| 2:14 PM EST

The Cost of Over Compliance


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Recent events have underscored that emissions/fuel economy compliance in combination with efficient and timely vehicle system testing to ward off costly recall and warranty campaigns will be the future differentiators. How an OEM efficiently complies with ever stiffening regulations in North America, the European Union and a host of other countries, while still delivering what consumers desire in content, value and performance, certainly was a differentiator to this point. It is even more pronounced now. Additionally, enhanced vehicle content driven by automated technologies, new materials and telematics sectors, as well as other areas in an ever more complex vehicle system, will require new integrated testing protocols which will require new thinking to achieve efficiently.

An intense spotlight is firmly affixed on our industry. Accelerated recall and warranty issues emerging over the past decade—from a myriad of OEMs—started the ball rolling with politicians, regulators and consumers. The increased level of warranty activity of late is an example, so many OEMs have raised efforts in this area in an abundance of caution. 

The new reality is “over-compliance” and extensive testing regimes. Suppliers and OEMs alike agree that the spotlight on compliance will raise the burden to ensure there is ample room for error in testing regimes and regulation interpretation for future programs. The average program will have to achieve at least a 20 to 25% improvement in CO2 emissions/fuel economy to ensure compliance through the entire cycle—even with incremental improvements mid-cycle. Given faster cycle cadence (something that we’ve addressed several times in this space) and a vehicle which lasts 11.5 years on average (according to IHS Automotive), the speed, efficiency and extent of fail-safe testing the vehicle will require new competencies. 

How will the new reality impact suppliers? OEMs will likely increase their threshold for inclusion of fuel saving technologies on all fronts: mass reduction, aerodynamics/parasitic loss improvement and powertrain efficiency. At risk are suppliers of incremental content or areas which are affectionately referred to as “commodities.” Upward pressure on costs to comply and test will leave less room for optional content to truly differentiate offerings. As overall investment in new technologies and time to enhance testing of the vehicle systems take hold, pressure for cost control will rise. Additionally, if new testing protocols are instituted at the OEM and supplier levels, more time and resources may be needed to execute these. Unless investment is reduced in other areas, the time and resources associated with the new requirements will equate to additional costs. Those suppliers that can navigate these new challenges through strategic investment in optimal systems, customers and testing regimes will benefit. Strong OEM-supplier relationships are more important than ever.

Beyond critical vehicle efficiency efforts, an increasingly complex testing regime will result in higher costs that will need to be passed along to the consumer in some form. As vehicle costs escalate, affordability starts to impact new vehicle purchases and the intensity of this is likely to increase over the next decade. Production volumes will face some pressure as consumers rationally opt for used vehicles in some cases, delay purchases, or seek other forms of mass transit. The impact will be slow and subtle though noticeable in virtually every aspect of the industry.

The new reality is speed, testing compliance and customer delight. An industry which adapts to working efficiently in this new structure will flourish. Old paradigms will need to fall by the wayside.