How auto suppliers can keep pace in an era of disruption and change
INSIGHT ARTICLE |
The automotive industry is in a state of accelerated transformation. Key elements driving this transformation include global demand for raw materials and parts (resulting in significant cost volatility), regulatory requirements and government policy. These trends will accelerate the development of alternative powertrain technologies. They will also force companies to refocus on vehicle components relative to safety, customer preferences and communication; entertainment alternatives; global competitiveness; and product portfolio expansion for enhanced growth opportunities.
All of this will put intense pressure on OEMs and their suppliers as we look ahead to 2020 and beyond. For auto suppliers, it’s emblematic of the challenges they face as the industry is wrenched from the tried-and-true ways of the past. This existing legacy business and operations model, combined with the need for accelerated transformation and the intensity of global competition, compel suppliers to ask themselves a fundamental question: What is the best way to maintain global competitiveness while balancing the need to create long-term value in this changing market?
We have identified four critical areas of strategic importance that suppliers must focus on if they are to remain competitive.
1. Innovation is critical
How to innovate and how to do so efficiently can be two different things. Investing options need to be carefully evaluated in terms of research and development, capital expenditures, and people. Take fuel economy and the pressure to meet shifting regulatory standards, for example. Until now, much of the focus has been on powertrain enhancement, essentially making a more efficient engine. But today’s suppliers must think differently. In this case, it could be to focus less on the embedded costs like the powertrain, and instead look more to vehicle weight.
Ford Motor Company did this several years ago when it decided to use aluminum in its top-selling F-Series pickup truck. That change shaved as much as 700 pounds from its largest pickups. It was an enormous risk to take, especially with such a popular and profitable product line. Today, the aluminum F-150 remains the top-selling vehicle in the United States.
But innovation extends beyond product lines. It also applies to how the products are made. Whether it is a more effective use of business intelligence and analytic tools, or deploying robotics, innovation brings a significant new trend in terms of how we look at the manufacturing process. This could greatly change many aspects of the bricks-and-mortar manufacturing process as a whole.
The takeaway: Innovation applies not only to the components themselves, but also to how they are made.
2. Smart consolidation
The access to capital that finances new initiatives has become increasingly tight in recent years, especially in North America. As a result, suppliers have had to become more efficient in their use of capital. Being nimble, being smart and being efficient are all necessary elements of doing business today. If suppliers do not incorporate these elements into their process, OEMs may look to alternative solutions. This could include sourcing other global suppliers or bringing certain strategic applications and supplier manufacturing processes and production in-house.
This means that suppliers will need to accelerate their development of critical intellectual property, including continued “smart” consolidation. It’s no easy task. Without access to proprietary knowledge, many suppliers will face barriers to entry in certain product lines, putting pressure on them to consolidate.
Example: Supplier A and Supplier B each make two similar sub-component parts, with each supplier producing one part better than the other. If they consolidate along product lines, these suppliers can take advantage of production synergies while enhancing market position and margin results.
The takeaway: Take a critical look at the components you are making and whether there are any synergies; if so, determine if consolidation makes sense.
3. Cost containment
Market constraints will make it difficult for those suppliers with a high cost of production to drive costs down further. In contrast, those suppliers with a low cost structure will have the advantage to capture market share while maintaining margins for their investors. This will create true long-term market value.
In addition, those suppliers that invest in new or enhanced manufacturing processes that align with innovative components (such as the emerging electric-vehicle market) will have an advantage that generally cannot be duplicated. This too, will provide a barrier to entry for those who don’t make the investments and generate a real long-term advantage for profitability for those who do.
The takeaway: Continue to focus on costs, leveraging innovation in both product development and product manufacturing to maintain competitive position while creating long-term market value to your investors.
4. Adapted products and adjacent markets
Suppliers can apply their innovations and expertise to enter into new markets, industries or adapted products. The result will be new revenue streams that can offset existing verticals or new industries. One example: a supplier with expertise in battery technology developed for the auto industry may find that it can be adapted to serve the needs of the aerospace industry.
The takeaway: Understand evolving market demands and find ways to apply expertise to new markets.
For auto suppliers in an intensely competitive industry, it is challenging enough just to manage day-to-day affairs. But the accelerating pace of change in the industry leaves executives with little choice but to adapt. Suppliers will need to consider these four areas of strategic importance as they move forward into this next decade in order to maintain global competitiveness and create long-term value.
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