Roughly 25% of today’s profits are generated from legacy ICE assets that will be the most adversely impacted by 2030, resulting in a 50% decrease from current levels. Disruption will require a nimble and well-coordinated strategic response, along with favorable policy changes by local authorities.
Automotive OEMs and suppliers alike have understood the significant impact on the future car architecture and invested heavily into new growth areas. Some players have already started to streamline their ICE-related portfolios, while others have disconnected them and are now managing the business separately. Various capital allocation choices are emerging, including investment in captive capacity, acquisitions, spin-offs and joint ventures (JVs), among others. Examples include:
- A European supplier invested in a hydrogen storage system manufacturer, another acquired a battery maker, while yet another global player plans to invest over €1b in fuel cell technologies in the next four years alone.
- A global tier 1 supplier recently acquired an advanced driver assistance system specialist for trucks and trailers.
- A large US automotive supplier spun off its turbocharger division, while another US peer split into two separate entities — one with a focus on electronics and one focused on powertrain solutions. Yet another European peer separated its powertrain business and is currently planning for its initial public offering (IPO).
Four steps companies can take to foster their strategic evolution
While peak ICE vehicle sales may be a thing of the past, long-term value can still be generated in traditional value pools — if the business model, organization and operations are designed accordingly.
Suppliers must perform a balancing act and simultaneously manage components and systems that are dedicated to ICE vehicles, while increasing their investments in new EV-related components and various other new key technologies, such as software. Timing and aggressiveness will dictate success. Companies can begin their journey by:
- Defining the strategic target picture
- Determining future business and product portfolios
- Defining target operating models
- Executing strategic options
Step 1: Defining the strategic target picture
It is crucial to evaluate if there is only one strategy or several parallel strategies to effectively fulfill diverging portfolio requirements and subsequently solve for both “new” business avenues, as well as any legacy or wind-down businesses. Developing a robust target picture requires the holistic and unbiased (“no sacred cows”) assessment of two perspectives:
- External — expectations of the automotive sector and segment growth trends and their variability, market attractiveness, competition and new technologies
- Internal — how capable and flexible the organization is in terms of workforce, know-how, resource availability and financial stability to achieve target aspirations
Step 2: Determining future business and product portfolios
After the strategic guardrails are clear, the range of options and associated feasibility for the future organization must be defined at a more detailed level. Questions, such as the following, should be looked at on several levels, from assessing individual products, business units and the overall enterprise:
- Where do I want to play?
- How do I want to play?
- How long do I want to play?
- With whom should I partner?
To determine the optimal future business portfolio, new segments should be identified and evaluated by their adjacency to the current business, the implementation complexity, the future right to win, and any potential barriers to entry or exit. It is important to determine which customer segment of the ecosystem should be in focus, such as off-highway, passenger car and trucks, and to align regional strategies to public versus private sector investments. For a well-structured portfolio, it is also vital to streamline existing offerings. A differentiation between future core versus non-core capabilities, along with targeted wind-down businesses, can release capital for better investment avenues. Scenario planning and iterative refinement of the road map play a prominent role in this process.