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How self-driving cars threaten German automotive suppliers

Behind the prominent automobile manufacturers lies a very extensive and diversified supplier industry. Small businesses in this sector are increasingly asking themselves what the transformation of the automotive industry means for them.

28 Sep. 2017 Source: t3n Ekki Kern

A news report from the past week perhaps best describes the depth of the change that is currently rocking the automobile supplier sector. Shanghai Shenda, one of China's largest automobile interior suppliers, is creating a joint venture with International Automotive Components (IAC) Group, which manufactures dashboards, console systems, door and roof panels, among other things.

A company known as Auria Solutions has now arisen from their collaboration, and is being presented as a "new, global supplier of paneling and acoustic products for the automotive industry."

New competition such as this out of China is causing many German suppliers to review their business models and make changes to ensure their future in the market. Business consultancy Bain & Company, in their report " An Autonomous Car Roadmap for Suppliers ," recently advised companies to expand their competencies, in particular in software development. This is necessary because the competition is changing: Newcomers from the technology sector are arriving on the scene, along with new suppliers from emerging countries such as China.

Acquisitions and partnerships are becoming increasingly important in the face of these developments, according to the consultancy. The goal is to gain know-how, technology and employees. "Suppliers need to introduce scenario planning to identify possible developments and make needed adjustments in a timely manner," says Hans Joachim Heider, Partner with Bain & Company. For companies, this means continuous technological and organizational improvements.

That may be no problem for major players like ZF, which develops automatic drives, or Bosch , the global leader in the sector. But how realistic is it for a small business to rethink its business model?

Where the small automotive suppliers stand

"The situation of the smaller automotive suppliers is much more critical than the larger companies that have more financing behind them, and are able to spread risk by trying out various options," Johannes Berking, Principal for Automotive Practice at Oliver Wyman consultancy shared with t3n.

In these cases, management must “think very carefully” about what to do. Starting down the wrong path, to use Berking's words, could have fatal consequences. This can create a great reluctance to do anything – “because it could end up being the wrong thing,” says this expert from experience.

The need to work together with other companies is therefore "becoming increasingly crucial," because that is how a small business can benefit from significantly more size, financial power and stability. Such cooperative efforts are already visible "at every level," says Berking, between the major players as well as small and medium-sized companies (SMEs). Best known are the joint ventures between carmakers and battery manufacturers or those in the lightweight construction segment.

Small and very specialized firms face challenges

Naturally, says our expert, the larger companies in the industry have a particularly easy time finding collaboration opportunities, because they are well-connected in the supplier landscape. For smaller companies this is often much harder. Particularly those small businesses that are fairly strongly specialized and suddenly want to change their strategic direction are facing a major challenge.

"They need to find someone who has something they can use to approach the market together," says Berking. It's also important to keep in mind that many smaller companies, unlike the larger firms in the sector, are simply not used to cooperating and forming partnerships.

And many particularly very small businesses stand out for the technology in their product that gives them a genuine competitive advantage, which is often why cooperation was never previously sought out.

For companies such as these, says Berking, a change of strategy in response to changes in the market is of course particularly difficult. A highly specialized company cannot simply reinvent itself overnight. Often, management must completely change its attitude towards dealmaking, says the expert from experience.

Expert says cooperation is "underdeveloped"

Thomas Schlick, automobile expert with Roland Berger, believes that cooperation among automotive suppliers is very underdeveloped compared to what vehicle manufacturers are doing. The question suppliers must ask themselves is this: "How open am I to cooperation, and to forging new paths?" There are "many conversations" about this currently, but none that in Schlick's view have "really worked well": "The sector is struggling with this."

Yet cooperation is a topic that must be urgently addressed, because many individual businesses will not be able to make it alone moving forward. They cannot shift from hardware to software on their own, nor finance a wide-reaching change of strategy or implement such a change quickly enough.

Alongside operational challenges, corporate culture also plays a significant role. And many companies aren't used to dealing with cultural differences, says Thomas Schlick. They have learned to be successful with their own corporate culture over the years.

“Many of the smaller companies are going to have to undergo a massive culture change,” predicts Johannes Berking of Oliver Wyman. They need to do things differently than in the past. The problem is that smaller, family-run businesses that have long been successful do not have experience bringing others alongside, and their eagerness to do so is "not particularly great," according to this expert. When push comes to shove, they will "need to learn how to work together successfully."

Sector still strongly rooted in Germany

Despite these many uncertainties and challenges, the industry in Germany appears to be very stable. A survey of 161 executive managers in the German automotive supplier sector by the Center of Automotive Management (CAM) in March of this year indicated a "very successful past fiscal year” and “great confidence" in the current and upcoming year.

However, large supplier companies view their future prospects "significantly more positively" than smaller firms. Companies in the metalworking and in particular electrical sectors were far more likely to assess the 2017 and 2018 business outlook as "very good" or "good," while the mechanical engineering, rubber/plastics and services sectors were more reserved in their judgment.

The German automobile supplier industry is still strongly rooted in Germany, with its core functions and workforce, but is also characterized by a high degree of internationalization. For example, 74 percent of suppliers are also active in other Western European countries, 49 percent in Eastern Europe and 51 percent in China. Forty-six percent of the suppliers surveyed are present in the United States, and 33 percent in Mexico, and a further 10 and 12 percent, respectively, are at least planning to enter these countries.

But the news is not all good: Many companies in the sector increasingly view cost pressures as posing an existential threat to their business, according to the CAM study. Forty-six percent of automotive suppliers agreed with the statement that continued cost pressure by carmakers “strongly threatens” their company's existence (previous year: 43 percent).

Cost pressures worry small companies

Unsurprisingly, larger companies with more than 1,000 employees are better able to withstand cost pressures than their smaller peers – and therefore feel less threatened, according to the survey. The degree of strain for SMEs is “considerably greater.”

Electrical and metallurgy companies are the hardest hit by cost pressures, whereas mechanical engineering and services supplier firms with their more complex products are apparently "less affected." Suppliers are feeling threatened when it comes to procurement, as well. Nearly two-thirds of companies stated that procurement by their main customers is "purely price-driven" and will "necessarily lead to quality issues" in the long run.

Many supplier companies also admit to having some doubts about the foundation of trust with their customers. Almost one out of every two supplier companies surveyed, fully 47 percent, do not believe that their customers have any stake in whether their company is able to stay in business or desire to help ensure their continued existence.Smaller firms in particular are concerned about the rapid development of new technologies and their "massive impact on the automotive supplier business," according to the CAM study. At 26 percent, more than one in four supplier surveyed admits to viewing a faster and more comprehensive transition to electromobility as a threat for their company.

A detailed analysis by strategy consultancy Oliver Wyman on this topic was recently released this past August. It predicts that suppliers that are still focused on conventional combustion engines are in danger of losing market share and missing out on growth opportunities.

Autonomous cars a disruptive element

However, this trend towards electrified vehicles is likely to take some time, estimates Thomas Schlick of Roland Berger. It is initially plug-in hybrids that will dominate the market in a sort of intermediary phase. Other "major disruptive elements" are networked mobility and self-driving cars , such as robocabs . These vehicles will also "permanently transform" the supplier landscape, predicts Schlick: "While eMobility has created some change, the big deal right now is autonomous vehicles."

Is the supplier sector panicking? "All these years people were very relaxed and only had operational problems to solve. I've noticed that now many companies are taking a closer look at how their industry is changing, and getting nervous. They are realizing that they need to adapt to the new technologies and try to participate in the future markets as well," says Schlick.

A few smaller companies with a very limited product portfolio are likely to disappear in the coming years, this expert says. Those that are very process-oriented and simply manufacture parts might be taken over or collaborate with other companies. But that will be a long-term process.

Connectivity services offer "great potential"

The sector's growth markets are no longer in Europe but mainly now in Asia, so it's important to be present there, says Schlick. But governments in countries like China are of course actively working to protect their own domestic market. It's not surprising that they have an interest in components for vehicle construction not being solely imported.

Along with geographic expansion, suppliers also have the possibility of entering new business lines. And because services to the driver as end customer are gaining in importance, as Johannes Berking points out, there is still "extremely high potential" in the field of connectivity services for new and innovative products: "That isn't the traditional end market for the supplier industry, but there will be solutions to be offered here as well."