While the auto industry has made progress decreasing emissions, decarbonizing the supply chain remains a challenge, write Karim Henain and and Anna Fritz Månsson from Bain & Company.
Decarbonization has become a front-and-center issue to nearly everyone: customers, business leaders, regulators, and investors – to name a few. But not all aspects of decarbonization have been addressed equally, especially in certain industries amid transformation such as the automotive sector.
While large automakers and the companies that supply them with key components have made progress decreasing Scope 1 and Scope 2 emissions by 8% and 9%, respectively, since 2017, Scope 3 emissions, remain a challenge.
Scope 3 include the greenhouse gases emitted throughout the supply chain (upstream) and those emissions generated consuming a product (downstream). These contrast with a company’s direct (Scope 1) and indirect (Scope 2) emissions, the latter generated by purchased energy.
Even leading automotive original equipment manufacturers (OEMs) have only reduced their upstream Scope 3 emissions by 2% since 2017, while Tier 1 suppliers have actually increased their Scope 3 emissions (upstream) by 5% during the same time frame, according to recent Bain research.
This data includes the average of leading companies that chose to report (it is not required), which means that the broader industry’s Scope 3 emissions are likely even greater:
The decarbonization challenge and opportunity
Why have upstream Scope 3 emissions, in particular, remained a challenge in the automotive sector even as other types of emissions, including downstream Scope 3 emissions, are addressed? There are several reasons. First, supply chain decarbonization requires a transparent baseline. This is particularly challenging in the auto industry given the huge number of suppliers in multiple tiers.
In addition, emissions are difficult and costly to abate, and to do so, various players across the value chain, from raw materials suppliers to OEMs, need to collaborate.
Automotive supply chain decarbonization is becoming more critical as electric vehicles (EVs) begin to take an increasingly greater share in the global fleet. Bain forecasts suggest battery EVs will rise to more than 75% of new vehicle sales by 2040. And since electric vehicles have a much higher proportion of upstream emissions than combustion vehicles, mainly because of the embedded carbon content in batteries, upstream Scope 3 emissions are becoming a greater focus.
As a result of this, the circularity of EV batteries is also becoming even more important.
The roadmap to supply chain decarbonization
Establish a baseline
Perfect is the enemy of good when it comes to baselines. Winning firms get started by establishing a greenhouse gas emissions baseline based on weight or expenses and then enhance the baseline over time by incorporating value chain assessments and adding real-time supplier emission data to enable continuous monitoring of progress.
For OEMs, key emissions sources are often battery cells, steel, aluminium, resins, and logistics; selected Tier 1 suppliers’ emissions are driven by the same metals plus textiles, electronic components, synthetic and natural rubbers, and other metals, including copper and magnesium.
Set targets
Successful automotive companies start decarbonizing the supply chain by setting targets that meet customer and investor expectations. First movers also consider the Science Based Targets initiative (SBTi). Many automotive companies do not yet meet the minimum SBTi requirements that call for 2.5% absolute annual emissions reductions for Scope 3 targets over a period of 5 to 10 years, which implies a reduction of 25% from 2022 to 2032.
Some OEMs and Tier 1 suppliers are only targeting 10% to 25% absolute reductions by 2030 to 2035.
Identify and prioritize levers
With a baseline established, leaders identify and prioritize decarbonization levers. Levers can be organized in four key types: supplier management, volume allocation, product design, and value chain engagement. Companies can help their suppliers reduce their carbon footprint by setting carbon emission requirements, designing incentives to encourage supplier decarbonization, sharing best practices and collaborating on joint reductions through partnerships and co-investments.
Companies can also choose to allocate volume to the most Co2-effective existing suppliers and use this as criteria for selecting new suppliers. For automotive companies, often more than 40% of the decarbonization levers pertain to product design, and consequently planning far in advance is critical as there is a long lead time to implementation. These design-related levers typically use greener or lighter materials and require cross-functional changes and value chain collaboration.
Partnerships across the value chain and broader industry partnerships can also allow companies to set joint standards.
Make the right trade-offs
Identifying and prioritizing levers is the first step, but winning firms emerge by demonstrating their ability to sequence and phase levers correctly, ensuring their commercial viability and market maturity. For example, it wouldn’t make sense for a company to start by tackling electric truck systems or green air freight as these are not yet readily available on the market.
At the same time, it may be possible to implement recycled materials faster and without a major cost impact, for instance. Or it may be worth considering green fuel shipping, which is starting to become available as shipping players begin to help reduce emissions by offering methanol-based shipping.
Embed supply chain decarbonization in the operating model
Leading firms redesign their operations to establish cross-functional links and ensure that key processes, supplier engagement, and technology all support decarbonizing the supply chain.
In one example of embedding supply chain decarbonization, a leading OEM is not only setting minimum carbon requirements for the short term and longer term but it is also specifying the materials required to be considered for rewards. These requirements could include, for example, 90% recycled aluminium, green steel, or that the energy used when producing plastic parts has to be 95% green.
Similarly, automotive OEMs and suppliers have started to introduce carbon and the cost of carbon as part of the equation when evaluating suppliers for awards.
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