11/5/2019 | 3 MINUTE READ

How To Thrive in the Automotive Downturn

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As global markets start to slow, automotive companies must realize that technology disruption makes this downturn fundamentally different – and thriving requires a new approach.

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As the telltale signs of a larger impending economic downturn emerge, we are seeing events like slowing automotive sales, increased inventories, increased incentives, and even increased auto loan delinquencies that point to a similar slowdown in the global automotive industry. The ripple effect of these events is causing increased automotive company layoffs, restructuring efforts, and an increased amount of distressed automotive M&A activity, and if organizations continue to face the global downturn with no plan in place, they’ll undoubtedly be left behind.

Today, technology disruption is forcing organizations to make dramatic “big bets” on a highly uncertain future — but there are a few known certainties that organizations can work towards. Without question, organizations need to calculate how best to bridge from the internal combustion engine (ICE) to hybrids and EVs. It’s also essential that they learn how mobility, robo-taxis, and connected technologies will change their competitive environment, and how to align their capital and precious human resources with this rapidly changing automotive environment.

This approaching automotive downturn is very different from the previous five recessions, which resulted in overcapacity of core assets, whether they were associated with ICE or vehicle manufacturing.  In those environments, cost-cutting may have been the best tool to right-size organizations as they dealt with lower demand.  However, with the advent of technology disruption, this is no longer a viable solution. 

 

It’s time to act.

Planning is critical. To maximize flexibility and preserve capital and human resources, automotive companies need to assess their structural health, refresh M&A pipelines, and align their top priorities.  Organizations, including suppliers and OEMs, have to prioritize their “big bets” and protect their most critical and strategic investments in order to stay competitive. Furthermore, they must recognize that tech companies (likely unaffected by the downturn) can and will use the opportunity to entrench themselves deeper into the automotive industry and disrupt longstanding competitive dynamics.

Many organizations have and will continue to start this process with cost-cutting and traditional downsizing.  I cannot overemphasize the fact that workforce reductions, to the extent they are required, should be the outcome and not the objective, Rather, the focus must be on positioning the organization for the future, not simply executing a downsizing. In planning for any downturn, managers need a link between the reorganization and the company’s ongoing revitalization — a link that traditional methods of downsizing fail to provide. That link requires a strategic approach that enables executives to focus on making sure the organization has the right team in place after the reorganization is completed.

 

Process is crucial.

In order to effectively develop a “downturn” strategy, your process should include the following three steps (1) market assessment, (2) portfolio management, and (3) strategy development.

Market Assessment. This is an in-depth analysis of the company situation through the lens of the changing automotive market.  During this phase, the organization does an in-depth analysis of the market dynamics, including how technology is changing the marketplace, how competition is evolving, and how customer behavior is changing as a result.  This step is critical in defining how the company will win in the future.

Portfolio management.  A winning corporate strategy requires the replacement of external capital markets with internal market allocation towards the most attractive growth businesses.  This is where capital and human resources are allocated based on strategic merit and is often the most difficult step to complete.  It requires objective clarity around each market and product in the portfolio and is the reason external consultation is crucial to a successful outcome.

Strategy development. Once the organization’s “big bets” are prioritized, a robust growth plan is developed to highlight the necessary resources and investment needed to create a winning and sustainable market position.  Paramount to the activity is an organizational “gap analysis” and clarifying shortfalls to fulfill the market objective.  These gaps can be filled through organic means (development of internal capabilities) or inorganic means (through M&A).  Once this is completed, action plans can establish a clear set of objectives. 

 

Don’t delay.

The organizations that will thrive in the oncoming downturn are the ones who act now. Rather than waiting to see where the current takes them, these organizations are, as I write this, planning and executing strategies that will help them move towards a brighter future — will you be one of them?

 

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