The road ahead for Canada's auto sector is full of challenges and opportunities
The Canadian automotive industry is in a period of turbulent change. Shrinking margins, changing consumer preferences and supply chain complexity are making an impact. These emerging trends will dramatically reshape the industry and reconfigure how auto parts suppliers and automakers operate. Chris Johnsen, a Deloitte partner and leader of the Automotive practice in Canada, offers his perspectives on the current state of the industry, and how suppliers and Original Equipment Manufacturers (OEMs) can position themselves for the future.
Across North America, the automotive industry is undergoing a period of turbulent change. Numerous trends are converging at once, challenging automakers and auto parts suppliers to rethink how they design, build and market their vehicles. "Suppliers need to be really aware of where the trends are going, and they've got to line up closely with the Original Equipment Manufacturers," says Chris Johnsen. "At the same time, the OEMs have to get a better hold on what consumers are asking for."
As leader of Deloitte's automotive group in Canada, Chris Johnsen has an insider's view of the trends, challenges and opportunities facing today's auto sector. Johnsen points out that, amid a challenging environment, there are real and tangible opportunities for automotive manufacturers, particularly suppliers. "There has never been so much money available for investment, and the auto industry seems ripe for investment," he says. "Some investors seem to be waiting to see where the chips fall.
But there's no question that there is capital out there, and the manufacturers that have proven they can take that investment and put some sort of return on the table will prosper in this environment."
The consumer is in the driver's seat
Chief among the trends reshaping the auto sector is the pace of changing consumer preferences. The mass market for mass-produced models is declining, and automakers and suppliers need to become more responsive to these rapidly changing tastes. In order to maintain a competitive edge, suppliers and OEMs must recognize that consumer preferences drive the market.
"Not too long ago, North American automakers were producing large numbers of vehicles fairly efficiently. But as demand for those models declined, the OEMs were forced to discount them, squeezing their margins," observes Johnsen. OEMs and suppliers need to recognize that the consumer is in the driver's seat — and that changing consumer preferences will effectively "pull" vehicles through the value chain. This "customer pull effect" is exerting a powerful influence in today's market.
"It goes right back to, what does the consumer want? If you build the cars that people want, people will buy them," says Johnsen. Suppliers and OEMs should work more collaboratively on parts and vehicle design. Some OEMs may want to consider more vertical integration of their supply chain. For their part, suppliers should be aware of where the demand "pull" is coming from. "If 80 percent of a supplier's business comes from one OEM, then they need to re-evaluate how profitable that will be in the long term," says Johnsen. "They may be in a good place with the platform they're supplying, but what's the length of that platform contract? How long is that going to be an enviable product?"
The auto industry in transition
As OEMs take constructive steps to address some of the capacity issues that have arisen, suppliers must also adapt. Johnsen advises suppliers to be more strategic by positioning themselves as leaders in design and innovation. Traditionally, automakers have outsourced components with low barriers to entry — less technologically driven parts, such as interiors and seating components. By recognizing that many of these components will likely move to offshoring production facilities, North American suppliers should focus on opportunities in high-value design and engineering.
"There are tremendous opportunities for suppliers to become technological leaders and innovators," says Johnsen. "So far, OEMs have maintained the 'secret sauce' to their vehicles, which is the powertrain." Unlike other parts that are routinely outsourced, the powertrain is closely guarded and proprietary. But Johnsen predicts that OEMs will increasingly outsource its design and production in an effort to control costs.
The new focus will be on areas of the vehicle that have not yet been outsourced. "There are plenty of very innovative and capable precision engineering shops in Canada and the U.S.," says Johnsen. "Companies that invest in technology and in precision parts-making, and in high value-added delivery of these parts, will stand to benefit in this environment." The continual delivery of leading-edge solutions and technologies is expected to become a key differentiator among suppliers.
The challenge for suppliers: specialize or diversify?
Today's suppliers are contending with a host of challenges: shrinking margins, increased commodity prices, and a weakened U.S. dollar, which has reduced the purchasing power of U.S.-based OEMs. In this environment, suppliers are being compelled to re-evaluate their business models. "Suppliers today have to ask themselves: should I diversify to attract more business from the OEMs, or should I specialize in a smaller number of parts and improve on those?"
Judging by auto industry news, most North American suppliers are moving toward increased specialization. "I think we'll find that the majority of Canadian suppliers will go into that specialist role," says Johnsen. "In the years to come, there will be many specialists with deep product specialties around a core component category, and there will be a few consolidated companies that offer a broader range of products to OEMs."
Ultimately, says Johnsen, both OEMs and suppliers should adopt a more global approach, and they should develop the flexibility to innovate quickly. Many of the North American suppliers and OEMs are already on the right path. In the end, the auto industry in Canada and across the continent will continue doing what it does best — designing and building cars. "At the end of the day, there will still be 1.6 million vehicles built in Canada every year," he observes. "Whether there are 10 large suppliers or 2,000 smaller ones supplying those components, the production levels will still be there."
