Automotive Industry The Combustion Engine - The Golden Child Turned Problem Child

Companies in the industry are no longer asking themselves whether the combustion engine is going to disappear from the market, but rather when this will happen. The recent COVID-19 crisis, which is far from over, has only served to accelerate the process. Companies that had already been experiencing difficulties were devastated by the lockdown, but they still manage to live on as “zombie companies” with the help of government support and new and more lenient bankruptcy laws – which means they also pose a real risk to their own customers. The motor industry, which had gotten very used to success year after year, now finds itself facing a sharp long-term sharp decline in unit sales and a supplier industry that itself is fighting for survival, combined with the need for collective reorientation of an entire industry sector. The German automotive supplier industry in particular is facing unprecedented challenges, as the reduced demand for its components and systems does nothing to change the binding supplier agreements in effect with the OEMs (original equipment manufacturers), which in some cases run for as long as 15 years. This so-called ramp-down makes it impossible to get out from under these agreements quickly, and is also forcing everyone involved to restructure supplier strategies and relationships.

Dr. Birgit Moritz, TWS Partners AG

Increasing Protectionism Is Making the Situation Worse

While all this is going on, we are also experiencing yet another horror scenario that would have been dismissed as overly alarmist just a few years ago: After decades of globalisation, protectionism is now on the rise and is leading to a renationalisation of supply chains. This is where things get difficult for the German motor industry because even as it has to deal with fundamental existential issues here at home, it can no longer easily turn to alternatives abroad to take the pressure off. Instead, the commercial pressure is actually increasing, as is the industry’s exposure to supply-chain risks.

“After decades of globalisation, protectionism is now on the rise and is leading to a renationalisation of supply chains”

One thing is clear: Old patterns of behaviour and rules of thumb will no longer work here. So, what can be done then? As an expert in game theory, and thus also in the field of strategic interaction, I can tell you that an analysis of the ramp-down situation leads to a clear and simple conclusion: Whereas everyone involved in this situation used to be able to count on continuous business in growing markets, and with sufficient follow-up business (we refer to this as a “repeated game”), they are now all just looking out for themselves and trying to save what they have as quickly as possible, and hold on to it, as no new business appears to be on the horizon (“endgame”). In a “repeated game”, you can “pay” with the promise of a glorious future together. In an endgame this doesn’t work and you are instead forced to make use of those strategies that are available in this “finite” set of circumstances. Threats to discontinue a business relationship in particular lose all credibility in this situation, which is why they are likely to be met with an attitude of “well, let’s get it over with then”. This has a direct effect on the power relationship between the customer (the car manufacturer) and the supplier. For example, car manufacturers may need to drop some suppliers, but they will do so in a situation of extreme uncertainty. Many suppliers will not be able to make up for the decline in orders by establishing new business elsewhere, and will instead stop operating altogether. The result will be a lack of viable suppliers on the market. However, such viable suppliers that do exist will feel that their position has been strengthened in this “endgame structure” and will increasingly demand higher prices and better conditions from the car manufacturers.

Proven Strategies No Longer Work

The motor industry will need to adopt completely new approaches in order to adequately address this complex situation in what is a highly disruptive environment. In other words, “old tricks” that worked in an atmosphere marked by growth will no longer be effective under the new circumstances. So, how can game theory help here? In terms of procurement, game theory is already recognised as an effective method for establishing and strengthening bargaining power in negotiations in order to produce a better result for the procuring party. However, game theory can also help companies achieve a decisive competitive advantage even in an industry undergoing radical upheaval. That’s because game theory not only establishes a framework for the comprehensive analysis of all involved parties, their strategies, the possible outcomes and, on this basis, the development of the best approaches for dealing with the new environment; it also makes it possible to intervene in “the game” and alter its course by changing the rules to your own advantage.

TEXT Dr Birgit Moritz, TWS Partners AG