Auto Majors Separate New and Legacy Businesses
Incumbent auto majors are taking actions to boost the pace of their transformation in order to compete most effectively with new players. This may entail splitting the company to foster new businesses, spin off activities or acquire startups. Benefits from such strategic initiatives include better focus and agility as well as a new culture, a fit-for-purpose operational model or even new funding sources. But this can also create new challenges.
Startups in the battery EV and autonomous driving (AD) space have raised tens of billions of dollars over the last few years. Massive funding combined with a startup culture and the lack of legacy operations allows them to move at high speed and bring their product to market most efficiently.
Conversely, incumbent players, whether OEMs or suppliers, have heavier structures and more rigid operating models. They must also deal with the staffing of legacy operations and yet-to-be amortized assets. It is tempting for these players to start with a clean slate while loosely leveraging still-relevant expertise (e.g., manufacturing and body engineering, supply chain) and production assets from their corporate “parent.”
For some of these incumbent players, this means spinning off emerging activities that suffer from being under the corporate umbrella for the above reasons. For others, the solution may be to buy a startup and integrate its products or services in the corporate’s value proposition while preserving the emerging company’s operating independence to avoid stifling its dynamic.
Several OEMs and Tier 1 Suppliers Have Split or Spun Off Businesses
The most recent major corporate transformation is that of Ford. The company just announced a split of its organization into two “strategically independent” auto businesses, the prime objectives being to scale EVs and strengthen operations. Ford Model e will focus on EVs as well as connected and digital solutions whereas Ford Blue will manage internal combustion engine-powered (ICE) vehicles. CEO Bill Farley’s message is clear: “deliver the speed of a startup with the deep expertise of high-volume production.”
Ford also intends to reset its distribution approach with new, EV-specific operating conditions, some of which have been proven successful at new EV OEMs. This includes a partial direct-to-consumer retail model, transparent pricing (perhaps not Tesla’s fixed pricing) and a build-to-order model in lieu of vehicle inventory. Dealers will be allowed to sell Ford EVs only if they meet certain criteria. One of the challenges in delivering on the overall promise will stem in Ford’s ability to create a startup culture and a matching operating model.
Volvo Cars was probably the first company to go down this path. Back in 2016, the Swedish OEM spun off now EV-focused Polestar which became co-owned by Volvo and its parent company Geely. The emerging OEM has since launched two vehicles and announced others. Polestar is asset-light (relies on Geely and Volvo for manufacturing), has established customer-focused expertise and is building an independent distribution network. The company is now planning to go public via a SPAC merger at $20B valuation.
Last December, Volkswagen Group announced the creation of a new company to manage its overall battery operations. Responsibilities will range from processing materials to engineering and manufacturing cells to reusing and recycling. The new entity is already planning 6 giga-factories.
Like Ford, GM reportedly talked about separating its EV business from the rest of the company but has not taken any actions – there was pressure from Wall Street to do so to create value for investors. Nevertheless, the OEM created BrightDrop last year to develop and offer electric products, software and services for commercial customers, supported by its own dealer network.
Toyota took a slightly different approach, establishing Woven Planet in early 2021. The entity aims at developing new solutions for the future of mobility, leveraging new skills and technologies. It has quickly grown with acquisition, e.g., buying Lyft’s Level 5 in the AD space last year. It is interesting to note that an American is at the helm of this transformative entity.
Chinese major OEMs have also used a similar approach. In 2017, BAIC established EV-only Arcfox which is now co-developing vehicles with Magna then Huawei. Likewise, SAIC co-founded Zhiji Automobile (IM brand), a high end EV-focused JV with e-commerce giant Alibaba.
One could also mention AD entities such as Cruise (majority-owned by GM) and Argo AI (Ford and Volkswagen), or new mobility services such as Renault’s Mobilize, Stellantis’ Free2Move of VW’s Moia. These entities have significant independence as well as a culture and operating models that give them much more agility than their parent companies. Their mission is to spearhead radically new technologies and business models.
Tier 1 Suppliers Have a Similar Approach
Delphi was also an early mover in 2017, then spinning off their autonomous driving, EV wiring and connectivity-focused business into Aptiv, a new public company. Delphi kept activities related to ICE and automotive electronics. In 2019, Aptiv established Motional, an autonomous driving-focused, 50-50 JV with Hyundai, Kia and Mobis valued then at $4B.
In 2018, Swedish supplier Autoliv spun off its ADAS- and autonomous driving-related sensors, software and electronics activities in a new company, Veoneer. Conversely, Autoliv retained the well-established passive safety business.
In 2021, Continental spun off its powertrain business into Vitesco Technologies, a publicly listed company. The aim is to capitalize on EV growth, while financing the development of new EV products with profits generated from ICE-related business – which is also part of Vitesco.
Expected Benefits and Likely Challenges
Potential benefits of the above initiatives are multiple, yet mostly common across these examples. Some relate to internal processes and operating models. They include the management’s complete focus on transformative technologies, the freedom from robust but rigid corporate decision processes and the ability to establish a fit-for-purpose culture.
Other benefits relate to the larger ecosystem. For instance, starting with a clean slate makes it possible to establish the best possible distribution model, e.g., some degree of direct-to-consumer combined with built-to-order in many cases. Last, a pure-EV play likely means higher valuation and a lower cost of capital. I invite you to read my recent analysis of Tesla’s $1T valuation.
However, such transformations do not come without challenges. A new culture results from many factors and does not happen overnight. Likewise, striking the right balance between independence and access to corporate resources (e.g., manufacturing, supply chain) is critical.
As the share of ICE vehicles vs. EVs dwindles, engine- and transmission-related businesses will progressively become aftermarket activities. This requires a very different operating model: long manufacturing runs are replaced by batches, parts diversity jumps and distribution channels multiply. As this transition occurs, we will likely see more Tier 1s separate these businesses.
Besides, we may see Tier 1 suppliers spinning off their AD activities, such as software or LiDARs. In this space, we have seen startups raise billions to develop these solutions. Suppliers can hardly justify financing such amounts on their own. A spin-off may be the only way to provide these nascent activities with the steam they need to grow on par with pure players.
For incumbents to survive in the most profound and broadest transformation the automotive industry has ever known, they must continue to mutate, incubate new businesses, shed old skins or join forces with new partners. Standing still is not an option.
Managing Director, Orsay Consulting
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