Automotive & Assembly Practice

Amid disruption,
automotive suppliers must
reimagine their footprints
Technology, sustainability, and the era of electric vehicles are complicating
location decisions for automotive suppliers.

by Andreas Behrendt, Ricardo Moya-Quiroga Gomez, Raphael Rettig, and François Soubien

© Monty Rakusen/Getty Images

April 2022
 For many automotive suppliers over the past
20 years, the calculus of plant location has been
relatively simple. If there was a billion dollars of
revenue in a region, that was probably a reason
to build and maintain a big plant there. If low-cost
labor was available in a different country but not in
one’s own, then the executive team was probably
evaluating the pros and cons of relocating.
Then COVID-19 came along, disrupting supply
chains and reducing people’s driving time and the
demand for cars. Some of the strategizing about
plant location receded into the background as other
matters took precedence.
Now, as businesses start to contemplate a
postpandemic world and automobile sales recover,
automotive-supply executives are returning to their
discussions about footprint location and are finding
them more complicated than ever. It’s as though
these executives are captaining a ship that has just
weathered a terrible storm—and, instead of coming
into clear waters, they discover that the rocks that
were on the nautical chart before are now much
bigger and closer.
This article dives into the trends that have turned
manufacturing-footprint strategy into such a
conundrum. Those trends include the rapid rise
of electric vehicles; the arrival of new, disruptive
OEMs; and CO 2 regulations that loom over the
automotive supply chain industry. We conclude
with a checklist that automotive suppliers can use
to determine how their manufacturing footprints
should change to give them the best chance of
winning in the future.
New questions for a new era
In addition to the traditional considerations about
their footprints, automotive suppliers today face a
host of new questions. The following are among the
most important:
— How can we transform our manufacturing
workforces and develop the capabilities we
need for our future product lines, including more
software and over-the-air expertise?
2 Amid disruption, automotive suppliers must reimagine their footprints
— Where might we have an opportunity to
vertically integrate through M&A?
— What structural advantages—more automation
or higher plant efficiency—do our competitors
have, and how can we narrow that gap?
— For the automation we’re doing, should we bring
it to our existing factories or take a greenfield
approach and build brand-new factories with
high levels of automation?
— What price will we pay—five or ten years
from now—for being behind in our use
of technology?
— Looking out over the same horizon—five or
ten years—what will be different in the areas
of labor availability, plant worker wages, and
transportation costs?
Not many automotive-supply executives would
dispute that these questions are important. But
executives’ full agendas mean they’re generally
not in a position to step back and take a strategic
long-term view. Much of the decision making in
automotive manufacturing is, indeed, incremental—
focused on something happening a year from now
(such as where to put in an efficiency program) or
two years from now (such as which plant to use for
a new product). This incrementalism could leave
suppliers in the wrong place, from a physical-
footprint perspective, as the industry reinvents
itself over the next decade.
The trends affecting
automotive suppliers
The most important trend, of course, is the rise of
electric vehicles at the expense of vehicles that
use internal-combustion engines and run on gas.
This trend is propelling many of the changes facing
automotive suppliers, but there are other trends, too.
Below are four of the most important.
— Technology-related portfolio shifts. The
industry’s focus on autonomous driving,
 connected cars, electric vehicles, and shared
mobility (ACES) is prompting a shift in the
supplier product mix. In a survey conducted last
year by McKinsey and the European Association
of Automotive Suppliers (CLEPA), 90 percent
of suppliers said they were reshaping their
portfolios to emphasize e-motor technologies
and battery innovations. The suppliers said they
were de-emphasizing body exterior systems,
suspensions, wheels, and engine systems
(Exhibit 1).
— Emergence of new OEMs. Tesla isn’t the
only electric-vehicle manufacturer disrupting
the automotive market. Other new electric-
car companies have arrived, and the stock
market, at least, is betting on their success.
These companies (including Nio) won’t have
the constraints of conventional OEMs in
building their manufacturing and assembly
capabilities. We would expect to see high levels
of automation in their plants—similar to Tesla,
which is by far the most efficient OEM in the
world—and maybe some “lights out” plants in
Central and Western Europe, near the demand
centers for premium electric vehicles.
The automotive suppliers participating in the
McKinsey-CLEPA survey were skeptical of these
OEMs’ relevance: two-thirds said they didn’t
think a significant part of their revenues in 2030
would come from parts manufactured for these
new OEMs’ vehicles. If suppliers’ investment
decisions reflect that belief—that is, if they
continue to direct their efforts overwhelmingly
toward their existing OEM customers—we think

Web <2022>
<Amid disruption, automotive suppliers must reimagine their footprints>
Exhibit <1> of <3>

The component
Exhibit 1 landscape is changing, so suppliers are adapting
theircomponent
The portfolios. landscape is changing, so suppliers are adapting their portfolios.

Expected market size development, € billions

Only half of components (by 1,578

revenue 2030) are expected
to remain unaffected by
portfolio shifts
Growth opportunities
42% Growing components, eg: e-motor; battery management
1,144 system; low-voltage/high-voltage battery cells; fuel cells
9%

61%
Stable components
46%
Stable components, eg: exterior lighting; wheels

30%
12% Sunset commodities
Sunset commodities, eg: body exterior; suspension,
Global Global wheels, tires; engine systems
2021 2030

Note: Displayed percent values without accounting for "N/A" answers; n = 74 (February 8–26, 2021).
Source: McKinsey Center for Future Mobility; McKinsey-CLEPA Pulse Check Survey

Amid disruption, automotive suppliers must reimagine their footprints 3

 Our analysis suggests that it might
be 2030 before the industry again
sees light-vehicles sales matching those
of 2019.
they will be cut out of a significant value pool.
Our view is that the new OEMs are poised to do
well and that there will be a significant volume
shift toward them and away from current OEMs
between now and 2030.
— An increased focus on sustainability. Under
pressure from OEMs, media, and capital
markets, most automotive suppliers (83 percent
in our survey) have defined sustainability
targets. A much smaller proportion (7 percent)
are actually starting to implement carbon
emissions–abatement programs. From a near-
term economic perspective, the gap between
planning and doing is understandable—as is
the decision by many automotive suppliers to
keep their plants in lower-cost geographies.
Recent studies have suggested that
transportation costs related to CO 2 would have
to rise by a factor of ten to erase the benefit of
having a plant in a lower-cost geography. Still,
there are going to be abatement-related rises
in cost, and we think there’s no question that
in the future, suppliers with more sustainable
footprints will have an advantage in terms of
pricing and margin.
— The end of unit growth in the light-vehicle
market. Light-vehicle sales have been hit
hard by COVID-19. In 2020—the first year
of the pandemic—light-vehicle sales were
4 Amid disruption, automotive suppliers must reimagine their footprints
down 20 percent. The Asian market for light
vehicles grew but not enough to offset steep
declines in Europe and North America. Our
analysis suggests that it might be 2030 before
the industry again sees light-vehicles sales
matching those of 2019.
Because of this decline, roughly half of all
suppliers are looking for new growth in areas
outside of automotive. Among those looking to
branch out, seven in ten say they’re exploring
sectors without any connection to automotive,
such as everyday household products.
The increasingly complex calculus
of supplier footprints
The math of doing some manufacturing in
low-cost countries still makes sense for
automotive suppliers. Consider the example
of Europe. Despite the wage inflation in many
low-cost European countries, the absolute gap
between blue-collar labor rates in low-cost
countries and in Western Europe will continue to
widen between now and 2030. And even if higher
wages in low-cost countries such as Poland and
Romania erode some of the potential for savings,
some of those savings will still be possible by
switching manufacturing to places such as Serbia,
the Republic of North Macedonia, and the Republic
of Moldova.
Indeed, one French player will soon start
operating its fourth plant in Serbia, and a Chinese
supplier has committed to putting more than
$50 million into a Serbian plant of its own. These
companies’ investments are starting to improve
the infrastructure and the administrative and legal
capabilities in the country.
Getting started: A checklist for laying
out a next-generation footprint
During this time of generational disruption,
automotive suppliers’ structural competitiveness
will be tested. For those companies looking to begin
a process of footprint reimagination, we recommend
six steps (Exhibit 2):

Of course, manufacturing in a low-cost country is 1. Benchmark your current plant footprint to

only one of the ways automotive suppliers can get
an economic advantage. Another is by introducing
more automation into the plants they already have
in high-cost countries.
And then there’s the very compelling argument
that footprint decisions should not and will not
be based on one factor in the future. Cost won’t
go away as a component, of course; it will always
matter. Also important, however, will be supply
chain sustainability. Resilience will be a third factor,
after a year in which a pandemic and the weeklong
closing of the Suez Canal vividly demonstrated the
vulnerabilities of global supply chains.
identify your strengths. You can’t know what
you should change—or seek to replicate—
without an accurate picture of what’s
happening in your current plants. To gain such
a picture, leaders might put each of their plants
under the microscope, so to speak, to assess
the plants’ profitability and their capacity to
grow to meet expected demand. Very often,
companies find that there is no additional
capacity at the plants putting out their highest-
growth products; the only capacity is at plants
producing lines that are less popular.
This step should also include a plant-by-plant
assessment of operational effectiveness—a

Web <2022>
<Amid disruption, automotive suppliers must reimagine their footprints>
Exhibit 2 of <3>
Exhibit <2>

These six steps canhelp

steps can helpsuppliers
suppliersmaximize
maximizethe
theprofitability
profitability of
of their plants.

1 2 3 4 5 6
Benchmark Identify quick Take advantage Consider Assess the cost Design your
your current wins at individual of structural whether you and capital- target footprint
plant footprint plants. levers. have the right spending implica- of the future.
to identify your mix of products tions of any plant
strengths. at each plant. changes you’re
considering.

Amid disruption, automotive suppliers must reimagine their footprints 5

 crucial attribute given the pressure OEMs are
putting on suppliers to lower their costs.
2. Identify quick wins at individual plants. This
step is about optimizing performance and
increasing plant productivity, as well as
tweaking the footprint to provide an
immediate economic benefit. Strategies
could include short-term reallocation of
volumes and rerouting customer orders to
best use individual plants and fine-tune
their performance.
3. Take advantage of structural levers. Staying
within the limits of your current plant
product mix, think about how automation
or digitalization could lift your plant into the
industry’s top quartile. From an automation
perspective, the highest ROIs are currently
in upstream areas such as injection molding
and assembly. The lowest ROIs, from the
perspective of automation, are in logistics.
4. Consider whether you have the right mix of
products at each plant. This step is about
figuring out the component specialization
profile of your manufacturing facilities. It starts
with imagining—before embarking on any
actual transformation work—how your product
portfolio might evolve in the future. With the
industry shifting to fuel cells and lightweight
materials, most suppliers’ production
technology should shift in the direction of
standard, flexible production lines. Capital-
intensive industrial processes—needed for
commodity components—will probably become
less important toward the end of this decade
and in the 2030s.
5. Assess the cost and capital-spending
implications of any plant changes you’re
considering. From the work you did in the
first step, you already know which “nodes” in
your manufacturing network are doing best.
That’s the level you want to reach for all of
your plants.
6 Amid disruption, automotive suppliers must reimagine their footprints
One approach to consider—not widely used
by auto suppliers—is value chain streamlining,
which unbundles product components based
on labor content and transportation costs. A
recent Europe-focused study concluded that
for highly stackable items—defined as 600 or
more parts per truck—manufacturing in a low-
cost country would be more economical than a
nonautomated plant in a high-cost country at a
distance of up to 1,500 kilometers. Even if the
plant in the high-cost country were automated,
the cost advantage would hold at a distance of
up to 1,000 kilometers, the study found.
Of course, this economic analysis could change
as automotive companies start facing more
sustainability-related regulations in their supply
chains. The analysis also doesn’t account for
the high social costs created by certain types of
value chain streamlining.
6. Design your target footprint of the future. This
step is the output from all the previous steps—
mapping out what, where, and how you’re going
to build. As automotive suppliers think through
this step, they would do well to remember one
of the ongoing dilemmas of footprint strategy:
setting the right size for a plant. Experience
suggests that with too many small plants, it’s
hard to achieve efficiency in terms of overhead.
Big plants are more efficient but can be
cumbersome to manage.
One solution is to house independent
product groups in one relatively big location
where they can operate autonomously while
sharing facilities management staff and other
overhead. This strategy is informed by our past
benchmarking, which shows that automotive-
supply plants with between 1,000 and
1,500 workers do the best job of indirect cost
absorption (Exhibit 3).
Not only plant size but also every aspect of a
supplier’s overall footprint is necessarily specific
to the company. So this last step is about
Web <2022>
<Amid disruption, automotive suppliers must reimagine their footprints>
Exhibit <3> of <3>
Exhibit 3
Automotive-supply plants
Automotive-supply plantswith
with between
between1,000
1,000and
and1,500
1,500workers
workershave
havethe
thebest
best
indirect cost absorption.
indirect cost absorption.
Proportion of plants, of each size, that are in the top quartile for their management of indirect
costs,1 %

Highest likelihood to be in top quartile Very low sample size

70

43

26
21

0
Number of 0–500 500– 1,000– 1,500– 2,000+
employees 1,000 1,500 2,000

1
Top-quartile value at 28%.
Source: McKinsey automotive supplier indirect functions benchmark, n = 198

figuring out the specific restructuring moves
you should make and identifying consolidation
projects to get you started.
Manufacturing footprints that served automotive
suppliers well in the past are going to fall short in
the coming period of disruption. The best way to
survive isn’t to react to the changes. It’s to anticipate
them and get out in front of them—shaping your
company’s future in the process.

Andreas Behrendt is a partner in McKinsey’s Cologne office, Ricardo Moya-Quiroga Gomez is a partner in the Munich office,
Raphael Rettig is a partner in the Düsseldorf office, and François Soubien is a partner in the Paris office.

The authors wish to thank Thomas Baumgartner, Alberto Bettoli, Harald Deubener, Axel Karlsson, Martin Lindner, Nicolai
Müller, and Ulf Schrader for their contributions to this article.

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Amid disruption, automotive suppliers must reimagine their footprints 7