CLA Episode 5: The Evolving Role of Contract Manufacturing in the Mobility Space with Alex Mitchell

Full Transcript:

Brandon: Welcome to the Capital Light Assembly podcast brought to you by Edison Manufacturing and Engineering. Edison is your low-volume contract manufacturing partner focused on the capital-light assembly of complex mobility and energy products. It's a fun episode I'm looking forward to. I have a special guest. I'm joined here by Alex Mitchell. Well, first of all, Alex, thanks for joining.

Alex: Thank you, Brandon. It's good to be with you!

Brandon: Yeah, I think this will be really, really fun. So, one, I haven't mentioned I was inspired - we've talked on several topics, and I really appreciate your perspective in this industry. I think you come from a unique background, with European, and North American experience, global automotive strategy experience, as well as some of the earliest stage startups, and you have some, I think, well-formed thoughts and opinions about manufacturing - what goes into growth and stuff like that - which I'm happy about! I'm looking forward to diving in, so with that said, would you mind just giving a quick intro to who you are? What are you working on?

Alex: Sure! Thank you again, thank you for having me, Brandon. My name is Alex Mitchell. As you said, I've spent the last 15 - 20 years of my career in the transportation mobility space across a couple of car manufacturers, an AV startup, etc.. and more recently, I've been affiliated with the Los Angeles Cleantech Incubator, or LACI, where we have a portfolio of, a number of, companies in the mobility manufacturing space. From aerospace to micro-mobility to four-wheel devices, you name it! I currently serve as a senior advisor on a number of projects, and then in addition to investing in the mobility space, I also run a newsletter called Su$tainable Mobility, which writes on some topics, including the emergence, or re-emergence, I guess I should say, of contract manufacturing in parts of the transportation manufacturing space.

Brandon:  Yeah, and I'll make sure to link to it here. I do recommend if you're listening to this and you like these topics, Su$tainable Mobility, or your newsletter, is one of the few ones that I open and read from start to finish every time it comes out. So, I do definitely recommend it. You do a good job there!

Alex: Thank you!

Brandon: So, yeah, so this this topic of contract manufacturing. So, I guess, if you wouldn't mind maybe starting - what has this meant kind of historically for the industry? What has been the role of contract manufacturing in the transportation sector in the past?

Alex: Yeah, and I'll start with a focus. I think throughout this conversation, we should obviously not just touch on passenger cars and make sure we touch on the other topics, but as you look at the dollar volume that has been driving in contract manufacturing, it really has historically been sort of like commercial vehicles, you know, passenger cars and light trucks. So, I'll focus there, and as I think about the history of contract manufacturing, I see three different phases. The first phase, I would argue, was the coach-building phase. I mean, that was in and of itself its own sort of contract manufacturing process. So, the original automobile manufacturers were doing body-on-frame manufacturing and would ship, you know, to somebody like a coach builder, Body by Fisher, and I would argue, okay, that was integrated - Fisher was part of General Motors, but there were a lot of those relationships where that was not a company subsidiary, but somebody was shipping a vehicle to somebody else to finish manufacturing with the frame. And so that was the coach-building era and that sort of, there were so many contract manufacturers in that era, we call them coach-builders rather than contract manufacturers. That waned as a lot of people transitioned from body-on-frame to unibody construction, and then the second phase was much more predominant in Europe than it was in the U.S., which was then the second half of the 20th century, and a little bit into the current century, which was sort of, think of it as hey, I'm a BMW, I'm a Chrysler, I'm a whoever, and for various moments and purposes, it made sense to actually not manufacture yourself, and farm that out to a third party. That could be because you lacked critical scale in the marketplace. So, that's, you know, Chrysler used to build Voyager minivans in Europe because they didn't have significant scale in Europe and had somebody else build their minivans for scale, or because you had a unique model that didn't have huge volumes, but you still felt there was a good business case. You know, you might have been a convertible or something like that, so that was definitely prominent, you know, and there were firms and continued to be firms like Magna and Belmont who do that again, more in Europe than in the U.S, and that was, you know, sort of a niche business for, you know, a niche in the grand scheme if you're BMW, a large business if you're Magna, but for many decades, and I think we're now beginning because of electrification, I think we're now beginning to see a really big shift in what that contract manufacturing is - and it will no longer go from being something sort of on the margins to, I think it will become something that is much more front and center of how people think about manufacturing cars going forward.

Brandon: And do you see that – so, maybe one question - so why has, over the past few decades, contract manufacturing been so much more prevalent in Europe than North America?

Alex: Yeah, I wish I had a great answer for you! I can give you some reasons that come to mind. One is, you know, there's almost at times a penalty or a homogenization that happens when you have a large market like the US, where you've got, you know, from one factory you can supply all of the US and fairly homogenous consumer tastes, yes, okay, in certain regions, pickups are more popular than minivans. But whereas in Europe, you know, you're going to have, I would argue, much more heterogeneous customer typologies, potentially very different energy policies in different markets or, you know, consumer tastes, you name it. And so more of an attitude and an expectation of European consumers - that they might have more variety than you would get in the U.S. For example, historically, there have been more global brands that chose to sell in Europe and not the U.S., partly just because of that sort of homogeneity of the U.S. market. Also, coach building really began as a profession in Europe, and so maybe just because its roots were there, it stayed prevalent in the contract manufacturing space as well.

Brandon: Yeah, there might be a culture piece too, right, of like, for whatever reason, so I, before my current role at Edison, I was in the engineering services space, and for whatever reason, it was much more common that it's just engineering services companies do huge chunks of work for European OEMs than it is for North America - like that model is not as native for the North American OEM. So, maybe there are good reasons, like you're talking to, in the background for why that is, maybe it's just a cultural type thing, but yeah, that's interesting, though. But then, looking at where we are now, so you mentioned electrification as a key shift. So, why does that potentially change the math, and if so, what do you see kind of evolving?

Alex: Yeah, so, I think when you look back at the second half of the last century, how most car companies sort of competed and won was on manufacturing. And a lot of the IP and manufacturing capabilities that went along with the in-house manufacturing of their own engines, for example, you know, that was very clearly something that was proprietary and a drive of their competitive standing. As you look at the EV space, what drives success for a car company is that a lot of manufacturing in EV is decently simpler than manufacturing an internal combustion engine car. So, just in the news this week, Ford is having some layoffs in Europe, and one of the reasons they're citing for the layoffs is, look, it just takes fewer individuals to manufacture EVs than it does gasoline power cars. Conversely, what then would allow you to succeed in the EV era as a manufacturer is less about things you can do on the manufacturing side and more about upstream R&D or downstream software that the customer touches. And so, I think you're seeing manufacturing going from something that was like a must own, because it's the source of um competitive advantage, to something that may be a price of entry in the category, but not always the most differentiating factor and where people might say - look the automobile industry is super complex and vast, we know we need to invest in our own internal battery management system software, we know we need to invest in downstream customer software for charging and the customer experience, and maybe because, you know, it's simpler to assemble EVs than it is to build gasoline-powered cars, maybe we don't own that anymore. Maybe we partner with somebody else on that. So, I think the EV simpler manufacturing makes that, and how it doesn't necessarily drive competitive advantages much anymore, might make people say, “Huh, maybe I will partner with somebody else on this rather than keep the manufacturing in-house.”

Brandon: And how do you think, so, yeah, I completely agree that manufacturing of EVs is simpler than conventional or hybrid vehicles. There have been a few high-profile examples of, I think, tech companies really, or like tech-ish companies, realizing that, yeah, it's simple, but it's still not easy, right? So, the design for manufacturability, and maybe that is more design-type stuff, but the ability to put together a product in a way that can be manufactured and then actually executed on it - like there is a significant barrier to entry there. So how much of it as well is that? By outsourcing some of this manufacturing, these companies are able to avoid the pitfall that they might otherwise run into if they aren't necessarily automotive manufacturing experts.

Alex: Yeah, well, I think that gets to sort of a little bit more about where the contract manufacturing industry goes, and if you were, you know, an upstart, whether you know a tech company that's considering having a car built for your purposes, or a startup that wants to be the next, you know, Tesla or Rivian, but says, “we don't want to own manufacturing”, I think either way, you want to think through sort of - as you think about contract manufacturing - where it touches some of the other key points in the value stream. Obviously, you know, you want it to be close to the end customer, but what I think newer about some of the models I'm seeing in contract manufacturing that didn't exist as much 40 or 50 years ago is the potential to bundle that with supply chain, right? So, is the person who's doing your contract manufacturing also responsible for the actual procurement and logistics of getting the vehicles or the parts to the factory? In some ways, that's actually getting harder to do than it used to be. We have battery shortages right now and are expected to have battery shortages for the next several years as various mines come on-site, etc. So, if you're a small startup, your ability to actually even just get capacity from CATL, Panasonic, BYD, you name it, might be limited, and actually going through a contract manufacturer who has scale and volume might be how you get sort of supply chain as well covered. The other thing linked to that is, are you coming with your own engineering and your own platform, or are they supplying it? So, one of the novel things that Foxconn is doing is Magna, for example, Magna, for those who sort of are tuning in for the first time on this topic, Magna is historically one of the giants in this space.  I'm not aware, there might be one or two exceptions, but like Magna didn't engineer vehicles on behalf of their clients, they manufactured them. You know, it was a BMW design that was designed and engineered by BMW, which Magna then manufactured. What Foxconn is proposing is something quite different, which is like the fundamental platform is ours, and you can modify it on top of it. So that's a pretty big piece, and then, you know, along with that, all the engineering services as well. So those are sort of like new wrinkles that I think are emerging on the supply chain side and the sort of engineering/platform side that weren't always key parts of the contract manufacturing proposition several decades ago.

Brandon: And do you see any specific profile of areas where you think this will become even more prevalent? So, I mean, we're specifically in the low-volume contract manufacturing space, so we don't compete directly with Foxconn and Magna, I don't think in many places - like we top off at 5,000 units per year or somewhere around there usually - but we tend to see that it's these obscure products that present challenges for traditional manufacturing. Whether it's for a large OEM, tier one, or a lot of time startups,  that's where we provide a ton of value because those are kind of the pain in the neck problems that we can help solve, but that's just a small subset of, I think, this greater topic that we're talking about here. So, where do you see that math playing out or, like the types of, you know, the profile of a situation where a company, whether it's an upstart or established company, thinking more drastic or differently about utilizing a contract manufacturing partner rather than doing everything in-house?

Alex: Yeah, well, I'll pivot to a different form factor that we haven't talked about a ton yet in the conversation, but one where I do think there's a lot of logical demand, which is Micro Mobility, right? So, bikes, e-bikes, scooters, all of our supply chain right now for those devices is in East Asia, and we certainly saw, during COVID, some of the supply chain challenges with having manufacturing so far away. We also saw then, you know, many, like, at LACI, for example, we had many numbers of portfolio companies who said, “I have customer orders, I have demand, but I literally can't get them filled because you know, my contract manufacturing partners in Asia are not able to ship right now they've got covid disruptions, etc.”. So, I think as the North American micro-mobility industry scales up, the logical first step is to say, if you're an emerging or existing bike scooter manufacturer, to say okay for Gen 3 of our product, let's not have a long cycle time between sort of the first batch and scaling. Let's do the first batch here in the U.S., test it out, make any final changes, and then maybe we'll work with somebody else overseas. So, I think micro-mobility manufacturing will come back to the U.S., and it will sort of go through waves. One of which will be micro-mobility contract manufacturing for just those initial several hundred or a couple thousand units that you need to test as you're like, okay, we'll go national with this scooter or bike design, but we need to make sure we do that first. But in addition to the logic behind some of the COVID supply chain disruptions we had in micro-mobility, you can clearly see in the inflation reduction act the push behind Made in America and all the logic there is. And so, the more, you know, people can think about in contract manufacturing, doing that domestically, that's going to change tax implications, availability to get incentives, and all that, and so I think contract manufacturing is due for a big boost when it comes to micro-mobility. And then, to your point on like below 5000 unit runs, maybe in four-wheel vehicles, I think there's going to be a lot of fleet customers who are going to look at this space. So, if you take the world of fleet customers, B2B is another way you know to say fleet; they generally care a whole lot less about the brand and care a whole lot less about the total cost of ownership, parts availability, reliability, and whether can it just do the job that my employees need? So, that's everything from, you know, last-mile delivery companies that deliver parcels and food, that's, you know, maybe companies who have a fleet of sales reps who are visiting dozens of customers over the course of a week, you name it. There's, you know, about 20 percent of the U.S. car market is fleet sales, and historically, all of those have had needs that haven't been fully met because they have had to, like, pick from a limited selection of, well - I can buy a Ford van or a GM van that's sort of really my choice. But going forward, for those last-mile delivery companies and for whoever else, there may be enough of an existing platform out there from somebody like Foxconn or whoever else, or a donor chassis from somebody, that justifies, for them, saying gosh, you know, we don't need the Ford brand per se, we need the following specifications, and we can get it with a 3000-unit manufacturing run of the contract manufacturer. Let's go ahead, it's cheaper, and it's going to get us a better product for our unique use case. So, I think there's going to be a lot of fleets of various volumes and various sort of just use cases who will say is working with a contract manufacturer to get our next vehicle the right move, rather than working via, you know, a traditional OEM in their dealership network?

Brandon: Yeah, that's interesting, and maybe pulling this topic together - I've really enjoyed your thoughts on this trend, the potential shift in the industry, and how things are going. I guess maybe the closing question here is, who should care? Right, so who should be really watching and paying attention to this? So, it sounds like someone who's starting a micro-mobility company should realize that, yeah, maybe the model could look different. For traditional OEMs, is this something that they need to be wary of this trend, or should they look at this as a threat or an opportunity? Who else are the people who should be?

Alex: Well, for the traditional OEMs, I think it's both. You know, there weren't always contract manufacturing opportunities. To your point, as many in North America as there were in Europe, Latin America, etc., it hasn't been a big industry. But now, if you're an OEM and you say, “Hey, we're native to this region of the world, and that's going to be our bread and butter, but we want to be a player in Latin America and in North America”, now there's a contract manufacturing industry that may be the better return on capital for your shareholders. So, let's, you know, in regions that aren't Asia, let's say let's work with contract manufacturers. Or, vice versa, if you're a, you know, emerging American manufacturer like a Rivian, you may say, “Hey, look, for our European operations, let's partner with a contract manufacturer”. So, I think it's both a threat and opportunity, and most car companies have been pretty disciplined around looking around the world when they produce a model and try to figure out where sort of the lowest cost place we can do it. So, I think it's an opportunity and a threat for both of them, but the number of people who are going to join the space of the building, you know, of cars or vans, is clearly a lot larger. The window of who can enter is, there are fewer barriers to entry, so, you know, if there's already been Rivian, Fisker, Lordstown, there's going to be more. And, I think, for every single one of those companies that starts, they're going to want to think through do we want all of the complexity of launching a car company, or can we actually focus on our software IP and chunk out manufacturing as a competency for somebody else. So, you can have that. I think you're also going to continue to have some of the tech players look at what they might do in this space. Some of the big tech companies and, again, they may say we don't necessarily want to own all this manufacturing process. You know, obviously, the classic example there is Apple with Foxconn. So, there may be some more of those big tech players who decide to enter parts of the mobility space by working with a contract manufacturer.

Brandon: Yeah, I would claim that I mean, situation dependent, but it could be a good way to maintain optionality, right, and dip your toe in the water and not make a huge capital expense or capital outlay and wait until you confirm whether there's the market demand and that the product's going to look a certain way before you make it, I mean, that shift from external to internal isn't always the smoothest shift, but like there is a potential there, I think, to kind of delay that decision until it's less risky.

Alex: Yeah, absolutely.

Brandon: Well, Alex, I really appreciate getting your thoughts on this. As I said at the beginning, definitely subscribe to the Sustainable Mobility newsletter if you haven't yet. Yeah, is there anything we missed here? Anything you want to close with Alex?

Alex: No, I think that was it! And look, this is a really cool time for folks like Edison who are in this space because, again, whether you're talking about manufacturing EV chargers, which you didn't necessarily touch on, micro-mobility, three-wheel devices, four-wheel, it's sort of a new golden era for contract manufacturing because of just some of the unique differences between everything that used to run on gasoline and things that might run on batteries.

Brandon: Yeah, I think that that's a good place to leave it. Well, thanks again, Alex. I really appreciate it, and best of luck to you!

Alex: Thank you, Brandon.