The automotive industry is going through disruptive changes with many factors impacting it. Environment protection and technology are on top of the list driving many innovations. In fact, the question “What keeps you awake?” is not an one to answer for anyone in a responsible position in the auto industry!
No longer can anyone list two or three things — there are a host of developments taking place not only in the tech space but also in business models and customer behaviour. Putting together a growth trajectory for an automotive company can become a nightmarish experience. Electrification (full or partial), alternate fuels, autonomous cars, shared mobility, and connected cars are all here to stay.
Lots more to do
Obituaries for the conventional engine seem premature when we see the work still being done to improve its fuel efficiency. The intensity of this problem depends on where you are in the world with what type of resources and infrastructure and government policy framework, because that will decide pace and direction.
It was not very long ago that vehicle manufacturers were vertically integrated. Since this posed a greater demand on manpower and capital they transitioned from making everything in-house, and became consolidators or aggregators, putting together various components and sub-assemblies from suppliers. In the process the supplier industry progressed in leaps and bounds in terms of engineering better products and in a sense becoming experts in their domain.
Substantial investment in R&D was necessary for them to meet the increasing demands of vehicle makers and customers, and to remain ahead of the competition. As a result, not only did products become better, even the business processes greatly improved the efficiency of the entire supply chain — so much so the vehicle makers depended on suppliers to upgrade their vehicles.
This well-oiled supply chain is in the throes of change and suppliers will be forced out of their comfort zone. A complete transformation is imminent. Organisations in the line of fire need a comprehensive relook at their product portfolio and life cycle of their current products, while shifting gears and strengthening innovation, building new capabilities, and looking into the future demands of vehicle manufacturers. They need to reinvent themselves. The detrimental effect of electrification will be most severe on the supplier industry and more so on those in the drive train components and systems business (that is, taking power from the engine to the wheel).
Basic changes
Fundamentally, the number of parts in a full electric vehicle is far less than that in a conventional internal combustion engine-powered vehicle. That in itself will be a major blow to the size of the ancillary market. Further, as the type of components will be entirely different, studies of core competency will need to be revisited.
Some vehicle manufacturers want to make their own batteries, for example. Will a battery manufacturer be able to take away the business by bringing in superior innovations? Will a new business model evolve in selling and recharging batteries? ‘In-house vs bought out’ debates will restart. Global sourcing may acquire a new meaning with the somewhat limited availability of expertise/resource and need for economies of scale.
It is interesting to see how some companies are already smoothly transitioning and positioning themselves as providers of electric mobility technology. They are building in-house capabilities for designing and manufacturing products for the future, acquiring or collaborating with technology companies, tying up with research institutes — this is alongside the conventional items for engines and transmissions that they are currently selling. They are ready for whatever happens in the market place. This requires enormous amount of resources, and hence the pressure for greater capital infusion.
What is worrisome is that mid-sized and small manufacturers will see demand for the conventional engine and transmission parts dropping, and will not have the resources and know-how to evolve. When this disruption takes place in the supply chain, many smaller players may fold up if a proper assessment of direction of future technology is not made and development prioritised accordingly.
Urgent research on the entire supply chain’s preparedness to address this disruption will be a good exercise, especially for the SME sector. Never has foresight and agility been so crucial to survival for the supplier industry.
(The writer is an independent consultant. The article first appeared in The Hindu BusinessLine.)