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Convergence of the auto and high tech supply chains

Two engineers take notes on an engine testing facility.

When audio speaker maker Velodyne began to diversify its product line in 2005, it switched from serving ears to making "eyes." The company's LiDAR mapping and obstacle avoidance system allows autonomous vehicles to visualize their environments. Now, the system is a primary component in self-driving cars being developed by Google and Chinese search-engine giant Baidu, as well as more traditional automakers, such as Ford. That's quite an evolution, but that journey is indicative of a larger trend.

A consumer electronics firm is now a player in the automotive industry -- it's no longer just a curiosity. Increasingly, long-dominant auto parts OEMs like Bosch or Allied Motion face competition from consumer electronics (CE) and technology companies. But products developed in the CE context also face challenges integrating with the well-established, just-in-time/just-in-sequence automotive supply chain.

Disruption time in the automotive supply chain

The convergence of these sectors, and the dissonance it produces, represent opportunities for innovative businesses that understand how trends in technology are transforming the way cars and trucks are made.

LG supplies battery and electrical systems for Chevrolet's Volt electric vehicle (EV). Samsung is using mergers and acquisitions to gain a seat at the table, and other CE companies are looking for ways to compete in automotive, as well. Growing demand and attractive margins will continue to draw new contenders.

It's not so much the advanced features you notice when looking at new cars, but it is the thousands of components you can't see which fuel the disruption. Three major trends -- infotainment, fuel efficiency and active safety systems -- drive innovations that by 2022, will add an estimated 60 million high-tech components to the automotive supply chain, according to IBIS World.1

Existing suppliers must adapt

As vehicles age, demand for aftermarket parts to meet the needs of current technology grow. CE companies are moving in, seeking ways they can fill the spaces not currently served by OEM suppliers. Existing parts suppliers face competitive threats and pressure to compete outside their comfort zones, prompting them to either change product development paths or acquire high-tech lines of business.

With innovation and product value increasingly defined by 1s and 0s, software competence has become one of the most crucial differentiating factors in the industry. OEMs must align their systems and supplier relationships to capitalize on product advances, or risk losing ground to nimbler competitors. Challenges like cybersecurity and data privacy, continuous product updates and Internet of Things integrations, can only be met with the kind of expertise now found among technology companies.

Fulfilling such demand will require constant innovation, and provide points of entry for new competitors. There are already 2,225 startups currently working to develop automotive technologies, according to McKinsey & Co. While roughly 30 percent of those will fail within two years, one percent of the remaining businesses will become major players in automotive parts supply. Existing Tier-1 suppliers must consider acquisitions, partnerships, or possible consolidations, in order to remain competitive.2

Strategic options for players old and new

Electronic component sales will grow from under $50 billion today to around $160 billion by 2020 -- a potential increase of more than 220 percent. It's not yet clear which sector will produce the biggest winners, but growth like that should provide opportunities for businesses of all kinds.3 Technology companies have at least three paths to entry to the automotive supply chain:

  1. Acquisition by an established parts supplier (including both traditional OEMs and newer components manufacturers from CE);
  2. Licensing products to Tier-1 suppliers; or
  3. Becoming an auto supplier themselves.

Questions of capital resources, supply chain solutions and contract logistics will be crucial in determining which route a business chooses. Collaborating with a third-party service can provide vital expertise and options for offloading operational burdens, such as logistics, systems integration, supply chain restructuring, warehousing, and distribution.

Most new entrants will target specific, high-margin supply chain opportunities related to their product portfolio and expertise before exploring opportunities in the broader auto sector. The influence with consumers and regulators enjoyed by some cash-rich high-tech companies may give them advantages with new forms of mobility and modular "bring your own device" solutions for infotainment and other categories.

The tech industry aftermarket is changing too

The days of DIY and gearhead glory are gone, but as cars become smarter and consumer behaviors evolve, new integrations may develop that enable CE firms to carve out space to compete on their own terms.

Mobile devices already allow us to bring our own music or podcast libraries with us as drivers or passengers. Could a heads-up-display (HUD) powered by smartphones be next? Can cars become platforms, with detachable speakers, backup cameras, and other mobile electronic features?

As needs and preferences change over time, by region or population density, the ways vehicles are useful and the features most in demand will change, as well. Vehicle sharing, specialized vehicles (optimized for ride hailing, etc.) and fully autonomous vehicles will change the way consumers interact with mobility solutions, creating unforeseen opportunities.

The formerly rigid automotive supply chain, established in an analog era, is transitioning into the digital. It requires both established OEM suppliers and prospective competitors from high tech to manage new risks and relationships with unfamiliar technologies. Auto manufacturers, as well, need to adapt their supplier relationships to enable more efficient and nimble performance. Learn how UPS solutions and services can hardwire your supply chain for success here.

2 McKinsey & Company, "Disruptive Trends That Will Transform the Auto Industry" (January 2016)
3 PWC Strategy (2014)

 

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