Planning ahead in an industry under disruption
It is no secret that the automotive industry is increasingly moving toward an electric-focused future. In the last 10 years, it has swiftly changed from an idea on a whiteboard to a reality that is having a global impact on all key players in the auto supply chain. Everyone is looking to transform the design and development of automotive components to be predominately electric, autonomous, data-driven, and technology-focused.
The key to navigating electric disruption
In order to succeed in this new era, the responsibility falls on the suppliers, private equity funds, investors, and all other automotive-related businesses to make the necessary strategic moves, which has to start with scenario planning.
Scenario planning and developing company forecasts is the least that a company can do. And those forecasts should not only include a one-year look-ahead (operational planning). They should also determine company direction for the next three to five years (business planning) and the next eight to 10 years (strategic planning). This is not only smart; it is also responsible and essential to surviving and thriving in this decade of automotive disruption.
For instance, consider electrification and how little the traditional internal combustion engine (ICE) has changed since its creation; suppliers haven’t needed to establish and maintain long-term scenario plans. The industry hasn’t been disrupted enough to warrant this kind of planning until today.
How disruption can help create goals
Few industries have witnessed a disruption of the same size, scale, and global impact as what automotive suppliers are experiencing today. Global changes toward electrification, reduced carbon emissions, and environmental protections mean that the ICE is on its way out, bound to become an artifact of the past before we know it.
And how we operate the vehicle isn’t the only thing changing. Automotive technology is advancing quickly, especially when it comes to autonomy and electronics. The way cars are made and manufactured, even beyond the engines, is being revolutionized.
Essentially, suppliers will not be needed in the same way, and because of this, they must go above and beyond the typical practice for scenario planning. It is imperative that they consider both their own goals for success, and how the outside industry’s rapid and chaotic changes are going to impact those goals.
Emerging business models
There are three quickly emerging, standard automotive business models that manufacturers must consider as they look toward the future: traditional manufacturing, electronic, and software automotive suppliers.
With technology quickly dominating the industry, suppliers must redirect their long-term focus from traditional ICE components to all the new components of intelligent, autonomous, and data-driven electric cars — even if they don’t plan on manufacturing new products.
Some traditional suppliers don’t have the resources, time, or means to do anything but stay the course with the traditional vehicle engine. This is one potential business model that is open to every supplier. For others, it will make sense to transition to manufacturing different components, specifically electronics, which will dominate car designs. As an example, 56% of the Chevy Bolt’s purchased components are manufactured by LG. This comes at the expense of traditional suppliers.
Whichever model a supplier chooses, though, they absolutely must incorporate scenario planning into their business practice to ensure success.
Scenario Planning: Traditional vs. Transitional Companies
Within the next 10 to 12 years, traditional supplier ICE businesses, or what I like to call “OldCo.” businesses, will no longer produce the same amount of products or require the same capital as they do currently. As the ICE continues to wind down, many OldCo.’s will increasingly need to rely on scenario planning to help them successfully envision and navigate the changing landscape and avoid a steadily declining business.
For some suppliers, the demand is already shrinking, and they are scrambling to make adjustments as a result of overcapitalization. Their lack of foresight and proper planning is forcing these suppliers to seek relief from their automotive customers. Without a long-term vision or flexibility to adjust to current demand, many will suffer the consequences and serve as examples of what not to do for others in the industry. Working through a robust, strategic planning process, these suppliers must think through options like consolidation, mergers, acquisitions, and winding down assets. What route will ensure that they maximize shareholder value, and how do they get there?
On the other hand, transitional companies that are already working or planning to diversify their product portfolio and manufacture electronics and software have an early advantage. I call these types of forward-thinking and strategy-oriented companies “NewCo.” businesses. They focus on research and development and market research to develop plans to shift the organization’s portfolio and build a sustainable competitive edge.
To top it all off, this kind of scenario planning must occur in the strategic planning stages of planning within a view of a much longer-term window. Having a firm pulse on the forward-looking market and an immediate goal for adaption is critical for ensuring long-term success at every level.
It is impossible for suppliers to precisely predict exactly how the future automotive world will impact them; though we can use trends and data to develop a strong outlook. In some cases, no amount of scenario planning will account for lost time. With many companies having already seized the opportunity to win in this new automotive landscape, it could be an uphill battle for many suppliers as they work to achieve their goals in this highly-competitive arena.
That is exactly why I’m encouraging both OldCo. and NewCo. suppliers to begin long-term scenario planning right away, and engage in a robust strategic planning process before it is too late. Suppliers who take advantage sooner than later will have far more opportunities, and also will have an advantage over the competition in their efforts to maximize value in these times of significant technology disruption.