For the last several decades, suppliers have refined their systems and processes to match the needs of their preferred automaker. But now suppliers are working with new auto tech companies like Tesla, Rivian and Faraday Future. It is not as easy to accurately predict growth and forecast when working with these new auto tech companies, let alone smaller start-ups like Canoo if they will even make it far enough to put the product on the market.
So, is it worth diversifying your supply chain to adapt to their future needs?
The Potential Rewards
Before you give a hard “No” to the idea of diversification, it’s important to remember that significant risks often come with the possibility of big rewards. Taking on an emerging auto tech company is like jumping into an entirely new industry. Still, it’s one that, regardless of that specific company’s outlook, is inevitable to grow sooner or later.
Investing in the systems for new automotive now could put you as a leading supplier in the not-so-distant future. After all, the first to the table with a viable solution, perseverance, and enough money to back it up can dominate the market.
Even if the company you initially partner with folds, if you choose the right product, you can continue to perfect your supply chain and offer your solution to other more promising brands.
Now is the chance for automotive suppliers to begin to predict the future needs of this emerging market and secure their spot at the top of the supply chain.
The Risks
Of course, reaching the top isn’t always an easy climb (not everyone makes it). Working with today’s automotive start-ups is an entirely different ballgame than what traditional auto suppliers are used to.
For the last several decades, suppliers have refined their systems and processes to match the needs of their preferred automaker. For example, one supplier may provide some materials to Nissan or GM, but its system is best optimized for the needs of Ford. By doing this, it is relatively easy to predict the upcoming needs of their OEM partner and organize their supply chain accordingly. Any changes to the system are typically slow and gradual, and there is usually a protocol for communicating that.
With automotive tech start-ups, however, there aren’t any set systems in place. It is a learning curve for the supplier and the automaker, and the outcomes can be great or terrible.
Some of the main concerns with this type of diversification are:
1. Infrastructure Cost
Establishing a new infrastructure for a new partner is expensive, from processes, software, tools and training. This is especially true when working with start-ups that don’t always have a clear infrastructure designed within their establishment. This can often lead to communication issues, software and process kinks, and unrealistic expectations—all of which can cost the automotive supplier time, money and progress.
2. Financial Risk
To maintain (or even gain) a foothold in an emerging market, it’s important to have staying power, which requires enough money to maintain and grow the business before a profit is even churned. With significant financial backing, no matter how good your product is, it’s possible to end operations before it even reaches the market. If a supplier chooses an auto start-up with not-so-good projections, their investments may be for nothing.
3. Product Risk
Being the first with a new technology solution can be groundbreaking and lucrative, or it can be a complete dud. When creating a new product, it’s hard to know whether people will adapt to it or if a better solution will enter the market right behind you. If you invest all your time and money into building a system for an irrelevant product, you could be left even further behind on the new supply chain.
With all of these risks, it can be scary to diversify. But the big question is, can automotive suppliers afford not to?
Can You Afford Not to Diversify?
At some point or another, most suppliers will need to diversify their products to meet the market’s needs, but it’s mostly about where you want to land on that supply chain that will help you decide if taking the risk now is worth it.
If you think diversification could be the right move for you, here are some questions to ask yourself when assessing potential OEM partners:
What is the growth of the industry as a whole?
Things like electrification are being pushed by legislation, so the percentage of sales is easily predicted. On the other hand, autonomous technology could take some time for the public to fully adopt, either due to cost or uncertainty in the technology. While it’s safe to say it will grow, it’s hard to predict at what rate.
What is the financial backing of the OEM?
Is the company you plan to work with funding the scale of Tesla, Neo, or Rivian? If so, then yes, they will have the money to ensure a quality product is brought to market. If you’re working with smaller companies, it could still be possible to make it to the end. Still, you will need to dig deeper to avoid start-ups like Canoo or Lordstown, which are already raising issues of economic insolvencies.
Are they tech-focused or cost-focused?
Is the client looking for a high-end product or something that simply fits their cost expectations? If the OEM is too budget-focused, they may begin to chip away at the integrity of your technology to cut costs. This trend could ultimately position your business as a commodity rather than a tech leader and make achieving expected profit levels challenging.
Diversification Starts with Strategy
Diversifying your business to meet the needs of a developing customer opportunity is a significant pivot and one that could pay off extremely well if done correctly. To make sure you’re making the right decision, you must align yourself with those who have a deep understanding of the industry and evolving position so you can develop a winning strategy that will guide you forward. Auto suppliers that build these strategies now are almost sure to become the new auto supply leaders of tomorrow.
