Overlapping Lines For OEMs, Suppliers In A Disruptive Landscape

By Vinay Piparsania

Vinay Piparsania is Global Consulting Director, Automotive at Counterpoint Research. He is focused on analysing industry data, identifying trends, drawing out insights and reporting stories on the continually evolving global automotive landscape. Associated with Ford Motor Company for over 18 years, he has held progressive international marketing, sales and service responsibilities in Ford India, Philippines and at Asia Pacific – planning, developing and launching several new products in these emerging markets.

In recent years, the automotive industry has undergone significant transformation triggered by the convergence of disruptive technologies and radically changing consumer trends, such as shared mobility, connectivity, electrification, and more recently, autonomous vehicles. Each of these presents its own set of challenges and opportunities, for both OEMs and suppliers.

Evolving Relationship

Automakers fundamentally depend on their suppliers to deal with almost everything from ultra-modern redesigns to progressive lightweight materials, as well as advanced hardware and software. With automakers racing to incorporate more technology in their vehicles, suppliers are now facing a challenge to reimagine their development strategies.
In fact, access to emerging technologies, such as those required to develop driverless cars and advanced materials, are leading to a significant number of alliances in the automotive sector. To remain competitive, the suppliers not only need to reinvent their product and technology offerings but also their business models.

Re-inventing Product, Technology

With rapidly changing customer trends, largely influenced by technological applications in popular personal devices, automakers need to make far more frequent mid-cycle changes to their vehicle platforms. By far, the most radical changes are demanded within the vehicle’s cockpit, requiring advanced electronic systems to match intuitive user interfaces similar to smartphones.
To enable enhanced in-vehicle experiences, suppliers need to shift focus from designing hardware-driven product approaches to developing embedded/open-platform/software-driven operating systems. Indeed, the role of software has exponentially increased. Counterpoint Research estimates software will account for almost 30 percent of total vehicle value by 2030, up from about 10 percent today.
In future, the automotive companies will realise that their brands will no longer be defined by the type of cars they make or their performance but by the mobility experience they offer. With software a critical requirement, all suppliers have to step up their digital capabilities, meet OEM demands for productivity and improve innovation and agility.

Alliances vs Mergers

Automakers are opening up to the realisation that the best way to reduce development costs, stay competitive and remain relevant is through alliances and partnerships for specific technologies. This modern consolidation approach reflects a convergence of factors -economic, demographic and technological-that will continue to shape the industry over the next decade. Most alliances are undoubtedly for a limited period, to benefit from an immediate technology opportunity, possibly to transfer that technology in-house.
The key for the next 10 years is to achieve economies of scale, especially on expensive components, like batteries. With large investments already going into developing EVs, technology must be state-of-the-art, so that the final product can survive in a fast-evolving market. It is, therefore, important to have access to new battery technologies through a strategic approach to lower the cost of future EVs.
Auto component firms need to work together with manufacturers, step up investment in technologies, re-skill employees and enhance operational efficiencies. Adoption of any new technology also needs adequate infrastructure to take off and attain critical mass. Efforts are needed to set up a complete eco-system from procurement of raw material to setting up charging infrastructure and even recycling of batteries. The opportunity landscape needs to be tapped by nurturing existing relationships, forging new partnerships, as well as ensuring active policy support. As the component industry prepares for the future, OEMs too need to share the risks and ensure a shorter payback period for their supply chain.
The magnitude of challenges that suppliers face will continue to increase. With private customers and fleets expecting to halve their cost through shared mobility services and autonomous vehicles in the future, OEM and supplier portfolio economics will be challenged. Value will shift towards software and systems which focus on enhancing the ride experience. New entrants have started to threaten traditional players and will continue to do so.
Observing such disruptions in other industries, redistribution of profits can also be expected, with higher profits accruing to owners of critical innovations. Automotive players will need to secure their revenue positions by staking claim, through patents or licenses, on proprietary elements in the value chain which have the highest contribution.
Each player, based on an objective assessment of one’s proficiencies and competitive advantages, must identify the most attractive domains like electric powertrains, infotainment, and advanced driver assistance systems. Pricing and revenue realisation must be strategised based on the technology applied and market dynamics to ensure sustained profitability and ROI.

Increasing Overlap

Auto suppliers are now competing with technology firms like Samsung, Apple and Google that develop the latest versions of computers and smartphones. It’s not surprising to see many automakers and suppliers at global consumer electronics shows. Traditional automotive industry players too are bidding against technology companies and electronic firms, to procure critical components in high demand. Examples of such components are circuit boards and semiconductor chips.
With the financial position of the largest global technology companies being far greater than major auto manufacturers -50 major OEMs together make up about 20 percent of the combined market capitalisation of the 15 largest technology companies- the next wave of cross-sector alliances involves a complete rethinking of current business models.
As lines overlap, consolidation and alliances between multiple stakeholders is evident. It will involve technology, people, data, and resources. While these modern collaborations offer many advantages over traditional associations, they are also complex and intricate, needing careful management to realise their full potential and avoid pitfalls.

New Wave Of Transformation

Some recent announcements that set the transformational tone of what lies ahead of the global automotive industry include:

  • Toyota Motor Company which will offer royalty-free access to its patented hybrid technologies intends to become a Tier-2 supplier, looking to halve the capital outlay for new plants for future EV models and generate new sources of revenue. Supplying to other automakers and suppliers creates an opportunity to scale production for modules like power control units and electric motors used in hybrids, plug-in hybrids, fully electric and fuel cell vehicles.
  • Ford Motor Company and Mahindra Group are leveraging their respective strengths in product development for India and emerging markets. They have entered into definitive agreements on powertrain and connected car solutions. The two companies also plan to co-develop compact SUVs, electric vehicles, and telematic control units. From 2020, the Mahindra Group will supply a low displacement petrol engine to Ford India for use in its present and future vehicles. The two automakers plan on utilising each other’s factories and sales network in India and other global markets.
  • Renault’s alliance with Nissan and Mitsubishi will start equipping its cars from 2021, with an Android operating system to make smart dashboards. Google is clearly looking to make Android the dominant force in vehicles’ onboard systems.
  • Volkswagen and Ford are exploring a development and production alliance for commercial vehicles, including vans. While the strategic alliance does not involve the two firms taking any ownership stake in each other, it allows the sharing of technology and developmental costs around major projects.
  • Groupe Renault and Brilliance China Automotive Holdings Limited, have established a joint venture to manufacture and sell light commercial vehicles (LCVs) to accelerate growth in China. Renault has also confirmed plans for three new electric LCVs within the next two years, to counter driving restrictions on ICE vehicles within China’s city centres.
  • BMW is seeking partners for its second generation autonomous driving programme, for debut in 2025. BMW is working with Fiat Chrysler Automobiles, Magna International, Intel and Mobileye to bring a new self-driving platform to the entire automotive market by 2021. With Intel and Mobileye, BMW Group is developing necessary solutions for automated driving. The BMW iNEXT will be the primary model for fully autonomous and automated ridesharing fleets for both highways and urban environments.

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