The automotive industry had been showing signs of weakness long before the outbreak of the COVID-19 crisis. For months now, the industry has been suffering from declining demand for vehicles. In addition, suppliers have had to invest in new technologies to support the increasing electrification of vehicles. In essence, rising investments are meeting declining profits in a perfect storm of events.
In the following blog, we review how some suppliers in the automotive industry have reacted to this disruption. All the suppliers have one thing in common - they have accepted the challenge and tried to find a future proof business model. They all want to avoid the famous ‘Kodak moment’.
Investing for the future
While sales rates for classic internal combustion engine (ICE) powered vehicles slowly erode, the automotive industry has been investing in the powertrains of the future. In general, the industry is in a difficult position. In particular smaller suppliers, who specialise in combustion engine components, are struggling with the transition to meet future trends, like electrified powertrains. ICE components used today are simply not relevant for electric vehicles.
A wave of consolidation has been changing the supplier landscape in the last few years. On one side, large suppliers, like Bosch and Continental, have expanded their expertise in e-mobility by acquiring new businesses. On the other side, they started selling companies that are related to conventional powertrains. Continental, for example, acquired the software specialist Elektrobit Automotive in 2015 to broaden its product range. Continental's intention is to split off its powertrain business as a separate business, while the 100% spin-off of its powertrain business Vitesco Technologies, has now been put on hold till further notice. The assumption is that Continental wants to concentrate more on electronics, sensors and software.
For many smaller and medium-sized companies, it is more to transition to new market trends. Due to their size and specialisms, profits from these smaller suppliers are typically less diversified, meaning they are likely to come under considerable pressure as the industry evolves. Their classic business with combustion engines is becoming less relevant, but at the same time, they must invest in new technologies which reduces profit margins and diminishes cash flow. They need to adapt their business strategy to keep pace with competitors.
To give you an example of how important the right business strategy is in a changing market, let's take a brief look at the rise and fall of Kodak in the course of digital photography and how Fujifilm did better.
It seems odd to consider that Kodak was actually a pioneer of digital imaging technology – the technology which was responsible for Kodak’s bankruptcy. Instead of realising the disruptive potential of digital photography, Kodak sought to focus on improving existing products to protect its existing business model. The company tried to protect the status quo rather than investing in the new technology. The former camera giant simply made the wrong decisions. Kodak wanted to control the market structure and didn’t focus on customer needs.
But a single company is not capable of stopping innovation in a market. Existing and new competitors bet on the new technology, and overtook Kodak. When Kodak finally reacted, it was already too late. All efforts, to gain back a competitive position failed, and Kodak filed for Chapter 11 bankruptcy protection.
Unlike Kodak, Fujifilm focused on its core competencies during the digital shift in the photo market: e.g. the manufacturing and handling of chemical substances and the development and production of devices that use these chemical substances. Fujifilm acted swiftly and changed its business through innovation and external growth by investing in new business areas such as office electronics and medical technology. As a result of the diversification, sales have grown, and the competitive position of Fujifilm has remained stable.
This case study can be easily applied to the automotive industry. A company, that today manufacturers only starter motors is bound to have its future revenue forecasts cut significantly as ICE based vehicles phase out. Such a company would need to make a rapid move into a close adjacency by modifying its product portfolio to offer also a solution in a mild hybrid vehicle, such as a belt starter generator or P0 eMachine.
A manufacturer for cylinder-head gaskets for example faces the same problem. Such gaskets are essential for ICE based vehicles but irrelevant for electric vehicles. A gasket manufacturer could use its core competencies of high-precision stamping, forming, and embossing in the micrometer range to produce bipolar plates which are the core element of fuel cell stocks of fuel cell electric vehicles.
In particular a company, that is specialised in exhaust tract shielding technology, has to transform its product portfolio to the technologies of the future. Due to missing exhaust systems in electric vehicles, exhaust shielding systems are not necessary anymore. But this knowledge could be used to develop battery shields to protect surrounding components from a thermal chain reaction caused by a thermal runaway.
The automotive industry is undergoing mass disruption, which is causing the supply chain enormous pressure. The current business models are under threat, and changes must be accepted. However, the automotive industry has been facing a sales crisis in the last couple of months, and COVID-19 has intensified the problem. Nevertheless, the right decisions in terms of business strategy can be made now. Electric mobility, connected and autonomous driving will be the future, and new technologies will be needed. Accept it, change it or leave it.
In this post we have reviewed some of the dangers of being complacent about the seemingly inevitable technical, and business model changes, that will affect the global automotive industry. Ricardo, over the last 2 to 3 years, has worked with OEMs, suppliers and investors, to redefine their product, technical and commercial strategies in light of these challenges. Ricardo has a wealth of knowledge across multiple industries and is uniquely positioned to advise on future competitive strategy.
If this sounds interesting, please reach out to one of our subject matter experts to see how Ricardo could help with future proofing your technology and competitive strategy planning. In the current quarantine period, we have become adept at conducting half or full day online workshops with Ricardo experts.
If you want to research this topic in more detail you can locate multiple automotive research papers and technical reports with a subscription to RiCK.