Powering ahead in the automotive industry: How can businesses stay ahead when sales and production of light vehicles are declining?

Automotive OEM Supplier report | Market trends

Entering the year, IHS forecast global light vehicle demand to be 88.7 million units in 2020 (a decrease of 0.9% from 2019). However, with the continued spread of COVID-19, by late March IHS had reduced its 2020 global light vehicle sales forecast to 78.8 million units (a decrease of 12.0% from 2019).

Oaklins’ automotive OEM supplier specialist, Matt Mueller, looks at future trends and optimal strategies for companies to remain competitive. A full version of this report is also available in pdf format.

Global light vehicle sales and production (Source: IHS Markit)

Future trends and strategy

Investments in connected, autonomous, shared and electric (CASE) vehicle technologies are powering the evolution of the traditional automotive industry. While early predictions of the timeline for the industry to deliver Level 4 autonomous vehicles and technology were at best overly optimistic, significant investments are being made to develop these technologies. These investments have delivered Level 2 and 3 features that will continue to gain popularity with consumers and be included in a wider range of new vehicles.

Consumer preferences and regulatory requirements will also drive a nearterm change in light vehicle propulsion systems. The current challenges to achieving wide adoption of electric vehicles are well known, including the cost of battery systems compared with traditional internal combustion technology, and concerns with limited charging infrastructure, battery range and charging times. Even with these challenges, the industry is rapidly working towards a future where electric powertrains are more prevalent.

2030 powertrain mix forecasts (Source Plastic Ominium Investory Day, 7 January 2020)

LMC Automotive reports that original equipment manufacturers (OEMs) have announced more than US$300 billion in investments in electrification, with additional investments planned by tier suppliers and for the required development of an electric charging infrastructure. In addition, OEMs have announced plans for more than 300 models with electrified powertrains. With this push to electrification, within 10 years it is expected that just 50% of light vehicles will be sold with internal combustion engines (ICEs), with another 35% utilizing a hybrid powertrain.

The dynamic changes in the automotive industry will require successful suppliers to assess their market position and core capabilities in order to determine the optimal strategy to maximize shareholder value MATT MUELLER, AUTOMOTIVE OEM SUPPLIER SPECIALIST, OAKLINS

This analysis must include an evaluation of the long-term demand for the product segments served, their organization’s ability to offer valueadded manufacturing processes, product innovation or differentiation, and the firm’s ability to access the capital required to support investments needed for the company to have long-term success in its targeted segments.

Suppliers in high-growth segments will need to focus on maintaining technological and competitive advantages to remain at the forefront of key technologies driving the industry. Traditional suppliers in these segments will need to partner or acquire talent and capabilities to better compete with the disruptor companies that are new entrants to the automotive industry. The substantial growth potential of these segments, in a market with the overall size of the automotive industry, provides an attractive proposition to a wide range of investors and well-capitalized new market entrants.

However, many automotive suppliers that participate in lower-growth segments will have relatively limited access to the capital needed for investments to update manufacturing processes or to develop capabilities that will be in line with future industry demand. Even prior to reductions due to COVID-19, private equity interest in automotive suppliers had diminished with declines in vehicle production volumes. Sources of credit were also more critical of the industry, as evidenced by Moody’s maintaining a negative outlook on the automotive sector since early 2019.

Expected segment growth versus light vehicle industry growth (Source: Oaklins’ estimates)

Suppliers in segments with lower expected growth are likely to experience more intense competition and margin pressure due to shrinking volumes and trends towards product commoditization. Stakeholders in these suppliers should evaluate a range of alternatives to maximize competitiveness and their long-term value:

Evaluate opportunities to optimize cost structure and productivity — pursuing operational improvements, increasing the use of automation and other cost-saving initiatives will improve efficiency, profit margins and decrease the use of working capital.
Assess operations to determine true core competencies — sourcing functions or manufacturing processes where the supplier does not have a discernible competitive advantage should be outsourced, eliminating distractions and inefficiencies.
Pursue acquisitions or mergers that diversify customer base, enhance process or product capabilities, control critical areas of supply, and increase scale and efficiency. Even in segments that are most at risk of secular decline, such as those related to ICEs, suppliers that can leverage scale and expert product or process capabilities are likely to enjoy successful and profitable operations for decades.
For those suppliers that participate in multiple segments, divest noncore operations or those that serve less-attractive segments to industry consolidators or private equity. Redeploy the capital from these operations to maintain the essential competitive advantages needed for success in the higher-growth segments.
Suppliers that do not have the desire or requisite capabilities to effect the change needed to position their businesses for long-term success should consider exiting. A sale to an industry consolidator or private equity firm with experience driving financial performance in challenging market segments would provide shareholders with proceeds that could instead be invested in other business ventures.

Download report as pdf

For more expert commentary in this sector, download the full version of this report as pdf with an overview of expected growth in each segment and sound advice on the self-evaluation suppliers need to undertake to position themselves for long-term success.