Continental, Bosch & Co.: What are German automotive suppliers doing?

At least readers who are active in the automotive industry will have understood the implications: Continental, one of Germany's largest automotive suppliers, is considering splitting up.

Restructuring happens frequently, why is it so significant? Because it is a direct consequence of the electrification of the car. Continental would separate the profitable tire and industrial division from the loss-making automotive division. Other suppliers such as ZF, Bosch and Schaeffler are also in turmoil. This is also manifesting itself on the labor market: Continental is laying off 7,000 employees, ZF Friedrichshafen wants to cut up to 14,000 jobs, VW will probably cut 1,000 temporary jobs at its Zwickau e-car plant (WiWo).

There have been warning signs for years: For example, innovative companies such as Cruise or Tesla are turning away from traditional suppliers because they can achieve their goals faster, cheaper and better if they do the work themselves (more on this in the article).

The following is specifically about the German 1st-tier suppliers: How are they doing, what are they doing, what are their chances of success? A small note: As is so often the case, these problems have a lot to do with culture and only a limited amount with technology, but technology still plays a frighteningly large role.

What is happening at Continental?

With a market capitalization of around 12 billion euros, Continental is one of the world's largest automotive suppliers. Continental began in 1871 as a manufacturer of rubber goods. However, the company soon began to develop the automotive industry as an important customer. Mechanical and, in particular, more and more electronic components were added to the product range.

For decades, Continental dominated the industry, strongly linked to the combustion engine. This also included strategic partnerships. For example, Schaeffler acquired a significant stake in Continental in 2008 and at times held over 90% of the shares. This acquisition was part of a strategic move by Schaeffler to strengthen its position in the automotive supply industry. The stake has since been reduced.

The Spin-off of the Automotive division has however a completely different dimension. This is not about strengthening a strategic position. Instead, the aim is to prevent one part of the Group from subsidizing another part and thereby weakening the Group as a whole.

A role model for other suppliers?

Many German 1st-tier suppliers face similar challenges. These include the transition to electromobility and the increasing importance of software.

The split could serve as a model for other German suppliers.

Philipp Raasch

The increasing importance of electromobility and software-defined vehicles requires far-reaching changes and major investments. With a spin-off, Continental could at least create the conditions for these changes without being thwarted by the rest of the corporation (or dragging it down).

In concrete terms, this means that broad-based suppliers such as Bosch and Schaeffler will create the conditions to tackle this expensive and risky transformation. Specialized suppliers such as Hella or Leoni may find this somewhat easier.

What are other German suppliers doing?

So far, no major splits have been proposed, as at Continental. The following measures are being taken in principle by almost all suppliers. The companies with particularly high strategic importance are shown in brackets:

• Investment in electromobility (Bosch, ZF, Schaeffler)
• Diversification outside of Automotive (Bosch)
• Global cooperations (ZF, Schaeffler)
• Technology focus (Hella, Leoni)
• Development of expertise in software and software platforms (Bosch, ZF)
• Digital transformation of development (Schaeffler, Leoni)

... and foreign suppliers?

We face two classes of competitors from abroad. In the Asian region in particular, we encounter established competitors such as CATLwho have to redefine their role. At the same time, newly founded companies, often heavily subsidized, compete directly with existing suppliers. They may have less experience, but they also have less legacy.

The second class includes competitors from the western hemisphere that focus on innovation, such as Mobileye from Israel or GM Cruise from the USA. These companies are generally start-ups that also position themselves in line with the new market conditions from the outset.

Alarming: No supplier was able to meet the requirements of GM Cruise

Two years ago, I published the article How Cruise reduces the cost of the central control unit by 90%. Cruise decided to develop its own control unit (and its own chips) after neither Bosch, Continental nor ZF were able to meet Cruise's requirements. Cruise did not actually want to develop the C7 control unit itself. But then it turned out that this would make it 90% cheaper, 70% lighter and 60% less energy consuming. The first vehicles with C7 are due to come onto the market next year.

How is that possible? The answer is, among other things: Agile product development. The challenge here is to incorporate electronics and mechanical development into the same processes that have long been used in software development. This includes a high degree of automation and seamless traceability for all aspects of development.

Agile development for complex systems is much more demanding than agile software development. Mechanics and electronics must be seamlessly integrated through extreme automation.

Important to know for suppliers: manufacturers like to work with suppliers. GM Cruise would have much preferred to outsource the development of the control unit. Something similar happened at SpaceXThe aerospace company then focused even more strongly on in-house development and production.

Agile product development as an enormous opportunity

However, this is also a great opportunity for suppliers: Suppliers who have mastered agile product development could score points with OEMs, who are themselves under enormous pressure. Of course, there is a risk that the culture of the client (OEM) will not allow this. For example, the specifications of German OEMs are so detailed, with tens of thousands of requirements, that the supplier only has limited room for maneuver. In other words, without a rethink on the part of OEMs, suppliers have little opportunity to realize the potential of agile product development.

But in order to remain internationally competitive, a transformation to agile product development is essential.

Conclusion

Continental is just the beginning, other suppliers will follow in order to create a framework to meet the challenges in the automotive industry. First and foremost, the culture must be transformed. But on a technical level, a change towards agile product development must take place. This can only happen if the car manufacturers themselves play their part. Let's hope they manage it.

Image source: Continental press kit