Accenture Research: New Supplier Business Models

New Accenture research shows that automotive suppliers can beat the current soft market conditions.

There’s a hidden story in the automotive industry: despite an increasingly challenging environment, a select number of automotive suppliers are continuing to beat the odds and sustain high performance, according to a new Accenture report. The fact that they are doing so in the face of restructuring, domestic production shifts, raw material cost increases and price pressures suggests that a winning equation is at hand.

As part of an ongoing analysis of high performance in the automotive industry, Accenture has updated its seven-year analysis of 31 of the largest, publicly traded global Tier 1 suppliers. Accenture found that suppliers that closely align their competitive strategies and business models with the value their products offer are leading their peers in revenues and profitability.

According to the research, high performers are winning by focusing on one or more of the following approaches:

• Low-cost producer: High performers optimize their material and production costs on a global basis. They take advantage of low cost sources of goods and services in places such as China, India and Eastern Europe, and they locate production facilities to optimize scale and total cost. For them, a relentless pursuit of lean overhead is critical to success.
  
  
• Differentiated producer: Successful suppliers in this segment (e.g. electronics, safety systems, etc.) excel in pioneering research and development and engineering and fully integrate product development with original equipment manufacturers (OEMs). They demonstrate pricing power with the OEM and the consumer.
  
  
• Hybrid producer: Some suppliers market both commoditized and highly engineered portfolios, but do so by establishing operating companies dedicated to each segment. They manage these through a holding company.

“Clearly, challenges such as legacy issues can severely limit a company’s ability to reach low-cost or technology leadership,” said Richard Spitzer, global managing partner of Accenture’s Automotive practice. “But high performers will quickly address these constraints and adapt their business models. The emerging market of unencumbered, global suppliers does not allow for much hesitation. With the right competitive strategy and business model, suppliers can position themselves to expand product markets and grow content per vehicle, and thus maintain revenue growth.”

High-performance suppliers recognize their products’ position on the industry spectrum of products.

At one end of the spectrum are commodity products, which OEMs buy on the basis of price. These mature, simple products are those that OEMs cannot price independently. As a result, high-performance commodity suppliers focus on low-cost production as their competitive strategy and business model.

At the other end of the spectrum are more complex, highly integrated and technology-driven products, which OEMs buy on the basis of innovation and performance differentiation. These products, which often can be priced into the vehicle, must be self-funding, i.e., the customer will pay for them or they save OEMs money in a demonstrable way. As a result, high-performance suppliers of these products require a competitive strategy and business model focused on technology leadership and the customer.

Industry pressures require sharp, well-focused business strategies and models.

Additionally, shareholder activism, which is unlocking supplier value by correcting misaligned strategies and business models, is heightening the need for clear models. Suppliers must know where their products are on the industry spectrum, so they can adapt their strategy and model accordingly. For hybrids that provide a mix of both products, a new business model will generally involve a holding company.

Additional analysis of the study reveals:

• Despite obstacles, the largest suppliers as a whole have outperformed the Standard & Poor 500 over the past seven years in terms of total returns to shareholders.
  
  
• They drive their consistent revenue increases through investing in research and development and capital expenditures at a faster rate than peers, leveraging these “growth investments” to develop more and better products continually.
  
  
• High performers have pursued similar levels of merger and acquisition activity as compared with their peers, but they executed post-merger integration more successfully, rationalizing expenses and realizing synergies more rapidly.

“These leading suppliers sustain their high performance by leveraging operational excellence and customer focus. Their success provides a valuable blueprint for moving forward in an increasingly complex industry,” said Umar Riaz, North American managing partner of Accenture’s Automotive practice.