Sustainability as Strategy: Navigating Automotive’s Fractured Future: Regional Strategies, Supply Chain Shifts, and the

00:00:01: Hello everyone and welcome to Sustainability as Strategy,

00:00:04: a podcast

00:00:05: brought to you by the experts

00:00:06: from Roland Burger

00:00:07: Americas.

00:00:09: I'm your host Sean McMahon and today we're going to be talking about the future landscape of the global automotive industry.

00:00:16: Joining me for that conversation is Brandon

00:00:18: Boyd.

00:00:19: Brandon

00:00:19: is a senior partner and North American automotive practice lead at Roland Burger.

00:00:25: Brandon, how are you doing today?

00:00:27: I'm doing fantastic.

00:00:28: Thanks for having me, Sean.

00:00:29: That's a pleasure to have you join the show.

00:00:31: I think the best way to start out this conversation is to ask you to just kind of tell us what the biggest trends are in the global automotive industry and what some of the biggest challenges that industry is facing right now as it looks towards the future.

00:00:44: Yeah, that's an excellent question and one that a lot of our clients are currently grappling with.

00:00:49: The big topics right now are how to deal with how the world is kind of fracturing.

00:00:55: And what I mean by that is that we're seeing that the world is kind of shaping into three different ecosystems.

00:01:04: We have China, Europe, and the US.

00:01:08: And the requirements to participate and win in those markets, if you're an OEM or a supplier, are changing.

00:01:17: And it's really creating a lot of complexity and challenges.

00:01:22: for our clients to figure out how to navigate that.

00:01:28: And I think this is a lot of what they're thinking about today is, you know, how do I navigate that in a world that is becoming more dynamic and complex every year?

00:01:40: And so, you know, it sounds like the industry's at a pivot point, right?

00:01:44: Depending on which region you're in.

00:01:46: Yeah, I think that's right.

00:01:47: I mean, if you kind of go back to, you know, we started, you know, probably a few years ago with the major, you know, change in technology, you know, really going from ICE to EV and this was really kind of viewed as the next kind of wave or industrial revolution in the industry.

00:02:07: And while that's kind of been happening, the markets have been also changing quite a bit.

00:02:13: If we look at China, the demographics of people that buy cars there, they tend to be younger, more tech savvy, interested in more of that gadgetry, let's say, than the performance of a vehicle.

00:02:29: And then when you move to US and Europe, the consumer or average buyer tends to be closer to their fifties.

00:02:37: And they have a very different view of what the vehicle should be.

00:02:43: And so when you start having these fracturing of what consumers or customers want at the very front end, that obviously creates a lot of challenges when you're trying to develop and build products that your customers love.

00:02:58: So you kind of have that fracturing.

00:03:00: And then, of course, we have the geopolitics and the backdrop of what's happening in each of the regions to support that.

00:03:09: And then you have a bunch of other things, whether it's natural disasters, supply disruptions, you name it, that are also creating a lot of complexity for these major decision makers at these companies.

00:03:28: So it's fascinating what you say about customer preferences, also leading to the need to develop regional supply chains.

00:03:36: And I say that because it seems like so many of the headlines these days are, all about geopolitics and tariffs and stuff like that.

00:03:41: But there is a customer preference angle to it, right?

00:03:44: Oh, absolutely.

00:03:46: I mean, that is a pretty important one.

00:03:48: And we are seeing that drive, you know, that market specifically.

00:03:53: But I'm not like underplaying the importance of the geopolitics either, right?

00:03:58: Like, you know, when I think about China, they've really had this ambition to become a relevant, if not the leader on the global stage for the automotive industry.

00:04:10: And with that, they are willing, and very smartly so, to take more risk.

00:04:17: And this is the risk that I would say entrepreneurs take when trying to establish or building their position in a very established market.

00:04:28: And so the entire automotive space in China, I think, has really had that entrepreneurial mindset, which has allowed them to go really fast, which we always talk about China speed.

00:04:44: But there's a real reason behind why that China speed has emerged compared to what I would say is the Western world, where we've already gone through that ramp up.

00:04:57: We are now generally more established and more risk adverse because we've also had the pain of warranty challenges or consumers being upset with the product quality and so forth, where I think when they've been more on the entrepreneurial side, similar to the model that Tesla took in building out their brand and specifically around the self-driving elements, where they took a lot of risks on the front end to build out a leadership position in a differentiated brand position.

00:05:33: And I really think China learned a lot from that.

00:05:36: They learned that they can take those calculated risks to try to leapfrog the established players.

00:05:43: And the new technology shift really also helped them because they kind of put everyone

00:05:50: on a more

00:05:50: level playing field.

00:05:52: They didn't have the fifty to a hundred year history of building combustion engines that they had to overcome.

00:06:00: So it really changed how they could approach the market.

00:06:06: So it sounds like what you're saying is there's a regional supply chains that are being brought forth, A, because of all the political preferences and also the level of risk that manufacturers are willing to take on.

00:06:20: So would you agree with that?

00:06:21: Kind of like a China and Asia supply chain in the US and then Europe?

00:06:26: Yeah, I think it's Asia's a little China specific I mean I I think the rest of China or the rest of Asia rather is Is kind of taking a split approach, you know trying to see how they can take the best of both sides.

00:06:41: So it's a little different and there are fewer OEMs that let's say that are coming from there now and I'm excluding from that group Korea and in Japan because I put Korea and Japan more into the you know, the West bucket, right?

00:06:56: Because they're more established, longer-standing group.

00:07:02: Yeah, that's probably how I'd characterize that.

00:07:05: And so what that means, you know, for the OEMs and suppliers is that they have to basically define strategies for each of those markets, which has not been an easy thing because the industry has been built up.

00:07:21: on these ideals around economies of scale.

00:07:25: And it's a little bit breaking that base principle because now you have to figure out different economies to work under different working styles and different speed.

00:07:38: And then as we mentioned at the front end, different consumer demands, which really puts into the business a lot of complexity.

00:07:48: and it creates a lot of challenges on how to operate effectively and efficiently.

00:07:54: Okay, let's dive into supply chains a little bit right now.

00:07:57: You know, if I'm trying to optimize my supply chain for any of those regions or just even from a global perspective, what are some of the key areas that I should consider?

00:08:06: Well,

00:08:08: on the supply chain side, this is where the geopolitics are actually coming into play quite a bit.

00:08:14: because it's hard to talk about supply chain without talking about supply security and national security.

00:08:22: And this is exactly where some of the base materials, as many of us know, are still being predominantly controlled in the China market, whether it's actually mine there, usually not, but the processing of those materials is still is happening in China more often.

00:08:45: And so you're seeing a lot of investment into trying to diversify some of that risk away from China.

00:08:53: And so that's where you're seeing lots of investment on the US front for sure and taking a view on critical materials and precursor materials and figuring out how we can diversify the supply chain and set it up in a way that would not be as reliant on China as an example.

00:09:17: Okay, so if you're trying to diversify your supply chain and de-risk, we'll say from China, how far up and down the supply chain should people be looking?

00:09:28: Well, I mean, it's going all the way down to, like I said, the base materials in many cases because you you know, and this is what's been a really interesting development over the last, I'd say, year where I think all of the OEMs have been pushing on the supply base to create a different level of transparency into their value chain than they've ever had.

00:09:51: So, you know, normally you would expect that, yeah, you could name all of your tier two, so if I'm a tier one supplying the OEM, I have a pretty good view of all my tier twos and where they're getting or building the products that feed my finished goods.

00:10:11: But that's not satisfactory anymore.

00:10:14: Now they want to do the double or triple click into.

00:10:18: where are you going end to end.

00:10:21: and can you provide us that transparency, which is really put a lot of the suppliers into scramble mode of figuring that out because it's not something that they've ever really looked into.

00:10:32: And then even if you go and ask your tier two, they often don't fully have the transparency.

00:10:38: So it's really trying to drive to a much deeper level of transparency than we've ever had.

00:10:44: And I think it's been very eye-opening to see the dependencies.

00:10:50: And this is really pushing, like I said, the suppliers and OEMs to really rethink their setup and how they think about supply chain risk.

00:11:01: And we're seeing a lot of investment into thinking through those problems and trying to move or at least have alternatives away from a single source.

00:11:13: Are you seeing an uptick in either reshoring or French shoring in the manufacturing side?

00:11:19: Yeah, I think that's that's a big topic right and the way that I you know the way that I've looked at is like if you think about how long it took to establish our industrial base and then how long it's taken kind of to to ramp down to where we're at today You know, it's going to take time.

00:11:37: I don't think that this is gonna be something that happens overnight.

00:11:42: and You know, I think this is another one of those challenging things for suppliers and OEMs that are kind of thinking about these things because you currently have an administration that is very supportive of that.

00:11:57: And then what happens if in two years there's a flip in that, right?

00:12:02: And I think that gives a lot of companies pause on how far do we want to go and how fast do we want to move in doing that.

00:12:12: But I do think there are very I think that outside of that, they still recognize there's probably value in de-risking it.

00:12:23: And so you are seeing more of that activity happening.

00:12:27: So you are seeing more of those things being considered, more of that manufacturing being brought back.

00:12:33: But I think this is all in light of them.

00:12:36: also working on things like AI and lights out manufacturing or where you're seeing a big pick up an interest is in the humanoid robot space because, you know, one of the challenges we've kind of come to realize post-COVID was having a stable workforce in the manufacturing environment has not been easy.

00:13:01: And, you know, even small improvements in automation can really help fix that.

00:13:09: And so you're seeing a lot of investments in those kinds of technologies now, where I think we're going to continue to see that as one of the big areas of capital deployment for these companies over the next years.

00:13:23: So, I mean, if I'm understanding you correctly, you know, initially, a lot of this manufacturing was offshore because it was cheaper, right?

00:13:29: You could find different locations around the world, you know, cut your costs.

00:13:33: Bringing that back would kind of naturally, you could assume would be more expensive, you know, for labor or whatever.

00:13:38: But that's being mitigated by investment in AI and automation.

00:13:41: So it's bringing it back, manufacturing back onshore doesn't necessarily mean bringing thousands of jobs back onshore, right?

00:13:50: Yeah.

00:13:51: Well, I think you're raising an excellent point, right?

00:13:54: Because it was a labor arbitrage offshoring.

00:13:58: And the kind of bringing it back, what's been interesting is I think people are willing to actually pay a premium or at least more money to have supply security.

00:14:13: So there is some room, at least we've seen in early indications of willingness to pay more for onshoreing.

00:14:23: But I do agree with your statement that I think the ambition though would still to drive costs down.

00:14:32: And that's gonna be very independent or dependent on you know, the the opportunities and making sure that the cost of the automation is in somehow more than the people that could be there doing it.

00:14:48: And I think that's where we are seeing some of the costs and automation going down because of the investments and where people are doing things in the flexibility that's created by AI and all of these kinds of technology advancements.

00:15:04: So I do.

00:15:05: I do suspect that that will be a big part of it.

00:15:08: But the other part of it, as I mentioned, is just also having a stable labor force that can ensure that high quality products and the effectiveness of the plant are also achieved, you know, the high utilization of the plant is achieved.

00:15:25: And so when you have unreliable workforce, that becomes pretty challenging.

00:15:31: I got you.

00:15:32: Yeah.

00:15:32: So I also want to ask you about something you mentioned earlier about China, and kind of go back to you know, kind of the hunger and the push that they have there to be number one, right?

00:15:41: And they learned some lessons from Tesla and, you know, kind of optimizing that way and kind of ramping up real quickly.

00:15:48: What happens to the global picture of all this when China and Chinese manufacturers, let's just say, take that knowledge and try to set up manufacturing in other markets around the world?

00:16:01: Yeah, that's a great question.

00:16:03: And that's been one that I think we've been asking because I think the initial thought was that and you know I always I love analogy.

00:16:13: so the field of dreams analogy of you know if they build it they will come.

00:16:18: and I think you know what we saw is that China did a lot of investment in building up capacity and with the idea that they would be able to export.

00:16:29: and and then what we're seeing is like that strategy has worked but it so far, but we'll have its limits.

00:16:36: I think countries are now saying, hey, wait a second, I don't feel comfortable with all these cars just being exported to our region.

00:16:47: If you're going to do that, you have to start localizing and adding content, or you're going to expect pretty high tariffs from us.

00:16:57: And so now they're in a position where they do have to do more localization.

00:17:03: And this is where a lot of the advantages start to dissipate, right?

00:17:09: So they no longer have the advantage of labor cost.

00:17:14: They no longer have the advantage of the same level of vertical integration and all the base supplies.

00:17:24: So they're paying the same prices as everybody else.

00:17:28: And so really a lot of the advantages start to go away.

00:17:34: The question though is that, are they still designing vehicles that are attractive to the customers in those markets?

00:17:44: And is the demographic that they have and that they're serving and the cost point that they're meeting more in line with what those consumers want compared to maybe what some of the others are doing?

00:17:58: And I think that's going to be the question.

00:18:00: that's going to be interesting to see how that plays out.

00:18:03: Because we do know that they are designing lower cost vehicles.

00:18:08: And because of the speed and, like I said, more of that entrepreneurial taking risk, they're able to do it at a different price point.

00:18:18: But as, like I said, consumer expectations change.

00:18:24: and so forth, and you have warranty and liability issues and whatever, will we see their speed slow down at all?

00:18:32: And will the price parity start to align?

00:18:36: And then it just becomes of what product does the customer like the most?

00:18:40: Okay, well, that's fascinating what you say about China, even if they do bring manufacturing to other places around the world, it doesn't necessarily mean they have an advantage because they also have to adjust.

00:18:49: So if I'm a business owner right now, you know, Roland Berger has tons of clients who are, you know, operating up and down the supply chain in the global automotive industry.

00:18:58: You know, what kind of advice would you offer them for how to navigate, you know, the next call it, twelve to eighteen months?

00:19:08: Yeah, this is a great question.

00:19:12: And, you know, it comes in light of an industry and specifically on the supplier side.

00:19:18: I'm going to start there because it comes in a five year period where they've destroyed collectively three percent of value per year.

00:19:28: Tell me more about that.

00:19:30: Yeah, so we have an analysis we do.

00:19:32: It's called our winners analysis.

00:19:34: And it looks at risk adjusted returns and growth in invested capital is kind of two dimensions.

00:19:44: And when we look at the risk adjusted returns and overall value, you can see that it's on a on a complete industry basis has destroyed three percent of value per year.

00:19:59: Which kind of points to, and also they're at record, I wouldn't say record, but they're at the lowest kind of return profile that we've seen in quite some time.

00:20:13: I think we average usually around seven and a half, eight percent, and now we're down in the four to four and a

00:20:20: half.

00:20:21: which is really just not healthy for the supply base.

00:20:26: And so what we're really trying to help our clients think through is how to get back to making money.

00:20:34: Because at the end of the day, These companies exist for their shareholders to return some value to them or provide some value to them.

00:20:44: And these companies need to do that because right now, if you look at it, it's kind of an uninvestable industry.

00:20:53: And that's a really sad place given how much I love this industry and I love cars.

00:20:58: So we really need to figure out how to get back to making money.

00:21:02: And I think that comes at probably making some pretty tough choices.

00:21:07: And there were a lot of bets over the last years made on, you know, EV kind of put position for new market opportunities, growing into new regions, new products, whatever it may be.

00:21:22: And I think a lot of companies are getting, you know, starting to think about like getting back to basics, you know, like, what are we really good at?

00:21:29: Where can we make money?

00:21:30: And I think that's a good place to start.

00:21:33: Because the one thing that is certain is that the future is uncertain and we we've seen that.

00:21:40: you know.

00:21:40: if we look at you know the the previous decade which we call the golden years you know we really didn't have the the amount of disruptions and supply issues and you know whatever just causing all of these challenges.

00:21:57: And now it's like you wake up every morning holding your breath, praying that it's not another major disruption today.

00:22:04: But that's a little bit how it feels.

00:22:07: So knowing that you have that head of you, that's what I'm saying.

00:22:11: You know, you got to get back to kind of a healthy position and build in flexibility and the ability to be nimble.

00:22:23: And also having probably, you know, clear or faster decision making so you can react to these things.

00:22:31: So I would expect a lot of the investments are going to be into building those capabilities so you can think faster, move faster, and react faster, all with the hopes of, like I said, making more money and providing better returns to shareholders and making the industry more sustainable.

00:22:56: Well, that sounds like sound advice.

00:22:57: Of course, yeah, we've got to try to make money.

00:22:59: That's kind of important.

00:23:01: So, hey, listen, Brandon, I appreciate all your insights today.

00:23:04: I've learned a lot and I think the listeners will as well.

00:23:06: So thank you for your time.

00:23:08: Now, thank you.

00:23:09: It was a pleasure, Sean.