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ICE component suppliers at risk

ICED OUT: McKinsey report warns ICE component suppliers that drastic change is required to survive an increase in vehicular electrification.

Study says business realignment, simpler supply bases needed for ICE suppliers to survive

12 Apr 2022

CONSULTING firm McKinsey has cautioned suppliers of components for internal-combustion automotive engines that they will have to realign their businesses (by simplifying supplier bases and engaging in increased merger and acquisition activity), if they hope to thrive in a world where electric vehicles are the norm.


According to a report published by Automotive News, the study was a major topic of conversation at last week’s SAE International’s World Congress Experience in Detroit, where engineers and industry executives gathered to discuss the impact of electrification on the decades-old internal-combustion engine supply chain.


It is proffered that business opportunities presented by an increase in the electrification of cars and trucks – and other emerging technologies – will significantly impact existing business models; firms that rely heavily on engines, transmissions, fuel systems and other ICE-related technologies face a “daunting outlook” because of shrinking markets.


In the United States, the market for transmissions in 2019 totalled $US93 billion ($A125.4b), with McKinsey predicting that number to fall to $US65 billion ($A87.6b) by the end of the decade, and to $US25 billion ($A33.7b) by 2035. Similar predictions were made of for internal combustion engine systems, with a decline from $US73 billion ($A98.4b) in 2019 to just $US17 billion ($A22.9b) by the middle of the next decade.


“Industry players have a choice: They can be the ones shaping the market or those responding to the shifts,” the report surmised. “It is imperative that organisations increase their merger and acquisition muscle and focus on supporting value-creation strategies.”


The report recommended that suppliers make a “fundamental separation” within their companies by identifying which segments have near-to-medium growth potential, and which have a more limited future. It suggested those with growth potential, such as new-vehicle programs and supplying the aftermarket should focus on “targeted expansion opportunities” and that segments facing a declining market would do better to focus on simply fulfilling existing commitments and managing their costs.


Further, the report said suppliers should work to build a “simplified yet stable supply base” in the short term to lower risk and increase productivity, and that businesses should not be afraid to make “bold moves” to develop new opportunities either through mergers and acquisitions, or by finding opportunities outside of the automotive industry.


And while it is unclear which external manufacturing environments will evolve, Toyota Motor Corporation general manager for strategy and planning, Brian Eggleston, said assembly plants must seek out ways to become more flexible and agile.


Mr Eggleston said that there was an “amazing opportunity to reimagine the infrastructure” businesses have relied on in recent decades, and that as factories begin to leverage the huge amounts of data offered by their machines, there was clearer guidance on how to make production lines more efficient, and to potentially adapt workers’ roles.


“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,” Mr Eggleston told Automotive News.


“We have to use the most important part of the human — their brains, not their hands or their feet.”

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