One Future, Three Ways Forward

The traditional automotive suppliers have three options open to them—consolidate in manufacturing, diversify into electronics or diversify into software—and they must pick one soon.

Electrification is the elephant in the room that suppliers cannot afford to ignore.  In this age of great global shifts to vehicle electrification, autonomous driving, connected cars, and ride-sharing, three clear paths to value creation have emerged, and each supplier can only choose one.  If they don’t want to be left in the dust by more entrepreneurial and/or strategic competitors, suppliers must decide between manufacturing, electronics and software—which one will they choose in order to win?

Let’s back up a little bit. Traditional automotive suppliers who specialize in manufacturing are still the backbone of the auto industry, as manufacturing is required for body, chassis, structures and internal combustion engine (ICE) components.  These are the businesses that continue to revolve around the ICE technology and related manufacturing processes.  Long-term, these businesses are facing a challenging horizon in terms of sustainability and profits.

Many stock analysts are already downgrading their outlooks for some firms as major economic powers (like France, the United Kingdom, India and possibly China) continue to put ICE bans in motion. Unless these suppliers make a decision among three clear paths forward, some traditional automotive supplier businesses will no longer serve as the backbone of the auto industry. And a few of these businesses could become an afterthought.

The first path is to continue to focus on traditional manufacturing.  The risk of this one path, which most of these businesses are already on, is whether or not they’ll survive.  Manufacturing in the auto industry isn’t going away, but it will change significantly in the age of electrification. Fewer mechanical components and a higher emphasis on software and electronics mean that the volume of the traditional suppliers’ current production could decline significantly.  The most likely scenario for traditional parts manufacturers is consolidation—merging two or more of their organizations into one, then developing financial synergies that will create both leverage and competitive advantage in a quickly shrinking market.

The age of electrification, then, becomes “eat or be eaten” for many traditional manufacturers. The businesses with the right amount of global scale will likely become the consolidators, but to succeed, they must be strategic and efficient in their efforts to wind down operations in their shrinking markets. Some of the components they specialize in have the potential to go away or will be reduced considerably.  So, all that’s left for those who choose the path of manufacturing is to figure out how to win as their market shrinks dramatically.

The second path to value creation for these businesses is the automotive electronics model.  The electronic content in vehicles will grow from $1,800 per car today to more than $7,000 as vehicles shift from standard ICE to battery electric. 

The critical new components for battery electric vehicles will include battery management systems, power electronics and electric drive motors, just to name a few.  Companies that have the industrial scale and the access capital, such as new industry entrants with large consumer product volumes like LG and Samsung, will have the power to truly carve out a space for themselves in this competitive landscape.  It’s already started–just look at the Chevy Bolt: LG supplies the entire electronic powertrain and infotainment system accounting for 56 percent of the car’s purchased components.  This share comes at the expense of traditional automotive suppliers.

The third option for traditional automotive supplier businesses is in software.  This emerging segment of the industry is currently being blazed by companies like APTIV, Elektrobit, Veoneer and Mobileye.  These companies are developing algorithms and software for the emerging technology of electric and autonomous vehicles, critical systems that are significantly different than what traditional manufacturing has been creating for decades.  As in the case of the electronic path, traditional manufacturers who have not developed a branch of their business to compete in this arena might not be able to make the transition.

Ultimately, the traditional automotive suppliers have three options open to them—consolidate in manufacturing, diversify into electronics or diversify into software—and they must pick one soon, as it takes several years for a supplier to transform itself.  Electrification will not be an instantaneous shift, but the success and survival of the automotive supplier businesses depend entirely on how well they can strategize for the future, which won’t wait on them to make a decision.