Who Will Survive the Electrification Disruption?

Who Will Survive the Electrification Disruption?

Electrification disruption had a major impact on automotive suppliers in 2018 and will continue to send shockwaves throughout the supplier sector going forward.

Companies around the globe have announced aggressive targets for banning the internal combustion engine (ICE) over the next 6-10 years, as they move toward the adoption of zero-emission vehicles (also known as battery electric vehicles or BEVs). (For more details, read “The End of the ICE Age?”)

Since then, stock analysts have started to downgrade the long-term outlooks for some of the world’s most stable automotive suppliers because they have significant involvement in the ICE ecosystem. As automakers confront intense pressure to completely shift vehicle propulsion from ICE to electric, analysts cannot afford to ignore the changes on the horizon. They are not suggesting that this electrification disruption will occur overnight, but they do expect it to create a significant risk to the earnings trajectories of many automotive suppliers.

Emerging Breeds of Business

As a result, we are starting to see two breeds of business develop within the same corporation:

  1. Old Company (or OldCo) – Business units that produce mechanical products associated with the slowly dying ICE ecosystem.
  2. 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.

The automotive suppliers who will survive this electrification disruption and emerging technologies are those that understand exactly how to properly invest their precious capital resources accordingly into OldCo and NewCo businesses. In many recent cases, automotive suppliers have started to favor investment in NewCo businesses and chosen to spin-off or divest their OldCo organizations.

Reacting to New Challenges

Understanding the competitive challenges ahead caused by electrification disruption and autonomous technologies, Delphi announced a spin-off into two separate businesses in 2017 (Aptiv and Delphi Technologies). Honeywell, Continental and Magneti Marelli have all announced similar spin-offs amidst similar strategic concerns. Even Tenneco and Federal-Mogul announced a spin-off of the powertrain business after they complete their merger later this year.

Spinning off, or divesting, these OldCo organizations is a key strategy being put in play by several top automotive suppliers. However, this strategic move is not only limited to organizations tied to the ICE ecosystem.

Look at the spin-off from Autoliv of Veoneer. Veoneer is a NewCo business focused on active safety systems for autonomous vehicles, while Autoliv is the OldCo organization focused on passive safety systems like airbags and seatbelts. These businesses are on two very different growth trajectories, with limited customer and operational synergies between these two business models. But more importantly, investment in capital and engineering resources will require a significant investment shift away from OldCo Autoliv to NewCo Veoneer.

Attracting Diverse Investor Profiles

Perhaps the most compelling reason for automotive suppliers to separate their two businesses is the fact that these organizations attract two very different investor profiles. NewCo investors are looking for high growth and high returns and are willing to assume more investment risk. OldCo investors like those attracted to traditional automotive stocks seek stable returns and a lower risk profile. Split into two different entities, these organizations can each attract the capital necessary to support their own corporate mandate.

Positioning for the Future

As this electrification disruption continues, automotive suppliers are challenged with the question of how to position themselves for the future. Businesses that stall, wait for a resurgence of the ICE era or cling to the past, will have limited options. They will lose the advantage of time and forethought and reduce any opportunities to get out ahead of this major shift.

It’s crucial for automotive suppliers to think strategically about what to do with the waning product sectors of their portfolios before it’s too late. Savvy automotive suppliers, like those mentioned earlier, have already noted the long-term growth outlook and have begun spinning off their traditional, slow-growth businesses and shifting investment and resources to emerging NewCo technologies.

The bottom line: Traditional automotive suppliers should take note and start developing their strategy for electrification disruption today or run the risk of quickly running out of options.


If you’d like to discuss strategic options for surviving these market dynamics, call Paul Eichenberg Strategic Consulting at 248-670-9108 or visit chief-strategist.com.

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