This week, in conjunction with General Motors reporting of Q2-2022 financial performance, the auto maker disclosed that it had secured strategic supply agreements to support one million electric powered vehicles in North America by 2025.
Some Broader Context
Our previously published commentary authored by The Ferrari Consulting and Research Group provided a mid-year assessment of our specific 2022 prediction that restoring more direct control of tactical and strategic materials sourcing would be a driving force for businesses and their supply management teams during 2022.
The period of 2020 and 2021 provided companies as well as government policy makers considerable painful evidence to the inherent vulnerabilities of globally extended and highly complex supply chains and of the needs among businesses to be able to better respond to major product demand and supply shocks.
We in-turn, predicted that multi-industry supply chain teams would explore and execute added defensive moves in assuring more reliable supply of key materials and components along with addressing means for mitigating continuous supply and transportation disruptions and double-digit inbound materials cost increases. Special emphasis would be placed on semiconductor, high tech electronic components, certain deemed essential raw materials or other components.
We further predicted a revisiting of vertical integration materials sourcing strategies in industries where such moves would enhance supply network risk mitigation.
GM’s Latest Financial Performance
The financial headlines related to GM’s latest quarterly financial performance was in achieving top line revenue growth but disappointing on profitability. While revenues increased 5 percent to $35.8 billion, net income slipped 40 percent on a year-over-year basis.
The auto maker had previously warned investors that the ongoing global-wide shortage of semiconductor device supply would impact second-quarter results. Reportedly, parts shortages including those semiconductor related prevented the shipping of 95,000 vehicles at quarter end. The vehicle backlog is expected to clear by over the next few months. GM CEO Mary Barra maintained guidance that the company would meet its sales and profitability targets for the year.
In conjunction with the financial reporting, GM announced that the company has secured strategic supply agreements for the materials needed to support the company’s goal for producing one million electric powered vehicles in North America by 2025. The reported multi-year agreements relate to battery production needs and include the company’s battery partner LG Chem, which will reportedly supply one million tons of materials that make-up battery cathodes, and a supply agreement with Livent Corp, for needed lithium hydroxide supply, also used in the production of battery cathodes.
Keep in mind that at the height of the global pandemic in 2020, the global wide shortage of semiconductors especially impacted auto makers because they had shorter term supply agreements with semiconductor distributers and specialty producers. Tier one suppliers to automakers, especially those producing the electronics that make up today’s more tech laden vehicles, had further semiconductor device supply agreements.
Initially assessing the overall impacts for global manufacturing output decline and demand erosion, many automakers elected to cancel or defer their supply contracts with suppliers. When industry demand began to rebound, the industry discovered that limited constrained global semiconductor production capacity was diverted to meet demand requirements for servers, personal computers, networking and other remote office needs.
From a strategic supply perspective, many auto makers did not view semiconductors and high-tech components as necessary for strategic supply agreements, that is until Tesla demonstrated that EV demand would change and indeed be positioned to take advantage of EV vehicle market growth.
Now, not a week goes by without the business news cycle featuring strategic efforts related to the design and launching of new EV vehicle platforms and models, or automotive brands partnering together for sharing innovation efforts, and with establishing long-term strategic supply agreements.
In January of 2021, GM’s CFO indicated that longer-term supply contracts or partnering with chip and wafer suppliers to mitigate the impact of supply disruption was being explored. By November of that year, the automaker indicated plans to reduce the types of chips it uses to just three families of semiconductors over the next several years. That reportedly would reduce the variety of chips GM orders by a reported 95 percent, making it easier for producers to fulfill the company’s needs.
GM’s Broader Innovation Efforts
GM efforts for entry into the electric vehicle segment began in 2017. For an insightful perspective, readers can review Business Network CNBC auto industry analyst Michael Wayland’s living case study of GM’s ongoing innovation efforts.
Five years ago, CEO Marry Barra established a company direction that GM would surpass Tesla in EV auto production by 2025. Noted in the report, CEO Barra indicated to her management team: “We started to say, OK, we don’t want to be disrupted. We want to lead the transformation.”
In 2016, GM introduced the Chevrolet Bolt in an effort to one-up the industry. That vehicle encountered its challenges and reportedly did not have the cachet of Tesla. The report points to the strategic importance for GM in coming up with the company’s Ultium vehicle platform as the base for producing a broad range of vehicles not only for consumer, but commercial and transport industry needs, and the transition to a broad range of EV model offerings. Further developed was the Ultifi platform for battery powering needs.
The report observes that this year, GM is expected to be the first automaker after Tesla to have the capability to produce lithium-ion batteries in the U.S. while other automakers are in the process of announcing their U.S. or North America presence.
A total of 30 GM EV models are planned for production by 2025 along with a doubling of revenues.
This week’s announcement to shareholders that “binding supply agreements” have been secured to support 2025 strategic supply needs is indeed industry changing and one that is likely to be emanated by other global companies. It sets the stage for many other companies not only reporting financial performance, but supply chain efforts and strategy as well.
By our lens, it is a solid example of restoring more direct control of supply networks, emulating the practices of high tech starts such as Apple as well as Tesla.
Our belief remains that multi-industry efforts for restoring more direct control of supply networks is definitely a more top of mind perspective for business and supply senior management leaders. While the perspectives will vary by industry, and that actions undertaken will be of a business specific nature, the aspect of rethinking of strategic and tactical sourcing strategy needs is well underway.
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