustion.
American Axle said that their content per vehicle for EVs would "clearly exceed" their ICE content per vehicle.
I would tell you on an apples-to-apples basis, the EV or electric vehicles, that vehicle will have higher content. So if you think about our North America full-size truck average, it's call it, $1,500, $1,600 of content per vehicle. If you think about our all-wheel drive application for an ICE crossover vehicles, it's $1,000 to $1,200, it's just where we are. If you take the comparable product we have in the marketplace today on an all-wheel drive application, it's $2,500-plus. If you put -- we've seen, as I mentioned earlier, applications with 1, 2, 3 or even 4 drive units, depending on the power requirements of the vehicle, I mean, it will clearly exceed our ICE content per vehicle.
Transition to Electric
The line of questioning for the two U.S.-based automakers presenting at the conference, Ford and General Motors, revolved around their transition from ICE to battery electric vehicles (BEVs). Analyst questions focused on the competition from new entrants with a lower cost of capital, as well as future allocation of capital between ICE and BEVs.
In response to a question on competition, General Motors' (ticker: $GM) recently appointed CFO said that the company's scale and its ability to have product offerings across different segments within the EV space would help them beat off EV startups.
this industry, because of the capital intensity because of the design times and the time to market to set up a supply chain to manufacture a vehicle and get all the processes right, is a scale business, and it will always be a scale business. And I think when you look at the tools that we have, ultimately, the number of vehicles that we can bring to market across all price points, and that's why we keep saying everybody in, and we want to make sure we have product offerings across the space. I think you see a lot of boutique startups that are targeting one piece of the market. It's going to be harder for them to compete when the legacies are putting multiple products in the category, the way we have historically and different trim levels because it's that complexity, it's that customization that really comes with the scale and the manufacturing expertise of doing what we do millions of times a year over and over and over again.
Ford (ticker: $F) said that their iconic brands and their understanding of customers would help them compete against EV new entrants.
There's a large number of competitors entering the market....that being said, there's not a company on the planet that wouldn't love to have some of the iconic products in their stable. So we need to take our advantages, the things that we have, our understanding of customers, the broad application of commercial vocations that we serve and have served for a long period of time and leverage that strength, take advantage of that. We have this incredible service network to support people's businesses and trying to drive using connected vehicle and our Ford Commercial Solutions to drive productivity and uptime for our businesses. So we're very confident. We're very bullish about this, and that's exactly why we're electrifying the transit and the F-150 because they're so critical and core to the commercial side of the business.
On the topic of allocating R&D and CapEx investments between ICE and EVs, General Motors said that they would
continue to allocate capital to ICE vehicles
to generate cash flows to fund the EV transition and that they have the agility to make capital allocation decisions based on consumer demand.
This is a transition that's going to have to have a lot of agility to it, right? We either have to lean in heavily to EVs or potentially, we have to be investing in a little bit more ICE depending on where the consumers are. We can produce it, and we need to be ready to produce it. And to some extent, we need to lean into consumers and get them comfortable with that. And I think when you look at charging infrastructure, you look at range capabilities, a lot of that EV anxiety is starting to fade, and we're starting to see take rates increase. But ultimately, the consumer is going to be the dictator of when that comes, and we need to be there for all of our customers. So yes, I expect there's still a ICE investment out there, but certainly, we're leaning heavily into the EV and AVs.
Some of the other companies at the conference that have not been covered in this article but you might want to read up on include:
Veodyne Lidar (ticker: $VLDR) - Global leader in LiDAR systems
the company's moat and the significant technology lead it enjoys over competitors
Ambarella (ticker: $AMBA) - Maker of computer vision processing chips
the potential of their products in autonomous vehicle systems
Aptiv (ticker: $APTV) - Maker of assisted driving and automotive electrical systems
its Smart Vehicle Architecture products
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