Q&A: Michigan’s auto industry confronts risks as EVs charge ahead

• Michigan’s leading industry continues with its rapid change from gas-fueled vehicles to all-electric
• The transformation comes with enormous implication for the state
• Fewer suppliers and more technology are among the considerations of the looming business changes

The North American International Auto Show takes place Sept. 17-25 in Detroit. Days before it opens to the public, industry insiders will gather to roll out the latest innovations and discuss the pace of transformation toward vehicle electrification.

That pace of the “monumental change” continues to escalate, said Bernard Swiecki, research director at the Center for Automotive Research, based in Ann Arbor, keeping the pressure on automakers.

Michigan accounts for about 19 percent of all North American vehicle production; unclear is how that will change over the next several years.

Related:

• Michigan’s largest public companies raising prices to fuel earnings growth
• Rising costs make for rough roads for Michigan’s independent truckers

Swiecki and the team at CAR, a nonprofit research orlganization that forecasts the industry for it global leaders and advises on public policy, are focused today on the environmental and business changes prompted by the shift to electric vehicles.

In 2021, even amid supply chain slowdowns and shortages, about 1.4 million electrifried vehicles — including hybrids — were built in North America. That will double in 2023, he said. 

Pure electric vehicle production in 2021 was 550,000, and that will reach 1.3 million by 2023.

On the flip side of those numbers are the internal combustion engine vehicles that Detroit-based automakers have put on roads for a century. 

Across the U.S., those “ICE” autos were 84 percent of all auto production in 2021. Next year, it falls to 77.2 percent, Swiecki said, and then they’ll be “less than half of the market’ by 2029.

Swiecki recently spoke with Paula Gardner, Bridge Michigan business editor, about the changes taking place in the automotive industry that will also affect the state, its workforce and its economy. Here are excerpts from the conversation:

How would you define the transformation of the auto industry right now?

At first I thought it was kind of grandiose, but I've been going around and just brazenly saying: This is our biggest transformation since the early formative days of the industry …. about a century ago.

I think it's safe to say no one has more at stake than Michigan. Both in terms of the opportunities that this presents, but also, that there is risk. 

The opportunities seem obvious, after some of the recent battery announcements that Michigan has won — like in Lansing and Holland. Tell me about the risks beyond other states landing major new factories, like when Ford chose Tennessee and Kentucky for its $11.4 billion investment last year.

Only Michigan, Ohio and Indiana have employment of over 20,000 people in the powertrain field, (meaning) engines and transmissions and related things (for gas-powered vehicles). 

It's an opportunity because we have unprecedented investment in these technologies. But at the same time, these new technologies are not arriving just kind of as an additive on the scene. They are taking the place of something that already exists, and Michigan's heavily invested in that thing. 

It's a transition that needs to be managed.

Where are we in that place of transition?

We're in the early stages of production (changes), but the investment phase is already well underway. In North America, last year, we had just the automakers announce about $36 billion of electrification-related investment. So you have to be ready today, because the investment decisions and a lot of that framework for the future (is being made now). 

When you say that by the end of the decade less than half of the vehicles will be gas-powered, that surprises me. Maybe it’s because I talk to many people who are looking far ahead in the EV world, but I thought that number would be fewer. 

Essentially getting from where we are to less than half is still monumental, right? Because when you think about the thousands of parts that are in a vehicle and transitioning all that vehicle manufacturing to the development of all those technologies, you're shifting over the entire production base of the industry.

That is the forecast but, for example, we're seeing from the Biden administration that they would like to make that even faster. The Inflation Reduction Act has credits for electric vehicles, so this is something that could have the potential to happen faster. 

That would be good for the environment, but what a timing wildcard for automakers. 

Such a fundamental shift happening this quickly is a bit of a moonshot and it's also a race because no company wants to be non-competitive because they didn't move fast enough on this product, which is why you see things like those (battery factory) investments. It is a desire to not be left behind. And frankly, not just not be left behind by the companies that you've been competing with for decades. 

We also have the likes of Tesla and Rivian, Lucid and Canoo, the disruptor companies that pose a real competition. Frankly, if the automakers didn't move fast enough, we could have been looking at a future where the product is built by companies that just didn't exist a few short years ago.

In Michigan, we're used to seeing cutbacks in facilities, plants and workers when there are sales downturns. Now we’re looking at a permanent reduction in gas-powered vehicle production even as we see some steps to make EVs here. That’s a lot of factory space to reshape or vacate.

We are seeing, for example, car engine plants making electric motors … and transmission plants making electric transaxles. So those things are happening, but the question is, what are the differences? 

The number that gets thrown around the most is that electric vehicles will have 30 percent fewer parts than conventional and maybe require 30 percent fewer labor hours to build. If that is in fact the case, then we have to think about how we can make up for that.

I mentioned that fact to someone from a car company and he said, “Well, that's one way to look at it. The other way to look at it is you can now just increase the production capacity of that plant. Then you keep the same number of people, but just build more vehicles.”

The potential supplier shake-out is staggering to think about.

Those transitions are very much on people's minds and to make it even more problematic — or maybe more interesting,  depending on your angle — there's no guarantee that all of these things will come from the traditional automotive supply chain. 

For example, electric motors are used in a lot of industrial devices, medical devices, you name it. The engine of your car, the vast majority of the time, was made by the automaker in a dedicated engine plant that the company owns specifically for that purpose because car engines are that specialized. 

However, when it comes to electric engines, I feel we need to investigate the possibility of a company that already makes large electric motors for industrial and other applications to add some capacity to their existing plants. Maybe add a new line, do some research and development and suddenly they're making electric motors for cars. And would that take the place of automotive jobs?

Very valuable parts of the automotive supply chain are potentially able to be sourced from outside the industry altogether. We don't normally have to worry about these things that we do with this.

What exists out there for suppliers to be able to make this transition, particularly the smaller ones?

It varies very much by company. The largest suppliers are transitioning already. They've been working on it for years. 

What we worry about the most is the smaller companies, the second- and third-tier suppliers. It's a whole other level of risk, frankly, and also many of them don't have the same available resources. Nowhere. They can't as easily understand the risks that they may face. 

Both the Inflation Reduction Act and the Chips Act were signed this summer. It seems like federal policy is moving fast to encourage EV production and sales, plus domestic manufacturing. What do you think are the most meaningful changes in policy recently, and what do we need to do next?

The Inflation Reduction Act (and its $370 billion for climate change, including $7,500 EV tax credits for buyers) is a big deal. We're still trying to understand some of its implications. Its domestic content requirements are going to go up so quickly that it will be a real challenge to meet them. We hear that a lot. So the industry is still adjusting. 

Last November, we passed the $1.2 trillion Infrastructure Investment and Jobs Act with $7.5 billion for EV charging stations around the country in publicly accessible areas.

One of the roadblocks for people who may consider an electric car is what we call “range anxiety” and having a greater, more robust charging infrastructure is one way around that issue. That’s a very big deal.

Today’s economic climate — with high inflation and rising interest rates, fueled in part by the supply chain slowdown — seems top of mind for consumers. How is all of that affecting the auto industry right now?

Wages are going up as part of inflation. And (the rest is)  definitely impacting the entire automotive value chain. All of your inputs are more expensive, including the people that make the actual products. Plus, there’s even a shortage of truck drivers and with high fuel prices, logistics has become very, very expensive and it's a cost-critical element to the industry. 

There is one other dynamic that's related to that that's playing out, which is that vehicles have become more and more expensive over time, about $47,000 per unit now. The average monthly payment I just saw is reaching over $700 a month. Not a whole lot of the people in the economy can afford that kind of a payment. 

As vehicles get more expensive…they’re selling to a smaller and better-off part of the population. 

As automakers consider their capacity and make choices for what facilities stay in use and what they develop for EV use, what is the implication for Michigan industrial property?

Batteries are the bottleneck in the whole process where the automakers could sell and build more electric vehicles if they had more batteries, but they don't. So there's a land rush to build battery plants. And what that is doing is prioritizing these large greenfield shovel-ready sites (like Ford chose in Kentucky and Tennessee) that have infrastructure to make it possible to produce very, very quickly. 

In Michigan, we've got fewer of those kinds of sites and more brownfields. 

My hope is that eventually if, if the industry returns to a more normal sourcing pattern, or a more normal investment pattern, and we don't have that same urgency that we do today, then maybe the brownfields will have a better shot … and be more competitive. 

What should Michigan be most attentive to over the next year as all of this unfolds?

The good news is there's nowhere else that can claim the kinds of assets that Michigan has. So essentially, we have the most powerful tool belt of anywhere in terms of being able to design and manufacture these products.

For me, it's the whole ecosystem. You're going to need alignment and collaboration, not just between government and industry, but for example, the educational institutions, and making sure that they're providing the right degree programs. Chemistry majors right now are making ridiculous pay levels, right because there's such a shortage. So even for me, the whole endowment here is just unrivaled. … You can deploy it to its full potential if you have as much collaboration as possible between these institutions. 

Are you seeing that happening?

There does seem to be a sense of urgency here in Michigan … driven by Ford last year. We didn’t have those kinds of sites, and we know that now. We did have the Michigan legislature pass economic development incentives that have been used by General Motors and its battery announcements. We have something like 50 different partnering organizations in the EV Jobs Academy.  I take those steps to be encouraging.