Decisions in uncertain times – consequences for suppliers

Munich, July 2023

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Decisions in uncertain times – consequences for suppliers

Munich, July 2023
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hy Europe’s suppliers must move fast as OEMs shift their global production footprintThe days when suppliers could plan for a certain, steady-growth future are over. As Europe’s carmakers transfer manufacturing capacity to North America and China, suppliers must abandon static planning models and be prepared to change their strategic direction rapidly.

“Pandemic”, “semiconductor shortages” and “rising energy and finance costs” are just a few of the reasons heard over and over to explain the crises in the global car industry in recent years. Even in 2022, managers at automobile companies were still in permanent crisis mode, making decisions and taking action in an atmosphere of continuing uncertainty the new normal.  For the time being, the prospect of returning to steady growth in high single-digit percentages, as a linear updating of past growth trends, seems to have vanished.

The prevailing uncertainty affecting suppliers’ plans are reflected in auto manufacturers’ sales figures. Globally, the number of vehicles produced worldwide is still considerably less than pre-pandemic. In Germany, for example, 3.4 million vehicles were produced in 2022, by far the lowest annual volume since 1990. Meanwhile, German production forecasts for the rest of the decade are being revised downwards. Accordingly, it is expected that by 2030 only 34 million vehicles will be manufactured in Germany, a fall of 14% compared with earlier forecasts.

A similar picture is emerging for the rest of Europe, where production volumes have been revised downwards by 18%.  The clear winners are North America and China; here, forecasts have been revised significantly upwards, with almost 10 million additional vehicles projected to be manufactured in these two markets by 2030. Meanwhile, government initiatives, such as the US Inflation Reduction Act, and a focused industry policy have created additional incentives for Europe’s OEMs to shift more production capacity out of the region. 

Sharp increases in production prices are another factor undermining business confidence across Europe’s auto supplier industry.  German suppliers have been especially hard hit by price rises of 33% for wages, energy and raw materials in 2022, compared with the previous year. Suppliers have tried to pass on at least part of these additional costs to manufacturers, but negotiations have proved extremely difficult over the past year. As a result, the average profitability of German suppliers in 2022 was 3.5%, compared with 4% in 2021 – a meagre yield when set against the global industry average of 5.7%. Meanwhile, the bleak mood among

German suppliers seems likely to persist, given continuing uncertainty over whether negotiations with the manufacturers can be concluded successfully.

Throughout Europe, banks and financial investors are also losing confidence in auto suppliers due to the downward pressure on margins and volatile sales forecasts, which in turn are increasing refinancing costs with stricter loan terms. This higher investment risk is reflected by returns on European automobile bonds, which had risen by 197% since the end of 2021.

Against this crisis-ridden backdrop, few European suppliers have sufficient liquidity to pre-finance the new developments required by the accelerating transition to electric mobility. This shortage of capital also means they lack the means to expand their own networks in North America and China as OEMs shift production out of Europe. In both cases the stakes are extremely high and even existential for suppliers, adding to the prevailing mood of uncertainty. 

European suppliers with the best chance of success will be those which analyse their planning assumptions early, keep them constantly under review, and are ready to change their strategic direction rapidly at short notice. Static planning models were the model for success when forecasts were still in effect a linear updating of past growth trends. Adjustment of strategic planning assumptions within the financial year is the new order of the day.

Author
Dr. Alexander Timmer

Partner

Dr. Alexander Timmer

Dr. Alexander Timmer (1981) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry, as a partner in May 2021. He is an expert in market entry and growth strategies, M&A and can look back on many years of experience in the operations environment. Dr. Alexander Timmer has been advising automotive manufacturers and suppliers in a global context since 2012. He has in-depth expert knowledge in the areas of portfolio planning, development and production. His other areas of expertise include digitalization and the complex of topics surrounding electromobility.
Prior to joining Berylls Strategy Advisors, he worked for Booz & Company and PwC Strategy&, among others, as a member of the management team in North America, Asia and Europe.
After studying mechanical engineering at RWTH Aachen University and Chalmers University in Gothenburg, he earned his doctorate in manufacturing technologies at the Machine Tool Laboratory of RWTH Aachen University.

Entscheidungen in unsicheren Zeiten – Konsequenzen für Zulieferer

München, Juli 2023

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Entscheidungen in unsicheren Zeiten - Konsequenzen für Zulieferer

München, Juli 2023
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andemie, Halbleiterkrise sowie steigende Energie- und Finanzierungskosten sind nur eine Auswahl an stigmatisierten Begriffen, die den Krisenmodus der Automobilindustrie der vergangenen Jahre beschreiben.

Auch im Jahr 2022 waren die Führungsetagen der Automobilunternehmen permanent im Krisenmodus. Agieren und Entscheiden unter Unsicherheit scheint sich als neues Steuerungsinstrument in der Automobilindustrie zu etablieren. Die Zeiten des stetigen Wachstums im hohen einstelligen Prozentbereich als lineare Fortschreibung der Vergangenheit scheinen damit vorerst vorbei zu sein.

Die Planungsunsicherheit für Zulieferer spiegelt sich unter anderem in den Absatzzahlen der Hersteller wider. Die Anzahl der weltweit produzierten Fahrzeuge liegt immer noch deutlich unter dem Vorpandemieniveau. Betrachtet man nur den Standort Deutschland wurden 2022 insgesamt 3,4 Mio. Fahrzeuge produziert – das war mit Abstand das geringste Produktionsvolumen seit 1990. Auch die Produktionsprognosen bis zum Ende des Jahrzehnts erfahren zunehmend eine Korrektur nach unten. So ist aktuell davon auszugehen, dass bis Ende der Dekade insgesamt nur noch 34 Mio. Fahrzeuge in Deutschland produziert werden. Ein Rückgang von -14% gegenüber früheren Prognosen. Ein ähnliches Bild zeichnet sich für Europa ab. Hier wurden die Produktionsvolumen um -18% nach unten korrigiert. Die klaren Gewinner sind Nordamerika und China; dort wurden die Prognosen deutlich nach oben angepasst wurden. Fast 10 Mio. Fahrzeuge zusätzlich werden für beide Absatzmarkt prognostiziert. Konjunkturprogramme, wie der Inflation Reduction ACT in den USA, und eine fokussierte Industriepolitik schaffen hier zusätzliche Anreize, Produktionsumfänge außerhalb von Europa zu lokalisieren.

Eine weitere Tatsache, die vor allem bei deutschen Zulieferern nicht für weiteres Vertrauen und eine zuversichtliche Geschäftsprognose sorgen, sind die stark ansteigenden Erzeugerpreise. So sahen sich deutsche Zulieferer mit Preissteigerungen für Lohn, Energie und Rohstoffe im Vergleich zum Vorjahr um 33 Prozent konfrontiert. Die kommerziellen Verhandlungen der Zulieferer, diese Preissteigerungen zumindest teilweise an die Hersteller weiterzugeben, haben sich auch im zurückliegenden Jahr als äußerst schwierig erwiesen. Demzufolge lag die Profitabilität deutscher Zulieferer im Durchschnitt bei 3,5 Prozent.

Eine magere Ausbeute bei einem Branchendurchschnitt von 5,7 Prozent und einer Marge im Vorjahr von 4 Prozent. Die Stimmung unter deutschen Zulieferern hat damit im vergangenen Jahr abermals einen Tiefpunkt erreicht. Die Unsicherheit, ob die Verhandlungen mit den Herstellern erfolgreich abgeschlossen werden können, wird die Zulieferer auch in diesem Jahr weiter begleiten.

Als Folge der angespannten Margensituation und volatiler Absatzprognosen sinkt auch das Vertrauen von Banken und Finanzinvestoren. Die Konsequenz sind steigende Refinanzierungskosten und -anforderungen. Aufgrund des steigenden Investitionsrisikos sind die Renditen für europäische Automobilanleihen seit 2021 um 197 Prozent gestiegen.

Die wenigsten Zulieferer verfügen nach den vorherigen Krisen über eine ausreichende Liquidität, um die durch die fortschreitende Elektrifizierung notwendigen Neuentwicklungen vorzufinanzieren oder das Produktionsnetzwerk in Nordamerika und China auszubauen. In beiden Fällen ist der Wetteinsatz für die Zulieferer extrem hoch und in den meisten Fällen auch erfolgskritisch für den weiteren Unternehmensbestand. Die Gewinnchancen sind jedoch unbekannt; daher sind sie ein weiterer Grund für die aktuelle Unsicherheit in der Zuliefererindustrie.

In derart unsicheren Zeiten werden diejenigen Zulieferer erfolgreich sein, welche ihre Planungsprämissen frühzeitig und kontinuierlich als Teil des Strategieprozesses hinterfragen sowie kurzfristig punktuelle Änderungen in der strategischen Unternehmensausrichtung vornehmen. Die statischen Planungsmodelle waren das Erfolgsmodell, als die Prognosen noch eine lineare Fortschreibung aus der Vergangenheit waren. Die unterjährige Anpassung der strategischen Planungsprämissen ist das neue Gebot der Stunde.

Autor
Dr. Alexander Timmer

Partner

Dr. Alexander Timmer

Dr. Alexander Timmer (1981) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry, as a partner in May 2021. He is an expert in market entry and growth strategies, M&A and can look back on many years of experience in the operations environment. Dr. Alexander Timmer has been advising automotive manufacturers and suppliers in a global context since 2012. He has in-depth expert knowledge in the areas of portfolio planning, development and production. His other areas of expertise include digitalization and the complex of topics surrounding electromobility.
Prior to joining Berylls Strategy Advisors, he worked for Booz & Company and PwC Strategy&, among others, as a member of the management team in North America, Asia and Europe.
After studying mechanical engineering at RWTH Aachen University and Chalmers University in Gothenburg, he earned his doctorate in manufacturing technologies at the Machine Tool Laboratory of RWTH Aachen University.

Press Release: Berylls TOP 100 Supplier Study 2023

Munich, July 2023

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Press Release: Berylls TOP 100 Supplier Study 2023

Munich, July 2023
S

uppliers' sales grow, but their margins continue to decline

  • Sales record of the 100 largest suppliers worldwide – the trillion-euro mark was exceeded for the first time.
  • The latest Berylls TOP 100 supplier study shows growth rates of up to 127 percent.
  • The growth is being driven by the increase in vehicle production last year and price increases.
  • Korean and Chinese suppliers are making exceptionally strong gains, while the market share of German and Japanese companies continues to decline.
  • Overall, margins are falling due to higher material and energy costs, and the gap between OEMs and suppliers is once again widening.

Download the full press release now!

Berylls Press Release
Press Release: Berylls TOP 100 Supplier Study 2023
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Dr. Alexander Timmer

Dr. Alexander Timmer (1981) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry, as a partner in May 2021. He is an expert in market entry and growth strategies, M&A and can look back on many years of experience in the operations environment. Dr. Alexander Timmer has been advising automotive manufacturers and suppliers in a global context since 2012. He has in-depth expert knowledge in the areas of portfolio planning, development and production. His other areas of expertise include digitalization and the complex of topics surrounding electromobility.
Prior to joining Berylls Strategy Advisors, he worked for Booz & Company and PwC Strategy&, among others, as a member of the management team in North America, Asia and Europe.
After studying mechanical engineering at RWTH Aachen University and Chalmers University in Gothenburg, he earned his doctorate in manufacturing technologies at the Machine Tool Laboratory of RWTH Aachen University.

Dr. Jan Dannenberg
Dr. Jan Dannenberg (1962) has been a consultant for the automotive industry since 1990 and became a founding partner of Berylls Strategy Advisors in May 2011. Until spring 2011, he worked with Mercer Management Consulting and Oliver Wyman in Munich, Germany, on international projects – for five years as Associate Partner, and another three years as Partner. He is a recognized specialist in innovation and brand management in the automotive industry, and primarily advises suppliers and investors on strategy, M&A and performance improvement. In addition he is Managing Director at Berylls Equity Partners, an investment company that specializes on mobility enterprises.
Bachelor of Arts in economics at Stanford University, USA; business administration and doctorate degree at the University of Bamberg, Germany.
Dr. Jürgen Simon

Dr. Juergen Simon (1986) is Associate Partner at Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry. He is an expert in sales and corporate strategies as well as M&A and can look back on many years of consulting experience.
Dr. Juergen Simon has been advising automotive manufacturers and suppliers since 2011 and has in-depth expert knowledge in the areas of holistic strategy development, business models and commercial due diligence. He also focuses on market entry strategies and topics related to the „Software Defined Vehicle“.
Prior to joining Berylls Strategy Advisors, he worked as senior consultant at the Droege Group, a consulting and investment firm.
As a graduate economist from the University of Hohenheim, he completed his doctorate at the Institute of Management at the Karlsruhe Institute of Technology (KIT) before joining Berylls.

Press Release: Customers remain skeptical

Munich, June 2023

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Press Release: Customers remain skeptical

Munich, June 2023
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erylls study on customer perceptions of manufacturers' sustainability initiatives

  • For more than 75 percent of the participants in the latest international Berylls study, sustainability is a ‚fairly‘ or ‚extremely relevant‘ purchase criterion for the next car.
  • Sustainability aspects such as transparency and emissions reduction are given high weighting, while fair working conditions in production hardly play a role.
  • Customers are predominantly skeptical of manufacturers‘ sustainability initiatives; much is perceived as greenwashing.
  • For only seven percent of customers, sustainable living requires them to give up their cars, the study shows.
  • Customers want incentives in the form of rewards for sustainable driving behavior.

Download the full press release now!

Berylls Press Release
Press Release: Customers remain skeptical
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Sustainability – What the customers say

Munich, June 2023

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Sustainability - What the customers say

Munich, June 2023

SUSTAINABLE CUSTOMER EXPERIENCE – WHY IT MATTERS

The automotive industry is undergoing a major transformation, as sustainability becomes a defining issue for the public as well as governments and regulators. In addition to ever-stricter environmental legislation, customers are growing increasingly aware of the environmental impact of their choices, so that OEMs must integrate sustainability into the core of their operations. It is no longer enough for manufacturers to produce electric cars and reduce their footprint in the sourcing and production of their vehicles, however. Rather, manufacturers must develop and deliver a comprehensive and cohesive customer experience that embodies sustainability, right across the first contact with the customer to the ownership lifecycle. Now that all the major OEMs have battery electric vehicles in their portfolio, manufacturers are finding it harder to differentiate their products on sustainability, even though this is becoming an important purchase criterion for customers.

What’s more, electric vehicle sales are proving to be erratic rather than on a straight upward trajectory. This is true especially in countries where governmental incentives are changing, and/or where the public charging infrastructure is still struggling to catch up with the availability and take-up of electric vehicles. A further pressure takes the form of new players in the market, particularly as Chinese manufacturers enter the electric vehicle industry with credible offerings, pushing western OEMs to rethink their strategies for attracting customers and reinforcing their brand loyalty. All of this is shifting the focus from the product to the wider customer experience as the key to sustainability-related differentiation. So, let‘s put ourselves in the customer‘s shoes…

 

Curious? Read the full article now!

Berylls Insight
Sustainability - What the customers say
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Authors
Dr. Jan Burgard

Berylls Group CEO

Philipp Enderle

Associate Partner

Philipp Purrucker

Associate

Philipp Brandner

Consultant

Dr. Jan Burgard

Dr. Jan Burgard (1973) is CEO of Berylls Group, an international group of companies providing professional services to the automotive industry.

His responsibilities include accelerating the transformation of luxury and premium OEMs, with a particular focus on digitalization, big data, connectivity and artificial intelligence. Dr. Jan Burgard is also responsible for the implementation of digital products at Berylls and is a proven expert for the Chinese market.

Dr. Jan Burgard started his career at the investment bank MAN GROUP in New York. He developed a passion for the automotive industry during stopovers at an American consultancy and as manager at a German premium manufacturer. In October 2011, he became a founding partner of Berylls Strategy Advisors. The top management consultancy was the origin of today’s Group and continues to be the professional nucleus of the Group.

After studying business administration and economics, he earned his doctorate with a thesis on virtual product development in the automotive industry.

Hungary: from low-cost, high-profit manufacturing base to riskier EV production center

Munich, June 2023

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Hungary: from low-cost, high-profit manufacturing base to riskier EV production center

Munich, June 2023
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ur analysis shows Hungary remains a promising long-term bet for OEMs and suppliers - provided they conduct rigorous due diligence before investing

Since the end of the Cold War, Hungary has proved an attractive manufacturing base for some of the world’s leading automotive OEMs and suppliers. However, the selling points that first drew international companies to Hungary, such as a relatively low-cost workforce and proximity to western European markets, are no longer sufficient on their own to justify major investments by global players. Other factors that need to be considered range from Hungary’s currently problematic relations with many other EU countries to a skills shortage in sectors that are critical to electric vehicles (EVs).

We believe that Hungary will remain a significant location for international automotive companies as recent announcements and investment activities by Magna and Boysen proof. At the same time, OEMs and suppliers will need to make smart decisions that take into account Hungary’s ability to serve as a cost-efficient manufacturing base as the transition to EVs accelerates.

This location assessment analyses the advantages and possible risks of expanding or establishing manufacturing operations in the country. In all cases, OEMs and suppliers should aim to achieve the following goals when deciding whether to initiate or increase investments:  

  • Production flexibility: Manufacturers have had to respond rapidly and cost effectively to the external shock of the Ukraine war and resulting energy crisis
  • Risk diversification: Continuing friction with the wider EU means businesses should avoid over-dependence on operations in Hungary
  • Skills sufficiency: Companies should ensure through training programs and recruitment that the local workforce has world-class electric mobility capabilities

Hungary’s automotive industry: a vibrant sector gearing up for electric mobility

In 2021, Hungary’s automotive industry included 491 companies with a combined workforce of 98,583 employees, according to data compiled by Germany Trade & Invest (GTAI), part of Germany’s economics ministry. Total production value reached €25bn, triple the equivalent figure in 2010, with around 90 percent of all vehicles exported, including 394,302 passenger cars.

Hungary’s car industry landscape includes a range of global OEMs and suppliers, led by German players, which have recently confirmed their commitment to Hungary with significant investment decisions. For example, BMW announced in November 2022 that it plans to invest more than €2bn over the next three years at its new plant in Debrecen, where it will produce around 150,000 next-generation “Neue Klasse” EVs annually, as well as high-voltage batteries for the vehicles.

Meanwhile, Mercedes-Benz will spend more than €1bn between 2022 and 2025 at its Kecskemét factory to develop two new EV platforms for more advanced, high-value vehicles; and in the same period, Audiwill invest €301 million to increase production of electric motors at its factory in Györ, one of the world’s largest engine plants.  

It is not just major European automotive companies which are ramping up production in Hungary. In September 2022 NIO, one of China’s “Big Three” EV manufacturers, announced plans to supply battery swap stations to its expanding European network from the company’s first overseas plant at Biatorbagy, near Budapest, which will also serve as NIO’s regional R&D, maintenance and training center.  

The common theme of all these spending programs is of course the global transition to electric mobility, which is also generating significant investment in Hungary by suppliers.  Hungary will have the world’s fifth largest lithium-ion battery manufacturing capacity by 2025, according to research last year by S&P Global, with China’s CATL playing a prominent role. CATL plans to invest €7.34bn in an additional 100-gigawatt hour battery plant in Debrecen aimed at serving nearby customers’ factories, including Mercedes-Benz, BMW, Stellantis and Volkswagen.

Other major international battery manufacturers with expansion plans in Hungary include Samsung SDI, which in late 2022 was discussing an additional plant in Hungary with BMW.  

At the same time, global suppliers of other EV parts and technologies are making big bets on Hungary as a manufacturing and R&D base, with German players once again in the forefront. For example, in September 2021 Schaeffler opened a new plant in the western city of Szombathely which only manufacturers electric mobility parts, with production scheduled to increase from 800,000 units in 2023 to 1.8 million units by 2029. Another illustration is Continental’s Center for Deep Machine Learning in Budapest, opened in 2018, which focuses on research into artificial intelligence (AI) applications for automated driving systems.

Just recently the Canadian Tier1 supplier Magna announced it’s plans for a new plant in Vecsés to deliver body and chassis parts to “two German premium OEMs”.

Investing in Hungary – the positives and the negatives

These are eye-catching investments, yet the full picture is more nuanced – for every “good news” press release about a new plant or R&D center in Hungary, there is often another company which has quietly decided that the country currently does not tick all the right boxes as a production base.

Hungary already has a well-developed electric mobility industry ecosystem, as the examples we have highlighted demonstrate. Yet beyond this essential precondition, investors need to weigh up the main advantages and risks associated with investing in the country.

The positives

  • Low corporate tax: Hungary’s current corporate tax rate of 9 percent is the lowest of any European country that is an OECD member, and less than one-third of Germany’s rate of 29.9 percent. This huge differential is a key reason why Hungary has proved such an attractive destination for German OEMs and suppliers.

 

  • Generous state subsidies: At a national and local level, Hungary’s government is committed to providing targeted assistance to foreign investors in key industries, often at the outer limit of EU state aid rules. Schaeffler’s recently opened plant at Szombathely is a typical illustration, receiving support worth around €14.9 million as a greenfield development.

 

  • Relatively low-cost labor: According to recent data compiled by the EU, an hour’s work in Hungary cost on average €10.40, compared with €37.90 in France and €37.20 in Germany. However, investors should also take note that Hungary’s average hourly labor costs rose 16.6 percent in the third quarter of 2022, the steepest increase of any EU country. In addition, there is a large disparity in wages between West and East Hungary

 

The negatives

  • Skills shortages: There is a dearth of highly qualified workers in Hungary, with some critics blaming the government’s increasingly strict anti-migration policies. The problem is compounded by the ease with which employees can move to neighboring EU countries in search of better pay and conditions. For example, Hungary’s metalworkers’ union VASAS estimates that the country’s automotive industry workers earn on average about one-quarter of the equivalent salary in Germany. As a result, there is currently hardly any qualified personnel available in western Hungary.

 

  • Political tensions with the EU: Some analysts suggest that the various ongoing disputes between Budapest and Brussels could damage Hungary’s attractiveness as a foreign investment destination, especially for EU-based companies. Within the automotive industry, investments in key electric mobility technologies could potentially be affected.

 

  • Proximity to war in Ukraine: Regardless of the Hungarian government’s equivocal position, there is no escaping the fact that, as a neighbor of Ukraine, the country is especially vulnerable to the war’s economic impact. Automotive investors will need to bear in mind the consensus among military and strategic experts that the conflict is unlikely to end soon. And in the event of an end to the conflict in Ukraine’s favour, a possible „Marshall Plan“ could lead to another shift of incentives for production re-location.

Modelling risk and revenue

OEMs and suppliers that are considering whether to invest in Hungary for the first time, or expand their existing footprint there, can utilize our range of risk analysis and revenue scenario modelling tools for the country. For example, we have developed a dashboard for analyzing potential revenue scenarios when defining Hungary production footprints (see Figure 1). 

Figure 1: Hungary revenue scenario dashboard for different production footprints

REVENUE SCENARIO SPOTLIGHT HUNGARY DEEP DIVE CELL CONTACTING SYSTEMS

[47°30’0.0″N 19°0’0.0″E, HUNGARY]

Source: © 2022 Mapbox © OpenSteetMap

Our dashboard enables companies to enter specific product data, relevant production platforms and selected timelines, in order to derive detailed sales planning scenarios based on customized revenue and profitability forecasts (see Figure 2). 

Figure 2: Example of revenue scenarios using the Hungary dashboard

REVENUE SCENARIO SPOTLIGHT HUNGARY DEEP DIVE CELL CONTACTING SYSTEMS

[47°30’0.0″N 19°0’0.0″E, HUNGARY]

Source: Berylls Strategy Advisors 

Berylls’ overview: The outlook for Hungary’s automotive industry

In the automotive industry, as in other sectors, Hungary continues to benefit from the exodus of production capacity from western to eastern Europe, which was triggered by the end of the Cold War. Yet this is no longer a straightforward story of companies seeking a nearby source of relatively cheap, reasonably skilled labor. The world has moved on, and so has the industry, from the age of fossil fuel vehicles toward the era of electric mobility.

In this context, we believe that Hungary merits both close attention by OEMs and suppliers considering major manufacturing investments, and rigorous, comprehensive due diligence. Like its language, the country itself is not easy for foreign investors to understand. Yet with sufficient research, Hungary remains a viable, long-term base for international automotive players.

Authors
Dr. Alexander Timmer

Partner

Felix Scheb

Project Manager

Eren Duygun

Senior Consultant

Dr. Alexander Timmer

Dr. Alexander Timmer (1981) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry, as a partner in May 2021. He is an expert in market entry and growth strategies, M&A and can look back on many years of experience in the operations environment. Dr. Alexander Timmer has been advising automotive manufacturers and suppliers in a global context since 2012. He has in-depth expert knowledge in the areas of portfolio planning, development and production. His other areas of expertise include digitalization and the complex of topics surrounding electromobility.
Prior to joining Berylls Strategy Advisors, he worked for Booz & Company and PwC Strategy&, among others, as a member of the management team in North America, Asia and Europe.
After studying mechanical engineering at RWTH Aachen University and Chalmers University in Gothenburg, he earned his doctorate in manufacturing technologies at the Machine Tool Laboratory of RWTH Aachen University.

How open source software can speed the transition toward the software-defined vehicle

Munich, June 2023

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How open source software can speed the transition toward the software-defined vehicle

Munich, June 2023
S

oftware development and deployment is emerging as one of the biggest challenges to incumbent OEMs’ dominance of the global automotive market. Established automakers need a new software innovation model, and moving to open source software is a compelling strategy.

When Chinese automakers lifted the curtain on their latest state-of-the-art digital vehicle innovations at the 2023 Shanghai Motor Show they laid down a marker for all automakers. A new breed of OEMs had arrived, and they had digital in their DNA. By building and deploying auto software faster and more efficiently than their incumbent rivals they proved that software is already one of the biggest challenges to incumbent OEMs’ dominance of the global automotive market.

Why is this, when incumbent OEMs have decades of experience in refining auto technology development cycles? Our experience with multiple established brand automakers suggests that standard innovation and supplier management practices are failing to meet the demands of rapid, iterative and collaborative software evolution. These ways of working are unable to cope with the number of software variants demanded, they result in conflict with legacy systems, they fail to deliver effective abstraction layers for simplification and to generate sufficient reusable content, and they are too slow.

Underlying these challenges is the fact is that the standard innovation model does not encourage equal-partner collaboration. Creating the software-defined vehicle demands digital-first skills, and integrated working models that reflect the collaborative ecosystem in which software development flourishes.

Incumbent OEMs have already undertaken several approaches in their attempts to gain momentum in the rapidly evolving field of automotive software. They have tried strategic alliances with big tech suppliers of proprietary software. They have tried building their own dedicated software houses. They have tried reproducing the agile working models familiar to IT businesses, grafting some elements of these onto legacy methods of planning and executing. None of these have really worked – and meanwhile, development costs are ballooning and returns on investment in data are disappointing.

It is time for a new strategy.

Why OSS?

Many established automakers gravitate naturally to the proprietary or ‘closed source’ software model. This instinct is in their manufacturing DNA, having often spent decades refining their own brand-defining proprietary technology. Patented software offered by technology companies such as Microsoft and Adobe comes with the advantage of IT development and integration support – but users are unable to modify or add to the source code. Open source software (OSS) is different: the source code is freely available for all users to inspect, improve, edit or otherwise develop, and under most OSS licenses the only limiting requirement is for the user to publish their code modifications in the software repository.

The OSS model is tested and widespread. Although users may not realize it, more than 70% of all software in use is open source. Developers and end customers often prefer OSS for its superior stability, security and capacity for rapid development and bug elimination; this is one reason why in 2019 IBM acquired Red Hat, one of the world’s largest OSS developers. In many respects, the innovation model behind OSS resembles the unstructured collaborative model that many automakers are already trying to emulate. So it is surprising that, with the exception of infotainment, where OSS operating systems such as Android are already in use, software under OSS licenses still plays a very limited role in the automotive sector.

The OSS approach can be shown to lower cost and improve innovation speed, and thereby increase competitiveness. It reduces cost because of the resource sharing that is intrinsic to OSS, and also minimizes contractual complexity through community ownership of software developments. It lessens technical complexity with better documentation through the simplification of data (usually known as abstraction) that is part of the OSS model, and it helps users to grow collaborative learning and development skills to a level that is unlikely to be achieved in proprietary software provider/user relationships.

Some automakers already understand these advantages and are deploying OSS at scale. One example is Mercedes, which has for six years now been employing an open source strategy that combines free and open source software. Auto supplier Bosch has co-created an OSS-focused ‘digital.auto’ initiative to improve adoption of digital best-practice in the automotive industry and to generate a repository of interoperable software development tools. Bosch is also involved in the ELISA (Enabling Linux In Safety Applications) project, an initiative from the OSS operating system Linux designed to develop and win certification for Linux-powered safety-critical applications with wide ranging uses in the automotive industry. And most recently, Bosch subsidiary ETAS announced a strategic collaboration with aforementioned Ret Hat on in-vehicle basic software layers. A great range of ‘mixed-criticality’ OSS applications is also being developed by the SOAFEE (Scalable Open Architecture For Embedded Edge) project supported by VW and auto supplier Continental.

A compelling risk/return equation

Many organizations see OSS as a risk to their business, and to some extent their concerns are valid. Yet the rewards for OSS adoption in an environment where companies need to shrink technology development timelines and embrace more collaborative ways of working are great, while the potential pitfalls are over-estimated. The challenge for companies is to minimize risk, and leverage the inherent advantages of an open source approach.

Companies are often unwilling to invest resources in a technology base that they do not own – but proprietary software users do not own the software they deploy either, they merely rent it. They also have questions over security, safety and regulation of OSS applications and operating systems – but addressing these issues directly through the growing number of OSS deployment initiatives may be a better strategy than outsourcing responsibility for mission-critical aspects of their technology stack.

To diminish risk, companies should consider adopting OSS as a core approach where certain conditions are in place. The levels of standardization and abstraction in the selected OSS should already be high, to control development costs and maximize usability. The potential resource savings from OSS adoption should also be high. And finally, the relevance of differentiation should be minimal, meaning that OSS adoptions should concentrate on the lower levels of the software stack, rather than on customer-facing applications where software becomes visible and differentiation is commercially important.

The path to adoption

Automakers are not short of choices for OSS development platforms. They include the Automotive Grade Linux Project, a Linux Foundation collaborative project to bring together suppliers and automakers and create a complete software stack for the connected car; Kubernetes, a software ‘container’ operating sub-system originally designed by Google engineers that is emerging as a powerful cloud application for managing multiple data hungry objects such as cars; and the Red Hat In-Vehicle Operating System, which is extending Linux to driver assistance systems.

As with all innovation choices, opportunities must be matched with real world organizational needs and capacities. Automakers will need to develop a detailed picture of where and how OSS solutions can be applied in their software stacks, and to encourage and enable suppliers to adopt OSS approaches, which include providing resources for joint projects and legal liability cover.

The supplier base cannot be fully leveraged without accepting that a degree of risk-taking is inherent in the collaborative model. Since competitive pressure from digitally native automakers will eventually enforce that model sooner or later, it makes sense for established OEMs to adopt it now and begin to benefit from a reduction in the development burden. The opportunity is there to take action before the industry’s widely-recognized strategic crisis turns into a financial one.

A narrowing window

Today, there is a growing risk that automakers begin to lose innovation capacity to both established technology companies and start-ups, as skilled employees see that the attempt to create software-defined vehicles on the old siloed and proprietary development model is failing. Yet OEMs still have know-how and structural advantages that they can leverage: the automotive industry remains dependent on domain-specific expertise and the ability to orchestrate technology and suppliers in a complex regulated environment.

Established automakers understand issues of feasibility and the real value-add of technology. They appreciate that new approaches like OSS, with its radically different concepts of both ownership and development process, demand gradual adoption with a clear vision of where the business case lies.

And that business case can be stated simply. The choice is to establish an alternative ‘automotive-born’ software environment with the potential to succeed where the standard model is clearly failing – or to run out of time and money, soon.

Authors
Dr. Matthias Kempf

Partner

Christian Kaiser

Partner

Dr. Matthias Kempf

Dr. Matthias Kempf (1974) was one of the founding partners of Berylls Strategy Advisors in August 2011. He began his career with Mercer Management Consulting in Munich, Germany, in 2000. After earning his doctorate degree and further consulting work at Oliver Wyman (formerly Mercer Management Consulting), he joined the management of Hilti Germany in 2008. At Berylls, his area of expertise is new mobility services and traffic concepts. In addition, he is an expert in developing and implementing new digital business models, and in the digitalization of sales and after sales.

Industrial engineering and management studies at the University of Karlsruhe, Germany, doctorate degree at Ludwig Maximilian University, Munich, Germany.

Christian Kaiser

Christian Kaiser (1978) is Partner and Head of IT at Berylls by AlixPartners (formerly Berylls Strategy Advisors), specialising in software and digitalisation. He started his career at DaimlerChrysler AG in 1997 and has 27 years of industry and consulting experience in the automotive sector and has worked as CDO, CIO and CEO in various international OEMs and software companies.
Mr Kaiser has also held roles as chairman or board member of various companies in the software industry.
At Berylls, he specialises in the areas of software defined vehicles, software development, digital business models, digital operating models and software task forces.
Christian holds a degree in ‘Business Economist (EBW)’ from the University of Applied Sciences Würzburg.

Digital automotive commerce OEM’s challenges & assets on the road ahead

Munich, June 2023

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Digital automotive commerce OEM's challenges & assets on the road

Munich, June 2023

AUTOMOTIVE TECHNOLOGY IS CHANGING FASTER THAN EVER BEFORE – YET THE INDUSTRY’S SALES MODEL REMAINS LOCKED IN THE PAST. THE TIME HAS ARRIVED FOR RADICAL CHANGE.

Automotive e-commerce has been around in various forms for more than 20 years. From the online-first used car sector to Tesla’s “5-Click” online purchase journey for new EVs, the range of digital automotive commerce models is already extensive. However, for traditional OEMs, the level of engagement with transaction across digital channels remains marginal. The full potential of digital automotive commerce is yet to be unleashed.

Automotive OEMs continue to operate a largely dealer-dominated sales model that gives limited access to the customer and little control over final prices. Manufacturers continue to communicate with customers nearly entirely with brand focus and lack the ability to systematically form the customer journey towards in the pursuit of transactions.

Berylls Insight
Digital automotive commerce OEM’s challenges & assets on the road ahead
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Authors
Henry Lundt

Principal

Christian Barbuia

Senior Associate

Philipp Purrucker

Associate

Interview – Elektromobilität: Chance oder Sargnagel?

München, Mai 2023

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Interview - Elektromobilität: Chance oder Sargnagel?

München, Mai 2023
R

abattschlacht in der Automobilbranche?

Tesla senkt die Preise drastisch – VW, Ford, BMW und Co. reagieren unterschiedlich. „Alle kommen aus dem Verknappungsparadies“, meint Jan Burgard von Berylls, „jetzt aber haben wir wieder Überkapazitäten und die Lieferketten haben sich entspannt. Der Wettbewerb spielt sich im Volumensegment ab.“ Der Vorsprung im batterieelektrischen Zeitalter ist nur mit dem richtigen Timing möglich. „Make or break!“ Ist Elektromomilität Chance oder Sargnagel für die Unternehmen? Burgard rät: „Grundsätzliche Strukturen in Frage stellen, sonst kommt man ins Hintertreffen – unabhängig von der Antriebsform.“

Hier gehts zum Podcast

Autor
Dr. Jan Burgard

CEO Berylls Group

Dr. Jan Burgard

Dr. Jan Burgard (1973) ist CEO der Berylls Group, einer internationalen und auf die Automobilitätsindustrie spezialisierten Unternehmensgruppe.
Sein Aufgabengebiet umfasst die Transformation von Luxus- und Premiumherstellern, mit besonderen Schwerpunkten auf Digitalisierung, Big Data, Start-ups, Connectivity und künstliche Intelligenz. Dr. Jan Burgard verantwortet bei Berylls außerdem die Umsetzung digitaler Produkte und ist ausgewiesener Spezialist für den Markt China.
Dr. Jan Burgard begann seine Karriere bei der Investmentbank MAN GROUP in New York. Die Leidenschaft für die Automobilitätsindustrie entwickelte er während Zwischenstopps bei einer amerikanischen Beratung und als Manager eines deutschen Premiumherstellers.
Im Oktober 2011 komplettierte er die Gründungspartner von Berylls Strategy Advisors. Die Top-Management-Beratung ist die Basis der heutigen Group und weiterhin der fachliche Nukleus aller Einheiten.
An das Studium der Betriebs- und Volkswirtschaftslehre, schloss sich die Promotion über virtuelle Produktentwicklung in der Automobilindustrie an.