Automotive Global Value Chain

1. The automotive industry has undergone a revolutionary transformation since the 1980s

A dramatic process of cross-border mergers and acquisitions has contributed to high-speed industrial consolidation of the leading 'system integrator' firms in both the passenger vehicle and the closely related commercial vehicle sector.

Consolidation of automakers. Through mergers and acquisitions, a handful of firms now control almost the entire global vehicle market. Major consolidations include:

• Daimler-Chrysler merger in 1998
• Renault-Nissan alliance in 1999
• Fiat's acquisition of Chrysler in 2014
• PSA's merger with Fiat Chrysler in 2021

Transformation of supply chain. Automakers have forced a comprehensive restructuring of their supply chains:

• Reduced number of direct suppliers
• Increased outsourcing of component manufacturing
• Pressure on suppliers to:
  • Build global just-in-time supply chains
  • Increase R&D investment
  • Lower costs

Technological revolution. The industry is entering a new era of change driven by:

• Electrification of vehicles
• Development of autonomous driving technology
• Integration of advanced software and connectivity features

2. Cascade effect drives consolidation and outsourcing in the automotive supply chain

The cascade effect has resulted in automakers (with their cutting-edge technologies and global marketing capabilities) actively selecting their most competent suppliers (in this case, tyre manufacturers), in a form of 'industrial planning'.

Automaker pressure. Large automakers use their immense procurement budgets to:

• Select "aligned suppliers" who can support global growth
• Demand just-in-time delivery worldwide
• Require continuous cost reductions and quality improvements

Supplier consolidation. This pressure cascades down the supply chain:

• First-tier suppliers merge to develop leading global positions
• Lower-tier suppliers consolidate to meet increasing demands
• Example: In the tire industry, the top three companies (Bridgestone, Michelin, Goodyear) control about 40% of the global market

Outsourcing of production. Automakers increasingly focus on:

• Core activities like design, marketing, and brand management
• Outsourcing component production to suppliers
• Demanding complete systems or modules rather than individual parts

3. Mega suppliers now control critical expertise in the automotive industry

These mega suppliers are now also the key players at the forefront of a technological revolution transforming the very fabric of our economic and social landscape.

Shift in expertise. Mega suppliers have acquired critical knowledge in:

• Advanced electronics and software systems
• Autonomous driving technologies
• Electrification components

Examples of expertise areas:

• Bosch: Leader in automotive electronics and sensors
• Continental: Expertise in advanced driver assistance systems
• ZF: Innovations in transmission and chassis technology

Impact on innovation. Mega suppliers are driving key advancements:

• Developing technologies for electric and autonomous vehicles
• Creating more sophisticated safety systems
• Integrating connectivity features into vehicles

This shift has important implications:

• Automakers becoming more dependent on suppliers for innovation
• Potential for suppliers to have greater bargaining power
• Need for closer collaboration between automakers and suppliers

4. Aggressive acquisition strategies fuel the rise of industry oligopolists

GKN has proven to be a survivor in an era marked by a seemingly precipitous decline in British manufacturing and engineering. GKN's resilience (and uncanny ability to prosper) is driven by its exemplary prowess in anticipating the paradigm shifts of each era.

GKN's acquisition strategy. GKN, a leader in driveline systems:

• Entered automotive industry by acquiring Birfield group in 1966
• Used joint ventures as springboards for acquisitions
• Steadily increased stakes in partners before full buyouts

Key acquisitions:

• 1966: Birfield (gave access to CVJ technology)
• 1988: Acquisitions in Japan and US to expand global presence
• 2011: Getrag's driveline business (strengthened AWD capabilities)

Results of strategy:

• Transformed from steel maker to automotive technology leader
• Achieved 42% market share in global CVJ market
• Developed expertise in electric and autonomous vehicle technologies

This aggressive approach is mirrored across the industry:

• Continental acquired ITT's brake business in 1998
• ZF's acquisition of TRW in 2015
• NXP's merger with Freescale in 2015

5. Technical innovation and lean manufacturing are key competitive advantages

However cutting-edge technology such as driverless car systems also brings a whole host of problems and uncertainty; for instance, in the event of an accident, the issue of liability becomes somewhat murky (i.e., should the manufacturer or the vehicle owner be held accountable?), as the vehicle occupant is technically not the driver.

Innovation focus. Leading suppliers invest heavily in R&D:

• Bosch: €6.378 billion (2015)
• Continental: €2.4496 billion (2015)
• NXP: $1.6 billion (2015)

Key innovation areas:

• Advanced driver assistance systems (ADAS)
• Electric and hybrid vehicle technologies
• Connected car technologies
• Autonomous driving systems

Lean manufacturing adoption. Companies implement lean principles to:

• Reduce waste and improve efficiency
• Enhance quality and reduce defects
• Improve responsiveness to customer demands

Examples:

• Bosch: Integrated RFID technology with lean practices
• Continental: Sent over 2,000 employees to Lean Academy courses
• Bridgestone: Increased total asset turnover from 0.93 to 1.12 (2009-2011)

6. Joint ventures serve as springboards for eventual acquisitions

GKN used this approach more extensively than any other firm in the automotive components industry in the 1980s.

Benefits of joint venture strategy:

• Allows firms to gain market knowledge with lower risk
• Provides opportunity to evaluate potential acquisition targets
• Facilitates easier entry into new markets, especially in developing countries

Examples of successful JV to acquisition transitions:

• GKN: Increased stake in various JVs before full acquisitions
• Continental: Acquired remaining stake in JV with Rico Auto Industries
• NXP: Increased stake in SSMC from initial JV to controlling interest

Risks and considerations:

• Potential for knowledge transfer to future competitors
• Complexity in managing cross-cultural partnerships
• Need for clear exit strategies and agreement terms

7. Increasing technological complexity drives demand for automotive semiconductors

Today's automobiles contain 50 to more than 100 microprocessors, critical components in parking brakes, engine control units, entertainment systems, stability control and power steering.

Growth of automotive semiconductor market:

• 2005: Valued at $18 billion
• 2015: Reached an estimated $29 billion
• Projected continued growth with increasing vehicle electrification and automation

Key application areas:

• Powertrain control
• Body electronics
• Safety systems
• Infotainment
• Advanced driver assistance systems (ADAS)

Industry leaders:

• NXP: 14.4% market share (2015)
• Infineon: 9.27% market share (2015)
• Renesas: 9.2% market share (2015)

Technological trends:

• Increasing computing power requirements
• Integration of artificial intelligence and machine learning
• Development of specialized chips for autonomous driving

8. The balance of power is shifting from automakers to mega suppliers

With the advent of the Global Business Revolution, firms from the emerging economies (e.g., China) have not been spared from the impact of the cascade effect. They too have been compelled to seek greater economies of scale and scope, better technologies, new distribution channels and markets in order to compete and survive in an increasingly oligopolistic global brakes market.

Factors driving the shift:

• Suppliers control an increasing percentage of vehicle value
• Mega suppliers have become multinationals with global reach
• Suppliers lead in key technological innovations

Examples of supplier power:

• Bosch: Largest automotive supplier with €70.6 billion revenue (2015)
• Continental: Second-largest supplier, leader in ADAS technologies
• ZF: Expanded capabilities through $12.4 billion acquisition of TRW

Implications for automakers:

• Increased dependence on suppliers for innovation
• Potential loss of control over key technologies
• Need for new collaboration models with suppliers

9. Consolidation continues among lower-tier suppliers to achieve economies of scale

These lower-tier suppliers are also sizeable multinationals with annual revenues exceeding US$10 billion. They are smaller than the industry oligopolists in the automotive semiconductor segment because they have chosen to specialise in other product segments.

Drivers of lower-tier consolidation:

• Pressure from first-tier suppliers to reduce costs
• Need to achieve economies of scale
• Access to new technologies and markets

Examples of consolidation:

• Foundry chip makers: TSMC, UMC, and GLOBALFOUNDRIES control 75% of market
• Brake components: Akebono's acquisition of Bosch's foundation brake business
• Automotive semiconductors: Ongoing consolidation among smaller players

Challenges for smaller suppliers:

• Difficulty competing with mega suppliers' R&D budgets
• Pressure to specialize in niche markets
• Risk of becoming acquisition targets for larger firms

10. Antitrust scrutiny is increasing in response to industry consolidation

Given the dominant market power wielded by the merged NXP and Freescale, regulators are even more likely to scrutinise their operations microscopically for evidence of anticompetitive behaviour.

Rising regulatory concerns:

• Potential for reduced competition and innovation
• Risk of collusive behavior among oligopolists
• Impact on consumer prices and choice

Examples of antitrust actions:

• European Commission fines on auto glass suppliers for price-fixing
• Increased scrutiny of mergers and acquisitions in the industry
• Investigations into potential collusion on emissions technology

Industry response:

• Companies expressing concerns about antitrust limitations in annual reports
• Increased focus on compliance programs
• Shift towards smaller, bolt-on acquisitions rather than mega-mergers

Future implications:

• Potential slowdown in the pace of consolidation
• Increased use of joint ventures and strategic alliances
• Greater emphasis on organic growth strategies

Last updated: July 25, 2024