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Disruptive Behavior – Silicon Valley targets automotive suppliers

Chicago, January 5, 2016

  • Auto industry facing a life-threatening challenge (again): Disruptive trends and entrance of new players is the new normal compared to the operational and financial challenges of 2007
  • New challenge from Silicon Valley tech giants is poised to disrupt industry and to challenge suppliers' legacy business models
  • Roland Berger study highlights a lifeline for suppliers. Players need to adjust to a radically different environment to maintain a leading role in the 'new industry'

The annual North American automotive supplier study by Roland Berger examines disruption within the automotive industry and supplier business models in particular brought by the advent of Silicon Valley players.
While all indicators point to the automotive industry having recovered from the crisis of 2007/2008, it is also clear that growth has leveled out. EBIT margins had hovered around 7-8% in the US since 2011, however supplier revenues and margins are stagnating in all major automotive regions. In the meantime, US suppliers have begun once again leveraging up their balance sheets reaching 2007 levels fueled by cheap and abundant cash. While globally this cash is being spent on an unprecedented wave of global M&A activities with the average size of deals in the last 12 months exceeding that of the previous 8 years North American suppliers continue to use this cash on "stock cosmetics" to increase immediate shareholder returns.
Looking back to 2007, it is hard to avoid a sense of déjà vu – the industry is clearly not "playing safe" any longer and though it may not recognize the fact, it is (yet again) on the verge of a life-threatening challenge. As Roland Berger Senior Partner and study author Thomas Wendt confirms, “The challenge this time is no longer financial or operational in nature. New entrants and disruptive technologies are posing an existential question regarding the business models of incumbent suppliers.”

On the one hand, disruptive trends such as automated driving, connectivity and new mobility are converging, thereby significantly reshaping the automotive landscape and traditional value chain dynamics. On the other, technology players have disrupted multiple industries over the last ten years and now these same players are knocking at the doors of the automotives. These are companies able to launch a product and, move a million units within half a day in the case of e.g. the iPhone 6 compared to a typical automotive manufacturer which can take over three years to sell a similar number of units of a mid-size passenger sedan. According to study author Thomas Wendt, “New players are bringing business concepts and a mindset, which is fundamentally different from the traditional automotive approach. This disruption is for real and is already impacting players in the entire ecosystem. Just to name an example, Amazon’s Alexa could turn into a serious competitor to all incumbent automotive infotainment and HMI suppliers in the near future.”
The Roland Berger study investigates how Silicon Valley players have already disrupted other industries and will continue to disrupt the auto industry by identifying four unique characteristics:

Ecosystem approach: Silicon Valley players build broad and collaborative ecosystems around their portfolios allowing them to derive value from multiple industries. Google is a great example where its multifaceted play in the automotive industry is just a piece of a bigger puzzle, a Google ecosystem.

Scale: Tech giants' interconnected products share technologies and thus generate major economies of scale in the range of hundreds of millions of units. Apple has developed a common platform comprised of its proprietary chip set, iOS and its cloud with these technologies scaled across a 300 million unit annual volume. Can individual suppliers ever match this scale?

Services: Services offered by tech players are expanding the very definition of service in the auto industry and are allowing for massive valuations with no assets. Uber is an example of a company that has disrupted multiple "asset-heavy" industries without owning a single vehicle. In the San Francisco metro market alone, Uber has generated approximately USD 1bn in revenues with effectively zero assets.

Speed: The tech giants are innovating at 10 times the speed of the automotive industry, creating new customer expectations. While an average vehicle goes through one lifecycle, a smartphone typically cycles through up to 10 generations. Thomas Wendt goes one step further, "With players from Silicon Valley increasingly active in the automotive space, the question arises whether there is a meaningful future role for traditional auto suppliers at all."

The Roland Berger study however, highlights a lifeline for the supplier industry. Players will need to adjust to a radically different environment to maintain a leading role in the 'new industry':

Eco-system and collaboration vs. traditional value chain dynamics.

As business models transition from hierarchical value chains to flat ecosystems, suppliers need to collaborate with each other and with other players to compete on level terms with Silicon Valley. Collaboration is required to achieve scale and build automotive and cross-industry service platforms as well as to create new value at the intersection of different roles in the ecosystem.

Platforms and services beyond traditional products.

The new automotive environment requires suppliers to think beyond traditional 'products'. A vision how to build and leverage platforms to expand technologies into holistic consumer solutions and how to monetize services in a new era of mobility is going to be crucial for all players who want to maintain a leading role in the new industry. Given the existing legacy of more than 100 years of doing business more or less the same way, this thinking is the biggest challenge facing incumbent players.

Embrace Silicon Valley speed, culture and mindset.

While it's important to embrace the ecosystem, it is equally critical to master a new collaborative approach to innovation. Innovation must be expanded beyond traditional R&D and include the startup playing field, which might be the hardest one for the traditional supplier to master. However, ignoring it is to ignore the richest pool of creative thought available in the market place as contemporary automotive innovation is, largely, the work of startups. Corporate venture activities must play a crucial role, but can only be successful if approached correctly. Here too, traditional mindsets are seen as the major hurdle to leveraging outposts in Silicon Valley to the fullest extent.

Despite the challenges, which need to be addressed, the study ends on a positive note with Roland Berger partner Thomas Wendt concluding, “Fortunately for traditional players there is still time to "reset" and start from a clean slate. The challenges ahead are manageable – but only with the ambition to go beyond traditional dynamics and behavior.”

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