Assessing the North American Supply Chain for Automotive Traction Drive Power Electronics Prepared for the Department of Energy Synthesis Partners, LLC This report is intended for public release. Please contact Steven Boyd of the Department of Energy or Synthesis Partners, Reston, VA with questions or comments. Synthesis Partners is the copyright holder. Contract Number: DE-DT0002121 September 2013 Collection Cut-Off Date: August 15, 2013 Synthesis Partners © September 2013 1 Table of Contents Section Page List of Figures 5 List of Tables 7 List of Appendices 8 Executive Summary: Key Findings and Recommendations 10 Tasking 17 Sources and Methods 17 Study Approach 19 North American (NA) Power Electronics Supply Chain 20 Companies and Organizations in the NA Power Electronics Supply Chain 21 Lessons Learned from Global Automotive Power Electronics Production Leaders 35 Background 35 Lessons Learned 36 Company-by-Company Data That Informs the Lessons Learned 37 Top Constraints Affecting NA Tier 1-4 Power Electronics Producers 40 Key Findings 40 Key Findings from Primary Research Sources 44 Selected Interview Extracts Regarding All of the Tasks 57 Selected Market Research Extracts 63 Alternative Scenarios and Singular Issues That Could Be Potentially Leveraged To Achieve A Significant Expansion in NA Power Inverter Manufacturing Volume 77 Introduction 77 Analysis 77 Scenarios 78 Synthesis Partners © September 2013 2 Singular Issues That Could Be Potentially Leveraged To Achieve a Limited Expansion in NA Power Inverter Manufacturing Volume 80 Appendices 84 Synthesis Partners © September 2013 3 This page intentionally left blank. Synthesis Partners © September 2013 4 List of Figures Figure Page 1: Map of Select NA OEMs, Including PEV and HEV Final Assemblers 22 2: Map of Select NA Power Electronics Tier 1 Suppliers 24 3: Map of Select NA Power Electronics Tier 2 Suppliers 27 4: Map of Select NA Power Electronics Tier 3 Suppliers 30 5: Map of Select NA Power Electronics Tier 4 Suppliers 33 6: Power Electronics Supply Chain Diamond 41 7: Risk Reduction Needed to Address Brittleness in the PE Supply Chain 42 8: Discussion Results: “Is the Traction Drive Inverter Market Important to Your Firm?” 45 9: Frequency That OEMs Were Mentioned During Interviews Regarding PE Investment Activity in NA 46 10: Frequency That Tier 1-3s Were Mentioned During Interviews Regarding PE Investment Activity in NA 47 11: Frequency That All Companies Were Mentioned During Interviews Regarding PE Investment Activity in NA 47 12: Distribution of Positive Responses:" Is A US-Based PE Supply Chain Critical To Your Firm’s Future Success?” 49 13: Distribution of Negative Responses:" Is A US-Based PE Supply Chain Critical To Your Firm’s Future Success?” 50 14: Key Advantages of a NA Power Electronics Supply Chain 52 15: Key Disadvantages of a NA Power Electronics Supply Chain 53 16: How Large a Role Do NA PE Suppliers Play? 55 17: Are NA PE Suppliers Preparing to Expand Production In the Next Five Years? 56 18: Sales of Prius HEV, i-MiEV, Volt PHEV, Leaf EV and Prius PHEV since Market Introduction 66 19: Electric Drive Vehicle Sales in the U.S., By Type of Alternative Drivetrain, 2012 67 20: EV Sales by Region in the U.S. 68 Synthesis Partners © September 2013 5 21: S&P 500 Sector Operating Profit Margins: Compared to Consumer Discretionary 72 22: S&P 500 Sector Operating Profit Margins: Compared to Information Technology 73 23: Comparing Global Auto and U.S. Big 3 Profits (Includes Oil Industry Profits) 74 24: Estimated Costs of EV Batteries through 2020 75 25: Critical Dimensions of Power Electronics Cost Reduction 78 Synthesis Partners © September 2013 6 List of Tables Table Page 1: Secondary Source Research Statistics 17 2: Primary Source Research Statistics 18 3: Top 10 Inverter Manufacturers 36 4: Ranking of Selected Tier 1s – By Sales to OEMs 37 5: Synthesis’ Assessment Regarding Needs Expressed, by Company 82 Synthesis Partners © September 2013 7 List of Appendices Appendix Page A: Bibliography 84 B: Companies Identified as Part of NA Power Electronics Supply Chain 97 C: Introductory Letter from Pat Davis, Director, Vehicle Technologies Office 104 D: Sample Questions Used to Initiate Interviews 105 E: Case Studies 106 Synthesis Partners © September 2013 8 Synthesis Partners © September 2013 9 Executive Summary: Key Findings and Recommendations Synthesis Partners (Synthesis) was tasked by the Department of Energy (DOE) to undertake research on the North American (NA) supply chain of technologies for traction drive Power Electronics (PE) for plug-in, electric, and hybrid vehicles. This report addresses: 1. The current PE production leaders (in terms of volume) and how they have succeeded – in particular their actions and strategies relevant to NAPE supply-network expansion activities. 2. The top constraints or bottlenecks that currently limit NA automotive PE Tier 1-4 producers from achieving high volume power inverter manufacturing. 3. Alternative scenarios and singular issues that could be leveraged to achieve a significant expansion in NA automotive power inverter manufacturing volume. Key Findings Task #1: Lessons learned from the current leaders • Synthesis assessed the paths taken to achieve global automotive traction drive PE leadership by Denso, Mitsubishi Electric and Continental o Each company was investigated through a limited scope case study • Synthesis selected the three case study companies from among the global PE production leaders in the 2012 Top 10 inverter manufacturer list. o These companies consist of the two largest Japanese Tier 1s (Denso and Mitsubishi Electric) and the lead European Tier 1 (Continental). Synthesis ruled out Toyota because it produces its own inverters, and our tasking was to focus on Tier 1-4 supply chain dynamics rather than on internal OEM suppliers. DOE reviewed and approved of the selection criteria employed. • Corporate analogies of each of these companies in terms of American companies are: o Denso: Delphi (nee Delco) o Mitsubishi Electric: General Electric o Continental: no current analogy, unless Goodyear were to buy Hitachi Automotive Systems America. • The different approaches taken to supplier relations by these companies are striking, while the success of each is undeniable. o Whereas Denso and Mitsubishi Electric operate tightly integrated supply chains that institute common internal business standards and practices, Continental maintains a competitive Tier 2-4 supplier network with open opportunities for capable companies to participate. Continental does not rely on a vertical integration strategy (e.g., Toyota). Interestingly, Continental began as a tightly integrated firm, and then made the strategic decision to expand its supplier base beyond its initial relatively constrained supply chain, first to include European suppliers and later to encompass NA and Asian suppliers. Synthesis Partners © September 2013 10 • The specific lessons learned relevant to NA PE suppliers, including the core ingredients to success that were found apply across each of the three companies, include: o Long-term, sustaining relationships with OEM(s) o Intent and capability to deliver global top-ranked quality, competitiveness and volume, and for a broad portfolio of automotive and beyond-automotive products § PE-only does not work § Automotive-only is not sufficient o Capability to invest hundreds of millions of dollars over decades § Patient capital linked to global growth strategy required o Capability to build and sustain competitive facilities wherever the market demands and rapidly achieve proximity to fast-growing markets o Capability to produce consistent engineering reliability and product quality standards – communicated throughout a global supply chain – to achieve optimal supply chain value management Task #2: Top constraints or bottlenecks that currently limit NA automotive PE Tier 1-4 producers • The issue of declining competitiveness of American automotive engineering and supplier networks is a key constraint affecting any potential growth of the American automotive supply chain. Market research data indicates that the loss of market share and competitiveness among American suppliers has accelerated as of 2012. In comparison to 2011, the 23 American automotive suppliers lost one rank on average in 2012. • The market for automotive PE is more volatile and a fraction of the size of other PE markets such as industrial motors. • Low profit margins o Profit margins of suppliers to mass market automotive OEMs are low and difficult to maintain o Anecdotal evidence indicates that profit margins in automotive PE are low relative to PE applications in other industries (e.g., oil and gas, industrial motors) • Global competition o Global suppliers can meet – both through expanded investments in NA (an opportunity) and supply from abroad (a constraint) – current and expected demand for high-quality traction drive PE products • Cost structure of the NA business operating environment o Labor and regulatory costs constrain new entrants and capital investment, particularly when non-NA sourcing arrangements do not hinder NA PE sales goals • Lack of reliable information is a constraint on NA PE supply chain revenue growth. OEMs and suppliers repeatedly expressed a need for a comprehensive, up-to-date and accessible database on the NA PE supply chain to assist OEMs and suppliers to readily identify: o Suppliers of target items within a specific geographic area; Synthesis Partners © September 2013 11 o Brief descriptions of