Auto suppliers: Are you pivoting to new growth areas wisely?
August 31, 2018
A recent Accenture Strategy survey found that 83 percent of automotive companies were confident in attaining their projected 2020 growth rates.1 Many companies identified implementing disruptive technologies (36 percent), accelerating innovation (47 percent) and business model transformation (37 percent) as key initiatives to drive growth through 2020 and beyond.2 It is clear that as automotive original equipment manufacturers (OEMs) reshape their business models to focus on electrification, connected and autonomous driving, automotive suppliers are working hard to keep pace.
As OEMs look to free up money to fund their transition, they’ll lean on suppliers to sharpen their pencils. At the same time, OEMs will continue to expect suppliers to invest more in R&D to help OEMs innovate if they want to remain key partners in the future. For now, suppliers will continue getting hit from both sides: pressure to sell existing products for less, combined with the need to ramp up spending on new products.
Then there’s the economy to consider. The current bull market is one of the longest in recent history. It’s just a matter of time before a downturn hits—either because the boom simply runs out of steam or macroeconomic / geopolitical forces kill the market’s momentum. The auto industry is already facing significant headwinds, including rising raw material prices, growing consumer reluctance to buy and increased competition, that will begin dampening demand.3 Merrill Lynch predicts U.S. annual auto sales can drop to 13-14 million in 2021, down from just below 17 million this year, before rebounding.4 Executives need to be thinking about repositioning their companies now.
Given these headwinds, and the pace of industry disruption, auto suppliers’ leaders should fundamentally re-examine their current plans and ask important questions to remain key players in the coming years:
Driving profitable growth requires deliberate decisions on where to compete and how to win. On the growth front, suppliers should think critically about the products, services, markets, geographies, and channels they’ll focus on—and how to redraw traditional competitive boundaries to their advantage. For example, in a recent engagement with a Tier 1 Supplier there was a clear burning platform to avoid commoditization of their core seating, interior systems and emission control technology by increasing the value of their offerings as a leading integrator in the shift toward connected and autonomous vehicles.
Accenture’s client experience suggests that 1.5 to 2 times current CAPEX/R&D of spending is required over the coming years when you tally up the ambitions of players shifting to new business models.
This leads to the profitability discussion: where to find the money to fuel the growth. Because incremental cost reductions will come nowhere near unlocking what’s required, suppliers will need a new approach to profitability—most likely, a resetting of the P&L. Looking at all areas of the company’s operations with an enhanced ZBB, or zero-based mindset (ZBx), rather than shaving off some percentage of historic spend, is arguably the best way to generate the savings needed to reinvest in existing and new products and services. When we took a surgical look at a Tier 1’s P&L, we uncovered over $200M in annual run-rate savings potential. Several areas were addressed to shift the cost curve, for example: R&D, Operations, Sourcing, IT and Global Business Services. This wasn’t another “traditional” cost reduction program, but rather a transformative mindset to re-allocate investment in the business to drive growth.
There’s no doubt that the auto industry’s future will resemble little of its present. Suppliers need to address some critical, fundamental questions about their own destination and how they’ll get there—while there’s still time.
1 Accenture Strategy 2017 Revenue Growth Study.
3 "Analyst: Industry's 'Goldilocks' period is ending; here come the bears”, Automotive News, June 2018.