Auto industry disruption will force suppliers to transform biz models
KUCHING: While the global automotive supplier industry continued to grow in 2017, disruption caused by four megatrends – Shared Mobility, Autonomous Driving, digitisation and Electrification – will likely force automotive suppliers to transform their business models.
This is according to the “Global Automotive Supplier Study 2018” by Roland Berger and Lazard. The study projects that supplier chief executive officers (CEOs) will need to transform their existing business models in order to capture shifting profit pools caused by these megatrends.
In 2017, the global supplier industry is expected to see revenues increase by approximately three per cent compared to 2016, and maintain profitability levels with an average earnings before interest and tax (EBIT) margin of approximately 7.3 per cent.
While volumes have reached record levels, global growth is slowing in some regions, with light vehicle production in North America expected to shrink by three per cent to 17.4 million units in 2017. For 2018, the study authors expect suppliers to enjoy continued revenue growth, but at a slower pace, while maintaining stable EBIT margins.
“The overall fairly positive sentiment is reflected in valuation levels of suppliers that are still trading above their longterm average,” said Christof S?ndermann, director at Lazard.
“But the four megatrends in the automotive industry are causing disturbance in all supplier domains.”
Recent developments point towards an acceleration of the disruption caused by four megatrends.
These include new mobility business models ( such as ride hailing and car sharing) which are poised to disrupt car ownership, personal mobility and goods logistics,
Others include the timeline for level 4/5 autonomous driving which keeps accelerating as necessary economics, regulations and technology fall into place.
The other megatrends are digitisation, artificial intelligence offers almost limitless possibilities, while connectivity- enabled technologies are reaching the point of mainstream application and momentum for electrification is building among regulators and OEMs, and progress on technology is accelerating
Based on these trends, disruption in the industry appears inevitable, but the transition period continues to be marked by a high level of uncertainty.
Automotive suppliers will need to prepare for five distinct changes that are emerging: slowing growth; accelerated technological change; software as a key differentiator; commoditization of hardware; and pressure on valuations for commoditised suppliers.
“Technology shifts require suppliers to substantially invest in old and new technologies in parallel, with benefits from new technology investments being uncertain,” said Martin Tonko, president director at Roland Berger in Indonesia.
“Margins and valuation levels in commoditized fields will come under pressure, but at the same time, electrificationanddigitisation offer new monetization options.”
He added that in Indonesia, automotive suppliers must invest even more than their Southeast Asia counterparts, as they start from a lower technology base and must keep up with external competitors.
Against this backdrop, the authors from Roland Berger and Lazard have identified a number of elements for suppliers to consider when transforming their business models to capture future growth opportunities.
Among these, are factors that affect strategy and portfolio, such as the impact of automotive megatrends, which segments and products will experience continuous growth, and how new segments can fit their current businesses. They must also determine how best to exit businesses that they deem unviable.
“Deep knowledge of disruptive trends is essential for any supplier,” said Tonko. “The current supplier business model of offsetting negative cost impacts with volume growth will no longer work.”
Potential implications include divestment and diversification into new growth areas, which is already reflected in ongoing merger and acquisition (M&A) activity in the sector in 2017. Innovation partnerships are increasingly important, and time is critical as many have already been formed.
“Pressure for suppliers also comes from OEMs, whose business model is equally disrupted by the megatrends,” observes Michael Schmidt, Director at Lazard.
“Not only are both looking at the same potential partners and M& A targets in the new growth areas of shared mobility, autonomous driving, digitisation and electrification, but the distribution of the value chain and the depth of vertical integration still remains to be seen.”