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Picture: SUPPLIED.
Picture: SUPPLIED.

When listening to our clients spread across the world in the automotive ecosystem — the original equipment manufacturers (OEMs), leading suppliers, retailers and technology providers — we have identified a number of key trends that are affecting and shaping the industry. 

The industry megatrend in recent months has been supply chain disruption. The chip shortage has had a major effect on the automotive industry, cutting production by roughly 7.7-million units and causing $210bn in revenue loss in 2021.

Previous confused information within the supply chain resulted in inaccurate or exaggerated demand forecasts. And with only weak links between vehicle makers and foundries, it has become extremely difficult for the overall industry to react to changes in demand.

Automakers still rely largely on just-in-time sourcing strategies using short-term forecasts, which offer little to no buffer — despite 26-week lead times for semiconductors. Many components are also sourced from a single producer and subject to strict quality requirements. All these factors have limited the flexibility of the supply chain during the recent shortages.

OEMs have allocated scarce chip stocks to premium and luxury vehicles with historically higher profit margins. As a result, production volumes of smaller vehicles (A and B segment) have been disproportionally affected. The chip shortage has put significant strain on automotive suppliers, especially for the volume segment, which were already hurting from lockdowns and pandemic-related closures.

Constant high cost pressures due to ongoing shortages of raw materials are undoubtedly constraining investment opportunities.

Semiconductors have become an integral part of the supply chain for many industries. Chips power everything from cars and smartphones to industrial equipment, and are also a key enabler for widespread adoption of emerging technologies such as AI, quantum computing and advanced wireless networks such as 5G.

This is one key reason all six of the major end-use categories for semiconductors continue to grow, whether it is automotive, industrial, consumer, data processing, military-civil aerospace or communication. According to Gartner, the automotive segment is expected to see annual growth of 15.6% from 2020 to 2024, the highest of all six categories.

Owning factories is a costly investment, which is why so many semiconductor firms prefer to outsource production to foundries overseas, particularly in Taiwan. Taiwanese contract manufacturers (such as TSMC) dominate the semiconductor manufacturing sector, accounting for more than 60% of total global foundry revenue in 2020.

To diversify and address shortages, chip manufacturers recently announced new investments that include:

  • TSMC will spend $100bn over the next three years to expand its chip production capacity;
  • Intel dedicated a portion of the production at one of its largest non-US foundries for the automotive sector;
  • Sony Group invested $500m in a joint venture with TSMC to build a $7bn chip plant in Japan; and
  • Samsung is planning a $116bn investment over the next decade.

However, it will take a few quarters to get production going, and many of these investments are targeted towards high-end chips, a future demand, even though it is low-end chips — especially those for the automotive sector — that are in short supply at present. We expect the automotive chip shortage to continue until mid-2023.

Climate change and tighter regulation of carbon dioxide emissions is a global imperative that will prevail for decades to come. It is the key driver of what is referred to as the “transformation of the industry”.

The fact that leading OEMs use their key market regions as a differentiator is an additional factor. European OEMs tend to focus on Europe and China, while Japanese OEMs tend to prioritise the North American and Japanese markets. North American OEMs primarily target their own home market, often with one additional region in the mix. Suppliers are thus facing different challenges depending on the region they are active in and the OEMs they supply.

The automotive supplier sector has not agreed on a single reporting standard for environmental, social and corporate governance (ESG) compliance, and many are even using multiple standards. Adding more complexity, several top auto suppliers lack a common format or approach to reporting — running the gamut from sustainability reports to integrated reports with financial details and from corporate social responsibility (CSR) to combined reports.

Suppliers have largely been waiting for further direction from OEMs before aligning their own mid- to long-term strategies. With OEMs having now (mostly) committed to EV power trains into the future, suppliers will increasingly focus on how fast consumer sentiment will shift from internal combustion engines (ICE) to electric vehicles. We have seen a huge rise in inquiries from both suppliers and OEMs related to strategies seeking to reduce their carbon footprints after last year’s COP26 climate summit held in Glasgow.

Suppliers in Europe face the strictest CO2 regulations. We expect ICE vehicles to disappear from the European market by 2035. Suppliers with a strong focus on ICE-related products will need to shift their business towards other products or face extinction. As a result, we are seeing many companies look to carve-out or spin-off strategies for their ICE-related product ranges. However, selling businesses with a high ICE exposure has increasingly become a challenge if not an impossible task.

The (ESG and carbon) regulatory environment in Africa is lax in comparison, with low to zero control of carbon and sustainability targets.

Global suppliers are now revamping their businesses for the future and focusing on key disrupters such as electrification, software-as-a-service, connectivity and autonomy. The focus of automotive suppliers is very much on making value chains more flexible to be able to react more quickly to uncertainties, but also to drive forward the development of new products and services gaining additional profitability.

The adoption of digital technologies is supporting this transformation. Whether it is a smart factory or distribution centre with automated product and picking lines, a shift to cloud-based systems to unlock business efficiencies or the move to online spare parts sales, digital technology is enabling these processes. 

The increasing share of software in vehicles and the associated necessity to build up own software development capacity is clearly in focus. Much opportunity lies in analytics in the wider automotive and mobility space and how data is effectively used by both consumers and companies.

Overall, the challenges remain over the short to medium term, even if successes are clearly beginning to emerge. The increasing complexity of supplier and industry transformation is being driven by digitalisation and commitments towards sustainability. aThe new automotive ecosystem will have to be built around these two imperatives and will have a significant impact on how automotive supplier value chains are configured going forward.

• Dr Davies is automotive industry leader for Deloitte Africa.


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