The auto industry is undergoing a period of tremendous advances as never seen before. Influenced by new computer systems, new manufacturing processes and innovative designs, neither vehicles nor auto manufacturing facilities look like they did a decade ago.
The change is putting pressure on original equipment manufacturers (OEMs) and auto suppliers to evolve and innovate. Many are changing their business strategies to focus on innovation, rather than production while refining their product offerings to the best that they do. Others are also working closely with their buyers to be a part of the design-to-market cycle and to make themselves an invaluable supplier.
A strong base of digitization will support keeping up with the pace of change.
Demand for Innovative Components
New technologies, materials, power trains, electronics and the changing demands from consumers are making automobiles far more complex than they were in the past.
Michael Robinet, Managing Director at IHS Markit Automotive in Southfield, Michigan, says, “The biggest shifts are in the ACES (autonomous, connected, electrified and shared) sector. The new designs in the sector influence how vehicles operate, how systems work, and they require a lot of electronics and software.”
Matt Desmond, senior manager of Manufacturing, Automotive and Life Sciences at Capgemini, an industry consultancy, said their OEM clients are quickly rethinking their business models to align with things like smart mobility, autonomous driving and connected services.
"Tier 1 suppliers realized a few years ago that to stay profitable, they need (to innovate)," Desmond said.
Capgemini said in a report on digital strategy for automotive suppliers that Tier 1 needs to acquire "digital mastery" and innovate to maximize their bottom line. Capgemini engages its Tier 1 supplier clients with a three-pronged approach called Automotive Connect: Suppliers that focuses on industrialization and agility, innovation and change, and insights and action.
"It's an active dialogue we're having with our Tier 1 clients. There's a tremendous amount of disruption and we're helping them move forward," he said.
OEMs' New Business Strategies
Successful OEMs and suppliers are employing several new business strategies to meet the demands of the new market.
First, they are focusing on innovation over production. Many are reorganizing through mergers and acquisitions to acquire the knowledge, resources and talent needed to produce these new technologies. Tier 1 suppliers are also creating new divisions to focus on innovative products while divesting others.
As more suppliers move to new technologies, the market for traditional, mechanical parts such as brake rotors, door handles, bearings and air filters will remain an important but commoditized business with low profit margins, said Alan Baum with Baum and Associates of West Bloomfield, Michigan, an automotive research and analysis company.
"You can be just a supplier of auto parts but there are 25 other companies doing that, and it's a race to the bottom," he said.
Finally, the most successful are those that put new strategies together to make themselves an invaluable supplier.
"If you provide value, you are no longer a commodity. You become something the automaker needs," Baum said.
Necessary New Talent
Auto component and supply manufacturers face a number of other challenges. In order to meet the demand for innovative and connected components, suppliers are scrambling to find new knowledge and talent. In the past, suppliers relied more on mechanical engineers, most are now seeking software engineers, Baum said.
Roughly, half of the engineers working around the globe are in software and there is more code in an automobile than ever before. It is a completely new industry.
Guillot, Craig, (2018). “How suppliers are innovating to keep pace with the auto industry”. Retrieved from https://www.supplychaindive.com/news/auto-series-supplier-innovation-digitization-OEM/516585/.