Amid disruption, automotive suppliers must reimagine their footprints

For many automotive suppliers over the past 20 years, the calculus of plant location has been relatively simple. If there was a billion dollars of revenue in a region, that was probably a reason to build and maintain a big plant there. If low-cost labor was available in a different country but not in one’s own, then the executive team was probably evaluating the pros and cons of relocating.

Then COVID-19 came along, disrupting supply chains and reducing people’s driving time and the demand for cars. Some of the strategizing about plant location receded into the background as other matters took precedence.

Now, as businesses start to contemplate a postpandemic world and automobile sales recover, automotive-supply executives are returning to their discussions about footprint location and are finding them more complicated than ever. It’s as though these executives are captaining a ship that has just weathered a terrible storm—and, instead of coming into clear waters, they discover that the rocks that were on the nautical chart before are now much bigger and closer.

This article dives into the trends that have turned manufacturing-footprint strategy into such a conundrum. Those trends include the rapid rise of electric vehicles; the arrival of new, disruptive OEMs; and CO₂ regulations that loom over the automotive supply chain industry. We conclude with a checklist that automotive suppliers can use to determine how their manufacturing footprints should change to give them the best chance of winning in the future.

New questions for a new era

In addition to the traditional considerations about their footprints, automotive suppliers today face a host of new questions. The following are among the most important:

• How can we transform our manufacturing workforces and develop the capabilities we need for our future product lines, including more software and over-the-air expertise?
• Where might we have an opportunity to vertically integrate through M&A?
• What structural advantages—more automation or higher plant efficiency—do our competitors have, and how can we narrow that gap?
• For the automation we’re doing, should we bring it to our existing factories or take a greenfield approach and build brand-new factories with high levels of automation?
• What price will we pay—five or ten years from now—for being behind in our use of technology?
• Looking out over the same horizon—five or ten years—what will be different in the areas of labor availability, plant worker wages, and transportation costs?

Not many automotive-supply executives would dispute that these questions are important. But executives’ full agendas mean they’re generally not in a position to step back and take a strategic long-term view. Much of the decision making in automotive manufacturing is, indeed, incremental—focused on something happening a year from now (such as where to put in an efficiency program) or two years from now (such as which plant to use for a new product). This incrementalism could leave suppliers in the wrong place, from a physical-footprint perspective, as the industry reinvents itself over the next decade.

The trends affecting automotive suppliers

The most important trend, of course, is the rise of electric vehicles at the expense of vehicles that use internal-combustion engines and run on gas. This trend is propelling many of the changes facing automotive suppliers, but there are other trends, too. Below are four of the most important.

• Technology-related portfolio shifts. The industry’s focus on autonomous driving, connected cars, electric vehicles, and shared mobility (ACES) is prompting a shift in the supplier product mix. In a survey conducted last year by McKinsey and the European Association of Automotive Suppliers (CLEPA), 90 percent of suppliers said they were reshaping their portfolios to emphasize e-motor technologies and battery innovations. The suppliers said they were de-emphasizing body exterior systems, suspensions, wheels, and engine systems (Exhibit 1).
• Emergence of new OEMs. Tesla isn’t the only electric-vehicle manufacturer disrupting the automotive market. Other new electric-car companies have arrived, and the stock market, at least, is betting on their success. These companies (including Nio) won’t have the constraints of conventional OEMs in building their manufacturing and assembly capabilities. We would expect to see high levels of automation in their plants—similar to Tesla, which is by far the most efficient OEM in the world—and maybe some “lights out” plants in Central and Western Europe, near the demand centers for premium electric vehicles.

  The automotive suppliers participating in the McKinsey-CLEPA survey were skeptical of these OEMs’ relevance: two-thirds said they didn’t think a significant part of their revenues in 2030 would come from parts manufactured for these new OEMs’ vehicles. If suppliers’ investment decisions reflect that belief—that is, if they continue to direct their efforts overwhelmingly toward their existing OEM customers—we think they will be cut out of a significant value pool. Our view is that the new OEMs are poised to do well and that there will be a significant volume shift toward them and away from current OEMs between now and 2030.

• An increased focus on sustainability. Under pressure from OEMs, media, and capital markets, most automotive suppliers (83 percent in our survey) have defined sustainability targets. A much smaller proportion (7 percent) are actually starting to implement carbon emissions–abatement programs. From a near-term economic perspective, the gap between planning and doing is understandable—as is the decision by many automotive suppliers to keep their plants in lower-cost geographies. Recent studies have suggested that transportation costs related to CO₂ would have to rise by a factor of ten to erase the benefit of having a plant in a lower-cost geography. Still, there are going to be abatement-related rises in cost, and we think there’s no question that in the future, suppliers with more sustainable footprints will have an advantage in terms of pricing and margin.
• The end of unit growth in the light-vehicle market. Light-vehicle sales have been hit hard by COVID-19. In 2020—the first year of the pandemic—light-vehicle sales were down 20 percent. The Asian market for light vehicles grew but not enough to offset steep declines in Europe and North America. Our analysis suggests that it might be 2030 before the industry again sees light-vehicles sales matching those of 2019.

  Because of this decline, roughly half of all suppliers are looking for new growth in areas outside of automotive. Among those looking to branch out, seven in ten say they’re exploring sectors without any connection to automotive, such as everyday household products.

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The increasingly complex calculus of supplier footprints

The math of doing some manufacturing in low-cost countries still makes sense for automotive suppliers. Consider the example of Europe. Despite the wage inflation in many low-cost European countries, the absolute gap between blue-collar labor rates in low-cost countries and in Western Europe will continue to widen between now and 2030. And even if higher wages in low-cost countries such as Poland and Romania erode some of the potential for savings, some of those savings will still be possible by switching manufacturing to places such as Serbia, the Republic of North Macedonia, and the Republic of Moldova.

Indeed, one French player will soon start operating its fourth plant in Serbia, and a Chinese supplier has committed to putting more than $50 million into a Serbian plant of its own. These companies’ investments are starting to improve the infrastructure and the administrative and legal capabilities in the country.

Of course, manufacturing in a low-cost country is only one of the ways automotive suppliers can get an economic advantage. Another is by introducing more automation into the plants they already have in high-cost countries.

And then there’s the very compelling argument that footprint decisions should not and will not be based on one factor in the future. Cost won’t go away as a component, of course; it will always matter. Also important, however, will be supply chain sustainability. Resilience will be a third factor, after a year in which a pandemic and the weeklong closing of the Suez Canal vividly demonstrated the vulnerabilities of global supply chains.

Getting started: A checklist for laying out a next-generation footprint

During this time of generational disruption, automotive suppliers’ structural competitiveness will be tested. For those companies looking to begin a process of footprint reimagination, we recommend six steps (Exhibit 2):

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1. Benchmark your current plant footprint to identify your strengths. You can’t know what you should change—or seek to replicate—without an accurate picture of what’s happening in your current plants. To gain such a picture, leaders might put each of their plants under the microscope, so to speak, to assess the plants’ profitability and their capacity to grow to meet expected demand. Very often, companies find that there is no additional capacity at the plants putting out their highest-growth products; the only capacity is at plants producing lines that are less popular.

   This step should also include a plant-by-plant assessment of operational effectiveness—a crucial attribute given the pressure OEMs are putting on suppliers to lower their costs.

2. Identify quick wins at individual plants. This step is about optimizing performance and increasing plant productivity, as well as tweaking the footprint to provide an immediate economic benefit. Strategies could include short-term reallocation of volumes and rerouting customer orders to best use individual plants and fine-tune their performance.
3. Take advantage of structural levers. Staying within the limits of your current plant product mix, think about how automation or digitalization could lift your plant into the industry’s top quartile. From an automation perspective, the highest ROIs are currently in upstream areas such as injection molding and assembly. The lowest ROIs, from the perspective of automation, are in logistics.
4. Consider whether you have the right mix of products at each plant. This step is about figuring out the component specialization profile of your manufacturing facilities. It starts with imagining—before embarking on any actual transformation work—how your product portfolio might evolve in the future. With the industry shifting to fuel cells and lightweight materials, most suppliers’ production technology should shift in the direction of standard, flexible production lines. Capital-intensive industrial processes—needed for commodity components—will probably become less important toward the end of this decade and in the 2030s.
5. Assess the cost and capital-spending implications of any plant changes you’re considering. From the work you did in the first step, you already know which “nodes” in your manufacturing network are doing best. That’s the level you want to reach for all of your plants.

   One approach to consider—not widely used by auto suppliers—is value chain streamlining, which unbundles product components based on labor content and transportation costs. A recent Europe-focused study concluded that for highly stackable items—defined as 600 or more parts per truck—manufacturing in a low-cost country would be more economical than a nonautomated plant in a high-cost country at a distance of up to 1,500 kilometers. Even if the plant in the high-cost country were automated, the cost advantage would hold at a distance of up to 1,000 kilometers, the study found.

   Of course, this economic analysis could change as automotive companies start facing more sustainability-related regulations in their supply chains. The analysis also doesn’t account for the high social costs created by certain types of value chain streamlining.

6. Design your target footprint of the future. This step is the output from all the previous steps—mapping out what, where, and how you’re going to build. As automotive suppliers think through this step, they would do well to remember one of the ongoing dilemmas of footprint strategy: setting the right size for a plant. Experience suggests that with too many small plants, it’s hard to achieve efficiency in terms of overhead. Big plants are more efficient but can be cumbersome to manage.

   One solution is to house independent product groups in one relatively big location where they can operate autonomously while sharing facilities management staff and other overhead. This strategy is informed by our past benchmarking, which shows that automotive-supply plants with between 1,000 and 1,500 workers do the best job of indirect cost absorption (Exhibit 3).

   Not only plant size but also every aspect of a supplier’s overall footprint is necessarily specific to the company. So this last step is about figuring out the specific restructuring moves you should make and identifying consolidation projects to get you started.

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Manufacturing footprints that served automotive suppliers well in the past are going to fall short in the coming period of disruption. The best way to survive isn’t to react to the changes. It’s to anticipate them and get out in front of them—shaping your company’s future in the process.