Smaller suppliers: How are you coping with globalization?
It’s a daunting task to follow OEM or Tier-1 customers around the world. Coordinating with their rapid-fire launch cadences requires a significant investment in people, resources and capital. Several smaller, regional suppliers who were not willing to extend their enterprise and increase their exposure to greater risk have opted to consolidate with larger players, or look for alternative approaches.
Let’s consider some context. In 2016, the average volume for the top 20 global vehicle platforms was 1.78 million units. By 2023, this is expected to escalate 37%, to 2.43 million units, with the average platform built in at least four regions around the world, according to IHS Markit Analysis. Swimming in such a swift current is not for the faint of heart.
Why this consolidation? The slow but eventual reduction in the gaps between major-market emission standards and the onset of a “global consumer” are two reasons. As OEMs seek to reduce variability and cost as well as the reduced-complexity benefits of global scale, those suppliers who are sole-sourced on global programs are required to launch facilities in several regions, often with little time between launches. The era of regional platforms dominating the landscape is long gone, excepting the US full-size pickup anomaly.
Outside of the benefits of scale, there are additional drivers that favor large, global suppliers. Systems integration and optimization is a mandate from the OEMs and Tier 1s, but it can present a burden for sub-tier companies which lack broad design and infrastructure capability. Sure, you can export from one location for global markets, but recent initiatives to reduce inventory and logistics costs, while building in a common currency to that of your customer, are driving the co-location of Tier 1 and Tier 2 supply.
Then there’s the constant drumbeat of Research and Development requirements to maintain technical leadership for customers based in multiple regions. Such pressure can tax a smaller, lesser-equipped organization. New materials, the steady rise of electrification, warranty risk and the sheer speed of the industry are proving to be substantial hurdles for many.
How can small suppliers survive the onslaught of the mobility industry’s globalization? Following your customers around the world can tax resources and expand risk—are you willing and prepared to accommodate such activity?
There are solutions and they require creativity. One option is to extend your enterprise with a peer from another region who is facing the same pressures. If a small supplier based in North America is being pressured to expand to Europe or Asia, odds are that there are others in those regions who are under the same gun. While alliances can be complex and usually demand some level of shared sacrifice, several smaller, regional suppliers have expanded successfully to new regions though a partner. They’ve reduced their risk and maintained independence. Maintaining a global contract with a reduced risk profile is tricky though achievable.
There are other alternatives. How strong is your company’s technology and patent/IP protection? Scale economies of your part/system and having a “logistics-friendly” capability may enable you to ship from a single location for the world. While currency exposure is still a concern, building the best mousetrap still attracts core customers.
Other possibilities include focusing only on regional platforms , close to your geographic comfort zone. This strategy usually does not have a happy ending. Firstly, global suppliers are not willing to overlook regional platforms (only built in one region) just because they have a global footprint. Secondly, OEM procurement teams also understand the dynamics of the market and may use this leverage to reduce margins and squeeze suppliers. Lastly, selling to a larger competitor is always a possibility.
No doubt it’s becoming more difficult for small, regional suppliers. The march of technology and increasing global scale are working against this critical group. Being proactive, opportunistic, open-minded to critical regional partnerships and flexible to emerging possibilities, are your keys to survival.