The number of newly announced electric vehicle model launches now totals 400 plus, which means that one out of every four vehicles will be electric by 2025. All these new program launches will transition this currently niche technology from low to high volume. Consequently, OEMs who find ways to reduce vehicle development costs will capture more market share and experience greater profitability, faster.
We recommend the following cost reduction strategies for electric vehicle programs to realize quick win, low-risk results.
10 Cost Reduction Strategies for Electric Vehicle Development
1. Tap into On-Demand Services Firms
Experienced automotive talent is difficult to come by, whether in Detroit or Silicon Valley. Companies are finding success putting together bigger teams with flexible resources, as opposed to fixed, which can increase or decrease their level of support as needed by the customer.
Tapping into on-demand services firms to perform various operations, instead of using staffing firms to find transient or full-time talent, offers both higher-quality work and staffing cost savings up to 50%; tasks like supplier PPAPs will spike workload demands that are well suited for third parties to efficiently execute at lower costs.
2. Consolidate Fasteners
Less is often more when it comes to fasteners. Consolidating fasteners results in less development time, contract management, and quality issues. Select one fastener distributor that can provide a wide range of fasteners at lower costs due to their bulk-buy leverage. Cost savings as high as 18% can be realized through fastener type and supply consolidation.
3. Eliminate Prototype Tooling
There are several ways to eliminate prototype tooling: computer simulations, 3D printing, and launching straight to production. Some select body-in-white, chassis, and powertrain systems could even be supported by using processes with little to no tooling like extrusions.
Embracing the current low-volume nature of electric vehicles with more manual assembly may reduce tooling and equipment costs by 10-25% while adding flexibility. Prototype tooling suppliers can also make wonderful production partners, as their business models are better suited for controlling costs at low volume.
4. Use Adept Suppliers
Hungry, smaller suppliers – usually under $1B in revenue – can be more entrepreneurial and will find a way to get more done with less. We often call these suppliers mares because they run on the heels of larger suppliers – thoroughbreds – push them to execute, and keep costs in line.
Outsourcing a module, i.e. an electric axle system, to a dexterous prototype supplier can be effective at reducing costs because its overhead is usually lower when compared to a larger supplier.
5. Integrate Off the Shelf Components
A common tactic to reduce development costs is to use off the shelf components. However, programs often morph into using higher percentages of modified or custom components. Involving supply chain early in the product development stages can help with this by heading off scope creep, tracking cost impacts, and preventing the need to redesign or re-engineer components, which will save on costs and time.
6. Commit to Supplier Development
Suppliers have many options today, especially for capacity-constrained processes like stampings and castings. High-volume supplier business models aren’t set up to profitably support lower-volume programs, so acknowledgment should be made that suppliers are taking on investments that’ll pay off one day.
OEMs need to communicate tailored supplier development programs that outline the value for suppliers and highlight the fact that cost savings should be generated through eliminating waste, not profit reductions.
7. Consider New Technologies
The powertrain – battery packs and electric motors – accounts for up to 50% of the cost of an electric vehicle, so focus cost reduction efforts with these components and assemblies to generate the highest returns.
Due to the chemistry and high energy density of future solid state batteries, further cost savings will be possible and approach less than $150.00 per kWh. Newer integrated electric motors and axles contain fewer moving parts, and eventually won’t contain earth metals, which will also help cut costs.
8. Offer Marketing Press
There are several non-traditional negotiating terms that can save money for an OEM, like marketing, which is a major expense for suppliers. For instance, trade shows can cost anywhere from $10K to $100K to exhibit and sponsor. As a result, a supplier who can mention an OEM partnership is a quantifiable cost avoidance for it.
OEMs are well advised to find ways to incorporate positive brand and press awareness into their negotiations since the positive PR that can be created for suppliers through branding, co-branding, and press can lead to cost reductions, if not also new business.
9. Partner for Capabilities
Major market shifts such as electrification require massive amounts of capital, but technology investment missteps may prove to be fatal. Now is the time to invest in strategic partners, joint ventures, and alliances to diversify risk by tapping into the broadest range of technologies and entrepreneurial know-how as possible.
If you’re a traditional OEM, get leaner. Look to partner with a specialist for non-core activities to free up cash for reinvestment elsewhere. And if you’re a startup OEM, don’t build out departments. Keep your full-time staffing low, investing only in your core capabilities needed, then partnering to fulfill the rest.
10. Outsource System Development & Supply
OEMs have dabbled with system outsourcing to supplier parks and further integration via the collocation of supplier module manufacturing within final assembly plants. Deployment of this strategy during product development is needed to capture the most cost savings for non-powertrain systems such as interiors, exteriors, and body-in-white where capable suppliers exist.
Suppliers often lead innovation in their respective areas and are better positioned for strategic initiatives (like weight reduction) to expedite the application of new processes and materials. They also typically have lower labor rates for both engineering and assembly, which when coupled with the elimination of inbound logistics through collocation, may lead to lower system costs.
The current one percent market share held by electric vehicles has a long way to go to reach the bullish analyst estimates of 25% by 2025. It’s expensive to design, engineer, tool, and manufacturer electric vehicles, so creative cost reduction will play a vital role in transitioning the technology from low to high volume. For OEMs to realize the cost reductions needed to sustain launching new electric vehicle platforms, fresh thinking and new tactics will be required. We hope the above 10 strategies aid your efforts in reducing the cost of future electric vehicle development.