Suppliers Must Refocus, Consolidate and Globalize
A strong North American production market which has experienced a near doubling of production volumes since 2009 to north of 17 million units has allowed several suppliers to utilize volume to mask real competitive issues within their vast product portfolios. Those that survived 2009 intact were able to expand operations at a torrid pace with less-than-optimal regard for efficiency and competitiveness in various sectors. We are now witnessing several suppliers pare their portfolio of products/services, eliminating those in which they are small, have a single customer, or for which they lack intellectual property or global scale.
Case in point. There has been tremendous change in interior system product portfolios offered by the major players. No less than three major interior suppliers exited interiors component supply of non-seating systems within the last decade, with these same suppliers vertically integrating within seating components through cloth, leather or other acquisitions to add content and build a system capability.
Additionally, we have witnessed several suppliers in interior and powertrain areas delve into the world of electronics integration to capture growing sensor opportunities or migrate to a mechatronics solution from a pure mechanical one as fuel economy rises in importance.
What is occurring is a traditional tale of suppliers extending their enterprise into several tangential product areas during the good times (many times at the request of an OEM or Tier 1 customer) with a strong run for 1 to 2 product cycles (a “cycle” is 5 years). Increased competition, supplier-driven intellectual property/innovation integration and globalization are causing several suppliers to re-examine their portfolios for opportunities to consolidate and strengthen the core.
Another driver has been the shift toward fewer platforms and global supply. The amount of capital and focus required by today’s supply base to keep pace is high. In an industry driven by faster cadence, swifter integration of new technologies and rising content/costs demands, a strong focus on the fundamentals is required. Being number 1 or 2 in a sector enables for better pricing, scale and long-term stability versus being the 4th or 5th player in a market dominated by dominant competitors.
We have recently witnessed OEMs paring back portfolios, eliminating brands, abandoning production facilities and rightsizing their capacity footprint to ensure a lower risk profile and more flexible enterprise. Suppliers are required to do the same. As I have written in this column many times, just because a supplier was sourced a program in the past does not mean it has to supply the next generation if the circumstances have changed. Other market changes are demanding supplier refocus on fewer product/system areas to bolster their competitiveness. Global scale, the lack of skilled labor and speed of change (automated driving, lightweighting and shared mobility) drives suppliers to ensure they are focused on bolstering global competitiveness.
The days of the megasupplier being active in a plethora of unrelated component sectors are well behind us. To stay competitive, smarter suppliers will constantly review their portfolio, consolidate to fewer product areas and vertically integrate to ensure position and margin. In most cases, a global footprint in the major sourcing/design regions is a must if a diverse customer set is desired.
Watch for more suppliers to look inwards as market production growth slows in the coming years, OEMs increase their posture for ongoing cost reductions and new suppliers enter from non-traditional markets and sectors. Increasingly, we will have a supply base of specialists versus generalists. The new way of the world.