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Recharging and assessing your future as an auto supplier


Video stores never recovered from Netflix hitting the market. Sadly, we are about to witness the internal combustion engine (ICE) suffer the same fate to electrification. While the descent might be a little slower for the fossil fuel-powered car, it’s happening faster than initially expected.

The majority of legacy automotive suppliers lack preparation for this massive shift in their industry. To compete in the world of electric vehicles (EVs), they will have to reassess their entire business model. Suppliers will need to decide if they will make significant business changes and the capital investments required to serve this new economy.

The pandemic drove and continues to drive vehicle demand as people avoid using public transportation and ride-sharing services. Suppliers have been busy keeping up with orders from their customers, which does not give them time to think about 10 or 15 years down the line, and that could be a mistake as the future is coming fast.

Yes, consumers are buying both ICE and EV cars right now, and investors are primarily pouring their money into the companies that make EVs.

The current state of EVs

Traditional original equipment manufacturers (OEMs) see what is happening. They are making investments in EV startups (e.g., Ford’s investment in Rivian and GM’s cash infusion to Lordstown) and have started to produce their own models (e.g., Ford Mach-E, Hyundai Kona, Nissan Leaf), but EV OEMs, like Tesla in the U.S. and Arrival in Europe, still dominate that space.

In fact, Tesla, which saw its share price shoot up 500% in the last year, sold 370,000 units worldwide in 2019, giving it a 16% global market share, according to McKinsey. Its nearest competitor, China’s BYD, had a 10% market share.

Europe and China are instigating the push for more EVs by implementing regulations that will reduce the carbon impact made by cars and trucks. Several European countries, including Denmark, Iceland, Ireland and the Netherlands, have stated they will ban the sale of gas- and diesel-powered cars by 2030, according to a May 2020 report from the International Council on Clean Transportation. Norway’s plan is even more ambitious with a 2025 deadline for the sale of ICE cars, while the United Kingdom’s is 2035 and France and Spain are looking at 2040.

In September 2020, China’s president announced the country would work to reach carbon neutrality by 2060. On the heels of that announcement, its Ministry of Industry and Information Technology introduced China’s plan to make all new vehicles sold in 2035 eco-friendly, with half to be powered by nonfossil fuel energy and the other half to be hybrids.

Closer to home, California issued an executive order that requires, by 2035, all new cars and passenger trucks sold in the state to be zero-emission vehicles.

Even without the government edicts, savvy consumers — individuals and businesses — were already paying more attention to EVs because of concerns about climate change as well as fluctuating gas prices. Amazon placed an order for 100,000 electric delivery vans from Rivian, and UPS ordered 10,000 electric vans from Arrival.

Legacy automotive attitude versus the mobility mindset

Traditional auto suppliers with minimal product diversification, limited R&D investment and little OEM integrated design capabilities are the ones most at risk of succumbing to the electrification era. They will have to take an honest look at whether they have the time and money necessary to make a viable pivot. Beyond that, it will require a complete change in mindset.

For decades, OEMs, being the behemoths that they are, have had the power to dictate to their suppliers that they want this product, this quantity, at this price, at this time. Suppliers typically have had no room for negotiation; the OEM will move on to another supplier. 

EV OEMs are agile and lean by design. The problem for legacy ICE suppliers is so are the electric cars. EV powertrains have very few parts compared to the thousands in an ICE vehicle, and therein lies the problem for traditional auto suppliers. The demand for ICE components will steadily decrease over the next decade, and the fight for that shrinking business will get more competitive until the last ICE vehicle rolls off the line.

No one wants to be the last ICE supplier standing in this scenario unless that is the end game for their business. To avoid such a fate, companies need an honest assessment of their operations, best conducted by an independent third-party management consultancy, who can evaluate the company’s challenges and provide a clear-sighted perspective on its best options moving forward.

If suppliers want and can stay in the industry, they will have to reinvent themselves by developing an entirely new product line or service. Auto supplier Webasto is one such example of that. For 75 years, the company was known for its panorama roofs and sunroofs, including the first folding roof for Daimler-Benz in 1937. Then, in 2017, it started developing and producing charging solutions and battery systems. The company now expanded its electromobility footprint through acquisition and by increasing electrification manufacturing in Germany and China.

Most companies cannot get to that decision on their own. Professionals can guide a company along the path toward growth and innovation by helping them determine what and where to invest the right way in their business through technology, connectivity, capacity and resources. This type of evolution often involves building new plants, creating new processes and developing strategic partnerships with other companies.

Proper guidance may even propel a company to compete on a level it hadn’t been able to before.

Regrettably, reinvention is not always an option, but companies will still need a timeline and succession plan. Succession planning can include the delicate task of finding an appropriate buyer or investor.

Change is never easy, and the aftershocks of the seismic event caused by EVs will be worse for those who don’t prepare for it.

For information about this topic and how our specialists have helped clients navigate the disruption caused by EVs, visit Baker Tilly’s mobility and transportation services page.

Peter J. Pearce
Principal
Peter Pearce is a principal in the consulting practice of Baker Tilly with more than 25 years of experience in the mobility and transportation industry.
Erich Bergen
Director, MBA, PMP
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