In May 2019, BCG published a report on the state of the global automotive market. The report predicted that the industry, after enjoying its longest period of continuous expansion in history, was on the cusp of a serious contraction.
Using a regression analysis based on underlying market drivers and historical cyclicality patterns, we forecasted that US vehicle sales would experience a cumulative decline of between 9% and 15% by 2021—although we predicted the industry would return to growth by 2022 to 2023. In Europe, our forecast was for a drop of between 5% and 10%, starting in 2021 and ending by 2023.
However, we also warned that the downturn would be fundamentally different from previous ones. As well as weathering tougher market conditions, automakers and suppliers would have to adjust their strategies and business models to dramatic changes in mobility, including the emergence of shared autonomous electric vehicles (SAEVs), and the digitalisation of their value chains even as they managed legacy powertrain assets.
While many industry reports and articles about the downturn focus on automakers, which do have big strategic questions to think through as market conditions worsen, suppliers are also feeling the heat
In short, we said that automakers and suppliers would need a different playbook from those that worked in the past. But they should also view the coming downturn as an opportunity rather than a threat and use this period to back bold plays that would give them a decisive competitive advantage over the rest of the field.
Since then, the downturn we anticipated has arrived, although market dynamics have evolved differently by region: 2019 US auto sales declined by 1% to 2%, to 17 million units, better than anticipated; Europe is on track to perform in line with analysts’ expectations; and China underperformed expectations, with sales down by 7% to 8% from 2018. The Chinese market is projected to fall by another 2% in 2020, according to the country’s automobile manufacturers’ association, making it the third consecutive year of declining sales.
But our perspective—that companies will need to act differently and with urgency if they are to rebound faster and emerge stronger from this downturn—still holds true.
Suppliers face a tougher challenge than automakers
While many industry reports and articles about the downturn focus on automakers, which do have big strategic questions to think through as market conditions worsen, suppliers are also feeling the heat. In the US, for example, BorgWarner and Meritor are among several parts suppliers that have announced restructuring programs. And in Europe, German suppliers Continental and Osram have also revealed plans to take out costs and cut jobs.
Compared with automakers, suppliers are resource-constrained and do not have the benefit of chief economists or large strategy groups, so change management needs to be driven by the business
In our analysis, the impact of the downturn on suppliers may be even more profound than for automakers. With a portfolio of different products and market positions to manage—some of which are less exposed to a downturn than others—automakers have many levers to pull. By comparison, the challenge facing suppliers is often more binary: their market positions are more clearly divided between growing and declining ones; the actions available to them are more limited because they have fewer commercial levers; and their ability to manoeuvre is also more limited due to their longer-term contracts with automakers.
At the same time, suppliers that can harness the transformation in mobility that will continue to progress and even accelerate through the downturn can create greater differentiation from their competitors and establish winning positions. We expect sales of autonomous vehicles (AVs) and electric vehicles (EVs), related components, data and connectivity services, and on-demand mobility offerings to increase rapidly from a standing start. By the end of the 2020s, they will account for 25% of total industry profits, and 40% by 2035—up from just 1% in 2017.
Confronted with multiple challenges, from contracting markets to future mobility, some suppliers are already taking radical steps to create paths to growth. And for those suppliers that have yet to do so, the downturn is likely to be the ideal time to act.
Here are some of the steps that leading suppliers are taking:
- Delphi (itself recently acquired by BorgWarner), Autoliv, and Tenneco have shifted from being conglomerates to more focused businesses by spinning off faster-growing electronics and technology units;
- From having a limited offering, companies such as ZKW and LG have expanded and now provide systems integration along the value chain;
- Magna and TRW are among several suppliers that have achieved significant scale benefits through M&A;
- Robotics firm Kuka has reinvented itself as a service provider, while other technology suppliers have also moved up the stack from providing hardware to adding revenue streams from data, software and services;
- Visteon is one of many companies seeking growth by moving away from being a captive supplier to a single automaker.
It’s clear that the actions these suppliers have taken are a response to the specific strategic questions they face. But there are some pre-emptive best-practice steps that all supplier companies should adopt as they prepare for the downturn.
The impact of the downturn on suppliers may be even more profound than for automakers
Compared with automakers, suppliers are resource-constrained and do not have the benefit of chief economists or large strategy groups, so change management needs to be driven by the business. Still, the imperative is clear: preventing legacy costs from sucking up valuable resources so they can create “breathing space” to change the direction of the business.
Seizing the upside in a downturn
We believe there are four key measures supplier companies should take immediately.
Create a downturn plan. Leaders need to act urgently to develop a downturn plan of action and secure buy-in across the organisation. They must align on their strategic and operational priorities, which may be different for different segments of the business. These can serve as a true north in navigating the recession.
Defining priorities is not a simple task and will require a deep understanding of current market dynamics, and an assessment of risk exposure and breakeven volumes along the entire value chain. Companies will also have to balance investments in traditional businesses against new mobility.
Right-size the cost base. Companies need to urgently build downturn-ready processes and get their costs under control. Zero-based budgeting (ZBB) is an effective way to achieve sustainable cost management, leveraging insights from other industries. ZBB introduces a rigorous bottom-up budgeting approach and clear cost package accountability to control costs over the long term. By installing a new culture of cost consciousness, it delivers sustainable savings and frees up funds for re-investing in new areas.
Automotive suppliers that act quickly and decisively to embrace a new and more strategic playbook will not only rebound faster from the next downturn, but also come out of it stronger than they were before
Invest to win. The data shows that companies which grow through a downturn are those that outperform when re-emerging after a downturn. Now is the time for leaders to review their M&A pipeline and identify promising strategic partners that can fill gaps in the company’s portfolio—keeping future mobility and AV needs in mind. A downturn can present attractive opportunities to acquire talent and capabilities inside and outside the traditional automotive sector. Companies that use the period before a downturn to prepare will be better positioned to seize attractive valuations when they arise.
Companies should also reassess their portfolios and identify countercyclical growth opportunities. For example, in the aftermarket, suppliers should undertake a granular, category-by-category assessment of their businesses and adjust their offering, pricing, and inventory levels accordingly.
Ensure effective change management. Leaders should make sure there is proper accountability and governance procedures to manage change and avoid pitfalls. Here are a few of the ways to achieve a smooth transformation: set bold ambitions that inspire the organisation; focus on a small number of critical transformative opportunities; create a culture of transformation modelled on the day-to-day actions of senior management; set up a dedicated program office for your transformation sponsored by a member of the leadership team; and provide rewards-based incentives.
While industry contractions are a time of uncertainty, they also introduce significant value-generating opportunities. Automotive suppliers that act quickly and decisively to embrace a new and more strategic playbook will not only rebound faster from the next downturn, but also come out of it stronger than they were before.
About the authors: Jonathan Van Wyck is a Managing Director and Partner based in BCG’s Minneapolis office. Aleksandra Bozic is a Partner and Associate Director based in BCG’s London office, and a core member of the firm’s TURN practice