There is still much road ahead for the internal combustion engine, though change is rapidly accelerating.
As soon as the 2030s, electric vehicle sales will outpace those of conventional models. That transition will disrupt the way the industry has operated for more than a century. But this is not unexpected, and it won’t happen overnight. So ICE component businesses have time to adapt and create value.
Industry players have shown remarkable adaptive skills before. For example, they made a strong recovery from the Great Recession in 2008. However, the end of the ICE era will bring its own challenges. In the past year, 15 out of the top 20 automotive light-vehicle makers have announced plans to sell only zero-emission vehicles, and more than half say they will make only ZEVs by 2040. If anything on this scale occurs, many current product lines will decline sharply. For example, the market for ICE transmissions could go from $93 billion in 2019 to $25 billion in 2035.
There are other challenges, too. For example, the growth rate for engine blocks and transmission housings began to fall in the late 2010s and is either stagnant or declining. And everyone is struggling to manage digitization and solve supply chain woes.
Still, difficult is not impossible. Even as EVs gain ground, ICE component businesses have plenty of value to create. For example, if lower-performing companies lift their performance on key metrics to the industry median, their enterprise value could improve by up to 40 percent.
Industry players have a choice. They can change the ICE market or sit back and wait to see what happens. But being late and reactive is never a sound strategy.
If, however, ICE components suppliers choose to realign their business models toward value creation, they can adapt. First, they must determine what is needed just to keep the lights on and what can deliver additional benefits. It will require a detailed plan for allocating capital, including the possibility of divestitures, to avoid stranded assets.
Think of it as installing two complementary engines. The growth engine is the part of the business that is winning new-vehicle programs and generating future revenue. The mandate here is to spot the most promising targets for expansion, such as priority new-vehicle programs and components with aftermarket potential.
The aftermarket typically has higher profit margins — and there could be long-term opportunities in servicing ICE vehicles through the 2040s and beyond. On the other hand, ICE businesses focused on components with more limited aftermarket-growth potential, such as exhaust systems and driveline parts, might look to restructuring, consolidation or diversification.
To get the growth engine running well, ICE component suppliers need to rigorously evaluate growth opportunities’ scale and value potential — for instance, examining specific geographies and emerging customer groups. They might also explore more stable adjacent markets, such as those for commercial truck and off-highway vehicles, to slow the pace of sales-volume decline.
Then there is the execution engine. This engine comprises ongoing vehicle programs already in production. Here the focus is on fulfilling existing commitments and managing costs in a lean way; it may be necessary to restructure operations, including consolidating manufacturing sites and suppliers, to be ready for the eventual decline.
One possibility is to evaluate which product lines are core and then optimize manufacturing capacity, footprint and other costs by taking a zero-based approach to costs. Another is to prune product portfolios and design a simplified yet stable supply base.
Disruption brings change, uncertainty — and opportunity. And, of course, every ICE component business is unique, with its product portfolio and customer mix. But complexity and uncertainty can be met with simplicity and strategy. We believe companies that get their growth and execution engines running smoothly will not only survive but thrive as the automotive ICE age gradually comes to a close.