(originally posted on the QAD blog)
Disruption caused by several emerging trends had a major impact on automotive suppliers in 2017, and it will continue to send shockwaves throughout the supplier sector in 2018 and beyond. Last February, Norway became the first nation to ban the internal combustion engine (ICE). By 2025, it intends to only allow the sale of electric vehicles. Over the course of the year, India, France and the United Kingdom all made similar announcements as the trend towards the adoption of zero emission vehicles (also known as BEVs or battery electric vehicles) started to accelerate around the globe. Now, China is indicating it may do the same.
As a result, from this turbulent landscape we are starting to see two breeds of business develop within the industry: Old Company (or OldCo.) businesses that produce mechanical products associated with the slowly dying ICE ecosystem; and New Company (or NewCo.) organizations that are adopting new products and business models suited perfectly to future growing markets such as electric and/or autonomous vehicles.
OldCo. businesses are firmly entrenched in the status quo, fulfilling the current demand for traditional automotive parts. They have succeeded for years with little need for major overhauls. While automotive technology has moved forward, the ICE has seen little change.
NewCo. businesses, on the other hand, are standing at the brink of an exciting new world in automotive. Whether these are start-ups, new entrants or spin-offs of OldCo. businesses, such as Aptiv or Veoneer, they are running full speed towards the future. These are the organizations that are driving technology disruptions, like electrification or autonomous vehicles, into the industry.
These two types of suppliers are vastly different, but they’re still facing a very similar risk when it comes to future challenges: how will they be affected by the rate of change as it relates to generating cash flows to pay for capital investments?
OldCo. Businesses Can’t Forecast Like They Used To
OldCo. businesses have been able to rely on steady, predictable demand for decades. Being able to accurately gauge how many parts they needed to make based on both steady volume and clarity on program life has been part of their past financial success. In some cases, these businesses have made significant investment in capital that has a 30-year life. However, with the onset of electrification and the potential for sharp volume decline, the once planned on volume and investment assumptions could disappear. This means volume that was planned to pay for invested capital could eat away at profitability and much needed cash flows. Without the consistency they’ve thrived on for so many years, these traditional businesses will risk bankruptcy if they don’t take action.
NewCo. Businesses Will Face Significant Challenges
Cash flow and access to new skill set resources are two of the primary issues NewCo. businesses will wrestle with as they take their place at the forefront of the automotive industry. If automakers ramp up demand for these new components too quickly, NewCo. businesses could become a bottleneck. They also face possible bankruptcy from an imbalance of required capital investment and the generation of cash needed to pay for new investment as they work to deliver these new technologies.
Finances and human resources aren’t the only things that have the power to challenge NewCo. businesses. They’ll be equally affected by the challenges associated with the development of new supply chains. As different raw materials and components become necessary to manufacture new technologies, modern suppliers can expect to face unpredictable challenges in obtaining such key items, leading to what may be an additional layer of bottleneck in manufacturing and delivery.
Automakers Expect Volatility
As global legislation and regulations drive the need for OEMs to adopt new technologies and create new vehicle architectures, car makers are already preparing for these challenges within their supply base. For instance, Daimler is currently preparing to electrify the entire Mercedes-Benz range by 2022. Daimler highlighted this issue in its annual report:
“Due to the planned electrification of new model series and a shift in customer demand, the Mercedes-Benz Cars segment in particular is faced with the risk that Daimler will require changed volumes of components from suppliers. This could result in over- or under-utilization of production capacities for certain suppliers. If suppliers cannot cover their fixed costs, there is the risk that suppliers could demand compensation payments.Necessary capacity expansion at suppliers’ plants could also require cost-effective participation.”
For Both, The Solution Is The Same
In order to combat the incredible challenges coming their way, both breeds of auto suppliers must have clarity about just how quickly things are about to change. Whether traditional or modern, these suppliers are looking at fast, potentially volatile ups and downs that can easily make or break their businesses. Above all, they must be proactive.
Many OldCo. suppliers need to focus on actively identifying and reducing costs that align with a potential operational wind down. They should also be considering the future of dedicated assets. By developing a strategy now so the organization can have the right plan in place, most OldCo. businesses will have no reason to go bankrupt and/or lose out when changes hit them hard.
For NewCo. businesses, being able to understand the future market and all the factors that affect it is key, as well as successfully developing channels to accessible, sufficient capital. The last thing these modern suppliers need is a healthy demand without a way to deliver it.
For both, succeeding in the near and long term is all about planning, developing an insightful vision and knowing when to execute strategically in volatile times in order to maximize profit. Without these factors, we can expect to see both OldCo. and NewCo. businesses fall to the wayside in the face of unprecedented technology disruption. The shift emerging technologies create means tremendous opportunities for organizations — if they’re prepared. However, these disruptions, as well as new competitors, will lessen the chances of survival for traditional suppliers who fail to act.