4 minute read 23 Sep 2019
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How OEMs can achieve the best of both worlds

By

Sven Dharmani

EY Global Advanced Manufacturing & Mobility Supply Chain Leader

Passionate about transforming supply chains. Problem solver. Curious and collaborative. Avid traveler, scuba diver and car enthusiast.

4 minute read 23 Sep 2019

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Traditional OEMs and new entrants may not have much in common, but in the Transformative Age, working together may be their road to success.

In the next 10 years, you will undoubtedly see instances of new entrants being acquired by traditional original equipment manufacturers (OEMs). Both have problems that are not easy to solve. But when these two types of companies are paired together, these problems can be addressed.

Both new entrants and traditional OEMs have strengths and weaknesses — and both have competitive advantages. Having less experience means having fewer constraints and less fear — after all, there is less to lose. But it also comes with a lack of wisdom and practical knowledge, as well as a tendency to make more mistakes along the way.

The automotive industry has existed for over 100 years. A lot of the large OEMs have spent decades really honing how they can make their supply chain lean; build and sell cars on a large scale, at a high volume and cost-effectively; get the cars out to consumers who actually use them; and help drivers maintain those cars. Over those decades, those OEMs have grown massive. They now lack agility. They struggle to achieve speed to market when they have a new, creative idea that needs to be launched fast. That’s where their own inertia of being large works against them. This is where the new entrants break the mold.

New automotive industry entrants don’t have existing friction points in their organization. Similar to how developing countries skipped landlines to adopt mobile phones, a new entrant doesn’t have a profitable business model to defend. As a result, they are all offense and very little defense. In contrast, existing large players have to defend their existing product portfolio, market share, revenue and profits. Factories, human capital and large swaths of land need to be paid off by traditional manufacturers, further constraining how much capital goes toward the future and thereby limiting their ability to innovate, scale up and scale down costs, and more.

New entrants, on the other hand, are constrained by how quickly a new idea can be scaled in a cost-efficient way. They can rapidly iterate. They don’t have to deal with existing cost bases or an asset base. Because they are small, they can experiment on a smaller scale, and whatever results in a successful experiment gets scaled. 

But new entrants must keep innovating and outpacing traditional OEMs or they risk losing the uniqueness of their technology. If nothing is unique about new entrants, they risk their sales stagnating and declining because traditional OEMs have the resources to catch up and do so at scale.

Between autonomous vehicles, electrification, connected vehicles and transportation as a service, the automotive business model is completely changing. Traditional companies are caught in a tug of war: how fast can they move into new products without actually destroying their existing business model?

New entrants created a completely different architecture for vehicles because they were not constrained by conventional vehicle construction. It took seven years for traditional OEMs to start to change the architecture of a car to reflect the skateboard model introduced by new entrants — and it may take a full decade to scale this architecture. 

Traditional OEMs are not about to wait. They are going to recognize innovative changes to the way cars are made and the way we use those cars. They will reproduce what the new entrants do faster and at scale. Instead of taking a decade, it will take traditional OEMs three to five years to scale an innovation as well as or better than new entrants.

From managing the status quo (an existing supplier base, dealer network and customer base) to turning to new products with new requirements (supplier base, parts, plants and revenue model), striking a balance will be critical to maintaining the value of the company and mitigating the risk of an overnight stock wipeout. 

We are not seeing the full effect of the electrification and new entrants yet. New entrants still need to figure out how to have financially viable business models in the longer term with the products and services at scale.

Acquisitions aren’t the only situations in which traditional OEMs and new entrants can play off of each other’s strengths: it would also be fascinating to see a joint venture between the two. Under this scenario, all of the knowledge from the traditional OEM could be used with the new entrant, allowing everyone to innovate. It happens in the tech world all the time.

Whether through acquisitions or joint ventures — however it plays out — it’s very likely that you’ll see traditional OEMs and new entrants working together in the coming decade. They’ll do it because they need each other.

Summary

Over the course of the auto industry’s 100-year-old history, traditional OEMs have grown large and mighty, but fall short on agility. On the other side, new entrants bring dexterity and exciting innovation to the fold, but they often stumble on scalability. Amid the high stakes and increasingly complicated environment, will the industry’s next David and Goliath story end in collaboration?

About this article

By

Sven Dharmani

EY Global Advanced Manufacturing & Mobility Supply Chain Leader

Passionate about transforming supply chains. Problem solver. Curious and collaborative. Avid traveler, scuba diver and car enthusiast.