The Future of the Automotive Value Chain: Supplier Financial Transformation Model

What lies ahead? The transformation of an entire industry…

The four automotive megatrends - e-mobility, connectivity, autonomous driving, and car sharing - will have a fundamental impact on the industry. As a result, the entire automotive value chain faces radical changes and automotive suppliers must prepare. The questions they need to answer now are, how can they best address these challenges, and how can they prepare for the inevitable transformation despite substantial uncertainties about timing and eventual market developments.

Many insights, opinions, and recommendations on this have been published. In 2017, we also published our views in two studies about the Automotive Value Chain (AVC), which gave a detailed insight into 19 different vehicle component clusters and how the upcoming sector changes will affect them (OEMs and suppliers).

Understanding the cost effects and cash requirements

We have now developed our analysis by combining deep sector expertise with financial transformation experience. While price and volume are a great starting point for shaping a transformation strategy, this eventually also requires a sound understanding of cost effects and cash requirements. Only when combined and applied to specific scenarios – tailored to the individual situation and needs of a supplier – does it enable management to make thorough and robust strategic decisions.

How to master the transformation successfully?

To master the transformation, we identified four key areas that need careful consideration:

• Strategic vision: A clear strategic vision that builds on future-oriented profit pools while at the same time addressing a strategy for component clusters with declining relevance is essential for the successful transformation. 
• Targeted restructuring: Commitment to a necessary and comprehensive reorientation is a key prerequisite. Only focused and decisive actions will ensure that suppliers can actively shape their future. 
• Scenario-based thinking: Scenario-based thinking is a valuable method for managing decisions in situations with high uncertainties. Different scenarios need to be evaluated to understand transformation options and anticipate their impact. These options then need to be translated into financial effects for the right decision to be made.
• Clear transformation concept: A detailed transformation roadmap, validated against various market scenarios for handling uncertainties along the time scale, is crucial to build trust and win over stakeholders.

Our Deloitte Supplier Financial Transformation Model will help address these four areas. It makes essential decision criteria tangible and quantifies the financial effects of each option on profit & loss, balance sheet and cash flow. Individual suppliers and the specific market conditions can be incorporated covering the key elements: Market view, Supplier View and Transformation Strategies.

The model can simulate different transformation strategies “on the fly” for a specific supplier. Although suppliers, especially in tiers 2 and 3, are fully aware that they need to prepare for transformation, the “how” and “when” are often unknown or uncertain. It is at this point that our model offers guidance.

In our study, we will walk you through the key automotive value chain developments, their effects on component cluster market and their financial impact on automotive suppliers.
We will demonstrate the power of our Deloitte Supplier Financial Transformation Model by both explaining its functionality and applying it to different suppliers in three deep dives – resulting in a clear strategy advice for these suppliers.

We hope that you will enjoy our study and the Deloitte approach to developing robust and successful transformation strategies for automotive suppliers.