The volatile, rapidly changing market environment over the last several years does not show signs of easing. The uncertainty is causing many automotive and industrial companies to set out on ambitious transformations to right-size costs while pursuing future growth opportunities. However, their transformation initiatives have experienced varying levels of success.

To understand what makes business transformations successful, we surveyed more than 240 C-suite executives from leading companies across industries in the Americas. Here, we are focusing on the findings from the roughly 15% of respondents in the automotive and industrial products sectors.

The companies that experienced success implemented focused efforts and targeted investment. With more turbulent times ahead, automotive and industrial companies now must follow the lessons from past transformations and launch new efforts to manage challenges in the near term and come out stronger. We will dive into the main challenges these companies are focused on in the next 12 months, how the industries should think about transformation to address their challenges, and why they should act now.

Differentiators in successful vs unsuccessful transformations in automotive and industrial goods sectors

In our survey, 100% of companies made transformation efforts within the last three years. Across all industries, though, just 25% were successful in achieving all of their objectives, with the industrial sector lagging automotive and most other industries.

Automotive has been more successful in achieving transformation objectives than most industries. That may be because there was little debate over how the industry must transform. It has been pretty clear for more than a decade that the future is electric vehicles. How to get there, however, was a little less evident. Success in transformation initiatives was primarily seen in managing supply chain disruptions, building a sustainability agenda, and increasing operating cash/liquidity/working capital.

Within industrial, 39% of companies in our survey did not achieve most of their objectives, and only 10% fully achieved them. Success was primarily seen in building a sustainability agenda, progressing digitization, and expanding into new geographic markets.

One additional important difference between the two sectors: Automotive has allocated its investments in transformation initiatives more effectively than industrial, based on the amount of spend versus run-rate benefit from successful transformation efforts.

Industrial spent almost 33% more per dollar of return on successful transformation projects than automotive did. On the other hand, automotive spent the most per dollar returned for unsuccessful transformations, where failures are much more costly.

Market forces in automotive and industrial industries over the next 12 months

Over the next 12 months, our research shows, some challenges will remain across industries, such as managing inflation and costs related to commodity prices. Both the automotive and industrial industries see rising interest rates as a new challenge to manage. Automotive businesses are also highly concerned about a general economic downturn, while industrial companies increasingly are focused on talent shortages. However, we are seeing industrial and automotive companies tackling or planning to tackle these main challenges they expect to face over the next 12 months in standard ways. 

Inflation

Industrial and automotive companies have attempted to manage inflation over the last couple of years by tightening internal measures and instituting cost controls, while passing on cost increases to customers. As we see inflation coming down, this is the right time to renegotiate with suppliers and optimize sourcing strategies. Most survey respondents saw this as their greatest opportunity to tackle inflation impact, followed closely by focusing on cost reduction initiatives.

Interest rates

Increases in interest rates are delaying capital expenditures across industries. Investments are being scrutinized at a much greater level, which will restrict growth in the near and longer term. Building a strong business case for investment and having more certainty in returns has never been more important to be able to continue investing in growth.

It is also important to note that there is an uptick in federal funding in the US through the Inflation Reduction Act and the Infrastructure Investment and Jobs Act to help ramp up US-based production and alleviate some pressure from rising interest rates. This applies to both the automotive and manufacturing and industrial sectors. 

Commodity pricing

There is a mix of trends within commodity pricing; some prices are declining, while others, such as rare earth materials, are on the rise. Where industrial businesses may benefit from declining prices of the commodities they purchase, automotive may face more challenges as the push for electric vehicles (EVs) requires commodities with rising costs and limited sourcing options.

Global trade

The global trade environment is still under pressure as relations with China remain uncertain. These tensions have caused some global prices to increase and access to supply to be temporarily or permanently restricted. After years of offshoring, however, companies are turning to new suppliers in Mexico, Eastern Europe, and other lower-cost regions that offer reasonable costs while mitigating supply chain issues.

Labor market obstacles over the next 12 months

Companies recognize that the labor market challenges are not relaxing, especially the macro shift in decreased availability of skilled trade workers. Optimizing processes and workflows will help companies protect themselves, but there is a need for alternative approaches when increasing production.

Process automation is one solution, which requires greater investment but can free up a company to fill additional positions or let workers adopt more significant value-added roles. Another option automotive companies are focusing on is to develop smart factories and integrate smart analytics and artificial intelligence into their manufacturing processes. Finally, there’s selective outsourcing, which can help reduce the need to hire more skilled workers and bolster organizational effectiveness by appropriately allocating internal and outsourced activities based on current capabilities.

Underlying all of the current labor challenges is the looming concern of an economic downturn. Companies need to act now to ensure they’re prepared. Investing in more dynamic analytics and flexible capacity to manage against fluctuating demand has set companies up for success through these uncertain times. It is also necessary to keep a close tab on suppliers and trade negotiations, evaluate operational risk profiles, and invest in operational resiliency, such as process flexibility measures in case of fluctuating demand or supply chain disruption. 

Creating a successful, sustainable transformation

With major challenges ahead, it is important to focus on transformation now, with an emphasis on the following critical success factors:

• Focus on tangible impact to create value for clients, shareholders, and other stakeholders
• Fundamentally change ways of working to make transformations sustainable in the long term
• Rally the organization behind the need to change, with clear leadership-level alignment

Immediate action will ensure the business is prepared for the challenges before they become more difficult to address. Strong and forward-looking companies are not letting up in developing sustainable cost transformation programs. Company leaders must now work on structural performance improvement or transformational programs to gain a tactical advantage over competitors.

Additional contributors: Hector Nelson, partner and head of Performance Transformation in the Americas.