Finding value as ICE melts: Difficult choices for auto parts suppliers

The transition from vehicles powered by internal combustion engines (ICE) to electric vehicles (EVs) is accelerating, creating challenges and opportunities for companies across the industry. By 2030, EV production is expected to hit 30 million units per year. In 2040, 37 percent of all vehicles on the road in the U.S. and Western Europe will be electric, KPMG estimates.

As EVs catch on, global production of ICE vehicles is expected to peak in the mid-2020s and then start to decline in Europe, the U.S., and China. Meanwhile, new approaches to design and manufacture EVs will limit the number of crossover components that work for all types of vehicles. Cars of all kinds may be built with fewer, more valuable parts—narrowing the opportunities for suppliers.

In this paper, we outline several strategic options for parts suppliers, ranging from divesting low-margin, low-growth businesses to playing the consolidator—becoming the efficient “last man standing” in a declining ICE parts business. We offer a framework for evaluating the impact of EVs on specific kinds of parts businesses. Finally, we outline strategies to help companies profitably navigate operations as the world shifts away from ICE and that business ultimately becomes secondary to serving the needs of EV makers and buyers.

Divest to exist

• If the strategic decision is to exit the business, divesting early can be an advantage—there could be a larger pool of willing buyers willing to pay a healthy multiple (e.g., “last man standing” players)
• Selling perimeter must be carefully considered to maximize value

Divest to improve returns

• While a strong cost position can enable continued operations despite a declining industry, divestiture may provide a higher return on capital
• Players in the "last man standing" category could represent a strong transaction partner due to their higher exit costs

Wind down

• If entanglements are too complex or there are other high exit costs, divestiture may not be a viable option in such cases, the only option may be to wind down
• If standard divestitures is not an option potential to explore JV/Partnership to share wind down costs and harvest value

Last man standing

• A competitor in this situation has a strong position to be a market consolidator and absorb volume from participants seeking an exit
• It is critical to be able to flex costs as volume declines
• This is likely to be a transitory strategy, on the path to becoming a niche player or harvesting eventually
• Consider this route relative to your next best Return on Capital investment option