Profiting from a new automotive future
INSIGHT ARTICLE |
The automotive industry has enjoyed unprecedented growth in recent years. Low interest rates, inexpensive gasoline and an improved labor market drove sales of cars and light trucks in the United States to a record-setting 17.5 million in 2015.1
U.S. auto suppliers have enjoyed the ride: 51 percent of U.S. executives in this sector reported that their companies were thriving in spring 2016, and only 3 percent say that their organizations are declining, according to the RSM Monitor survey. Many executives also were optimistic that expansion would continue, both in the near term and further down the road (Figure 1).2
Industry executives, however, are also aware of factors that could hobble growth: Original equipment manufacturer (OEM) price pressures, weakening economies and even rising interest rates were among their top concerns (Figure 2).3 To maintain growth in the face of challenges, auto suppliers will need to:
- Prepare for changing demand patterns
- Keep up with a range of new technologies—both within the vehicle and in their companies
- Develop strategies that allow them to respond quickly to OEM and upper-tier auto suppliers
Demand expectations vary
OEMs are chasing markets around the world, each with unique demand patterns and supply-chain requirements. Auto suppliers are moving with the OEMs—whether they want to or not.
U.S. market sales are being fueled by employment growth and higher household incomes. In the United States, light truck deliveries were up approximately 8 percent through September 2016 compared to the first nine months of 2015, in part due to low fuel prices. But deliveries of passenger cars had fallen by about 7 percent,4 as consumers look to SUVs and larger vehicles. In October and November, both Ford and General Motors announced production cutbacks at North American plants producing compact cars.5
Similarly, nine-month European auto sales were up 8 percent to 11.6 million, and have been rising since 2013, driven by pent-up demand. The region’s gloomy economic outlook in general, and Brexit in particular, though, could slow future growth.6 Other countries and regions—China, India and elsewhere in Asia—offer near-term growth prospects as well. In the first eight months of 2016, auto makers sold 14.4 million cars in China, up 13 percent from the same 2015 period, driven by a tax break to buy vehicles; monthly August year-to-date sales rose by 26 percent.4
Looking further out, industry analysts see emerging regions—the Middle East and Africa—offering increased sales opportunities, with growing middle classes that could offset declining markets elsewhere around the globe.
Millennials are at the center of many automotive demand projections (see sidebar). Who would have imagined that many teenagers of driving age would take a pass at racing to the license bureau, opting instead to avoid even operating a car until forced to do so? Or that young professionals would select other means of transportation—public transit or ride-booking service, for example—over car ownership?
Technological advances force suppliers to change products and processes
Technology enhancements within cars and light trucks—in-vehicle intelligence, engine diagnostics, communication and entertainment systems, awareness technologies, smartphone keyless entry—have arrived at a fast and furious pace.
Most auto suppliers will need to boost their high-tech and innovation capabilities to keep up with the digital expectations of consumers and OEMs, and prepare to support emerging technologies such as:
- Vehicle tracking systems
- Remote diagnostics and control systems
- Biometric entry systems
- Vehicle-to-vehicle communication systems
- Digital/tablet-like dashboards
- Autonomous vehicles
These and other technologies demand that suppliers adapt for a dramatically different future. For example, what role will the suppliers of steering wheels have with driverless cars?
Some technological changes are driven by corporate average fuel economy (CAFE) standards; nearly one-quarter of auto-supplier executives believe CAFE 2017-2025 regulations could contribute to a decline in the auto industry.10 But the mandate to develop more fuel-efficient and alternative-fuel vehicles also will attract new suppliers to the industry, forcing traditional suppliers to adapt. For example, the need for more battery space in hybrid and electric vehicles requires auto suppliers to minimize the footprint and weight of their components.
Auto suppliers anticipate significant fuel-source changes in the automobiles they support, including rapid adoption of electric and hydrogen fuel cells (Figure 3).11 Unless CAFE standards are changed, they will eventually force adoption of fuel-efficient and alternative-fuel vehicles by consumers—dramatically changing OEM and supplier production requirements. Many energy analysts also anticipate gasoline and diesel prices will rise in 2017 and going forward, compounding CAFE effects.
While technology opens new-product opportunities, it can also pose challenges for auto suppliers, many of whom have limited capabilities to offer support and maintenance for these advanced electronics. The enhanced connectivity of in-auto electronics systems—to smartphones or the internet—also increases the risk of cybersecurity problems; hackers have already gained unauthorized access to vehicles, shutting them down in mid-drive.
Auto supplier enterprise technologies
Automotive suppliers are also investing within their companies to streamline the flow of information and intelligence to upper-tier suppliers and OEMs (Figure 4).
Auto suppliers are trying to improve the security of their business systems and information. Nearly a third of auto suppliers report unauthorized access to their company’s data or systems or a technology-security incident within the last 12 months. Even worse, 11 percent do not know if these events even occurred.13
Common steps to improve information technology and data security include enhanced security protocols and adding data-security staff. Half of auto suppliers are likely to undertake a major cybersecurity risk-mitigation initiative in the next 12 months.14
Adapting to a new automotive future
Even amid a booming market, auto supplier executives remain keenly aware of the cyclical nature of their industry. They know that record growth cannot continue forever, and are already implementing strategies to allow their companies to maintain stability as economic conditions change (Figure 5).15
Although auto suppliers are likely to be especially frugal with capital investments, they are still funding R&D and new-product development—especially for components and materials related to the sector’s driverless and alternative-fuel future. A key consideration for these investments will be whether a given supplier can develop new capabilities internally, or look instead toward mergers and acquisitions. Although only 7 percent of auto suppliers planned to grow sales in the next 12 months via an acquisition or merger,16the need for new capabilities is pushing many executives to consider non-traditional acquisition targets, including technology companies new to the auto industry. These smaller firms will need to be prepared with sell-side due diligence documentation—or find themselves undervalued.
Some executives will wonder if their companies should exit the industry altogether. If so, the time to prepare with rigorous sell-side due diligence is now—even if that decision is delayed three to five years. Having due diligence documentation in place early on can help provide sellers with accurate financial information and proof of good performance while allowing management to focus on day-to-day operations. Done well, sell-side due diligence increases buyer trust—and the valuation of the target company.
For U.S. auto suppliers who remain in the industry, the road to the future is promising, albeit strewn with obstacles. How they navigate around them will be the difference between success and failure in a brave new automotive world.
1 Gautham Nagesh, “Auto Industry Looks for Bumper Year in 2016,” The Wall Street Journal, Jan. 3, 2016.
2 RSM Monitor 2016.
4 U.S. Light Vehicle Deliveries, Autodata, Motor Intelligence, Oct. 3, 2016.
5 Tom Krisher, “GM Laying off Over 2,000 at 2 Car Plants as Sales Slow,”ABC News, Nov. 9, 2016.
6 Europe car sales grow 7% but VW fails to end share decline, Automotive News Europe, Oct. 14, 2016.
7 “China Car Sales Revved Up, Again,” in August, The Wall Street Journal, Sept. 9, 2016.
8 “More Americans of all ages spurning driver's licenses,” University of Michigan Transportation Research Institute,” Jan. 20, 2016.
9 Dee-Ann Durbin, “Millennials are finally arriving in the car market,” citing according to J.D. Power’s Power Information Network data, Associated Press, March 9, 2016.
10 RSM Monitor 2016.