Alina-Sophie Ernst, Autor bei Berylls - making automobility viable

ow do we keep the company manageable as it becomes larger and more complex?

How can we navigate effectively in times of changing customer requirements, new technologies, and business models alongside the numerous geopolitical crises? The German supplier industry is working intensively on these issues. The quality of the company’s internal control system has become the new top management task.

A joint study by Berylls and pims.ai¹ shows that over 56% of the selected strategic business units of automotive suppliers are unable to leverage their full return potential of 9%² on average. As a result, more than half of these companies are giving away money, unlike top companies that have a comparable competitive position and a similar level of market attractiveness.

The affected companies frequently react by exerting more control, but run the risk of overstepping the mark. They introduce a large number of key figures, some of which obscure the essentials of the business. Moreover, they often focus on the operational management of day-to-day business and less on the expansion and management of the company’s long-term strategic success potential.

It is therefore important to bring the key aspects of the business back into the focus of corporate management and to ensure the continuous planning and management of the strategic potential for success. To achieve this aim, the concept of six key factors³ can serve as a promising navigation system for top management. According to empirical long-term studies, these six key factors explain over 70% of a company’s success. The concept does not directly show decision-makers what the right course is for them, but it does provide them with guidance for determining and navigating the best course. We would like to briefly present these six key factors below.

6 Key variables – navigation system in stormy times

Market position – driver of long-term business success

One of the strongest drivers of long-term business success is the market position, often expressed in terms of market share. However, market share is not an end in itself – a superior market position is a prerequisite for gaining additional market share. However, many companies do not know the ideal market positioning for their product, which results from its positioning along the axes “price compared to the competition” and “customer-perceived product quality”, thus placing the relative customer benefit at the center of the analysis. The value map is an effective tool here, which decision-makers can use to derive valuable recommendations for a more advantageous market position or to define corrective measures in order to achieve the desired positioning. This is also illustrated in the value map below: while the competitor “This business” and competitors 1 and 3 all offer an above-average price, “This business” scores with its product quality, which is perceived as the best. Competitors 1 and 3, on the other hand, must expect to lose further market share due to their perceived below-average quality.

pims.ai Customer Value Map for a competitive market position

Innovation performance – risk of “innovating past” market requirements

It is not sufficient to simply measure innovation performance via a key factor. It is much more about recognizing the respective substitution dynamics on the market, i.e., the way in which new products satisfy market demand and thus replace old products. Supplier strategies are often still strongly driven by their own research and development activities, according to the principle: If I have a good product, there must also be a customer problem that needs solving. Forward-looking corporate management must therefore steer new product development in such a way that it takes into account the speed at which substitution processes take place on the market. It also needs to be able to respond to these processes with the right new products. Developing a management capability of this nature is absolutely critical to success, especially during this period of transformation in the automotive industry.

Productivity – implementing productivity gains

Productivity is another key factor. Supplier companies in particular are exposed to considerable productivity pressure. People often talk about cost pressure, but this is only one aspect of productivity. Rather, the aim is to provide either the same level of service at lower cost (input) or significantly more services (output) at the same cost. The Berylls-pims.ai study shows that suppliers with lower expected returns compared to top companies have productivity potential particularly in the areas of manufacturing and distribution. These companies frequently find it difficult to implement the effects of accumulated experience curves and continuous improvement measures in such a way that a genuine increase in productivity is achieved. If companies manage to leverage their productivity potential, they can strengthen their competitive position and use it to gain additional market share. Consequently, it is once again important to consistently focus corporate management on the key factor of productivity in terms of labor, capital, and time.

Attracting good people – more than ever a challenge for the sector

The shortage of skilled workers among manufacturers and suppliers in the automotive sector is a well-known problem. If you look at the development of junior staff, it becomes even more serious, as today, a supply chain graduate already has six vacancies to choose from, and this number is set to rise over the next few years.⁴ It is therefore hardly surprising that attractiveness as an employer is another key strategic factor when it comes to recruiting good people. Supplier companies are now required to revise their HR strategy. Which skills will be needed going forward? Can we generate the necessary expertise ourselves or do we have to buy it in externally on the market? How good are we at recruiting, retaining, and developing talented people? In many cases, companies do not lack the knowledge of what they need to improve or the financial resources, but rather managers who are effective at implementation. Strategies are therefore needed that provide answers with regard to the right basic and advanced training and the recruitment of good people in order to avert potential risks to companies.

Liquidity and profitability – sufficient financial power for tomorrow’s business

Key factors five and six are presented in a summarized form. This is because liquidity and profitability are not taxable variables for future success potential, but rather the result of implementing the strategic plan. The higher the potential for success, the greater the probability of having sufficient liquidity and long-term profitability. The frequently used phrase “We have to maximize our profits” falls short here. To be able to finance the business in the long term, it is crucial to gain clarity about what the profit minimum is. After all, it is easy to maximize profits in the short term by postponing investments – but the actual task of top management is to manage the six key factors in a balanced manner in both the short and the long term.

Conclusion

Navigating the transformation of the automotive industry, which is currently in full swing, is sometimes a difficult matter. Against this backdrop, the logic of the six key factors gives decision-makers the required orientation. These six key factors considerably speed up the discussion and the decision-making process within strategic planning and management and protect against the distractions caused by peripheral issues and personal management perceptions. At the same time, they also set out the requirements for a good strategy and compel the management teams of supplier companies to provide or find the necessary answers. These key factors can also be used as a basis for reporting and target cascading within the organizations. The further operationalization of these key factors into operational indicators even makes it possible to align the value-adding processes and thus closely interlink what is strategically planned with what is actually implemented. Thus, strategy work becomes productive through clearly aligned corporate management, making it a critical task for decision-makers in the automotive industry.

¹ PIMS stands for “Profit Impact of Market Strategies” and is still the world's largest empirical research program in the field of strategic management, dating back to the 1970s. PIMS uses data from over 4,500 corporate units to determine the most important drivers for the sustainable success of companies.

² 9% describes the return on sales and therefore the average expected return of a supplier company.

³ The concept of six key factors goes back to Malik.

⁴ Supply Chain Management Center der University of Maryland (2015).

Authors

Dr. Alexander Timmer

Partner

alexander.timmer@berylls.com

Laura Kronen

Partner

laura.kronen@berylls.com

Dr. Christopher Brüggemann

Associate Partner

christopher.brueggemann@berylls.com

Felix Riebel

Consultant

felix.riebel@berylls.com

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.

Laura Kronen

Laura Kronen (1980) is a partner at Berylls by AlixPartners (formerly Berylls Strategy Advisors) with a focus on transformation. She is passionate about moving people and organizations forward. With over 18 years of industry and consulting experience, her focus is on transformative challenges in the operations context – from executives to individual employees, at manufacturers and suppliers. She helps her clients align strategy, structure, and culture in their respective market environments to build resilience.

Prior to joining Berylls, Laura Kronen worked at PwC Strategy&, Volkswagen AG and Audi. She holds a diploma degree in industrial engineering from the Karlsruhe Institute of Technology (KIT).

Dr. Christopher Brüggemann

Dr. Christopher Brüggemann (1983) is a Project Manager with focus on transforming organizations to improve performance, speed and agility. He is also an expert in strategy deployment, organizational design, and transformational change. Christopher has advised numerous companies through multiyear organizational transformations, often focused on operating model development and putting new ways of working, structures, processes, decision making mechanism in place.

Before joining Berylls, Christopher worked at Sixt SE, several other consultancies, and served as a research associate in cooperation with Deutsche Telekom. He has a PhD in economics and a diploma degree in business administration of Bayreuth University.

t is a well-known and widely documented fact that the automotive industry is currently undergoing a transformation against the backdrop of electrification, software-defined vehicles, and autonomous driving.

But where are the automotive industry and its suppliers in particular heading in view of the current challenges and what options for action are currently open to them?

When suppliers withdraw from key growth segments

For a number of reasons, company managers in the automotive supplier industry are not to be envied at the moment and many look back ruefully on past times, which were characterized by good predictability of volume call-offs and an (often) generally cooperative and reliable relationship with the OEMs, among other things. After all, the picture today is very different: a flood of new manufacturers who are increasingly competing for volumes with existing customers. Highly volatile volume call-offs, especially for BEVs. Expensive innovations that do not pay off due to fierce competition and low prices. High input costs, which also vary greatly from region to region. Customers who have completely new and different needs. New, primarily software-driven OEMs that have drastically reduced development times and for whom the time-to-market factor is key. Established premium manufacturers whose flagship models are suddenly not selling, which can also call their technological leadership into question. European OEMs who prefer to work with suppliers from the Far East even when it comes to key innovation issues in order to cut costs, despite the massive risk. The labor market in Europe, and Germany in particular, has long been an obstacle to growth due to the shortage of skilled workers and further reductions in working hours. Risks are being successively avoided, especially relating to capital investment. The list goes on and on. The consequences can already be observed on the market when certain established suppliers withdraw from key growth segments such as sensors, batteries, or electric motors.

Supplier landscape in the future – is Germany losing relevance?

It is not currently clear where the whole thing will end. However, it is abundantly clear that China has a very special role to play in further developments, and for a great many reasons. On the one hand, the long-successful division of labor between production in China and development in the rest of the world is increasingly disappearing. Chinese companies not only produce, but are often highly innovative, especially in core domains such as BEVs. Although around seven times as many patents for motor vehicles are registered in Germany as in China, around four times as many patents for electric drivetrains were registered in China compared to Germany. The fact that China increased its number of patent applications by a factor of six between 2010 and 2020 alone shows where the journey is heading. On the other hand, Chinese OEMs will continue to grow and thus cause a power shift on the global automotive market. Moreover, Chinese suppliers will automatically continue to scale up due to their regional proximity and gradually expand their global presence. The trend is also reflected in the TOP 100: while there was only one representative from China in 2012, ten years later there were already nine and the number is expected to rise to around 20 by 2030 – not including any major acquisitions that may take place.

This paints a scenario in which Chinese suppliers in particular gain global market share and become drivers of innovation and high-tech solutions. In contrast, German suppliers in particular are having to rely more and more on very lean structures and cost advantages rather than an innovative edge, with production in Eastern Europe and other best-cost locations and an associated increase in the relocation of labor to other countries. How long companies will remain based in Germany once value creation has been relocated will primarily be a question of incentives provided by the state and the tax situation. This does not bode well for Germany, where employment figures in the automotive sector have already fallen from 808,000 in 2020 to 774,000 in 2022.

The pressure to act is growing

Suppliers in Germany in particular need to be aware of the transformation taking place and possible scenarios and prepare themselves accordingly. In any case, the topic of portfolio must be high on the agenda, as a targeted focus – even if this often means painful divestments in growth topics from an emotional perspective – enables resources to be allocated to topics with long-term competitiveness and margin potential. For the remaining topics in the portfolio, a radical change needs to be initiated by many suppliers, especially those based in Germany, including:

Do not rely on yesterday’s long-standing customers being tomorrow’s customers, as there are not only shifts in market share on the part of OEMs, but cooperation with them is also increasingly being characterized by short-term optimization rather than long-term stable partnerships
More reactive product development, if this is desired and above all paid for by the customer, as innovations are becoming less and less worthwhile, especially with shorter cycles and a lack of technological standards
Radical reduction of intrinsic value creation in Germany in order to avoid the numerous location-related disadvantages, for example with regard to energy costs, digitalization, infrastructure, and the labor market
Active sales work with Chinese OEMs for both the Chinese and the European market in order to participate in the growth or substitution of established customers
Significant streamlining of structures, such as reducing administrative tasks to a minimum or dismantling hierarchies to be able to respond swiftly to market changes
Cutting costs by all available means – regardless of “sacred cows” – in order to maintain competitiveness
Reduce dependencies on customers, products, and regions in order to be prepared for the enormous and unpredictable uncertainty

The challenges are huge and long-term success is anything but set in stone, which means swift and decisive action is essential.

Authors

Dr. Jan Dannenberg

Executive Partner

jan.dannenberg@berylls.com

Dr. Alexander Timmer

Partner

alexander.timmer@berylls.com

Dr. Jürgen Simon

Associate Partner

juergen.simon@berylls.com

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. Alexander Timmer

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.

ew business models and services in the software-defined vehicle environment are posing challenges for the supplier industry.

Just as with the end product, the product portfolio is also changing towards more software-based services while at the same time maintaining traditional products. The depth of added value and the development of new skills are important for remaining competitive going forward. The degree of change required and the effort involved in digital transformation are largely underestimated. Budget overruns and underestimated investments and costs, such as for licenses, are a part of everyday life. As a result, current projects with a software focus are getting out of control. Recent examples show that budget overruns of several hundred percent are not uncommon and – apart from the profitability of a given project – they can also jeopardize the existence of the entire company.

Increase in costs for software projects

Source: Berylls by AlixPartners

The successful implementation of software projects therefore requires more than the widespread introduction of agile methods at operational level. Overall, there are three key fields of action for the art of mastering code:

1. Processes, methods, and tools (PMT)

In addition to the principle of “software as a product”, changes are also taking place in the working environment. Software development is being transformed into software production, which involves a change in processes. The introduction of agile working methods alone does not increase the operational ability to develop, integrate, and release software. Activities and artifacts need to be adapted to enable the operating model to produce software.

Requirements

Traditional development processes in the automotive industry take three to five years and sometimes specify requirements right up to the end of the project. Releases to customers every two weeks do not allow this. In addition to the technical challenges, it is also essential to apply the RFLP logic consistently throughout and to derive a centrally controlled architecture from it for the regulatory aspects. Consequently, a holistic requirements structure (Requirement) would take precedence over a functional architecture (Function), in which the regulatory, technical, and customer-oriented requirements are collected, clustered, and hierarchized. This is followed by the design of the systems (Logical) on which the final physical architecture (Physical) is based.

Artifacts

As processes and tools from the hardware environment already exist, these are often applied to the software. The shift to more software means questioning processes from two perspectives: a) context and b) linkage. With regard to the context, activities and artifacts need to be adapted to the software products, such as release management. Otherwise, necessary processes will be ignored and the required process fidelity not achieved. In terms of linkage, the availability of data and stringent versioning is essential to contribute to success. Products such as Codebeamer make it possible to track activities without significant media disruptions.

Integration and Testing

When talking about testing, CICD pipelines – automated processes that enable Continuous Integration (CI) and Continuous Deployment (CD) – are part of the conversation. The latest version of a software product can thus be (virtually) checked for the current status of the hardware for testing purposes. This requires partners who develop data models and provide the necessary infrastructure – an essential make-or-buy decision. In operational terms, the direct transfer of test results to development is crucial to success. Establishing DevOps on the basis of automated workflows not only reduces the management effort, it also accelerates the pace of development.

Industrialization

The processes surrounding CICD and DevOps can be described as software production, as functions are produced and provided on a large scale. To ensure quality and production reliability, a clear release process is of key importance. Defined categories for customer capability and the monitoring of release processes are recorded to ensure the transfer of functional software to the customer vehicle.

2. Capability Management: Quality versus quantity

Automotive suppliers face the challenge that in many cases development teams and management do not have the right or the sufficient skills to be successful in the software business. This challenge is exacerbated by the critical importance of quality over quantity in software development and architecture, as high-performing software engineers are up to 10 times more productive than their average colleagues. It is essential for suppliers to consider the key success factors.

First, suppliers need to identify the level of core software performance and strategically leverage partnerships or acquisitions in order to strengthen it.

A comprehensive understanding of the necessary roles and skills in the software field is critical to developing targeted recruitment efforts, customized training programs, specific career paths for experts, and strategic workforce planning initiatives. In view of rapidly developing technologies, continuous capability improvement is also of the utmost significance. Top tech companies, for example, give employees time each week to devote to specially selected side projects and expert groups. This practice not only promotes innovation, but also fosters a culture of continuous learning and the exploration of diverse technical alternatives.

Due to the fierce competition for top talent, suppliers need to think beyond traditional recruiting channels when it comes to attracting new people. This includes alternative talent pools such as coding boot camps, top committers to open source projects, and hackathons. In addition, the opportunity must be created for top developers to earn top salaries without necessarily being pushed into management careers.

Finally, it is crucial to create a working environment that prioritizes the “developer experience,” for example through access to state-of-the-art technologies, a collaborative culture, and flatter decision-making hierarchies to provide an attractive workplace for both new and existing employees.

3. Leadership

Nowadays, organizing software development in agile teams is standard practice. But while software is being developed in new structures at operational level, managers often have problems leading these teams to sustainable success. Many of them were successful in traditional hardware development scenarios and are now faced with the challenge of adapting their management style and continuing to develop. Software managers should therefore take the following levers to heart when managing employees.

First of all, managers need the assessment skills to be able to evaluate and manage software projects. This is the basis for making effective and efficient decisions, taking technical, commercial, and strategic aspects equally into account. Current trends towards “code-first” or “everything-as-code” reinforce this requirement.

Moreover, managers must be prepared to leave day-to-day business decisions to the agile project teams. For example, the short-cycle reprioritization of features within a defined framework should be left up to the teams to ensure the best output. Since software development is more dynamic than hardware development, rigid control against originally defined specifications and milestone plans rarely leads to successful products. Instead, managers should instruct their teams to first generate deliverable software versions that meet the minimum customer requirements and regulatory stipulations. Extensions to the software can be provided via continuous over-the-air updates.

Finally, managers should see themselves as bridge builders and systems integrators between software and hardware development. They should clarify questions such as: Which software requirements really need to be defined when determining the hardware (usually a long time before the first line of code is written)? What are the critical milestones that need to be provided with initial software versions at an early stage? Or: How can software and hardware teams work better together? The smooth synchronization of long-cycle hardware development and short-cycle software development is increasingly becoming a critical task that managers are required to manage.

time to act

These days, software projects that get out of hand are not uncommon in the automotive industry and can cause significant financial damage. In addition to structural levers such as the standardization of processes, methods, and tools, the right internal and external capabilities are required. Managers – today often with a mainly hardware-related background – need to adapt their management practices to meet the software-specific requirements.

Due to the growing trend towards software-defined vehicles, suppliers need to act now to ensure their future viability.

Authors

Christian Grimmelt

Partner

christian.grimmelt@berylls.com

Sebastian Böswald

Associate Partner

sebastian.boeswald@berylls.com

Sebastian Bräuer

Associate Partner

sebastian.braeuer@berylls.com

Altan Yamak

Associate Partner

altan.yamak@berylls.com

Christian Grimmelt

Christian Grimmelt has been an integral member of the Berylls by AlixPartners (formerly Berylls Strategy Advisors) team since February 2021. Previously, he gained extensive professional experience in top management consultancies and in the automotive supplier industry.

During his time at the world’s largest automotive supplier, he drove the establishment of a central unit to optimize the company’s global logistics and production network.

Christian Grimmelt’s consulting focus is logistics and production network optimization, purchasing and (digital) operations including launch and turnaround management for OEMs and especially suppliers.

Christian Grimmelt holds a university diploma in industrial engineering from the Karlsruhe Institute of Technology.

Sebastian Bräuer

Sebastian Bräuer (1982) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors) in 2022 as Associate Partner. He started his career in consulting where he led and supported assignments with focus on operational excellence programs primarily in automotive but also in consumer goods and chemicals. Later Sebastian worked for an German OEM in leadership roles regarding organizational development, digital product offering and digital car strategy. At Berylls Sebastian focuses on topics regarding Digital Car.

Sebastian graduated in economics and engineering at the Technical University of Dresden.

Sebastian Böswald

Sebastian Böswald (1991) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors) in April 2021. He is an Associate Partner and an expert in both transformation and operations. Over the last decade, he has focused his work on strategy and organizational design, as well as on two megatrends shaping the automotive industry: software-defined vehicles and CASE (connected, autonomous, shared, and electrified mobility). In these fields, he has advised our global OEM clients as well as Tier-1 suppliers and tech companies.

Prior to joining Berylls, he worked for PwC Strategy& and started his career at BMW as a project manager for product strategy and digital charging services.

He received a Bachelor of Science in Automotive Computer Science at the Technical University of Ingolstadt as well as a Master of Science in Management from the Technical University of Munich.

f you look at the current headlines around electric mobility, they are mostly negative. Car rental companies such as Sixt and Hertz are reducing the percentage of electric vehicles in their fleets, Audi wants to bring fewer electric models onto the market, and Mercedes is stopping a complete e-platform.

However, automotive production in China and the USA is also predicted to grow by 2030. The question for suppliers is therefore how they can participate in this growth and whether they need to adapt their focus technologies and the geographical location of their production sites.

Growth in China, the USA, and Mexico, site closures in Germany

If we look at the forecast production site developments of the world’s TOP 20 automotive suppliers, at first glance a positive trend emerges: between January 2022 and February 2024, suppliers announced significantly more expansions and new openings than closures and disposals (see Figure 1).

Figure 1: Number of planned site changes at TOP 20 automotive suppliers worldwide
Announced period of the planned site changes: January 2022 to February 2024

Source: Berylls by AlixPartners

However, this does not apply equally to all countries, especially not to Germany, where sales and closures predominate (see Figure 2) as well as relocations to other regions, for example at Continental. The Babenhausen plant will be closed by 2028, parts of the production there have already been relocated to Eastern Europe and the plant in Gifhorn will be completely closed down by the end of 2027 due to a lack of profitability.

Figure 2: Number of planned site changes at TOP 20 automotive suppliers in selected countries
Announced period of the planned site changes: January 2022 to February 2024

Source: Berylls by AlixPartners

There are also a large number of plant sales and closures in the USA. In contrast to Germany, however, there are no signs of a structural exodus here, as the plant closures are being more than offset by a significantly larger number of new ones being opened and existing capacities expanded. Electric mobility is a key driver of growth in the USA (Figure 3) – the Inflation Reduction Act has the potential to further strengthen this momentum. Apart from the USA, Japan, Canada, Hungary, and China in particular are among the winners in terms of new openings and expansions (Figure 2).

By far the highest growth is expected in China – as in the USA, here too, investments in the production of electric drivetrains clearly dominate at over 40%. German companies play a key role here, accounting for almost 40% of the aforementioned investments in China – and are therefore responsible for more local investments than China’s TOP 20 suppliers.

Figure 3: Percentages of investment priorities od the TOP 20 automotive suppliers in selected countries
Announced period of the planned site changes: January 2022 to February 2024

Source: Berylls by AlixPartners

In Mexico, the investing companies specialize in the electrics and electronics markets. Around 40% of local investments are made in this area, such as for the expansion of three Aptiv sites to increase production capacity, e.g., for low-voltage cable harnesses.

Chinese and US companies investing primarily in domestic markets

In addition to the trends of e-mobility and growth in China, the “home country first” trend stands out in the planned investments (Figure 4): US companies are focusing primarily on the American domestic market and far less on Asia or Europe. Chinese companies are also pursuing this strategy and clearly focusing their investments on the home market. In view of the recently adopted 100% import duty on Chinese electric vehicles in the USA, this is a clear sign of the increasing isolation of the two markets, which is also reflected in the investments of the suppliers under review.

Figure 4: Percentages of investment priorities od the TOP 20 automotive suppliers in selected countries
Announced period of the planned site changes: January 2022 to February 2024

Source: Berylls by AlixPartners

German companies, on the other hand, are showing little interest in new sites within their own country – even though at 27% they are responsible for the largest share of investment among the TOP 20 automotive suppliers. BOSCH is investing in new plants in China to increase production capacity for e-powertrain components, and ZF Friedrichshafen is investing USD 500 million in its existing site in Gray Court, South Carolina, to be able to produce both conventional and electrified drive systems there.

Sites in Germany are being closed – but German suppliers are leading the way in establishing new production capacities

All in all, the view of the future from a German perspective is ambivalent: there will be a significant consolidation of automotive supplier locations in Germany – the expansions planned to drive the e-mobility transformation are mainly taking place in the USA and China. However, German suppliers also benefit indirectly from this development, as they are still strongly represented in these relevant growth markets – and can even expand their positions there.

For globally operating automotive suppliers, it is worthwhile consolidating their presence in growth markets such as the USA and China, as this ensures compliance with local standards and avoids high logistics costs or looming import duties, and critical tier-n suppliers and their resources are easily accessible.

Figure 5: Percentage of countries of origin of investments by the TOP 20 automotive suppliers and target country of planned investments
Announced period of the planned site changes: January 2022 to February 2024

Source: Berylls by AlixPartners

Authors

Dr. Alexander TImmer

Partner

alexander.timmer@berylls.com

Christian Grimmelt

Partner

christian.grimmelt@berylls.com

Stefan Schneeberger

Associate Partner

stefan.schneeberger@berylls.com

Andreas Maihöfner

Project Manager

andreas.maihoefner@berylls.com

Alexander van Woudenberg

Project Manager

alexander.vanwoudenberg@berylls.com

Christian Grimmelt

During his time at the world’s largest automotive supplier, he drove the establishment of a central unit to optimize the company’s global logistics and production network.

Christian Grimmelt holds a university diploma in industrial engineering from the Karlsruhe Institute of Technology.

Dr. Alexander Timmer

ntil 2020, the supplier industry was a guarantor of stable market developments and steady growth.

However, since 2020 the tide has turned. Trends that were thought to be reliable in the long term now need to be reconsidered in the short term and replaced by new changes at short notice. This uncertainty is still the new normal today, and will probably remain so for the unforeseeable future – and managing directors and decision-makers alike will have to come to terms with it. Suppliers seem to be getting better and better at dealing with the situation.

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TOP 100 supplier study 2024

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Contact us

Dr. Jan Dannenberg

Executive Partner

jan.dannenberg@berylls.com

Dr. Alexander Timmer

Partner

alexander.timmer@berylls.com

Dr. Jürgen Simon

Associate Partner

juergen.simon@berylls.com

023 was a successful year for the Chinese car market. A total of 21.9 million passenger cars were sold in 2023 (domestic sales only, excluding exports), an increase of 4.3% compared to 2022.

As in recent years, EVs (referred to as NEVs in China, equivalent to xEVs) displaced ICEs – and their share continued to grow to around 36% of the total market, an increase of 33% year on year (see figure 1).

Figure 1: NEVs have been on the rise for quite some time

Source: Berylls by AlixPartners, CAAM, CPCA

Looking at the domestic market, it is clear that Chinese players continue to dominate, as they have done in recent years. Especially for battery electric vehicles (BEVs), the following companies stand out: BYD (2.7 million units sold), GAC Aion (483,000 units sold), Geely (469,000 units sold), Chang’An (385,000 units sold), Li Auto (376,000 units sold), and NIO (160,000 units sold). Only Chinese manufacturers are among the top 10 best-selling BEV brands, with one exception: Tesla with 604,000 units sold in 2023 (see figure 2).

Figure 2: The Chinese NEV market is dominated by mostly local players

Source: Berylls by AlixPartners, CPCA

At the same time, the success of Chinese OEMs can also be seen on foreign markets. The export volumes of Chinese OEMs have increased massively in recent years for both types of drivetrain. The total export volume has increased by >400% since 2020 and grew very strongly by 65.3% year on year in 2023. While the trend can be seen in both segments, the export volume for EVs has grown even more strongly than for conventional ICEs – for example, sales of electric vehicles in China have increased more than tenfold since 2018 (2018: 140,000, 2023: 1.68 million units sold). Although Chinese OEMs have not yet made their mark in established Western markets such as Western Europe, they are determined to do so. We can therefore expect to see more activity by Chinese OEMs in such markets in the future (see figure 3).

Figure 3: At the same time, overseas activities have massively increased

Source: Berylls by AlixPartners, CPCA, Press

How did this development come about? There are a number of reasons for this, the first being the acceptance of EVs among Chinese consumers. Despite the absence of buyer incentives or “money in the trunk” from the state, the majority of Chinese consumers are turning to EVs. A Berylls study with over 1,000 respondents shows that 56% of vehicle owners and 42% of first-time buyers would opt for a EV when choosing their next car. At the same time, Chinese brands are predominantly being chosen (in terms of EVs), with 46% of all car owners and 61% among first-time buyers. In a direct comparison, only 32% (car owners) and 23% (first-time buyers) would opt for EVs from German brands!

This finding is related to reason 2: The number of Chinese brands has increased significantly in recent years and at the same time Chinese brands are comparatively “better” than their foreign JV competitors. “Better” means in this case: the customer gets more (functions and technology) for less money.

And a lower price is the third reason. An unprecedented discount battle took place in 2024. Driven by Tesla’s price cuts for the Model 3 and Model Y, Chinese OEMs lowered their prices significantly. Foreign OEMs/JVs also followed suit, as can be clearly seen from the example of the ID.3 made by SAIC-VW. ICEs are also affected by this, with the FAW-Audi A4L starting at less than EUR 30,000.

Figure 4: Price erosions will remain the dominant issue in 2024

Source: Berylls by AlixPartners

The key insight here is that prices have shifted massively downwards, but there will be no recovery in price reductions and cars will not suddenly become more expensive just because they are better equipped.

On the contrary, a “tech overload” is taking place – equipment that is only found in the premium segment in Germany is either becoming or is already standard equipment in volume vehicles in China. This applies in particular to Smart Cockpit (a collective term for connectivity or infotainment) and AD/ADAS. It’s a race for KPIs, with OEMs outbidding one another on things such as: e-range, charging time, number and resolution of cameras (keyword: LiDAR, millimeter-wave cameras), computing performance (“TOPS”), chips (e.g., Nvidia Orin X, Qualcomm Snapdragon 8295), ADAS functions (keyword: NOA, NGP), and much more. However, Chinese OEMs are not stopping at “functions”, but now also focusing on driving characteristics. In order to offer customers added value for their money, features such as CDC and Rear Wheel Steering are also slowly finding their way into standard vehicles.

Figure 5: The baseline has been shifted considerably

Source: Berylls by AlixPartners

While prices have never been lower, premium has been turned into a race for functions (combined with buzz words)
Chinese OEMs are loading up their models heavily on HW and SW side and compete on “KPIs”

Typical dimensions and “KPIs” incl.:

Smart cockpit – number and setup of screens, smartness of AI assistants (e.g., 4 zone voice control), OTA
E-powertrain – electric range (going towards >1,000 km), (fast) charging speed, size of battery pack
AD/ADAS – AD level, ADAS functions (driving pilot, NOA, NGP etc.), types, numbers and spec of cameras (LiDAR, milimeter wave radar, 360 camera, # of MP), computation power (measured in TOPS)
Interior and comfort – “zero-gravity” leather seats, “living room” elements, chassis system (e.g., CDC)

To summarize: cars in China are being equipped with an increasing number of functions while becoming cheaper and cheaper. More functions and lower prices – two developments that go hand in hand in China.

Outlook

In 2024, the pricing battle will continue with undiminished ferocity. With very few exceptions, no OEM is likely to be profitable in 2024. We can assume that some domestic OEMs will “disappear” this year, and even the current market leaders are not immune to this danger. However, this is no reason for foreign JVs or OEMs to cheer. Volumes that disappear with one local OEM are likely to reappear with another local OEM. At the same time, local OEMs are gradually gaining market share from foreign JVs and OEMs, a trend that can be observed in nearly all segments.

Implications for German suppliers

In order to deduce these, we first need to understand the strategies of the manufacturers. They will pay much stricter attention to costs, much to the detriment of suppliers, although the rigor of the foreign JVs and OEMs certainly cannot be compared with that of the local Chinese OEMs. Moreover, foreign JVs and OEMs will increasingly relocate their development activities to China. At the same time, a large Chinese supplier landscape is currently emerging, particularly in the areas of e-powertrain, smart cockpit, and AD/ADAS.

For German suppliers, this means:

1. Pressure on profitability and cash flow, because all OEMs will optimize their own costs, i.e., all OEMs, regardless of their origin, will successively onboard more purely Chinese suppliers. To compare: some local players are using 80% to 90% of purely Chinese components.

2. Investment pressure, as the relocation of OEM development activities (Western OEMs and JVs) to China means a move to China on the supplier side. Local capacities and skills need to be built up.

3. Market share pressure, as Chinese suppliers already dominate various domains, including smart cockpit, batteries, and AD/ADAS, and are expanding rapidly in other areas. As already indicated in a), very few domains are still dominated by German suppliers, just think of chassis. Chinese suppliers are also attacking in these domains, for example through aggressive pricing, but with comparable quality and functions.

Strategic guidelines for German suppliers

The core activity of German suppliers must be cost control. The aim is to reduce your own supply chain costs (including material costs) and overhead costs proportionately because suppliers have to invest in order to meet increased local customer requirements. This includes things such as: strict cost and especially cash discipline, the selection of new subcontractors and, above all, cost control in the product development process.

At the same time, it is important to remain innovative, i.e., to offer products at lower prices. Without innovations and the resulting differentiating advantages (at a similar pricing level of course), OEMs are turning directly to Chinese suppliers. As previously mentioned, OEMs have to outdo each other in terms of technology in order to survive on the market – so all suppliers will have to follow suit.

However, it should be noted that suppliers must remain agile, especially due to changing OEM requirements. This is illustrated by an example: XPeng P5 was the starting signal for LiDAR at its launch in 2021. So far, all Chinese OEMs have followed suit with LiDAR, including NIO, Li Auto, AITO, Luxeed, AVATR, etc. – the LiDAR “knob” above the windshield is now standard. A very rigid technology roadmap would not allow such rapid changes, because this agility on the OEM side must be able to be mirrored by suppliers.

Finally, Western suppliers should consider M&A and also partial sales. In particular, it is important to eliminate areas that are less competitive or where competition is so intense that continued operation no longer makes sense. In addition, collaborations could be entered into with Chinese companies in order to share knowledge on topics such as connectivity. However, the decision needs to be assessed and made individually for each company.

Author

Willy Wang

Associate Partner

willy.wang@berylls.com

Willy Wang

Willy Lu Wang (1981) joined Berylls Strategy Advisors in 2017. He started his career participating in the graduate program of Audi focusing on production planning. After stations at another strategy consultancy as well as being the strategy director for a German Tier-1 supplier, he is now responsible for the China business at Berylls.

He has a broad consulting focus working for all clients in China, whether they are JVs, WOFEs or pure local players. He is also responsible for the development of AI and Big Data products dedicated towards the Chinese market further strengthening the Berylls End-to-End strategy and product development capabilities.

Wang studied Electronics & Information Technology with focus on Systems and Software Engineering and Control Theory at Karlsruhe Institute of Technology.

Wherever you look, the euphoria surrounding electric mobility is fading, mainly because there are still too many hurdles for electric mobility to become a widely accepted mode of transport. These include uncertain residual values, an inadequate charging infrastructure in some areas, and comparatively high prices or surcharges compared to vehicles with combustion engines. Although the current disillusionment is not a departure from the course we have ultimately set towards electric mobility, it is at least a further slowdown in speed and thus a shift on the timeline.

For suppliers who are already struggling with a variety of challenges (e.g., low volumes, short innovation cycles, low margins), the development comes at an inopportune point in time. While the mood among suppliers regarding electric mobility was still very optimistic (if not too optimistic) last year, according to this year’s Berylls Supplier Executive E-Mobility Survey 2024 it has meanwhile become a good deal gloomier.

Suppliers now less optimistic about the electric future

The results of the survey also show that the electric mobility course we have embarked on is here to stay. While 70% of suppliers still depend on combustion engine vehicles for at least a quarter of their revenue today, only 55% expect this to be the case in five years’ time. At 69%, the vast majority of respondents see electric mobility as an opportunity for their company – but compared to the previous year’s figure of 77%, the mood is now far less upbeat. The response is hardly surprising given the tougher market conditions, which are also reflected in the expected impact on revenue over the next five years. While 75% of respondents expected an improvement last year, this year’s figure has fallen to 55%. The same applies to margins: last year, 43% of respondents still expected electric mobility to have a positive impact in five years’ time, whereas in 2024 only 25% predict higher margins.

Selected results of the E-mobility supplier survey 2023 & 2024

Source: Berylls by AlixPartners

Strategic stalemate

Suppliers often find themselves in a difficult situation. In order to maintain or gain market share, they feel compelled to keep up with or even drive the rapid pace of technological development. However, in many cases innovation does not pay off in the form of high margins. After all, the large number of competitors are creating a highly competitive market with low prices and profit margins, which often means suppliers are caught in a dangerous vicious circle. Only if they sell more will there be a chance of achieving profitability through economies of scale. At the same time, selling more of the often loss-making electric mobility components means a deterioration in the overall margin or the need for it to be subsidized by the rest of the business.

Divestment or focused growth

Even though the overwhelming majority of suppliers surveyed (86%) are satisfied with their electric mobility strategy, it can be assumed that they are rather too optimistic in view of the further worsening of the situation described above. In any case, it is important for suppliers to take a critical look at the electric mobility business and, in many cases, to examine their economic rationale. There should be no taboos here, and divestments should also be an option that can or, in many cases, must be assessed. Major Tier-1 suppliers have recently led the way and withdrawn from supplying components such as battery packs, electric motors, power electronics, and battery management systems. Despite the supposedly attractive market size and prospects of growth, no positive result could be expected in the foreseeable future, which meant that return expectations could not be met or capital allocations justified.

If all the signs point to staying, the innovation strategy needs to be fundamentally scrutinized against the backdrop of shorter innovation cycles and often a lack of profitability. It is also important to organize start-ups efficiently and without errors, to “claim” missing call-offs directly from the OEMs and to define a well-thought-out competitive positioning. A high degree of flexibility and a certain openness to new technology should also be elementary parts of the strategy. After all, many OEMs are currently switching to the model of technology openness, similar to BMW. As a result, engine programs, for example, are being extended, which in turn benefits those suppliers who are still operating in these areas. OEMs are already realizing that their former supplier base in combustion engine-dependent components has shrunk and concessions have to be made on prices.

However, one thing is certain: the electric mobility business is likely to remain challenging and in many cases still needs subsidizing from other business areas before it can become attractive in the long term. Now more than ever, suppliers need to ask themselves how they want to position themselves in this fiercely competitive market.

Author

Dr. Jürgen Simon

Associate Partner

juergen.simon@berylls.com

Dr. Jürgen Simon

hether the COVID-19 pandemic, supply bottlenecks, the war in Ukraine, or inflation – the crises seen in recent years have also presented the automotive industry with challenges in the form of rising interest rates, high energy costs, and volatile raw materials prices – and continue to do so.

In addition, manufacturers are exerting pressure on suppliers due to increasing price competition, which is further exacerbating the revenue and profitability situation and has already led to massive job cuts at many suppliers. Among the TOP 100 suppliers worldwide, a decline in margins from 8.3% in 2017 to around 6% in 2023 can be observed.

Suppliers had to contend with some significant cost increases in 2023. This was the result of an expert survey in which German representatives from medium-sized companies to the largest global suppliers took part. Around 76% of respondents stated that costs had risen by more than 5% (7.9% on average). The main reasons given for the increase were the higher cost of materials, wages, and energy. For 2024, the majority of experts surveyed predict the recent downward trend in producer prices to continue and lead to lower cost increases than in the previous year. Only just under 30% of experts expect costs to rise by more than 5%, with an average increase of 4.2% in 2024.

However, measures taken on the supplier cost side alone will not be sufficient to counteract the rise in costs and the further increase in pressure from OEMs in 2024. Any claims arising from cost increases, volume fluctuations, etc. need to be systematically identified and implemented. Claims management has great potential to boost revenue and earnings.

Actual cost increase in 2023 and expected cost increase in 2024 compared to the previous year

Source: Berylls by AlixPartners

While 38% of all respondents still covered more than 75% of their cost increases through claims in 2023, the outlook and level of confidence in the ability to successfully manage cost increases via claims has deteriorated for 2024. Only 19% of suppliers still expect to be able to pass on more than 75% of their increases to OEMs through claims. The majority expect less than 50% of their claims to be successful.

This development has led to a thought experiment regarding the relevance of successful claims management. According to Berylls experts, companies with outstanding claims management skills can realize up to 15% of their revenue through claims. Let us now imagine a supplier with total annual revenue of 1 billion euros, a 6% profit margin and claims realization of 100%. Based on these figures, 150 million euros of that company’s revenue is generated through claims. If the claim rate now falls to 50%, this corresponds to a drop in revenue of 75 million euros. Assuming costs remain the same, the profit margin is then reduced to –1.5% in this case and therefore in the red. Effective claims management is therefore highly relevant for the company’s results. The decline in the assertion of claims predicted by the experts for 2024 could have dramatic consequences for individual suppliers and threaten their very existence.

A shift can be observed with regard to the reasons for claiming. While higher materials costs were the most common reason for claiming in 2023, volume fluctuations are expected to be the main cause in 2024. This trend is in line with current forecasts, which recently revised production volumes in Europe slightly downwards for 2024, largely due to declining sales volume predictions for BEVs.

Actual (2023) and expected (2024) coverage of the cost increase through claims

Source: Berylls by AlixPartners

However, despite the worsened outlook, the experts surveyed rate their claims management as positive on average, according to the survey. In summary, the maturity of claims management is usually well below the optimum level, resulting in the following fields of action for suppliers:

Create transparency: In order to process claims both swiftly and successfully, comprehensive transparency regarding all options for claims, contracts with customers, cost developments, and ongoing claim processes is essential.

Establish clear rules and processes: Successful claims management requires clear structures, responsibilities, and processes. It is important to establish coherent rules for communication with customers and the involvement of management levels.

Enforce claims systematically: KPIs must be used to manage, control, and incentivize the enforcement of claims. They serve as a trigger for initiating a claim process and help to boost performance and drive effectiveness. The involvement of cross-departmental and cross-functional teams from purchasing, production, sales, and finance as well as external experts in critical negotiations is crucial to successfully asserting claims.

A final look at the survey results: In 2023, the experts surveyed were unable to compensate for a total of some EUR 2.7 billion of the total cost increases via claims. As the enforcement of claims is likely to become even more difficult in 2024, it is therefore imperative for all suppliers to further professionalize their claims management processes.

Main reasons for claims

Source: Berylls by AlixPartners

Authors

Dr. Alexander Timmer

Partner

alexander.timmer@berylls.com

Thorsten Lips

Partner

thorsten.lips@berylls.com

Philipp Stütz

Associate Partner

philipp.stuetz@berylls.com

Maximilian Deuringer

Consultant

maximilian.deuringer@berylls.com

Philipp M. Stütz

Philipp M. Stuetz (1981) joined Berylls at the beginning of 2021. He has over fifteen years of experience in the automotive industry. Thereof he spent seven years at an international automotive supplier with assignments in Spain, the USA and Mexico and over eight years in consulting. His focus is in operations excellence, especially in large transformation programs, process optimizations and efficiency improvements in administrative functions and indirect operations areas. He counts suppliers and OEMs to his clients alike.

Philipp M. Stuetz graduated in business administration from the universities of Stuttgart and Strasbourg.

Dr. Alexander Timmer

Thorsten Lips

Thorsten Lips (1972) is a partner at Berylls by AlixPartners (formerly Berylls Strategy Advisors). He began his career as a management consultant at PricewaterhouseCoopers Düsseldorf in 1998. After spending six years at Malik Management Centre in St. Gallen, Switzerland, he took the cross-industry, global responsibility for Pricing, Sales, Service and Marketing as a partner at Horváth. At Berylls, his area of expertise is Pricing & Revenue Management. This encompasses classical topics like new- and used-car pricing, aftersales pricing and the like. In addition, he is an expert in innovative Pricing and Revenue Management approaches for digital products and services as well as in the field of data-driven Pricing.

Industrial engineering and management studies at the Technical University of Ilmenau and the Technical University of Darmstadt.

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