This post will look at the effect of change along a complex automotive supply chain, it will investigate the resultant chance of both obsolescence and substitution and it will propose actions and strategies that can maximise success. We will present actions and behaviours that can increase the likelihood of success. Building corporate agility into the business will be needed to capitalise on the opportunities that arise from a dynamic supply chain.
Industries are constantly changing as new technologies come to market and new supplier relationships are formed. As with all supply chains, some players strike an innovation or form a new relationship that pushes another player out; this is natural. Many industries can be modelled with a supply chain, as shown below. These tend to be relatively complex, and the recent COVID-19 pandemic has only reinforced how every supply chain is sensitive to disruption on both the supply and demand side. Over time, suppliers who can deliver significant value tend to capture more business and drive further consolidation through organic or inorganic growth. In the automotive sector, consolidation has taken place further downstream with the likes of big Tier 1s, which puts further pressure on their suppliers higher up in the supply chain.
1. The compounded risk of obsolescence
As technology advances and consumer behaviour changes, products will naturally change to meet demand, perpetuating the continual cycle of micro-economical equilibrium. This technological change could be at any tier of the supply chain and will affect all upstream suppliers. This leads to the conclusion that the further up the supply chain a company is positioned, the higher the compounded risk and susceptibility to change.
Example: Consider the supplier of camshaft steel. A shift in consumer preference towards lower emissions has led to a focus on alternative lightweight materials for camshafts. This caused a shift in the demand for camshaft steel and will impact both the raw material and manufacturing suppliers. This is expected to lead to a reduction in the steel supply in this product segment over time. Equally, the downstream supply may push for alternative technologies to fulfil the efficiency needs. This drives all the players in the supply chain to create new emergent technology that could remove the need for camshafts altogether and consider hydraulic valve lifters as an alternative.
2. The compounded risk of substitution
As relationships change, the competitive landscape shifts to accommodate. No matter the saturation of the market for the goods supplied, there is always the chance of one supplier being replaced with another. These natural ebbs and flows are healthy for an industry, allowing the free market principle of competition to drive efficiency.
Example: Consider a supplier of bearings into a drive shaft. The drive shaft supplier could form a new relationship with a new bearing supplier, thereby leading to a new deal, replacing the current supply volume. Equally, the OEM could decide to re-tender the supply of the driveshaft resulting in a substitution of the current supplier. Within the automotive supply chain, it is often agreed that suppliers will accept a year on year price reduction for supply, under the assumption that efficiencies will be found in production. If this agreed YoY price reduction is not enough to account for the baseline efficiency improvements, the supply may also be re-tendered.
3. Risk of vertical integration
As large players look to grow their revenue and ultimately profits, they seek to convert more of the pass-through revenue to added value and minimise their exposure to supply chain volatility. This is achieved through vertical integration which can be done organically or inorganically, through acquisitions. As large players take up market share of upstream activities, new supplier relationships may be formed, pushing out old existing ones.
Example: In 2015, automotive supplier Michelin, concerned with the supply and cost of natural rubber, took the initiative to buy into rubber plantations and refineries. This secured their supply and allowed them to control pricing further up the supply chain. This move had the effect of forming a strong supplier-customer relationship which went a long way towards controlling the price of the natural rubber supply market.
Example: Similarly, for the supply of the growing energy storage industry, some large automotive OEMs, realising the limitation to the amount of lithium available, bought into lithium mines. In doing this, they have been able to control the raw material supply into their cell suppliers. This not only reduces the risk of open market volatility it also informs them of the supply cost of the raw material to their suppliers, giving them visibility of their suppliers’ cost base, which allows them to better negotiate on pricing.
To address the threat of competitors, players at all stages in the value chain should:
- Define how customers are seeking to deliver value in the supply chain
- Adapt and align your proposition to be attentive to the customers’ needs
- Work with customers to improve the overall value proposition
- Seek to continually improve the offering in line with the customer’s strategy and aspirations
- Understand the customer’s competitors, their product value proposition and how products could be adapted
To mitigate the risk of obsolescence, it is important to be aware of the trends along the supply chain to better position the business and capitalise on likely opportunities. To address the threat of substitutes, players at all stages in the value chain should:
- Understand the macro-level market trends and how they could impact each part of the supply chain
- Work to identify new and emerging opportunities to diversify the offering and increase potential revenue streams
- Be wary of obsolescence at any Tier of the downstream supply chain. Use macro level market trends to identify where replacements are likely to be and understand how to add value for any new offering
- For example, consider the supplier of engine blocks, understanding the trend towards low emission and electric vehicles helps them to realise that there is likely to be a growing demand for electric motors. This may present the opportunity to establish supply for motor housings or rotator cores both of which will see demand rise.
This post has discussed some of the dangers of being complacent about competitive positioning along the supply chain and how this positioning needs to be continuously reviewed. Ricardo, over the last 2 to 3 years, has seen an uptick in working with Tier 2 suppliers, who were part of the combustion engine supply chain, to re-define their pivot strategies towards higher growth segments in the automotive sector. 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. Equally if you want to gather more information about innovation and disruption in the automotive supply chain, discover more about a RiCK subscription.