Innovation inflection point in the auto industry: suppliers must react

Suppliers and the need for change

The automotive industry is experiencing a once-in-an-era transformation. Above all, the industry needs to electrify – but it must also respond to customer demand for new Vehicle-as-a-Service business models, set within a true circular economy. These forces of change demand new operational models at every level in the auto value chain.

For some companies, the threat is existential. Auto suppliers that fail to embed innovation in their business models – and to demonstrate this to capital markets and wider stakeholders in the automotive ecosystem – will run out of customers and run out of money long before the automobility revolution is complete.

Many automotive companies have been surprised not only at the depth of change brought about by the pivot to connected, autonomous, shared and electrified mobility, but also by its speed. In addition to the widely forecast increase in demand for sustainable mobility, government requirements – and in some cases possible outright sales bans – are forcing automakers to adopt electric-vehicle technology much faster than they were anticipating only a few years ago.

Consider the fact that in 2022, sales of electric vehicles rose 60% year-on-year. The majority of those sales were in China, the world’s largest EV market, but sales in Europe and the US are set to grow fast. We forecast that sales in the US will rise tenfold between 2021 and 2030 to 6.3 million units a year, and the US will be the fastest-growing EV market in the world, with 34% growth to 2030, compared with 33% in Europe and 22% in China.

It is unlikely that the EU’s proposed exemption of e-fueled vehicles from the 2035 phaseout of combustion-engine cars will significantly impact investment in electric vehicle components; most auto suppliers are already committed to transitioning their product portfolios to electric technologies. This became more than clear at this year’s AUTO Shanghai recently held in China.

However, the growth in electromobility masks the fact that in the shorter term both OEMs and supplier companies remain heavily dependent on conventional internal-combustion technology for revenues. In 2022, just over 81 million road vehicles were manufactured, of which 8.7 million were pure EVs and 13.08 million were hybrids.

This leaves small and medium-sized supplier companies with an acute challenge. Unlike large OEMs or large suppliers, they are typically highly specialized, and lack a broad span of technology competence. They cannot afford to make multiple technology bets as they prepare for a future in which many of the critical components of today’s vehicles will no longer be required. An expected fall in global sales volumes in the short term – as the chart below shows, vehicle production forecasts for 2023 have recently dropped by around 6.6 million units – only make it harder still for small and medium suppliers to plan and finance their transition.