A sandwich position for an OEM Tier 1 supplier — attacked on both ends in the value chain. A wakeup-call for comfortable automotive industry managers
End of las year, I was delighted to support a German, system-relevant, automotive Tier 1 supplier to deliver the digital strategy for one of the largest — but also oldest — divisions of the company. Luckily, I was not alone in taming the beast (and I don’t suggest you try it single-handedly) as I partnered up with an automotive boutique consultancy.
There was an element, I think no one — including the partner — expected. While busy with the typical strategy approach of looking into competition, customers, end-consumers, and trends in order to formulate a winning strategy (the “right to win”, in consulting jargon) for the division who, while still a cash cow, but with a decreasing profit margin — I discovered that the Tier1 supplier is currently under attack from both ends of the value chain. In other words, not only from their direct competitor, and/or their suppliers, new market entrants, but also from their customers themselves.
Let me explain it with the help of this diagram:
Looking at the graphic value chain of the automotive industry, we see that Tier 1 suppliers have had a unique positioning towards the OEM. They created sub-components from their suppliers into individual components or complete units which then go straight into the car — which is obviously assembled by the OEM.
This was a close way of collaborating but also made the parties dependent on each other. In the past, for example, the Tier 1 supplier produced certain products solely for the particular OEM and was (too) often willing to give all rights, incl. intellectual property or right to use data which are produced by the component, to the OEM.
However, for the OEM, this was never a monogamous symbiosis with their Tier 1 suppliers. They always kept plan B simultaneously alive and are sourcing about 20% of each part from a second supplier. So, diversified supply, but single-driven demand. Ouch.
(That naturally, pushed the Tier 1 suppliers into dependency on their customers; very powerful customers who are known to squeeze the last bit out of their Tier 1 servants.)
The second “Ouch!”, comes in when we look what happened in the recent past, without me seeing significant action to decrease that first risk, but conjuring up Tier 2 suppliers from the other end of the chain.
Tier 1 suppliers are not against leaving the tough negotiation with their customers, the OEMs, to their Tier 2 suppliers. With that punishment of modern margin-slavery style, Tier 2 began to work on their independency, now producing products which are directly sourced to the OEM. In particular, the highly important capabilities of digital products.
As if it was not enough to get overtaken by their suppliers, the OEMs started to attack their space as well. Not only in the new fields, but also on their home turf, such as cockpit, light modules, steering or breaking, as we can see in the second image.
As the end-consumer continuously demands a better driving experience, the OEM experienced an increased pressure to manage, observe, track and connect their components so they could deliver the best driving experience to satisfy the consumers’ expectations.
Where does that leave Tier 1?
Still in the same sandwich position, which is getting narrower by the minute.
At this point, leaders need to (re-)think, whether it is still possible to move into the future with marginal, comfortable evolution — or rather with an (admittedly, uncomfortable, and slightly scary) disruption in order to move that quantum leap forward which I think is needed to maintain the lead.
My experience in these 3 months highlighted to me that the divisional top leaders are still pretty comfortable — and relying heavily on the corporate initiatives to solve (their) problems.
Don’t wait until you get disrupted — maybe from more than one source. Be proactive and get it going yourself, because despite the effort it takes, it’s undeniably worth it in the end.
