Shaking up the tier hierarchy: Automakers, industrial suppliers and tech companies

This is the first blog post of a three-part series in which we’ll share our perspectives on where the industry is heading and most importantly how industrial suppliers can prepare for a future that is already on our doorstep.

Tech giants and high-tech suppliers to OEMs (original equipment manufacturers) have largely held an unclear position in the tiered system of automotive manufacturing—sometimes working with OEMs, sometimes with tier one suppliers and sometimes functioning as semi-independent arms of an OEM itself. 

Now we see evidence of change in the news nearly every day: ZF and Microsoft, Bosch and Cariad (a subsidiary of Volkswagen), Continental and Amazon Web Services (AWS), Qualcomm and General Motors, Renault-Nissan and Microsoft, Ford and Google, BMW and AWS—the list of partnerships and joint ventures between automotive suppliers, OEMs and tech companies is constantly growing.¹²³

Why? In today’s automotive market, cars are no longer assemblies of mechanisms, frames and panels but sophisticated computers on wheels. Due to that reality and new use cases and successive crises impacting vehicle production, OEMs and industrial suppliers need to shake up the long-held tier hierarchy and work directly with tech companies.

As the industry moves inevitably to software-defined, connected, autonomous vehicles, it’s clear that no single company can supply what’s needed on its own. The question is, how can industrial suppliers position themselves for this new ecosystem power structure and for a future that is already on our doorstep? Here are a few suggestions:

1. Diversify the core business.

Large automotive suppliers continue to diversify their businesses. Twenty-five of the top 35, so 71% of automotive suppliers (all with revenues above $7B) already generate on average ~30% of revenues from non-automotive businesses according to Accenture analysis—a trend that is increasing.⁴ This shift shows the increasing pressure for automotive suppliers to create new business models while diversifying their core business to ensure future competitiveness. It also points to the importance for automotive suppliers to shift their mindset from selling individual parts to selling integrated systems. For example, ZF now supplies complete systems for its autonomous shuttles, which include not just the components but also offering planning, implementation, operations and maintenance for them.⁵

2. Capitalize on new opportunities at speed.

Industrial suppliers need to start thinking now like a tech company to enable speed and scale. While some may build capabilities in-house, most will need to form partnerships and alliances to bring in the right tech talent and tools. Thus, it’s not surprising that many see a competitive advantage in uniting with tech firms (and OEMs) to advance new offerings and to set themselves apart from other industrial suppliers. One prime example is the recently announced partnership between Bosch and Volkswagen Group subsidiary Cariad leveraging Microsoft’s cloud platform. These leading industry players are moving swiftly to dominate an expected billion-dollar market for autonomous vehicles. Their focus is on software development to enable a more rapid deployment of automated driving functions that can be integrated into vehicles of all classes.⁶

Similarly, ZF’s partnership with Microsoft also includes moving its processes and platforms into the Microsoft Azure cloud. This will accelerate the development of new innovations and enable the supplier to offer intelligence-driven solutions for end customers, including automated driving, vehicle motion control and predictive maintenance.⁷ Such offerings bring the relationship between supplier and end customer closer together, make the automotive supplier more essential to automakers, and create new—potentially much more profitable—revenue streams.

3. Invest in efforts to support future growth.

Over the next decade, electrification will cause a major shift in the entire automotive supply chain. Due to regulatory pressure and consumer pull, the revenue pool will shift from traditional internal combustion engine (ICE) to electric vehicle (EV) components, causing traditional component players to re-think and adapt quickly to offset decreasing revenue streams.⁸ As the industry electrifies, automotive suppliers and automakers will get a new value-creation opportunity by partnering with tech companies and leveraging their expertise.

Automotive suppliers must also look at full-lifecycle sustainability. Automakers have set strict deadlines for achieving climate goals and look to their suppliers to support that effort. Suppliers, therefore, must also prioritize sustainability initiatives, including having relationships and processes in place to enable reuse, refurbishing, recycling or some means of creating a second life for their products at the end of the normal lifecycle of the vehicle. Some automotive and industrial suppliers have already moved in this direction.

More and more, industrial suppliers will also need to invest in digital transformation and new services, harnessing data to create an end-to-end digital experience for customers and partners—from sales engagement through delivery and operations and into the aftermarket. Building a data-driven digital infrastructure brings valuable insights on markets, customers, partners and competitors. It also provides the direction for where industrial suppliers incl. Automotive should steer their businesses next. 

Ultimately, suppliers need to define a specific data monetization approach to tap the full potential of service profit pools in the future. There are numerous considerations industrial and automotive suppliers will need to factor as they shape their future in the industry. Putting more emphasis on electrification, sustainability and enhanced profitability is fundamental. Selecting the right partners with which to collaborate and which can help orchestrate a highly complex ecosystem is just as important and will make a difference in achieving growth ambitions.

In the next two posts of this three-part blog series we will share our perspectives on the V&A and technology developments we see in the market, as well as new business models and related talent demand and skill sets.