Supplier Growth: The Immediacy Mandate
A new dawn of revenue growth is upon us as the industry changes more swiftly, integrates unprecedented levels of technical capability and continues to function on a global scale. Those choosing to grow within these new dynamics are increasingly opting for acquisition or joint ventures as a means
of lowering risk and speeding implementation of a growth plan.
There was a time when a supplier would view expansion into a new market segment to organically grow their business as a somewhat easy task. It would take some capital, the acquisition of some key personnel, slightly modifying an existing process or satisfying a customer seeking an additional competitor–every supplier has a story as to how they “grew” into a new area. In most cases, the market was stable or rising, allowing suppliers an adequate return at the end of the day. In the end, burden was covered, revenue grew and the entire business gained from further diversification.
Today, the situation is different. Faster technology adoption, the need for immediate global scale and the tremendous rise in electronic integration/control of more systems demands a different approach to expanding into new sectors. Seeking bolt-on acquisitions or key joint ventures which accent the process capability, add critical intellectual property (IP), strategic customer relationships and the ability to extend value-add is now the new norm: Faster, strategic and more focused. Where an organic approach to expanding into a new market sector may have taken 10 to 15 years (2 to 3 vehicle cycles), suppliers do not have the luxury of time. Immediacy is the new mantra.
Other factors are driving a focus on acquisition or joint ventures versus the old-fashioned method “building from within.” Firstly, the talent gap makes it difficult to hire the right people and keep a motivated team while the business gestates. It is easier to simply acquire human capacity as a unit—another company has already done the heavy lifting. Barriers to entry such as IP are removed when the right target is acquired. Working around IP drives high legal risk and customers who worry about stepping on toes. Possibly the most critical is the need to be global right away. Most customers are not willing to wait several years until the business case enables a global footprint—competition is fierce and patience is low.
One need look no further than the movement to add variable functionality driven by electronics/electrification to simple mechanical systems. We have witnessed this in powertrains, safety, interiors and chassis systems. Scores of these suppliers have or are seeking acquisitions/affiliations to add software, sensor or electric motor technology to their capability set. Building this from scratch is time-consuming, prone to a higher risk of failure and lacks the speed required by today’s competitive marketplace.
Tomorrow’s successful supplier is likely to exhibit the following characteristics:
• Be more vertically integrated for the ability to supply higher value-add systems versus individual components.
• Have a true global breadth and the ability to strategically supply within a region to cut logistics and inventory costs (when it makes business sense).
• Be diversified between segments served, regions focused on, customers and the cadence of their business. Suppliers who are “lumpy” (heavily localized in a few areas) have a higher business risk.
• Ensure that they are in the top 3 to 4 suppliers in their business segment from a profitability, technology integration (product or process) and scale perspective.
• Be leaders in talent acquisition, retention and productivity.
These are all tall tasks though there is a need to look ahead—quickly. The days of the small, regionally focused supplier which is concentrated on one or two key customers and driving better-than-average margins are coming to a close. Seeking the right acquisitions/joint ventures in this quick-paced market is the most efficient method to meeting the challenges ahead.