Global automotive supplier revenues continue at record levels in 2017
Global automotive supplier revenues continue at record levels in 2017, but industry disruption is gathering pace and threatening business models
- Global revenue expected to increase 3%, but signs of slowing growth visible
- Disruptive trends in automotive industry affecting all supplier sectors
- Suppliers face accelerating technological change with emergence of software as key differentiator, and commoditization of hardware parts
- Business models will need to transform in order to capture future growth
Munich, December 13, 2017
While the global automotive supplier industry continued to grow in 2017, disruption caused by four megatrends – Shared Mobility, Autonomous Driving, Digitization and Electrification – has gathered pace, according to the "Global Automotive Supplier Study 2018" by Roland Berger and Lazard. The study postulates that supplier CEOs will need to transform their existing business models in order to capture shifting profit pools caused by these megatrends.
The study analyzed performance indicators from approximately 650 suppliers around the globe to assess the current state of the industry, as well as trends and challenges.
Global growth continues but is slowing
In 2017, the global supplier industry is expected to see revenues increase by approximately 3 percent compared to 2016, and maintain profitability levels with an average EBIT margin of approximately 7.3 percent. While volumes have reached record levels, global growth is slowing in some regions, with light vehicle production in North America expected to shrink by 3 percent to 17.4 million units in 2017. For 2018, the study authors expect suppliers to enjoy continued revenue growth, but at a slower pace, while maintaining stable EBIT margins. "The overall fairly positive sentiment is reflected in valuation levels of suppliers that are still trading above their long-term average," said Christof Söndermann, Director at Lazard. "But the four megatrends in the automotive industry are causing disturbance in all supplier domains."
Recent developments point towards an acceleration of the disruption caused by four megatrends:
- New mobility business models (such as ride hailing and car sharing) are poised to disrupt car ownership, personal mobility and goods logistics
- The timeline for level 4/5 autonomous driving keeps accelerating as necessary economics, regulations and technology fall into place
- In digitization, artificial intelligence offers almost limitless possibilities, while connectivity-enabled technologies are reaching the point of mainstream application
- Momentum for electrification is building among regulators and OEMs, and progress on technology is accelerating
Based on these trends, the automotive "end game" appears inevitable, but the transition period continues to be marked by a high level of uncertainty. Automotive suppliers will need to prepare for five distinct changes that are emerging: slowing growth; accelerated technological change; software as a key differentiator; commoditization of hardware; and pressure on valuations for commoditized suppliers. "Technology shifts require suppliers to substantially invest in old and new technologies in parallel, with benefits from new technology investments being uncertain," commented Felix Mogge, Partner at Roland Berger. "Margins and valuation levels in commoditized fields will come under pressure, but at the same time, electrification and digitization offer new monetization options."
Profound knowledge of trends required
Against this backdrop, the authors from Roland Berger and Lazard have identified a number of elements for suppliers to consider when transforming their business models to capture future growth opportunities. Among these are strategy and portfolio: What is the impact of the automotive megatrends? Which products will enjoy continuous growth? Which new segments fit well into the current business? Is a ramp-down strategy needed or might a "last man standing" strategy be sensible for some segments? "Profound knowledge of the disruptive trends is essential for any supplier," said Mogge. "The current supplier business model of offsetting negative cost impacts with volume growth will no longer work."
Openness, speed, flexibility and innovation essential
Potential implications include divestment and diversification into new growth areas, which is already reflected in ongoing M&A activity in the sector in 2017. Innovation partnerships are increasingly important, and time is critical as many have already been formed. "Pressure for suppliers also comes from OEMs, whose business model is equally disrupted by the megatrends," observes Michael Schmidt, Director at Lazard. "Not only are both looking at the same potential partners and M&A targets in the new growth areas of shared mobility, autonomous driving, digitization and electrification, but the distribution of the value chain and the depth of vertical integration still remains to be seen."
According to the study, the disruption offers a unique opportunity for traditional suppliers to expand from selling hardware only to selling features and services. For suppliers to succeed in the new automotive environment, they will require a new set of competencies and capabilities. They will have to rethink their overall strategy with an open mind, act fast and be flexible, find new ways to innovate, and enter into partnerships with new players.