A handful of Chinese companies are currently among the global Top 100 automotive suppliers. Among others, Weichai Power and Yanfeng Automotive Interiors, suppliers of diesel engines and interior systems respectively, are ranked as “pure” Chinese companies. Pirelli and Nexteer meanwhile, have Chinese majority shareholders or are under Chinese ownership. Outside the Top 100, many medium-sized suppliers are also under Chinese ownership, for example Kiekert and Hilite.

Weichai Power, currently ranked no. 17 in the list, had a total turnover of €11.9 billion in 2017. Alongside engine production, the company has consistently expanded its product portfolio, which now includes gears, axles, control units and other components, such as for forklifts and commercial vehicles. Acquisitions outside China including Kion (2013) or Linde Hydraulics (2012) have contributed significantly to the growth of Weichai Power.

Yanfeng Automotive Interiors is currently the world’s largest supplier of vehicle interiors. The company, the result of a joint venture with Johnson Controls, supplies OEMs with comprehensive interior solutions and achieved a turnover of €7.1 billion in 2017. Through its relationship with Kostal, the company can also offer human machine interface (HMI) solutions. Yanfeng also supports some joint ventures, for example with KSS (safety systems such as airbags, safety belts and steering wheels), Plastic Omnium (exterior parts such as bumpers and radiator grilles) and Adient (seats and seat components).

The success stories of both these companies indicate that more Chinese companies are going to be moving into the Top 100. To this end, various strategies are being pursued. Established suppliers use internationalization, as well as moving component suppliers horizontally and vertically to module/system suppliers in the value creation chain, to achieve turnover growth. A whole range of new suppliers are using the rapid development of e-mobility in China to drive their growth.

International expansion, along with technology development and extension of know-how, is typically accelerated by acquisitions abroad. Examples of this are Nexteer, Kiekert and the starter and generator maker Sparte (SG) by Bosch, which was taken over in 2017 by the Zhengzhou Coal Mining Machinery Group (ZMJ). Because ZMJ was mainly active in the Asian region before the takeover, the takeover gives the company not only immediate access to the European market, but also to supply premium European and American OEM customers in Asia. Ningbo Joyson (ranked no. 75) has also been able to achieve enormous turnover growth through takeovers abroad. In Germany these include the takeovers of Preh (2011), Quin (2015) and TechniSat Automotive (2016), as well as the takeover last year of the troubled Japanese supplier Takato by the Ningbo Joyson subsidiary, KSS.

Horizontal movement – i.e. the expansion of the product portfolio – and evolving from a component into a system supplier are also typical growth strategies used by Chinese suppliers. One good example of this is the largest supplier conglomerate in China: the Wanxiang Group (turnover €xxx billionin 2017). The company started in the late 1970s, producing universal joints for cardan shafts. Since then Xanxiang has not only constantly expanded its portfolio, but has also consistantly evolved into a module/system supplier through targeted acquisitions. The current portfolio includes steering columns, axle shafts, water pumps, silencers, brake calipers, front axis modules and small power units. Battery producer A123 has been a part of this conglomerate since 2013 and Fisker Automotives since 2016.

Another example of typical Chinese company growth is the Minth Group (turnover €xxx billion in 2017), which offers interior and exterior components (radiator grilles, roof racks, door sills etc.). The company has massively expanded its portfolio by producing structural components, control units and seat components. Since 2016 Minth has also been the first company from the supply industry to hold a license to build BEVs. Fulin Precision Machining and Shengrui Transmission are also companies following a similar growth path to Wanxiang and Minth.

The internationalization and in particular the verticalization of their portfolio present the companies with new challenges. Although process chain management of the production of parts and components is still comparatively easy, the integration of components and modules into complete systems requires comprehensive system knowledge.

While autonomous driving and connectivity in China are dominated by the internet giants Ali, Baidu and Tencent, e-mobility does offer opportunities for new suppliers. As the largest single market for BEVs (known in China as NEVs – new energy vehicles), battery producers of Chinese origin (e.g. CATL, BYD, Guoxuan, Lishan, BAK, and CALB) already had around 35 percent of global market share for installed battery capacity in 2016. This share is expected to increase to 45 percent by 2025.

CATL and BYD are currently among the obvious market leaders. In 2017 CATL achieved a turnover of around €2.6 billion (34 percent higher than the previous year) and a considerably improved profit margin of around 20 percent compared with 2016. CATL acts both as a cell pack supplier and as a rechargeable power pack supplier, and supplies numerous Chinese OEMs such as Geely and FAW, Chinese NEV start-ups such as NIO and WM, and the local joint ventures of BMW and Volkswagen. CATL has now reached a market share of 29 percent on the domestic market.

A supplier landscape has also developed in the e-mobility ecosystem around vehicle charging. This includes companies whose products range from hardware production to installation of charging stations, operation and back-end solutions. SAIC Anyo, Starcharge, Wanma and Zhida are some of the more important companies in this segment, however their business operations are still very much limited to the Chinese region.

With the continuing growth in global car production and the sustained high domestic demand in China, it can be assumed that five more Chinese suppliers will join the Top 100 club within the next three years. International competition and cross-border consolidation look set to gain considerable momentum once again.

The intangible is taking over from the tangible. Apps, algorithms and artificial intelligence are ousting coal and steel. The market capitalization of the 10 largest car companies (including Tesla) is around €670 billion (as of the end of 2017), which corresponds to the market capitalization of Microsoft alone.

Digitalization has the potential to shake up value chains and distribution, with a considerable impact. However, companies can improve their existing positioning, and develop new business models, by introducing product and process innovations:

1. Optimizing current business models, for example through digitalization of products and services in the established portfolio. This can be done by networking of the supply chain beyond company boundaries or through the use of artificial intelligence to improve flexibility and the capability to react to changing markets.
2. Expansion of the business model, for example through further development of the product and service portfolio in the context of autonomous driving or electrification of the powertrain.
3. Development of a new business model, for example through the creation of novel transport solutions and the development of direct (end) user access.

The multifaceted drivers of digitalization in industrial manufacturing, including the Internet of Things, Industry 4.0, mobile devices and Big Data, affect companies in the supplier industry with varying degrees of relevance and urgency. This means that an in-depth discussion about the importance of digital transformation becomes necessary in every company, in order to make use of opportunities and identify risks as early as possible and be able to take the relevant countermeasures.

In this context, organizations are increasingly asking themselves to what degree the existing company culture allows for managing high-complexity digitalization. Small and medium-sized suppliers are on the verge of missing the boat here. Company culture is often still organized along traditional lines and can work against the need for agility, flat hierarchies and self-managed teams in digital transformation projects. Even “trial and error” methods and short development cycles with the close involvement of external partners are often difficult to carry out within a long-established culture.

Although the relevance and urgency of digitalization is accepted, hardly any companies have a real masterplan for carrying it out. It is not immediately apparent what the future direction of the business should be and to what extent digitalization is going to change the company. The question that often remains is whether the company can continue to exist as a component or system supplier or whether an entirely new business model must be developed. For many companies it is simply not possible to identify and use the opportunities that are arising, for example from the application of Big Data. For this reason many medium-sized companies focus primarily on process and cost optimization instead. The fact that digitalization can offer direct customer access is often overlooked.

As a result, there is a lack of understanding about the opportunities created by new products, services or digital business models, and the existing potential for new sources of revenue is more or less ignored. Many suppliers’ financial resources are also insufficient to meet the cost of digital transformation and there is a shortage of people with the right digital skills.

Despite these factors, existing company culture is often cited as the most frequent reason for a non-existent masterplan and a lack of comprehensive discussion about digitalization.

Berylls’ Company Culture 4.0 survey shows company culture to be a significant success factor and many suppliers are indeed working intensively on that: management teams discuss and reflect on their perceptions of culture, describe values, norms and basic beliefs about leadership and co-operation, and in many cases train their staff in how to deal with these. So why is commitment not leading to a comprehensive discussion about digitalization?

Berylls believes the following factors are behind the lack of progress:  

• The continuing success of the existing business model and concentration on established, direct competition reduces readiness to make changes within the company.
• Understanding of digitalization varies widely in existing organizations and no common definition of digitalization has been worked out.
• Discussion about company culture concentrates too much on traditional cultural values that have been effective so far: quality, reliability, thoroughness and thrift, combined with a down-to-earth approach. It is not in the participants’ DNA to storm ahead without careful planning or to regard investments as an experiment.
• To a large extent, business owners and senior leaders live out these traditional values. In discussions about digitalization they often act based on their experience, do not argue enough about the best objective solution and shy away from investments outside their traditional areas of opportunity.
• Within a company there is still relatively little knowledge about digital skills and approaches. This means that no shared vision can be developed regarding the cultural strengths and weaknesses needed for digitalization. Consistent promotion of strengths and limitation of weaknesses becomes more difficult.

To achieve success, the necessary culture patterns of digital transformation need to be identified to define the right measures to be taken for organizational development. Is the existing company culture a help or a hindrance when it comes to the complex demands of digitalization? The company cultures of many organizations show a lack courage to take new pathways, are closed to innovative ideas, favor a culture of debate rather than a pursuit of harmony, and lack the strength to implement change in the face of resistance. Courage as a quality is often dismissed as recklessness and determination as obstinacy. But both of these are attributes without which a fundamental change cannot be tackled.

This is why Berylls Strategy Advisors has established a set of recommendations for adapting company culture to meet the needs of digitalization – for medium-sized companies in particular – without losing the elements that make them successful right now. Our recommendations are continually being redeveloped, with the help of company culture experts and collaboration partners:

• Berylls recommends a pragmatic pathway and emphasizes the importance of systemic and systematic management. It is leaders who determine culture development in a company. However, it is by no means a question of reinventing the leadership. Instead, it should be adapted to meet the needs of organizational development. For example, agility is not only a method, but an attitude. The skill lies in implementing existing company approaches in an appropriate and meaningful way.
• It is also important to consider the cultural perspective at the point where a company-wide digital strategy is being worked out. As well as strategic and structural initiatives, digital transformation above all requires cultural initiatives that can mobilize the entire workforce. The clear creation and allocation of responsibilities at top management level are helpful for the successful implementation of company-wide and centrally controlled measures for digital transformation.
• Most importantly, the development of a comprehensive masterplan for digital transformation needs to be right at the top of the decision-makers’ agenda. Both the potential and risks of digitalization must be looked at as a whole in order to reach the right conclusions for the company concerned. The basis for this is a clear definition of what digitalization actually means. The strength and effectiveness of applying knowledge of digitalization to the business model is enormous, but the path to get there is not easy, as the Berylls Company Culture 4.0 survey shows. If knowledge gaps are to be reliably closed, as for example with Big Data expertise, focused involvement is needed from external experts.
• However, as the recommended ways of working may not be compatible with the existing culture, work to develop the organization’s digital mindset is necessary. One pillar for this is the creation of appropriate training opportunities. When it comes to important personnel decisions such as recruitment and promotion, attention should be paid to those skills needed urgently by the company for digital transformation. Sometimes breaks from the norm must be accepted or even consciously implemented. Digital transformation demands a cultural rethink from established companies if they want to secure their success. Such a rethink starts at organization’s very heart.