Auto-industry vertical integration returns

Automakers traditionally have considered vehicle assembly an essential manufacturing competency, but evolving industry requirements mean the definition of such "core" activities will become more dynamic for carmakers and suppliers alike (image: FCA).

Déjà vu: Vertical integration returns

The relentless flurry of technology linkups and acquisitions borne by OEMs and suppliers in sensors, software, artificial intelligence, mobility capabilities, and those offering innovative business models has made me realize: We’ve been here before.

It’s déjà vu driven by the industry moving to vertically integrate in key segments, only to possibly unravel and restructure again as the value equation changes.

When I entered the business in the mid-1980s the groundswell to divest in-house component operations at the U.S. ‘Big 3’ was already underway. For decades the OEMs had manufactured the bulk of their bills of material. Such vertical integration had grown from scale economies, cost, intellectual property protection, control of the value equation and risk mitigation – especially if a new technology was being introduced. It even spawned several sub-brands that built their own brand integrity with the end consumer, including GM’s Saginaw Steering Gear with its famous tilt-wheel capability and Chrysler Airtemp climate control.

For many reasons these vast in-sourced capabilities painfully unwound over 30 years, while the OEMs reflected: Why are we designing and building components when they may not include the latest technology or be the most efficient?  Can our capital be used in other area which has a stronger ROI? Is the industry and its requirements changing so quickly that we are losing pace and becoming uncompetitive?

As a result, many of the formerly in-house capabilities were sold off or shifted to new, independent entities. Delphi and Visteon were the largest examples of this trend. Tier 1 and 2 suppliers gained new clout as they took over what had been captive technologies.

Recently, the landscape and industry dynamics have again shifted—as the famous French saying goes (loosely translated), “The more things change, the more they stay the same.”

Most OEMs design and manufacture systems which they feel are core to their brand and vehicle DNA. Vehicle design/styling, powertrain (though some of it has been outsourced) and manufacturing are still typically considered strategic and are kept in house. Increased need for greater vehicle electrification to meet rising emissions standards and to integrate substantive levels of autonomy is also driving OEMs and Tier 1s to seek partnerships and acquisitions. So is demand for increased sensor performance and sensor-fusion capability. All are vital to a cohesive and positive customer experience.

As OEMs peer over the horizon to establish the true differentiators that will drive value for the consumer, they are also taking the opportunity to restructure their businesses. Many investments made in recent years have focused on acquiring or partnering to secure intellectual property and capability in critical spaces. Fewer of them are focused on brick-and-mortar acquisitions where physical capital is central.

Not long ago, OEMs simply would have collaborated with various suppliers in these new spaces—vehicle autonomy, connectivity, ride sharing and various electrification technologies. The pace of technological change and the new vehicle-customer value equation have altered that approach.

OEMs are again vertically integrating. While the trend this time around is assuming a different form than its predecessor, in the end the industry is seeking to add more internal capabilities as a competitive hedge.

Moving full circle, industry players will require constant re-evaluation of the business model to what drives value—both internal and external. Continued dynamism in the autonomy and connectivity spaces, as well as in electrification, is a given. It is bringing new engagements among tech innovators, new suppliers, traditional Tier 1s and 2s, and both incumbent OEMs and new ones. What will they value as ‘core’ technology?

To buy or to build? Partner or acquire? Selective vertical integration is a solution whose time has come again.

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