In recent years, the automotive industry has undergone significant transformations, triggered by the convergence of disruptive technologies and radically changing consumer trends, i.e. shared mobility, connectivity, electrification, and more recently, autonomous vehicles. Each presenting new challenges, and opportunities, for OEMs and suppliers across the automotive industry.
An Evolving and Transforming Inter-Dependency
OEMs typically rely on the expertise of their suppliers to develop solutions and strategies to keep them competitive. However, in the rapidly evolving circumstances, this inter-dependency is increasing the pressure on the supply chain to continually develop novel solutions, transforming the OEM-supplier relationship even further. Automakers are fundamentally depending on their suppliers to deal with everything, from ultra-modern redesigns to advanced hardware and software, to progressive lightweight materials. With automakers racing to incorporate more and more technology in their vehicles, suppliers have had to reimagine their operations and research/development strategies. In fact, the growing importance of product innovation and access to emerging technologies, such as those required to develop driverless cars and advanced materials, are critical factors behind the significant number of alliances and M&A deals in the automotive sector lately.
Reinventing Product and Technology Offerings to Remain Competitive
To remain competitive in this increasingly crowded and fast-moving space, incumbent auto suppliers will need to basically reinvent their product and technology offerings, as well as their business models. With advanced trends, like electrification, being at the forefront, suppliers face unique demands, requiring integrated and sophisticated solutions. Take for example, a need for electric vehicle battery protection against collisions – looking to develop battery casings or chassis structure, guarding potentially explosive/corrosive new generation electrolytes from leaking on crash impacts, while also designed to efficiently dissipate heat generated during operations, and without compromising light-weighting of the vehicle by over 20% , to improve mileage coverage per charge.
Facing rapidly changing customer trends and lifestyles, strongly influenced by other technological applications, automakers need to make far more frequent mid-cycle changes to their vehicle platforms. By far, the most radical changes are demanded within the vehicles cockpit and interiors, requiring advanced electronic systems to match the intuitive user interfaces similar to what’s available today on most popular smartphones and personal electronic devices.
To enable these in-vehicle experiences, suppliers have shifted their focus from designing hardware-driven product approaches to developing embedded, or open-platform, software-driven operating systems. Indeed, the role of software has exponentially increased, and will continue to grow dramatically. It is estimated that software will account for almost 30 percent of total vehicle value by 2030, up from about 10 percent today. With increasing sophistication and connectivity, the average new vehicle is believed to currently have computing power capable of processing over 100 million lines of software code.
Protecting Revenues; Staking Claims to Innovations
The magnitude of challenges that suppliers face will only continue to increase. With private customers and fleet expecting to halve their cost through shared mobility services and autonomous vehicles in the future, OEM and supplier portfolio economics will be challenged as value shifts towards software and systems enhancing the ride experience. New entrants have started to threaten traditional players in the automotive supply base and will continue to do so. With the anticipated demand for vehicle models changing, so will the mix of parts, components, and systems supplied, as well as associated services to be provided.
Redistribution of Revenues and Profits to be Expected
Observing disruptions in other industries, a redistribution of profits can be expected, with higher profits potentially accruing to owners of critical innovations. Auto-industry players will need to secure their potential revenue positions by staking claim, e.g. through patents or licenses, to those proprietary elements in the value chain which have the highest contribution on product and service enhancements that customers perceivably want and value the most.
Each player must identify the most attractive domains for themselves- for example, electric powertrains, infotainment and advanced driver assistant systems, based on an objective assessment of their own proficiencies and competitive advantage. Aligned to technology and market dynamics, pricing and revenue realization must be prioritised to ensure sustained profitability and ROI.
Auto suppliers will now not only compete with each other to satisfy automotive OEMs but also with technology firms like Samsung, Apple and Google, who are developing and owners of the next versions of computers and smartphones. It’s not surprising nowadays to see as many automakers and auto suppliers at various consumer electronics shows around the world, as there are electronic suppliers. The transforming supply chain will also see traditional automotive industry players bidding against the latest technology companies and electronic firms, especially when it comes to procuring critical components in high demand, like circuit boards and semiconductor chips.
Supplier businesses will continue to face dramatic changes, challenging their fundamental economics, with certain areas of the automotive market shrinking considerably and others showing continued growth. While software is definitely becoming more and more the critical requirement for differentiation for certain players, all suppliers will necessarily have to step up their digital capabilities to stay in sync to meet OEM demands for productivity, competitive costs, innovation and agility, responding to changing demand patterns
Which firstly means, having to drop conventional mindsets that have long dominated automotive industry suppliers.