Report: Daunting road for ICE parts suppliers

DETROIT—Suppliers to internal-combustion engine vehicles will need to realign their businesses, simplify their supply bases and increase their merger and acquisition activity if they hope to thrive in the world of electric cars and trucks, according to a recent industry report by the consulting firm McKinsey.

"Industry players have a choice: They can be the ones shaping the market or those responding to the shifts," the report concluded. "It is imperative that organizations increase their M&A muscle and focus on supporting value-creation strategies."

The report comes as auto suppliers ponder how electrification and automation might upend their decades-old business models.

That shift was a major topic of conversation at SAE International's World Congress Experience last week in Detroit, where engineers and industry executives gathered to discuss the impact and business opportunities of emerging technologies.

The outlook is especially daunting for suppliers that rely heavily on engines, transmissions, fuel systems and other combustion-oriented technologies. The market for those parts will shrink drastically as the share of EVs rises.

In 2019, the market for transmissions totaled $93 billion, McKinsey reported. By 2030, that will fall to $65 billion, and then further dip to $25 billion by 2035.

The market for engine systems follows a similar trend, declining from $73 billion in 2019 to $17 billion by 2035.

McKinsey, a global business consultancy, recommends that suppliers make a "fundamental separation" within their companies, identifying which segments of their company have near-to-medium growth potential, and which have a more limited future.

For those with growth potential, such as new-vehicle programs and the aftermarket, suppliers should focus on "targeted expansion opportunities," McKinsey advised. But segments that face a declining market would do better to focus on simply fulfilling existing commitments and managing their costs.

The report recommended that suppliers build a "simplified yet stable supply base" to lower risk and increase productivity. And they should not be afraid to take bold moves to develop new businesses, either through mergers and acquisitions or by finding opportunities outside the auto industry.

It is still far from clear which future opportunities are certain and which are still evolving, said some executives at last week's exposition. Advanced safety is a hot field for many companies, but the technologies still are changing.

Many SAE Level 2 advanced driver assistance systems are being primarily used to make driving more convenient and less fatiguing for drivers rather than to enhance safety, a panel of automotive executives said.

"Drivers are not using it because they want to drive more safely," Dominik Schuster, BMW Group vice president of vehicle safety, said during one panel discussion. "They're using it because it's more convenient."

That has a bearing on how systems will be designed and marketed in the next few years, Schuster and the panelists said.

Level 2 systems are those that provide steering and brake or acceleration support to a driver, such as features that provide both adaptive cruise control and lane centering.

Nick Sitarski, vice president for Toyota Motor North America R&D's integrated vehicle systems division, said it remains unclear whether Level 2 systems as a whole provide additional safety benefits, even if some capabilities within those systems do appear to provide some extra safety.

"Level 2 systems are designed for convenience, reduced driver fatigue and getting you to your destination more rested," he said. "But components that make up the Level 2 system do provide some safety benefit."

But, he added: "The jury is still out on what the result of that looks like when you combine everything."

Also uncertain is knowing how manufacturing environments will evolve.

Brian Eggleston, Toyota Motor Corp. general manager for strategy and planning, predicted that assembly plants will become more flexible and agile through the rise of big data, which could give increased visibility into the supply chain.

The transformation offers companies an "amazing opportunity to re-imagine the infrastructure" they have relied on in recent decades, Eggleston said.

He said factories are beginning to leverage huge amounts of data from their machines, providing guidance on how to make production lines more efficient and potentially changing the role of workers.

"We are going to be able to get the work force further and further away from repetitive action that takes less thought and move toward decision-making," Eggleston said. "We have to use the most important part of the human — their brains, not their hands or their feet."