Scaling up: a recipe for success in automotive manufacturing

Survival in automotive manufacturing is more likely if players implement ‘scale’ in crucial aspects of their business, according to Owen Edwards of Grant Thornton.

Writing in Cox Automotive’s latest quarterly insight, AutoFocus, Owen highlights that OEMs must seriously invest in areas including supply chain, vehicle distribution and technological evolution to achieve sought-after economies of scale.

As the market continues to evolve with new drivetrain technologies, batteries and so-called e-fuels (aimed at helping ICE vehicles meet new legislation), there has been a corresponding investment increase in autonomous vehicles and mobility services, meaning OEMs forced to spend even greater sums in their supply, distribution and retail chains.

Cox Automotive’s Insight and Strategy Director Philip Nothard commented: “Much activity in automotive at the moment has involved OEMs protecting their businesses through mergers and acquisitions. Scaling up is the logical extension of this.”

Owen Edwards (pictured), Grant Thornton’s Head of Downstream Automotive asserts that increasing scale in the upstream and downstream automotive sectors has become even more important.

He said: “The scaling up of the supply chain cannot be isolated to new drivetrain technology as traditional OEMs still aim to make profits from ICE vehicles and legacy parts. ICE vehicles reduce their market share on a global basis, and producing such vehicles will inevitably become less profitable. Automotive manufacturing plants depend on volumes and high levels of throughput to make profits.

“Some OEMs are reported not to be making sufficient profits from BEV sales and have continued to undertake increased investment in new battery and vehicle technology. Therefore, with declining sales of ICE vehicles and insufficient profits from BEVs, OEMs are planning for the future, especially when considering the future of ICE vehicles. Owen says Geely and Renault’s joint-venture power plant company is a prime example. Partnerships like these are hugely important to gain economies of scale and maintain profits when the sales of ICE are slowly declining.

“Renault has predicted that the partnership could produce up to 80% of ICE-vehicle power plants global requirements, although no timescale has been outlined for that ambitious target”, Owen said.

Philip Nothard thinks automotive manufacturing faces severe challenges, making partnerships and scaling up an increasingly easy decision.

He said: “We are seeing a new willingness on the part of OEMs to join forces to overcome the problems that have faced manufacturing in recent years. Serious cooperation must be welcomed, especially given the mutual benefit inherent in such partnerships. However, more needs to be done to navigate the strongest headwinds faced by the industry for decades.”

Owen says the share price dip of Tier 1 suppliers between 2017 and 2022 highlights the pressure OEMs have applied on their supply chain.

He said: “This indicates pressure on the supplier chain parts businesses from several areas, leading to unpredictability and constraints exacerbated by the lack of clarity over demand from the OEMs, who have suffered large swings in their production targets and volumes over the last few years.

“There have also been bottlenecks to sourcing raw materials and labour shortages as employee expectations have shifted from manufacturing and production jobs to other roles or industries.”

Therefore, a large scale is required to provide more meaningful returns on capital investment, which is always evident in capital-intensive businesses.

Strategic changes will be necessary to develop the scale needed, Owen insists. That means focusing on new markets, such as BEV and ADAS products, which should generate high-profit margins and that much-needed scale. Consolidation and even more partnering agreements between OEMs or legacy parts providers are also expected in the medium-to-long term.

OEMS are partnering to support the manufacturing of vehicles, but they are joining forces to reap the rewards in customer service areas too. Ford and Tesla’s recently announced partnership in the US, which allows the former’s customers to use the latter’s charging network, is a prime example, according to Owen.

He concluded: “Whether it’s supply chain or distribution of vehicles, continued technological evolution and the significant investment required, the automotive industry is being forced to consider different options to gain economies of scale and achieve the return on investment necessary to satisfy shareholder demands.”

Philip Nothard said: “Scaling up is a trend that’s becoming widespread in manufacturing. OEMs not already on board could do worse than take a leaf from competitors’ books. That’s if they want to remain in a strong position as both local and global issues persist.”

To read more of Owen’s commentary, click here.