The future of the automobile business has entered a phase of rapid transformation, yet the supplier business has not. Suppliers are caught between two urgencies – the urgency to transform for participation in the rapidly emerging ownerless/driverless future, and the urgency to perform profitably in current programs and contracts. The intensity of the current demand means that many suppliers cannot raise their sights and take the long view. But unless they do, they will be unable to successfully compete in the digital transformation of the industry.
Software continues to eat the world, and the auto business is now being consumed. The anticipated “plateau” of car production – the implication of factors such as urbanization, ridesharing, and autonomous vehicles – has everyone now looking at an increasingly smaller market. “Peak auto” has been declared and leading auto companies are already preparing alternative business model strategies. Ford is now calling itself a “mobility” company to express a diversification from a hardware focus and a move into transit, technology and services. BMW has said that half of its staff will be software engineers within five years as they make a full bet on the driverless car.
As with the OEMs, suppliers preparing for that future means looking at their business in a completely new way. Conventional advice, however, leads their thinking in conventional directions.
In our auto manufacturing region, accounting and real estate advisors are holding conferences and workshops with the smaller suppliers to evoke consideration of the implications of the plateau. The assumption is that without a scaling response to the volume of the market, many of these suppliers may be mortally wounded and lost as production and development assets to the OEMs.
We think, however, that cutting costs and shedding assets is only part of the solution and may be the wrong focus. The real implication of the transformation of the auto business is the shift in core technologies to electrification and the shift is business models to the digital. While there are some matters of scale in a world of peak auto hardware, there are entirely difference measures of scale in digital transformation. That is, while hardware volume shrinks, digital technologies present opportunities for rapidly increasing scale in new business models.
As we've noted in other places, the big news in cars this year was not at the North American International Auto Show but at the Consumer Electronics Show. Leaders of auto supplier businesses must now look toward a new horizon and start making the moves that will enable them to move quickly to participate with others in the engineering of the digitally-defined future of mobility.
The OEM's have begun investing billions into new facilities to change the image and direction of their companies over the next few years, and to shift their talent mix. Their urgency in making a new kind of workplace is to attract those engineers before their competitors in the technology space do. The suppliers ought to follow that lead. There will soon be new metrics for the industry and we believe that this is a time for scaling up investment in the places and spaces for the talent who will shape that future.