What about the OE suppliers in an electrified age?
Last week, I wrote about how the focus on electrification of new car sales was ignoring the fact that there would be a substantial ICE parc for many years to come, even in markets that enforce electrification relatively early like Europe. That parc will however be ageing and in long term decline, and will in our view force some degree of specialisation in the repairer sector, as the number of ICE cars coming to workshops will start to decline and the specialist skills and equipment required to work on them will no longer earn an economic return if thinly spread across all repairers.
News last week that Bosch – the largest supplier of Original Equipment (OE) parts to the car industry globally – is considering closing a plant in Munich that produces components for combustion engines puts the focus on another sector that must adapt and will shrink overall as the result of electrification. It has been estimated that around 70% of the components in a car change as a result of electrification, and that the number of components in the power source reduces from 2,000 for an ICE to 20 for an electric drive motor. Some systems such as the fuel system are replaced completely by the battery and charging system, others such as the heating, ventilation and air conditioning system (HVAC) remain, but operate on different principles. If you are a fuel tank producer, it’s unlikely that you will have skills and processes that can be adapted to producing batteries, if you’re an HVAC producer, you’re probably OK and can adapt, though some processes will still become redundant, and you will need to judge the pace of the transition.
Most of the largest global OE suppliers such as Bosch, Denso and ZF have a foot in both the ICE and EV worlds, so their challenge is more about managing their portfolio of products, plants and people, investing in and expanding one set, whilst progressively ramping down and consolidating the other. Some facilities may become sub-scale, particularly as the shift moves from supporting OEM production of new cars to supporting the parc of existing ICE cars. Sourcing may shift to plants in markets that are moving more slowly towards electrification, like in the Americas. As the cars age, then more work will move out of the franchised workshops which almost exclusively use OE parts, and into the independents who use a mix of OE and non-original parts. If we are looking at filters and radiator hoses, then availability will not be an issue for decades to come from non-OE sources, but for more complex parts like injection pumps or gearboxes, this could become a challenge.
Some years ago, I worked for a private equity investor who had within their portfolio a small French company that specialised in producing very high precision machined components that went into Bosch fuel injection pumps and BMW variable valve timing mechanisms. Their skills were in the precision machining of tiny parts which was reflected in their pricing as they generated a net margin of around 30%. They had no aftermarket business, and in a non-ICE world they have no future, unless they can find a new niche in fuel cells or some other industry. There are many such companies sitting at Tier 2 or Tier 3 in the supply chain, and they face a tougher challenge than the largest suppliers, with very specific skills and a very concentrated customer base.
If we are to avoid the environmental nonsense of legislating for and incentivising the switch to greener BEVs, but at the same time prematurely scrapping large numbers of ICE cars because the parts have become unobtainable, then we (the industry and society as a whole) need a solution that will maintain parts availability for ICE cars as far into the future as possible – not as pampered, price no object, classics, but as affordable everyday cars for people who can’t afford to trade up to a BEV. As a solution, I’m reminded of a very different company in the toiletries industry – actually my first consulting client – whose business model was based on acquiring brands from the major players that no longer fitted into their brand portfolio, including the formulations and production know-how, and then transferring these into a low cost facility. Promotional spend was very low, but pricing was competitive and the product life was extended by many years.
In the coming years, I suggest that we will see a similar model of Tier 1 OE suppliers divesting themselves of ICE-related product lines and facilities, and some Tier 2 and 3 specialists selling up completely, with the acquirers being private equity players or industrial conglomerates. They may strike relationships to sell their products through the original brand channels or sell direct as OE-quality parts. They will however be doing us all a service by maintaining parts availability until such time as the environmental trade-off between ICE emissions and premature scrappage reaches a balance.