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How automotive suppliers can succeed in the vortex of change


September 26, 2022

In this second blog post of a three-part series, we will discuss the current M&A and technology developments in the automotive supplier industry to help shed light on mission-critical transformation steps for industrial suppliers.

The automotive industry is experiencing changes not seen in over a century. Today, with trends like the shift from internal combustion engine (ICE) technology to electrification, the current industry ecosystem is evolving and may eventually bear greater resemblance to today’s high-tech sector. In our previous blog, we saw that industrial suppliers would need to start mimicking tech companies. Meanwhile, new players will likely enter and leaders in different specialties—sometimes setting industry standards—may eventually emerge. Evidence for this is strong as we see a growing amount of merger and acquisitions (M&A) activity in the industry.

So, what will established automotive suppliers need to do, starting today, to be well positioned competitively in the future?

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Understanding the trends affecting automotive suppliers today

Understanding the state of the global automotive suppliers market and underlying trends will help set the stage for how to enhance competitiveness. Below is a snapshot of the five most important trends we see:

  1. Regulation. Governments have introduced CO2 regulations and incentives to accelerate the shift to sustainable mobility. Regulators worldwide defined more stringent emissions targets by 2030 and beyond.1 Under pressure from OEMs, the public, and capital markets, most automotive suppliers have set their own sustainability targets.2 There is no doubt that, industrial suppliers with a more sustainable footprint will develop an advantage in terms of pricing and margin.
  2. Consumer behavior. Consumer behavior and awareness are changing in the light of the “software-defined vehicle” and as more people accept alternative and sustainable mobility modes. While in the past the customer’s experience of a car was primarily defined by hardware, software is now taking on a much more important role. The sharing economy is upending conventional notions of car ownership—away from traditional individual transport towards completely new forms of mobility such as self-driving robot-taxis (with a SAE automation level 4 or 5). This affects automotive suppliers, as cars of the next generation will need different components as well as completely different chassis, systems or interiors. But this evolution not only affects suppliers’ development and operations, it also makes new business models and types of collaboration – e.g. by using model-based systems engineering (MBSE), virtual simulation and digital twins – possible.3
  3. Technology. The industry´s focus on connected cars, autonomous driving, shared mobility, and electrification (CASE) is prompting a shift in business models and the product mix. As the automotive industry evolves from ICE to hybrid, plug-in, battery electric vehicles (BEVs) and fuel cell electric vehicles (FCEVs), industrial suppliers are reshaping their portfolios to emphasize e-motor technologies, advanced driver assistance systems (ADAS) and battery innovations, while de-emphasizing body exterior systems, tires, and combustion engine systems.4 As a consequence, the majority of the technical content within the future auto is expected to stem from software, a shift that is accelerated by the increasing customer demands for “experiences” while driving.
  4. Declining Sales and Diversification. Light-vehicle sales have been hit hard by the pandemic. In 2020, global light-vehicle sales dropped by 14 percent.5 Mainly driven by supply chain pressures and the semiconductor shortage, we expect light-vehicles sales not to reach pre-COVID volumes before 2024. Therefore, industrial suppliers are increasingly looking for new growth in areas outside of automotive. Those looking to diversify their business portfolios explore sectors such as everyday household products6 or agricultural and industrial machinery.7
  5. Rapid Compressed Transformation and forced agility. The need to execute bold programs in accelerated timeframes, often spanning multiple parts of the enterprise simultaneously continues. This requires new digital solutions and adaptability for businesses to succeed long-term. Industrial suppliers need to embrace cloud and digitize their infrastructure and offerings with forethought and vision. Becoming structurally agile thanks to these fundamental capabilities and assets is mission-critical for future growth.

Within this environment, we are seeing ongoing consolidation, divestures and change in product portfolios among global suppliers. For example, the investment pressure on electric and autonomous vehicles and software will further accelerate M&A activities and industry consolidation. In fact, we anticipate that the entire automotive supplier market will be dominated by a handful of players within the next few years. Evidence for this is strong as already in 2020 and 2021 the top 10 of the top 100 suppliers accounted for 40% of the total global sales—with the top 5 each reaching sales over $30 billion.8 A prime example is the merger of Faurecia and HELLA creating the 7th largest global automotive supplier with a highly advanced technology portfolio. The combined group, Forvia, has publicly stated their ambition to reach sales above €30 billion, with an operating margin of over 8.5 percent by 2025, by focusing on six business groups and areas such as e-mobility (incl. hydrogen solutions), ADAS & autonomous driving, cockpit of the future, and lifecycle value management.9

We are also seeing new entrants, many digital natives bringing technical innovations and the agility to maneuver quickly to fill emerging market needs. For example, US-based chip maker Nvidia expects its automotive sales to grow by more than a third to $11 billion this year, based on booming demand for greater automation in cars. The company is now increasingly betting on software and chips that underpin sophisticated driver-assistance systems.10

A closer look at emerging technology developments

New technologies are emerging for everything from infotainment centers to autonomous driving systems. In particular, the quest for green, carbon-free fuel alternatives is spawning ongoing M&A activity and development in hydrogen technologies for FCEVs, batteries for BEVs and solar-power augmentation. A prime example is the partnership Michelin and Faurecia struck with Symbio for hydrogen-powered vehicles. Renault also has a hydrogen joint venture with US-specialist Plug Power called Hyvia. Plastic Omnium, which makes body components and fuel tanks for traditionally powered cars, is shifting into supplying electrified vehicles and also branching into areas such as hydrogen.11

In the transition to a more sustainable future, batteries will also play a major role. Not only does battery use help reduce carbon emissions, but it also represents a significant value-creation opportunity for manufacturers and supports national economic growth. In fact, the biggest opportunities may be in Europe and North America, which have a rather immature EV battery value chain and an insufficient number of gigafactories compared to China.12 To serve the growing demand and boost Europe’s battery ambitions, the world’s largest auto supplier Bosch recently announced a joint venture with Volkswagen to explore the possibilities of industrial-scale solutions in battery manufacturing, aiming to establish a fully localized European supply chain for e-mobility. For Bosch, the move will strengthen its role in the transition towards EVs, which represent a threat for many automotive suppliers since EV manufacturing requires fewer steps and less labor than building a traditional combustion engine.

Forging a path to the future for industrial suppliers

Having examined market and M&A trends as well as emerging technology developments, a critical question remains to be answered: What is the path forward for industrial suppliers? Examining how the top automotive suppliers are positioning themselves can provide important insights. Industrial suppliers should carefully consider the following key areas to shape their future:

  1. Ambition. Identify the necessary changes to the business model such as new products, services or go-to-market approach and evaluate growth opportunities, e.g., specific technologies, geographies, adjacent markets, aftermarket, etc.
  2. Platform-based approach & methods. Reorganize around data and digital to operate and innovate like a tech company. A modular, platform-based setup of tech companies, coupled with new technologies and ways of working is what enables them to accelerate and innovate.
  3. Capability. Assess what capabilities are core to the organization today and prioritize new investments that will help create a competitive advantage while increasing agility and speed-to-market, i.e. getting products to market faster than others. This could include an internal “incubation engine”; another option is to “buy” capabilities via ecosystem partners or M&A activity.
  4. Talent. Focus on how to hire, upskill or retain the right talent needed for the future direction. Embed the company’s purpose and culture into how work is organized and measured.

Industrial suppliers must navigate change across multiple dimensions over the coming years. Understanding how the above-mentioned trends and developments factor into a changing global supplier landscape is a starting point. However, suppliers must accelerate their own change agendas starting today to seize new opportunities and to secure a strong position in the future.

In the next post of this three-part blog series, we will share our perspectives on the above-mentioned new business model developments and related talent demand and skill sets.

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Jean-Nicolas Brun

Managing Director - Industrial & Services Lead France and Benelux and Global Industrial Suppliers Lead