Adapt or fall: The three paths forward for suppliers in a new automotive world

Adapt or fall: The three paths forward for suppliers in a new automotive world

Electrification is nearing an inflection point, and autonomous, connected capabilities won’t be too far behind. Changing consumer attitudes, improved battery economics, stricter regulations, and the opportunity to hit big in a newly emerging market are speeding up innovations. But what does this mean for traditional automotive suppliers? 

In short, suppliers need to start thinking differently. They need to think outside of the box to compete with entrepreneurial and strategic competitors in today’s rapidly changing auto industry and find ways to adapt, merge, and shift to maintain relevance. 

Here are three distinct paths automotive suppliers must choose from if they want to stay in the game. 

#1 – Manufacturing

The first option is to continue focusing on traditional manufacturing. The primary risk of this path is whether or not you’ll survive the shift toward electrification. Manufacturing in the auto industry is here to stay, but suppliers should expect significant changes. Fewer mechanical components and a higher emphasis on software and electronics means that the volume of traditional suppliers’ current productions could decline significantly. And with most traditional suppliers already choosing this route, the competition could be high. 

But how will the switch to electrification play out? Currently, the share of EVs—and especially BEVs—in U.S. auto production is still quite small, but it’s growing. Recent U.S. legislation has called for 50% of the market to consistent of battery-electric, fuel-cell electric, or plug-in hybrid by 2030—and according to our forecasting models from the 2021 regulations report, battery electric vehicles are on path to dominate the market, accounting for up to 32% of all passenger vehicle sales by 2030. 

To prepare for this shift, traditional parts manufacturers should consider consolidation—merging two or more of their organizations into one. Then, they must develop financial synergies to create leverage and competitive advantage in a shrinking market.

#2 – Electronics

The second path to value creation is the automotive electronics model. The electronic content in vehicles will grow from $1,800 per car today to more than $7,000 as vehicles shift from the internal combustion engine (ICE) to battery electric.

While changing infrastructure is necessary, electrification is also highly dependent on battery technology. The most expensive component of an EV is its battery back, and successful EVs require reliable, long-range battery packs. While the auto industry has utilized multiple batteries in different applications, lithium-ion is the only feasible battery type for EVs.

Although traditional automakers have had the time and capital to build their own ICEs, the lack of know-how and initial cost of battery production may force them into EV-related collaborations (i.e. Magna-LG). At the same time, companies with the industrial scale and access capitals, such as new industry entrants with large consumer product volumes like LG and Samsung, will have the power to carve out a space for themselves in the competitive landscape at the expense of traditional suppliers. 

#3 – Software

The third path for traditional automotive suppliers is in software. As an emerging segment of the auto industry, software is currently blazed by pioneers like APTIV, Elektrobit, Veoneer, and Mobileye. These companies are developing algorithms and software supporting the emerging technology of EVs and AVs.

As the industry shifts toward electrification, autonomy, and data, the separation of hardware and software will fundamentally change the dynamics of the industry’s value landscape. Manufacturers must navigate the exponential increases in software content while changing their operating models to develop hardware and software side by side. 

Considering that neither OEMs nor traditional suppliers can fully deliver the technology requirements of new systems, co-development and diversification will likely become necessary. Moreover, in an automotive world driven by user experience over horsepower, manufacturers must embrace the latest technological innovations (including UI, UX, and analytics) to move forward.

For OEMs, the separation of hardware and software will make sourcing more competitive and scaling less complex, allowing for a standardized platform for application software while maintaining competition on the hardware side. Meanwhile, traditional manufacturers who have not developed a branch of their business to compete in the software arena may not survive the transition.

Choosing the right path forward

The momentum toward electrification is unstoppable, and traditional automotive suppliers will need to think differently to survive. Whether suppliers decide to consolidate in manufacturing, diversify into electronics or diversify into software, they’re going to need a robust, responsive and strategic plan to step out in front of the competition as we move forward in 2021—and beyond.

Electrification will not be an instantaneous shift, but the success, survival and growth of traditional auto suppliers depend on how well they can strategize for the future, which requires expert knowledge to navigate. Contact us today to start making key decisions for the future of your business.


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