Incredible industry disruption is accelerating the rate at which major auto suppliers must spin off, divest and merge businesses related to the internal combustion engine.
For those who have been keeping tabs on the automotive industry, the electrification of cars is not news. What may surprise you, however, is just how quickly, ruthlessly and thoroughly electrification is taking over the industry. From global legislation to shifting consumer interests, traditional auto manufacturing is under incredible pressure to modernize. This has only become more apparent in the last year, as several auto suppliers have begun making big moves to prepare themselves for the upcoming shift to electric and autonomous vehicles. These big changes are far from over and have the power to impact manufacturing in an unprecedented way.
In February 2017, Norway became the first nation to ban the internal combustion engine (ICE), and it intends to only allow the sale of electric vehicles by 2025. In early September 2017, Xin Guobin, China’s vice minister of industry and information technology, told a forum of automakers in Tianjin that the government would ban the production and sale of fossil-fuel cars. Most Chinese automotive insiders believe this ban will take place starting in 2030. India, France and the U.K. all made similar announcements over the course of 2018 as the trend toward the adoption of zero-emission vehicles or battery electric vehicles (BEV) has started to accelerate around the globe.
Consequently, stock analysts have started downgrading the long-term outlooks for even the world’s foremost suppliers with significant involvement in the ICE ecosystem, as automakers confront intense pressure to completely shift vehicle propulsion from ICE to electric. While analysts are not suggesting that this shift will occur overnight, they do expect it could create significant risk to many suppliers’ earnings trajectories. Suppliers must, as they say, face the music.
In 2017, many major suppliers began the process of addressing these challenges head-on. Delphi, for example, announced a spin-off into two separate businesses, while Honeywell, Continental and Autoliv announced similar strategic plays. These suppliers understand that, while electrification disruption won’t run them into the ground overnight, if they don’t make decisive and strategic choices now they will be left in the dust by those who did.
Today, countless suppliers produce machined components solely for the ICE ecosystem. Approximately 80% of the machined components going into average vehicles are tied to the ICE, while electric cars require far fewer components and less time to construct. This shrinking and shifting market will create excess capacity and have a significant impact on everything from the workforce to the supply chain to the economies of manufacturing towns. If they want to win, there are a significant number of strategic issues to consider.
- How will excess capacity affect pricing and profitability for these components?
- What new business opportunities will be available from EV components or alternative markets such as aerospace?
- What will be the best strategy for the organization going forward?
2018 might represent the most significant year so far in the electrification shift, but I predict that the pressure is only just beginning to build. Nations around the globe will continue to encourage the development and production of eco-friendly vehicles as the market and public opinion shifts away from cars with traditional ICEs. Suppliers, quite frankly, cannot afford to ignore the power and potential of electrification to impact their businesses. There are plenty of other players in the arena who are ready and willing to do what it takes to succeed in this new automotive world.
Now is the time to implement strategies that will ensure
a positive, winning outcome by the time electrification completely overtakes the internal combustion engine –
and not a moment later.
Provided by Paul Eichenberg of Paul Eichenberg Strategic Consulting. He will present his insights on automotive electrification at the 32nd Forging Industry Technical Conference Sept. 11-12 in Long Beach, Calif.