DACH Automotive Industry
10-year period of sustained growth and record results in the car supply industry has come to an end. The digital revolution, OEMs’ customer focus, and the expansion of automotive supply chains around infrastructure provision and mobility operations are all dramatically changing the economics for suppliers. Berylls has identified eight challenges to which every car supplier CEO needs to respond:
The car industry used to exercise tight discipline in its supply system, with clear structures along the whole chain, good planning reliability and solid forecasting, as well as reliable relationships. VUCA, or Volatility, Uncertainty, Complexity and Ambiguity, in today’s auto industry has resulted in massive disruption to the established supply system. VUCA forces are increasing significantly, making forecasting more difficult or even impossible. Management based on experience, stability and certainty is also made more difficult. Minor unplanned deviations can have a major impact on suppliers and lead to a chain reaction along the value creation process.
CEOs need to create an organizational and management model to reliably manage their companies against this backdrop of VUCA.
The years 2010 to 2018 were golden ones for the car supply industry, marked by sustained growth, widespread cost controls, strengthening of equity structures, solid financing and improved competitiveness. But the next five years will be very different, with disproportionally higher costs to contend with – the result of wage increases in the east, acquisitions in the west and rising prices for raw materials – alongside a reduction in productivity improvements. Financing will be more difficult, too – with higher interest rates and the car industry viewed by banks as a “crisis industry.” The period will see increased complexity in customer profiles, limitations on globalization (increasing logistics costs) and a requirement for high investment in innovation. The average EBIT margin of 8 percent for supply enterprises and 6-7 percent for medium-sized companies will shrink to around 5 percent by 2025.
CEOs need to switch to “sustained restructuring mode” to secure the operating efficiency of their highly complex value creation systems in an ever-changing world.
CASE (connected, autonomous, shared and electric) vehicle technologies are at the heart of change in mobility services. Because of their systemic interlinkages, strong functional improvement of the “mobility” product and high levels of intervention in existing solutions, their development, production and implementation are expensive and lengthy. CASE is expensive and up to now has delivered few – if any – financial improvements for companies in the car industry. This will not change in the coming decade; investments in the development of CASE technologies will run into double-figure billions. At the same time value is flowing out of the traditional profit sources, especially the internal combustion engine (ICE).
New developments by OEMs are being suspended, investments are not being made, financial resources are getting scarce. The balancing act between years of loss-making investments in CASE technologies and non-existent profits from the traditional business can no longer be managed. The losers in this development are ICE-dependent companies (which still represent 25 to 30 percent of value creation in the car industry), traditional low-tech suppliers and the typical medium-sized businesses which can no longer afford tough and risky business. On the other hand, the winners are the large enterprises (such as Bosch, Conti and ZF), car suppliers in the CASE field, new mobility start-ups and niche specialists.
CEOs need to leave behind former approaches, develop new business models to participate in the change in the car industry initiated by CASE, and at the same time tackle high numbers of fundamental innovations with long amortization times against a backdrop of faltering core businesses.
Competition in the supplier industry has always been merciless. Weak suppliers are rapidly sifted out according to the “survival of the fittest”. But this was happening within a stable economic system. The sustained and continuous development that has made the car industry and its suppliers highly innovative was based on a system in which any changes would be financed from the system itself. Innovations would be introduced into the market in small steps and skills would be built up gradually.
However, that system has now ruptured. A recent Berylls survey of 1,000 mobility start-ups shows over in the past five years, more than €180 billion has been invested in mobility venture capital. During the same period, only about half that amount was spent on investment in research and advance development for traditional automobile players.
Start-ups are looking more for disruptive innovations than revolutionary developments: a complete car from a 3D printer, cars which hover above ground, flying vehicles, zero-waste cars etc. These visionary business models coupled with absolutely “infinite” financial and intellectual resources are now clashing in a competition for the best mobility solution of the future, creating a clash of cultures with established suppliers.
CEOs need to assess two things: the risks posed to their business models by tech start-ups with disruptive approaches and the opportunities these bring from which their companies can profit.
In developed societies, the disadvantages of individual mobility are becoming more and more apparent: unsustainable use of natural resources, traffic accidents, time wasted in traffic jams and pollution (air, noise and water). The car is increasingly the scapegoat for all these problems and young people are turning away from it. Other industries and careers – and the companies associated with them – are gaining social prestige and attracting talent away from the erstwhile flagship auto industry.
CEOs need to make their companies, and indeed the whole car industry, attractive again to continue attracting the best talent.
The collaboration between OEMs and suppliers over the past 30 years has never been co-operative, marked by cost pressure, supplier-customer relations and tough competition. This is not going to change in the future. However, system-relevant players in specific areas, and in areas which are critical for OEMs, are the exception. Because of VUCA and the enormous upheaval going on in the sector, it is almost impossible for OEMs to maintain reliable and stable relationships with their suppliers. The once clear and – to a certain degree – predictable future is dissolving and reliability is declining rapidly. The result is that production start-ups are delayed, vehicle projects are suddenly cancelled, quantities are considerably less than planned, or they increase significantly, specifications are changed at the last minute, and commercial agreements are broken.
In parallel to this, completely new customer relationships are developing with tech start-ups or Asian start-up OEMs, who have little or no knowledge of the mechanisms of the car industry (and possibly do not even want to acquire any). The tectonic changes began a long time ago; Asian and in particular Chinese OEMs, combined with the Chinese automobile market – which has grown in importance because of its size – are bringing about a shift in the balance of power. China has replaced Europe, Japan or the US as the measure of all things for the car industry. Will Daimler, BMW or Audi become the Telefunken, Grundigs and DUALS of the 2020s?
CEOs need to adapt their companies to the new global balance of power when it comes to interacting with their customers.
The whole balance of power in the mobility industry is shifting to China and Asia more broadly. Every third car is produced in China. In future China will be growing twice as fast as the other core markets. In relation to future technology for e-mobility, growth and market penetration are already higher in China than in the rest of the world. There is also great willingness to invest in new OEM markets and mobility start-ups in China. Furthermore, China is buying out suppliers in hi-tech countries; takeovers of western OEMs are not excluded. State economic policy has defined the mobility industry as a key industry and is supporting its advancement. In short, China is set to become the “North Star” of key markets for OEMs. For the traditional car industry this means that they need to become more Chinese. And that goes for all aspects of their own business model.
CEOs need to bridge the gap between the build-up of skills in China and the securing of skills in the west.
The whole of the automotive value creation system is based on increasingly smooth and efficient processes: zero PPMs, JIT/JIS deliveries, simultaneous engineering, and so on. And this system has to work all over the world. Target prices for components are calculated on the basis of organizations functioning “perfectly.” The reality looks different: production start-up problems, quality costs, overtime caused by interface problems and high staff turnover in BCC countries. The majority of car suppliers have clear deficits in their business systems because, for the most part, things do NOT run perfectly.
CEOs need to establish high-performance organizations which are “best in class” at fulfilling all customer requirements, while at the same time ensuring profitability.
Our outlook in summary? The last 10 years were a piece of cake compared to the challenging agenda of the next 10.
Dr. Jan Dannenberg (1962) has been a consultant for the automotive industry since 1990 and became a founding partner of Berylls Strategy Advisors in May 2011. Until spring 2011, he worked with Mercer Management Consulting and Oliver Wyman in Munich, Germany, on international projects – for five years as Associate Partner, and another three years as Partner. He is a recognized specialist in innovation and brand management in the automotive industry, and primarily advises suppliers and investors on strategy, M&A and performance improvement. In addition he is Managing Director at Berylls Equity Partners, an investment company that specializes on mobility enterprises.
Bachelor of Arts in economics at Stanford University, USA; business administration and doctorate degree at the University of Bamberg, Germany.
