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Competing priorities for auto suppliers as OEMs zero in on EVs

INSIGHT ARTICLE  | 

RSM US LLP sponsors the Original Equipment Suppliers Association’s Automotive Supplier Barometer, a quarterly survey of the top executives of OESA’s regular member companies. The survey provides insight into the commercial issues and business environment the industry faces. Each quarter’s survey focuses on a different topic, from planning to production. The following article offers Q4 2021 insights on capital investments and innovation.

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Original equipment manufacturers and auto suppliers have for years had to balance the need to invest in more sustainable electric technologies with their current operations related to internal combustion engine vehicles. But as more OEMs place major bets on electric vehicles and other technologies focused on reducing emissions—and as the Biden administration focuses on spurring EV growth and the broader energy transition—auto suppliers will have significant opportunities to reimagine their business for this new electric-focused world.

Suppliers need to be strategic about how to stretch already scarce capital investment resources and strike a balance between both innovation and existing operations, while also dealing with major supply chain disruptions on their core business and competing with new entrants in the market. Companies that seize this moment to make human capital investments alongside technology investments to sustain a competitive edge in this changing environment should see superior future results.

Financing the future

The entire automotive sector is navigating massive disruption and opportunity from EVs, and auto suppliers are adapting as this broader market shift continues. The ongoing ripple effects of the transformation will be profound in the future, affecting all aspects of the business, from talent and sourcing to operations. Given these facts, the current low interest rate environment brings significant opportunity for companies that are ready to upgrade their technology, acquire new technology or enter new markets.

Investment in innovation will be crucial. For many suppliers, investments in research and development aligned to EVs is a primary focus, while others may focus on tactical acquisitions of companies adept in EV innovations. Organizations need a clear vision of what type of business they want to be in the future and should have a robust capital allocation process to make sure that their investments are aligned with strategy, maximizing returns and balanced to manage risk.

As OEMs continue to digitize the driver interface and vehicle infotainment options, there will also be some opportunities for suppliers to share in the development and implementation of software, monitoring and data extractions that will help companies across the automotive supply chain better understand driver interests and patterns. Consequently, companies will be able to provide complementary services.

Adapting to meet demands in these digital areas of growth may seem daunting for suppliers struggling to allocate capital between legacy and future ICE platforms and investing in products that serve the electric future of the automotive space. This dichotomy of focus has created an environment where some entities may need to reassess the composition of their C-suite teams, committees and boards to ensure priorities are aligned.

The R&D and deal landscape

Headlines continue to highlight OEMs’ commitment to reducing carbon emissions and considerable investments in battery EVs, battery supply, and other technologies such as hydrogen or plug-in hybrid vehicles. Suppliers are maintaining an acute awareness of such priorities and investing in complementary research and development to support these trends.

As a result of irregular production cycles and production cuts since early 2020, however, many companies have been forced to defer R&D investments and instead focus on expenditures that support current platforms or future platforms that have already been awarded.

In the second quarter of 2020, early in the pandemic, North American suppliers’ average R&D spend dropped to $122 million. That figure surged to $172 million in the fourth quarter of 2020 in the wake of stimulus spending. R&D spending then tapered off in the months that followed. While related spending is above 2020 levels, the average supplier spend in the second quarter of this year dropped to $133 million, still below the five-year quarterly average of $137 million.

Average automotive supplier R and D expenses in millions

Similar to R&D investments, merger and acquisition activity during 2021 has not been as significant as might have been expected, again due to production disruptions and ongoing effects of the pandemic. As shown in the chart below, North American M&A activity in the automotive sector slowed dramatically from 2019 through 2020, though it has begun to see momentum building in deal flow this year. This is likely a result of ongoing access to capital and need for diversification and entry into significant EV and other future mobility opportunities.

Number of North American auto parts and equipment M and A transactions

This somewhat uncertain landscape for R&D and M&A activity adds another layer of complexity for suppliers already grappling with keeping ICE operations running smoothly and simultaneously ramping up their EV capabilities. It also brings opportunity for companies that are ready to hone their strategies for the future.

Organizations need to take advantage of historically low financing rates to make technology, process and human capital investments now that will fuel their future strategy. Key areas of focus here should be around supply chain visibility, data analytics and factories of the future.

We expect deal activity in the developing EV space to continue. Companies should strategically evaluate opportunities to acquire entities aligned to EVs, other technological advancements in the automotive space and/or joint ventures with such companies.

The takeaway

Suppliers need to think about how the increasing pressure on resources will affect their business in the immediate and long-term future. Companies cannot delay in evaluating future opportunities and risks associated with labor, supply chains and the rise of advanced technologies in the sector as EVs proliferate.

Companies should prioritize strategic investments in innovative solutions, looking to actual and anticipated investments made by OEMs as a guide for where to place their bets.


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