Auto Suppliers: It's Smart to Consider New Markets

Suppliers to the automotive industry are at a crossroads. On one hand, it’s hard to beat the lucrative volumes historically associated with the automotive sector. On the other hand, the industry is racked with significant order uncertainty. Disruptions caused by tariff complexities, weak consumer adoption of electric vehicles (EVs) and ongoing supply chain volatility are wreaking havoc on short- and long-term planning efforts. 

One potential solution for some businesses is to diversify the revenue stream beyond the automotive market. The question is how to make that assessment appropriately. 

Ask Key Questions 

Opportunities exist to diversify into many industries that use technologies and materials similar to those used in automotive. Given the current headwinds in the EV market, some EV battery manufacturers, for example, are pivoting to alternative users of battery technologies, including energy storage systems and powering data centers’ enormous (and growing) energy demands.

The move makes sense for a number of reasons. It fills a gap in demand for EV batteries, provides a revenue stream (albeit likely lower than automotive) and provides a runway for companies to readjust and continue technical development.

While prospects may abound, expansion requires a strategic look at many factors, including possible research and development (R&D) adjustments and capital expenditures (CapEx). 

Among the first questions executives should ask themselves to determine whether it’s time to diversify are:

• Will my technology remain competitive over the long term? Technology considered leading-edge today may not be advanced by the time automotive volumes return. However, businesses with sustainable products may want to explore entering other industries to bolster revenue in the short term while the automotive industry recovers.
• Where can I monetize my product to survive? Although many suppliers are already somewhat diversified, selecting which new end markets to enter, establishing commercial relationships and refining technology to meet different end applications consumes precious time. However, it’s certainly time to look elsewhere if the automotive industry is failing to sustain the business in the short to medium term.
• Should we have been contemplating other industries all along? Many interesting technologies have been developed recently by organizations that laser-focused on automotive sales only because of the high-volume potential. Spreading into other sectors where those technologies are deployable may be a strategic move that should have occurred before, but is even more vital now.

Follow the Process

The biggest obstacle when expanding into brand-new markets is typically a lack of commercial relationships—with a lack of entry points and relationships to the new customer base. In essence, companies must establish themselves all over again, just as they did upon entering the automotive arena. A methodical, four-step process can help establish a diversification roadmap:

Step 1: Scrutinize your organization first. Think about your commercial approach and differentiators. Ask questions, including:

• How big is our volume problem? i.e., How many markets/customers do we need to serve to replace our declining automotive volume?
• How much capacity do we really have to fulfill new business?
• Did we purchase our equipment, or did an OEM pay for it and demand exclusive usage rights?
• Are our physical locations in the right places to serve the markets being contemplated?
• Is our product relatively homogeneous across industries, or specific to certain markets? 

Step 2: Examine the new market opportunities. First and foremost, you must understand which product technologies are appropriate in each market. Look not only at their current volumes, but also at their growth potential. Ask:

• What differentiators are necessary to win commercially in each new sphere?
• Who would be our leading competitors, and how do we stack up?
• What are typical margins for each marketplace?
• Does the new customer base know, accept and trust our brand?
• Will our current labor force suffice, or will we need a labor force with different skills, expertise, or locations? 

Step 3: Map your internal capabilities against the new end markets. Next, compare what you compiled in Step 1 against what you learned in Step 2. Question:

• What operational and capabilities gaps exist?
• How close are we to being able to serve the new end market profitably, with what we have today? 

Step 4: Determine how to proceed. Suppose the first three steps result in a decision to expand. In that case, the final step is to analyze whether to try to grow into the new market organically, inorganically through acquisition, or a blend of both. While acquisition is usually the quickest path, you must weigh the speed of an acquisition against the risk and cost involved. 

Leverage Your Investments

Regardless of the target industry, there is almost always some R&D, CapEx or other investment necessary to enable diversification. But how can organizations leverage their existing equipment and physical locations to minimize CapEx investments? 

For example, could a press that produces parts for passenger cars produce product for recreational vehicles? And could the organization serve agricultural regions from its present location, or would it need to build new facilities?

From an R&D perspective, especially for products highly engineered for automotive applications, think about targeting adjacent industries that need a similar level of product “robustness.” Few industries have as stringent regulatory, safety and product quality requirements as automotive. However, since that level of engineering comes at a cost, it’s essential to determine whether it’s necessary for the new market. 

Automotive OEMs and suppliers continue to drive technology solutions that advance at a pace that often exceeds what consumers perceive as valuable or worth paying for. As companies with automotive-specific solutions contemplate entering new markets, it is critical to understand what customers and end consumers value and are willing to pay for.

Navigate Uncertainty Strategically 

As North American automotive projections slow, suppliers face both challenges and opportunities. Expansion into new markets may require investment and understanding of those markets, but it may also offer a practical pathway to mitigate the risks of automotive fluctuations. 

While taking a strategic approach to balancing automotive dependence is not a simple process, it is a crucial one. Thoroughly assessing organizational capabilities, conducting a rigorous evaluation of potential markets and strategically aligning resources can help businesses build resilience. Suppliers can thrive even in an uncertain economic landscape by approaching diversification with deliberation and clarity.