Automotive Suppliers—It Has Never Been More Important to Say “NO” to OEMs

With so many automakers leveraging software-driven differentiators to set themselves apart, it is not surprising that recent years have seen an influx of enabling technology suppliers into the automotive market that have honed their capabilities in digitally-native, software-defined device markets. From Tier Ones to semiconductors, and cloud compute to location intelligence, incumbent suppliers have found themselves under pressure from newcomers with experience in the consumer electronics markets that automakers have striven to imitate.

In response, incumbent suppliers have experimented with different strategies to retain their market position. An initial tendency to lean into “automotive-grade” design and manufacturing lasted only as long as it took for newcomers to mature in functional safety and secure the necessary certifications to satisfy Original Equipment Manufacturers (OEMs) with respect to failure rates and safety processes. More recently, automotive suppliers have coalesced around a basic strategic positioning—flexibility; whatever the OEM asks for, they get. Painting the newcomers as commoditizing, one-size-fits-all interlopers, out to displace the OEM as the most visible brand in the eyes of their consumers, incumbent suppliers adopting the “flexible” strategic position seek to reassure OEMs that, as their longstanding trusted suppliers, they are the right partners to give the OEMs scope for differentiation while always remaining invisible to the consumer, allowing the OEM to retain their all-important brand identity.  

The flexible strategic position appears compelling on paper, but it suffers from a fatal flaw—automakers ask for dumb things, and the consequences of their self-defeating requests end up reflecting on the supplier, and not the OEM. Anyone within an incumbent system supplier will have at least half a dozen cases in which a system that began as compelling and competitive ultimately suffered death from a thousand cuts.

"The BOM is too high, can we reduce the system memory?”, “We are worried about the data costs, can we cut back on the number of updates?”, “We need our own special variation of this service, to reflect our brand identity—can you build it for us?"

For the supplier trading on their flexibility, the answer to all these questions is obvious—“Of course!” But every redesign, every variation, every self-defeating cost-down exercise has the potential to delay Time to Market TTM), compromise the User Experience (UX), and add additional costs. Critically, ad-hoc, platform-specific variations deepen the tie between software development and hardware development; a key factor that has made automotive TTM inherently slower than the Consumer Electronics (CE) markets that OEMs crave to imitate.

Meanwhile, one of the newcomer, “inflexible” suppliers will inevitably pitch a “one-size-fits-all” solution that has better hardware specs, a solid roadmap for Over-the-Air (OTA) updates, and all the benefits that disentangled hardware/software development can bring to TTM. Any C-Level executive comparing the newcomer solution to the endlessly-compromised incumbent solution will come to a conclusion that is as inevitable as it is erroneous—our incumbent supplier simply cannot deliver what the newcomer can.

Incumbent suppliers are increasingly aware of this challenge, and some have begun to pivot away from project-based work to product-based work when engaging with their OEM customers, providing more modular solutions that can be adapted through configuration, rather than project-based customization. This applies as much to tools as it does to components or integrated systems—suppliers are moving toward solutions with lightweight customization options and, in general, they are finding some OEM customers facing major economic, competitive, and cost headwinds that are more amenable to turnkey-style solutions.

However, this is not universal. For some automakers, the response to the pressures of Chinese competition, Electric Vehicle (EV) slowdowns, macro headwinds, and poor Software-Defined Vehicle (SDV) traction has been to expect more special treatment, not less, putting pressure on Tier One suppliers, in particular, to become more “project” just as they are trying to pivot toward “product.”

In such cases, the pivot toward products over projects has reportedly resulted in some fractious negotiations between OEMs and their suppliers, with some key OEM decisions makers remaining convinced that the key to their survival is heavy customization—ironically, a message once preached to them with enthusiasm by the same incumbent suppliers. Raised voices, abruptly ended phone calls, and ominous emails from OEM procurement departments have been far from unusual. Nevertheless, there are enough reports of OEMs coming around, even after a few weeks of radio silence, to encourage incumbent suppliers that this is a strategic pivot that is more than worthwhile.

Lightweight customization through configuration offers the best balance between satisfying the OEM need for differentiation and retaining the TTM and cost advantages unlocked by keeping variations to a minimum, especially when the configuration levers align well with the reality of OEM organizational challenges and skills shortages. There can still be some value in combining the product offering with professional services support, to which the more ambitious OEMs can still be directed for the development of, for example, new User Interface (UI) layers/OTA schedules, etc. Nevertheless, the core foundations of any tool, service, or system should be rigorously defended as off-limits for OEM customization.