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Supplier disruption

How can suppliers succeed in the changing automotive industry?

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Disruption in the industry

The automotive industry is vital to the UK economy

In the UK, more than 30 original equipment manufacturers (OEMs) build more than 70 models of vehicles – supported by 2,500 component providers. Nearly 190,000 people are employed directly in manufacturing and over 856,000 people are employed across the wider automotive industry. In 2018, the industry had a turnover of around £82 billion and accounted for twelve per cent of total UK export of goods. However, overall production decreased by nine per cent between 2017 and 2018 as the industry struggled to cope with unprecedented levels of disruption.1

Structural change

A number of factors are directly impacting the manufacturing decisions of OEMs in the UK.

  • Changing customer demand, evidenced by:
    • sales of Electric Vehicles (EVs) reached more than one million units for the first time in 2017 increasing by 54 per cent over 2016 and surpassed two million units in 2018.2 
    • UK diesel production fell by 23 per cent from 2017 to 2018.3
  • an increased focus on digitalisation, the sharing economy and autonomous vehicles has required significant investment for both OEMs and their supply chain. This change has also brought new entrants into the market that are challenging the status quo
  • new regulations such as the introduction of Ultra Low Emission Zones (ULEZs) and changes to road tax have driven change within the industry, whilst new trade agreements and changing tariffs have given OEMs alternative options for where they produce their vehicles. For example the EU’s economic partnership agreement with Japan came into force on 1 February 2019 making it cost effective for OEMs to produce cars in Japan for export to the EU4 
  • possible future impacts from Brexit, Japan/EU EPA and US tariffs are unclear, meaning OEMs are taking fewer risks and being more cautious with investments.
     

Manufacturers reaction

A number of UK based OEMs have made announcements regarding their future strategy and proposed plans to change their manufacturing footprint in the UK. These could lead to job losses and lower volumes for UK based suppliers and have centred around three key themes:

  • workforce reductions and plant closures 
  • movement of new model production to alternative overseas locations
  • lower production volumes.

What does this mean for the supply chain?

Changing profit pools in the supply chain

Deloitte analysis has identified where the greatest profit pools should be in 2025, depending on a number of different scenarios. Figure 1 considers a scenario where OEMs retain the balance of power.

Source: The Future of the Automotive Value Chain – The Supplier Transformation Model, Deloitte TTL, 2018

We believe that electronics, electric drivetrain, and high voltage (HV) battery and fuel cell production are the areas with the greatest potential for profit in the future, while transmission, ICE and exhaust system production are the areas that will likely see the greatest decline in profit.

What should suppliers do?

Plan for change

OEM suppliers need to consider their key objectives and strategies to plan for and stay relevant in a time of significant change. Planning for change involves a three-stage process:

  1. know your risk and understand your supply chain
  2. develop a future market strategy
  3. implement mitigating actions or restructuring plans.
     

Know your risk and understand your supply chain

Suppliers should first assess business exposure in order to understand how reliant they are on their customers and their own supply chain. A number of different factors such as which OEMs the wider supply chain is exposed to and how important they are to business will be critical to maintaining production.

When analysing their exposure to risk, suppliers should consider the following questions:

  • who are your key customers and suppliers? And what does their supply chain look like?
  • how easily can your customers switch their supply, be that locally or internationally?
  • how exposed are your suppliers to the wider sector and what is their current financial position? 
  • can you use alternative suppliers if required?

Develop a future market strategy

It is important for suppliers to understand where the key risks are in order to decide on future strategy. This will depend on a number of factors, especially which parts a supplier produces and what their exposure is across the UK automotive industry.

A major risk to suppliers in the UK comes from the growing number of OEMs looking to relocate production. If OEMs relocate production overseas, suppliers will either need to find a new customer base in the UK, follow their customers to new markets or look for new customers in different geographical markets.

Given the challenges in the industry, we are likely to see a growing number of suppliers consider diversifying by investing in alternative technologies, which are more likely to be sustainable in the long term. This could be achieved either through acquisitions or building in-house expertise. Whatever the desired route, it is likely to need major investment and financing.

Developing a future market strategy that moves the organisation away from their core business will also mean that the skillsets of workers need to change to match the demands of new business models and technologies. This in turn will require an increased focus on recruiting digital talent and training existing workers.

Some key questions to consider when developing a future market strategy are:

  • what is the immediate versus long-term impacts on your business? 
  • what future business will you serve and what other markets could you consider for growth?
  • what is the optimal structure to achieve this? 
  • what level of financing will be needed to enable this?
     

Implement mitigating actions or restructuring plans

In order to create a sustainable business model, some international suppliers have already invested in alternative technologies, whilst reducing their exposure in other areas. This has led to major changes in their manufacturing footprint.

Sustainable transformation requires a supplier to make major changes, some of which will be considered radical such as plant relocation. As a result, commitment and dedication from both employees and management are needed.5

Some key questions to consider when implementing mitigating actions or restructuring plans are:

  • what are the potential costs and impacts of implementing different mitigating actions or restructuring plans such as profit improvement, sale, closure or diversification? 
  • what opportunities are there to consolidate by buying up customer bases from other suppliers looking to divest parts of their business or to transform the business by investing in new or alternative technologies?
  • how do you manage key stakeholders (for example lenders, employees, media and pension scheme trustees) through any transition?

 

Key takeaways

If the UK automotive supply chain is to survive and thrive in the current climate, it is critical that suppliers develop an action plan to navigate the disruption. Building on the activities outlined earlier, the recommended first steps include:

  • map exposure for current and future volumes of products supplied to OEMs and downstream suppliers
  • develop a finance model to understand the impact that future volumes are likely to have on cash and profit
  • model different scenarios including changing of manufacturing footprint, diversification in to other areas and sale of business
  • develop a communication strategy for all key stakeholders, including internal workforce, lenders, government affairs and media amongst others.

Understanding and planning for disruption will be key to success in the current and future automotive industry. At a minimum, suppliers should speak to customers and the wider supply chain to understand how potential changes to operating models and manufacturing footprints will affect business. Only then can suppliers effectively expect to mitigate the risks.

 

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1 The UK automotive industry, the Society of Motor Manufacturers and Traders (SMMT), 2019. See also:https://www.smmt.co.uk/industry-topics/uk-automotive 
2 Electric Vehicles Global Outlook, International Energy Agency, 2018. See also:https://webstore.iea.org/download/direct/1045?fileName=Global_EV_Outlook_2018.pdf
3 ACEA Economic and Market Report – Full Year 2018 (page. 8), European Automobile Manufacturers Association, 2018. See also: https://www.acea.be/statistics/tag/category/economic-and-market-outlook 
4 EU – Japan economic partnership agreement, the European Commission, 2019. See also:http://ec.europa.eu/trade/policy/in-focus/eu-japan-economic-partnership-agreement/
5 Future of the Automotive Value Chain – The Supplier Financial Transformation Model (page. 86), 2019. See also:https://www2.deloitte.com/de/de/pages/finance/articles/automotive-value-chain-supplier-financial-transformation-en.html

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