Automotive suppliers suffer shifting market, despite production growth

11 January 2018

Growth in automotive industry production has continued, rising 2% on 2016’s figures to hit 94.9 million new units. However, suppliers are experiencing pressure thanks to a major shift in focus to new mobility forms, with the NAFTA region being most acutely impacted.

The automotive industry is in the midst of a global gear shift, as various mega-trends make themselves felt. Automation, electrification, connectivity and mobility, are each set to transform how consumers and corporations alike utilise vehicles, resulting in a more integrated, sustainable and safe operating environment.

In a new report from Roland Berger, in collaboration with Lazard, the strategy consulting firm explores major trends in the industry, from current market conditions to the wider impact of changes expected over the coming decades as the industry wide changes set in. Vehicle production has continued to rise steadily, and, although production has slowed somewhat on the average across previous years, global production was up 2%, or 1.8 million units, to 94.9 million units.

Europe had a relatively strong showing, with a 2% increase bumping production to 19.1 million units, or around a fifth of global production. While China saw modest growth of 1% to 27.6 million units, the NAFTA region, crippled by uncertainty around the future of regional trade – thanks in large part to the threat of the Trump administration to implement import tariffs – saw production decline 3% to 17.4 million units.Global light vehicle production by regionJapanese and Korean manufacturers led absolute unit growth increases, with production increasing 4% year-on-year, a considerable improvement on average CAGR over the past six years. South America saw production jump by 14%, although total unit growth stood at 0.4 million units, while the long-term trend is well behind the 4.3 million units produced in 2012.

Supplier strains

Roland Berger’s analysis also identifies how far suppliers to the automotive industry have enjoyed growth in recent years. Europe saw relatively solid ~6.9% CAGR growth between 2010-2017e, while EBIT margins stood at ~7.2% – boosted by premium offerings and good consumer market alignment. In Asia, meanwhile, Japan and South Korea have enjoyed relatively strong growth – at ~7.2% and ~5.1% CAGR between 2010-2017 – their EBIT margin has fallen below the collective average during 2017e.

Suppliers in China similarly enjoyed solid growth, with revenues up by ~11.9% CAGR between 2010-2017e, while EBIT margins were noted as a solid ~8.7% over the same period – margins have fallen on the back of increased regional competition. Again comparing relatively poorly, however – despite being noted to have strong EBIT margins at ~8.3% – the NAFTA region was impacted by relatively slow revenue growth over the recent period at 3% CAGR between 2010-2017e. Key supplier performance indicators.Differences in consumer product segments are noted to have seen shifts in relative performance. Tires, for instance, had relatively low revenue growth between 2010-2017e, at ~2.9%. However, thanks to lower material costs, EBIT margins have jumped from 6.6% in 2010 to ~11.5% in the latest report. In contrast, while exteriors have seen solid 7.4% revenue growth, EBIT margins have remained level at around 7.8%.

Interiors, while enjoying revenue growth of 5.6%, continued to see EBIT margins pressured, falling from 5.9% in 2010 to ~5.5% in the latest survey. The outlook for the industry as a whole saw continued, albeit slower, revenue growth, as localised unit growth in Europe (1%), NAFTA (1%) and Japan/Korea (-3%). South America is projected to see around 10% growth, while China sees growth soften to 1%.Supplier global revenues outlook

Overall, global growth is estimated at around 1%, boosted by South America, Russia, Turkey and the Middle East. Supplier revenue growth is expected, however, while EBIT margins will remain stable too, affected by favourable technology innovation and relatively stable economic and political conditions.

Commenting on the trends, Felix Mogge, Partner at Roland Berger, said, "Margins and valuation levels in commoditised fields will come under pressure, but at the same time, electrification and digitisation offer new monetisation options."

Mogge concluded, "Profound knowledge of the disruptive trends is essential for any supplier. The current supplier business model of offsetting negative cost impacts with volume growth will no longer work."


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Four ways digitalisation is transforming car brands and dealers

16 April 2019

From changing expectations from the customer to new stakeholders entering the industry, the digital transformation of global automotive industry means it is facing the wholesale transformation of its business model. In a new white paper, global consulting partnership Cordence Worldwide has highlighted four major digital trends that are transforming the relationships between car brands and dealers with consumers.

With digital transformation drives booming across the industrial spectrum, automotive groups are no different in having commenced large digital transformation programmes to improve productivity, efficiency, and ultimately profitability. Falling sales figures mean the automotive sector is facing an increasingly difficult road ahead, something which means companies in the market are even more hard pressed to find new ways to improve their bottom lines.

While it offers major opportunities, the industry’s move to digitalise is not without complications. It has triggered a series of major internal changes, which have presented automotive entities with the challenge of becoming a “customer-oriented” industry. A new report from Cordence Worldwide – a global management consulting partnership present in more than 20 countries – has explored how automotive companies are navigating the rapidly changing nature of digital business.

New business models

The level of change likely to be wrought on the automotive industry by digitalisation is hard to overstate. Automation could well lead to significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels, while leading to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue openings arising by 2030.

As a result of this colossal opportunity, it is easy to see why almost all automotive groups now have digital departments, with generally strong communication within the digital transformation and the customer approach. The changes to society which this may have are potentially distracting automotive firms from the change it is leading to in its own companies though, according to Cordence’s paper.

The automotive market is dead, long live the mobility market

Because of this, the sector’s business model is set to transform over the coming decades. With digitalisation speeding up the appearance of concepts such as car-sharing, a subscription package model will likely become more palatable. At the same time, car and ride-sharing models will cater to the sustainability criteria of millennials, who will rapidly become one of the automotive market’s leading consumer demographics in the coming years.

Antoine Glutron – a Managing Consultant with Cordence member Oresys, and the report’s author – said of the situation, “These ‘old school industries’ are now working on creating new opportunities, but in so-doing are facing challenges and threats: new jobs, new technologies, new ecosystem of partners, necessary reorganisation, different relationship with customers, and even new businesses. The customer approach topic is in fact a real challenge for car companies as it implies changing their business model and adjusting their mind-set to address the customer 4.0: from product-centric to customer-centric, from car manufacturer to service provider.”

Digital customer experience

In the hyper-competitive age of the internet, even top companies face an uphill challenge when it comes to holding onto customers through brand loyalty. Digital disruption has resulted in changes to consumer behaviour, which is forcing a range of marketing strategists to reconsider their old, possibly out-dated strategies. As modern customers wield an increasingly impressive array of digital tools and online databases, they and are now able to quickly and conveniently compare prices, check availability and read product reviews.

The automotive sector is no exception to this trend, according to the study. In order to adapt to the needs of the so-called ‘customer 4.0’, car companies will increasingly need to change their business model and move away from product-centric companies to customer-centric ones, from car manufacturers to service providers.

Glutron explained, “As an automotive company, you can no longer expect customer loyalty simply with good products; you must conquer and re-conquer a customer that “consumes” your service. The offer now has to be global, digital and personalised. Your offer has to be adapted to this customer’s needs at any given moment. A key issue related to data control is to build customer loyalty by creating a customer experience 'tailored' throughout the cycle of use of the 'car product': purchase, driving, maintenance and trade-in of the vehicle.”

One way in which the sector may be able to benefit from this desire for a tailored experience is via connectivity. Consumers are generally positive about new connective features for automobiles, and many are even willing to pay upfront for infotainment, emergency and maintenance services. Chinese consumers, where the connected car market is set to hit $216 billion, are already particularly interested in paying a little more for navigation and diagnostic features in their future new car. This can also enable automotive companies to exploit a rich vein of customer data, enabling them to rapidly tailor their offerings to consumer behaviour.

New automotive segments

Digital transformation has also brought with it the rise of completely new application areas. As mentioned earlier, the most well-known example is the autonomous or self-driving car, where the last steps forward were not taken by major automotive groups but by technology companies such as Tesla. While this may have given such firms the edge in the market briefly, a number of keystone automotive names will soon be set to take the plunge into the market themselves, leveraging their car manufacturing prowess and huge production capacities to their advantage.

Before companies rush to invest in this market, however, it is worth their while to remember that the readiness and uptake for such vehicles differs greatly geographically. For example, following a study published in 2018, 92% of Chinese would be ready to buy an autonomous car, compared with only around 35% of drivers in France, Germany and US. Meanwhile, the infrastructure of different nations will also be significantly less accommodating of the new technology.

Use digital for steering thr activity

Elsewhere, Cordence’s analysis has suggested that hooking the cars of tomorrow into the Internet of Things is also likely to see a rapid change in the business model for car maintenance, providing real-time diagnostics for problems. This presents chances for partnerships to improve the connectivity of cars, especially with tech companies; for example, PSA partnered with IBM for a global agreement on services in their vehicle. Meanwhile, data could also be sold to other parties with an interest in this data, such as the government, which could use it to manage traffic levels, or ensure that only adequately maintained vehicles take to the road.

Glutron added, “With the increase in the amount of client data and connected opportunities, the recommendation is to set up data-centric approaches. The value is now in the customer data. The general prerequisites are to rework the data model and the Enterprise Architecture and generally build up a data lake including data from all sources (internal and external, structured and unstructured).”

From automotive to mobility

Relating further to the idea of connectivity, the report claimed that automotive firms must now adjust their models in line with the provision of end-to-end mobility, rather than treating the sale of a car as an end point in their relationship with the customer. In order to realise this transformation, transformations are likely to become more and more important.

A network of partner companies means automotive firms can provide a global mobility experience. As the vehicle is increasingly connected to its environment, new partners can also be cities, governments, and other service providers within the global mobility services industry in which the car brands want to take part.

According to the study, the target is clear. Companies must look to a holistic transport service, offering to move customers from A to B in a unique and pleasant way – otherwise they might as well take public transport. At the same time, they should extend the services reachable “on-board” (especially the enhancement of the connectivity between the car and smartphones or other connected devices), and reach high standards in terms of user experience (online sales, online payment, customised experience during and after the use of the car).

Concluding the report, Glutron stated, “These mobility market transformations could be considered a threat for the car manufacturers. Quite the opposite: if they take up the challenge and review their business model so that they become the service provider – communicating no longer to a driver but to a ‘mobility customer’ – they can then take advantage of their expertise and their position as a historical player. The most convenient means of transport are cars, and building a car is highly-skilled work.”