The Four Strategic Choices Facing Suppliers
Has there ever been a period of automotive history where the shift in trajectory, technology envelope and level of risk assumed has been so high — and happening as rapidly as the transition to electric vehicles? I’ll submit that the post-WWII boom and competitive shakeout, the 1970s oil embargos and subsequent focus on lightweighting, and the bankruptcies of a couple of major U.S. OEMs come close. But those events will pale in comparison to the impact of the ICE-to-BEV transformation.
The current S&P Global Mobility BEV production-share forecast for NA is almost 9% — up three percent from last year. By 2030, the forecast is for 39% of production to be battery-electrics. Of course, that leaves roughly 60% of production powered by IC engines, with most of them likely to be hybrids. Still, given this backdrop suppliers in the engine, transmission, driveline, fuel and exhaust spaces have been strategizing their future. Some are proactively making critical decisions while others are waiting for the dust to settle (and the next rounds of vehicle emissions and fuel-economy regulations to arrive). News flash! The dust has settled.
Virtually every supplier will be impacted by the changing value equation as electrified platforms are the focal point of most of the new capital and technology investments. Those suppliers in the BEV-negative (adversely affected by battery electric propulsion) sectors essentially have four strategic choices going forward. Forward-focused suppliers have already made a choice.
Choice 1: Lift and Shift
Given their position within the competitive market in the ‘ICE’ sector and/or their ability to transfer technology to BEV-agnostic or BEV-positive areas — these suppliers transfer their operations to new light vehicle sectors. Several major Tier 1 moves to date are evidence of this as they focus on technologies that promise a more profitable future. This includes e-motors, inverters, battery thermal management technologies and electrified chassis (braking, steering and suspension). The ‘lift and shift’ suppliers are using the success from the declining ICE business to transform into a new entity driving higher margins for the future.
Choice 2: Evacuate
Several suppliers looked toward their long-term future prospects — and opted to seek an exit. These suppliers reviewed several factors to make this decision:the age or the ambitions of company ownership; other, more lucrative options for their capital and technology; the level of risk they were willing to assume and their position versus competitors and customers as volumes decline. Given these realities, many decide that a strategic sale (selling to a competitor) or financial-markets entity is the best solution for all involved. Such sales may include the eventual wind-down of operations or product lines or re-investment in the enterprise to improve efficiency and raise margins.
Choice 3: Cash Cow
The ‘cash cow’ choice is fairly simple. Management may not believe that future volumes will decline as swiftly as forecasters predict. The ownership and executive team may determine that their best route is to ‘milk’ current assets, optimize their position through pricing and nominal investment and ride out the future. This decision is easier if there is a strong aftermarket demand for the product. As ICE production volumes wane, the aftermarket component of their business becomes more important. In the end, this decision will end in acquisition or wind-down of the operations.
Choice 4: Double Down
Choosing to invest new capital into the acquisition of competitor capacity, business relationships and technology is a bold choice. With a strong market position, several suppliers are strategically acquiring competitor capacity, technology and business relationships. Using this newfound leverage, suppliers are strengthening future financial performance through raising prices or consolidating less efficient capacity.
While there are several variations of these strategies for BEV-negative suppliers, in the end suppliers are making these critical decisions either actively or passively.