At the CAR Management Briefing Seminars held in Traverse City, Michigan recently just-auto’s Calum MacRae met with Neal Ganguli Deloitte’s US automotive practice leader to discuss how suppliers can maximise their portfolios and the effect that CASE will have on overall industry volumes.
just-auto: Do you think it’s fair to say that if a Tier 1 or Tier 2 supplier doesn’t have a CASE strategy at the moment it will struggle to survive?
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Neal Ganguli: I would not characterise it that way. I would say they need to actively think about strategies to deploy to either mitigate risk or capture the opportunity that CASE brings. The way we see it, as in our automotive global automotive supplier study of last year, is that some commodities within automotive fall into some risk of commodification and decline driven by connected, shared and electric and so on. On the other hand, there are a lot more technology-rich products and technology opportunities related to CASE. So we think suppliers ought to be actively thinking about how to mitigate the risks to the parts of their portfolio that are more commoditised and then how to capture the opportunity that’s going to be available in these portfolios that are driven by more of a newer technology.
j-a: If the same growth opportunities and the same risks exist for all suppliers how do the suppliers differentiate themselves if they’re following the same strategy?
NG: So in our automotive study we divided the world based on what product portfolio suppliers have today and what kind of financial capacity and strategic capacity they have to do something about it. Then we took those two axes and divided up the world. From there we can see that there are companies who have lower quality businesses, which means parts of their current portfolio are faced with more risk of commoditization or decline, and then there are suppliers on the other end of the spectrum whose quality of business are more tuned toward driving innovation at higher margins that might be more suitable for some of the new CASE business models. So it’s not necessarily the same amount of risk and value, but as an industry the same opportunities are available for suppliers to go after, and the same risks are faced by parts of their portfolio. A lot of suppliers play across multiple product segments, they just need to look carefully at where are the most risks and how to mitigate them, and then where are the most opportunities and what to do to create capital and strategic resources to go after those opportunities.
j-a: To maximise shareholder returns, your report talks about shedding assets. How do you go about finding a buyer in the market for underperforming assets?
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By GlobalDataNG: Again from the portfolio analysis you have a multitude of strategies you could pursue, one of them being the divesting and shedding of underperforming assets. As we’ve seen in the industry over the last few years, the buyers tend to be either players who are in the industry that are saying, ‘We need to consolidate even though we have a commoditised portfolio, we’re going to be the consolidator of those assets. We’re going to be the ones who are going to scale up and drive cost and asset efficiency and consolidate that difference.’ So, there will still be parts that are consolidated but are needed in the car, even though they are margin commodities. So you can a have strategic buyer in that regard or we’ve also seen a lot of financial buyers in terms of private equity that are coming in and maybe have an exit later again to a consolidator or an independent company. Thirdly, we’ve also seen there are players outside of the automotive industry that are putting capital in, now a lot of it admittedly is in tech and software and more of the higher technology parts of the business, but there are industrial players that are coming in and saying, ‘We want to play in automotive as one of our verticals’ and thinking to consolidate some of the assets as well because they do similar things for industrial companies, off-highway companies and so on, so they’re adding automotive assets as part of their portfolio.
j-a: So what attracts the acquirer to underperforming assets is the scale opportunity?
NG: Consolidate, drive for cost and asset efficiency. You benefit customers by your cost position and efficiency. It’s not only consolidation but digitalisation of factories to drive efficiency, having an optimal supply footprint and manufacturing footprint to drive down the cost position in these legacy assets.
j-a: So do you think, given digitisation and robotisation in factories, that low cost country sourcing is yesterday’s strategy?
Digitisation is more than just the automation of the factory itself, it is also about harnessing the data and really getting into smart factory thinking and using the data to your advantage to drive some predictive capabilities.
NG: I would say both are valid. There’s no reason why if your strategic manufacturing assets go across countries that you couldn’t actually digitise and drive operations and scale, efficiency of operations and scale of operations in that geography. And digitisation is more than just the automation of the factory itself, it is also about harnessing the data and really getting into smart factory thinking and using the data to your advantage to drive some predictive capabilities, take down your cost or differentiate yourself even though you’re in a commoditised segment.
j-a: What do you think the effect of the imposition of tariffs will be on the US automotive supply chain?
NG: I’m not going talk to exactly say how players are going to react or what it’s going to do but what we’ve seen lately with the OEMs where they have announced the effect on their cost structure. That’s going to flow down the value chain to suppliers, either in terms of price pressure or cost pressure, profit pressure, and there are parts that are affected by these things. Suppliers are going to have to think about how they have their value chain structured in terms of taking advantage or mitigating the risk that some of these decisions might bring. There are certain scenarios they are going to have to think about.
j-a: In this rapidly changing environment how can OEMs on the one hand be expected to face the cost of legislation, regulation, volume headwinds and then the cost of implementing CASE as well and still maintain profitability?
NG: Get the basics right. Drive the most efficient cost structure and asset efficiency thus creating the capital to be able to invest in CASE and new technologies and new business models, hopefully which are higher margin parts to their portfolio. OEMs are also now relying a lot on their supply base to bring them design, research and capabilities that the OEMs don’t necessarily want to invest in themselves because as they prioritise what they invest in. So they want suppliers to be partners in this process and figure out how do we jointly get leadership and technology into the cars of the future. We are also seeing a lot of players from outside the industry be it financial capital, or companies in high tech and consumer electronics that are partnering with the OEMs and developing and launching some of these solutions in the future. So there is an ecosystem developing that the OEM is part of but not necessarily the only entity of.
j-a: Traditionally we saw 25-30% of the bill of materials was powertrain, if you add electrification it’s 40-50% of the bill of materials, so you’re saying drive efficiencies into the commodities of your operation?
NG: Right. And the cost structure of the electric vehicle is certainly different. On the one hand the powertrain is going to be a higher part of the cost but on the other there are a lot of parts that go away. You won’t have necessarily the same type of braking, won’t have necessarily the same type of drivetrain and axle system. That’s where the portfolio decisioning of where do I need to invest capital versus maybe push it down to suppliers comes in. And we’ve seen different kinds of decisions made by different OEMs as to how much of the portfolio they think is going to be electric. Not everyone’s put the same amount of capital in.
j-a: If you were at an OEM or supplier at the moment would you be conserving capital rather than investing it and waiting to see what happens?
One of the biggest risks that players in the ecosystem face today is not doing anything
NG: That’s a very difficult one. One of the biggest risks that players in the ecosystem face today is not doing anything. Yes, conservation of capital is going to be important because so much is uncertain, but not putting a stake in the ground around the opportunities that make capital is going to be the biggest risk you face at this point.
j-a: In auto we’re seeing a lot of impact from Silicon Valley in terms of how tech stocks are valued versus traditional auto stocks leading to many suppliers splitting their businesses into legacy business and new tech businesses. Do you think the stock valuation pressures are pushing OEMs and suppliers towards strategies they might not neccessarily be comfortable with?
NG: I think suppliers are doing that with or without pressure from Wall Street to be able to make sure that the right investment and the right type of strategic thinking goes behind each these parts of their portfolio.
j-a: If we have Level Five autonomous vehicles and we have the foundations of the sharing economy applied what do you think might be the impact on industry volume?
While the volumes are expected to go down the miles driven are actually expected to go up
NG: We do see in the longer term shared mobility driving a pressure on volumes globally. While the volumes are expected to go down the miles driven are actually expected to go up but that is because the overall utilisation of the vehicle as an asset is going to be driven up on an average because of shared mobility and so on. However, the value of content in a vehicle will go up so while volumes go down there will still be opportunities in the portfolio.
j-a: Do you think it’s realistic that the utilisation of individual vehicles will go up because there’s been a recent study that’s saying that in New York City the peak rush hour traffic is worse than it’s ever been because of the proliferation of ride hailing service? It seems it will be difficult to smooth demand to that overall utilisation becomes higher...
NG: We believe that we’re still in a transitional phase and at some point volumes will face downward pressure. We’re not in the autonomous phase yet. Once there it will be similar to the milk runs in logistics. As regulation catches up, as the autonomous technology becomes more commercialised and industrialised and as people get more and more comfortable with shared mobility paradigms I think it’s definitely going to drive down the volumes and increase utilisation.
