scenario planning, disruption, automotive

Preparing for the Future in a Tumultuous Environment

Automotive electrification is not just an idea anymore, it’s a swiftly approaching reality. Global powers, the biggest automakers, and even the average consumer are all already making great strides toward a future that is predominantly electric (and autonomous, and data-driven); it now falls to suppliers, investors, private equity funds, and all other automotive-related businesses to make the necessary strategic moves in order to win in this new era — and it all starts with a fairly simple business concept: scenario planning.

Scenario planning is, quite frankly, the least one can do to ensure the success of their company. Coming up with a forecast for where the company should be in — not only in one-year (operational planning) or in three to five years (business planning), but in eight to 10 years (strategic planning) — is not only smart, it’s also responsible. However, considering how few changes have been made to the traditional internal combustion engine since its creation, suppliers have had little reason to establish and maintain longer-term scenario plans. The industry simply hasn’t been disrupted enough to warrant it, until today.

Using Disruption to Create Goals for Success

Few industries have witnessed disruption of the same size and global impact than that in which automotive supplier industries are experiencing today. Global shifts toward electrification, reduced emissions, and environmental protections mean that the internal combustion engine is on its way out, bound to become a relic of the past before we know it. Simultaneously, automotive technology is advancing quickly, especially when it comes to autonomy and electronics; the way cars are made, even beyond their engines, is being revolutionized. To put it simply, suppliers will soon not be needed in the same way, and because of this, I believe that they need to go above and beyond standard practice for scenario planning, considering not only their own goals for success, but also the way that the outside industry’s rapid and somewhat chaotic changes are going to affect those goals.

Automotive Business Models to Consider

Quickly emerging are three standard automotive business models manufacturers must consider as they look toward the future, which include traditional manufacturing, electronics and software automotive suppliers. In an industry increasingly dominated by technology, suppliers must shift their long-term focus from the traditional combustion engine components to all the components of intelligent, autonomous and data-driven electric cars — even if they don’t plan on shifting gears to manufacture new products.

Some traditional suppliers don’t have the time, resources, or wherewithal to do anything but stay the course with the internal combustion engine; this is one potential business model that is open to every supplier. For some, it will make sense to transition to manufacturing different components, specifically electronics — 56% of the Chevy Volt’s components, for example, are manufactured by LG. Regardless of the model they choose, suppliers absolutely must incorporate scenario planning into their business practice if they want to win.

Scenario Planning: OldCo. vs NewCo.

Traditional, or as I like to call them, “OldCo.” businesses need scenario planning to help them envision the way they can successfully wind down in an industry that will, within the next 10-12 years, no longer require the amount of capital and types of product they sell in the quantities they currently produce. For some, that timeline is even shorter: there are suppliers who are currently turning to their customers for relief, having over-capitalized for a demand that has already begun to shrink. These are suppliers who could not (or simply did not) make the time for thorough, proper planning when it counted and will soon serve as examples of the consequences of not doing so. Working through a robust strategic planning process, these suppliers must think through options like consolidation, mergers and acquisitions, and winding down assets — what route will ensure that they maximize shareholder value, and how do they get there?

Similarly, companies that are looking to make the jump into manufacturing automotive electronics or software need to employ scenario planning for a successful transition, factoring in things like research and development, testing, hiring, market research and more. They must be prepared to develop plans to fill critical gaps necessary to gain a competitive edge. And to top it all off, this kind of scenario planning must all take place in the operational-to-business stages. The industry is moving too quickly for any plan that might take longer than five years to activate. On the other hand, long-term strategic scenario planning for these transitional companies (or “NewCo.” as I call them) should paint a picture of a much different business than the one they’re currently in, prior to a successful industry shift.

Looking Ahead

Of course, it’s impossible for any of these suppliers to precisely foresee what the future holds for them, and in some cases, no amount of scenario planning can account for lost time. I expect that, considering how many companies have already seized the opportunity to win in this new electrification landscape, it’s going to be an uphill battle for many suppliers to achieve their goals — regardless of what they hope to do. That’s exactly why I’m advocating for both OldCo. and NewCo. suppliers to engage in longer-term scenario planning as soon as possible, with a robust strategic planning process. Suppliers who take advantage sooner than later will have far more options, as well as have a leg up on the competition in their efforts to maximize value in these times of significant technology disruption.