A blueprint for successful digital transformations for automotive suppliers

A blueprint for successful digital transformations for automotive suppliers

By Ondrej Burkacky, Johannes Deichmann, Dominik Hepp, and Bernhard Mühlreiter

Leaders in the automotive-supply sector are mastering six elements of successful digital transformation—and reaping the rewards.

Digital disruption is hitting the automotive sector hard, though the effects are still only just playing out. From the growth of electric vehicles to shared-mobility business models to self-driving cars, automotive companies are scrambling to catch each new wave.

The largest original-equipment manufacturers (OEMs) have long been working on digital transformations, but most tier-one suppliers have only truly begun to develop new digital products and services and push hard to digitize internal processes within the past few years.

They might profit from some important learnings developed from progress on digital transformations in other sectors. To name a few of the more important ones: digital transformations suffer from half measures; while there is enthusiasm for pilots, scaling them within the organization is hard and often does not yield the intended results; after pursuing a number of obvious measures, roadmaps tend to be vague or too narrowly focused, reflecting a lack of commitment; there are many small, product-focused digitization efforts ongoing in an organization, but there is no overarching strategy and no central coordination and moderation.

In our experience working with automotive suppliers, we have learned that successful digital transformations should be well designed and soundly executed across six core areas (Exhibit 1). Central to the success of the transformation is being clear about the impact each of the six areas has on the others and understanding the key dependencies across all of them.

Digital strategy and targets

A) Digital strategy and targets

The first step in the transformation process is developing a digital strategy that takes into account the myriad new ways value can be created with digital technology.1

One of the challenges for automotive suppliers is that digital technology generates two quite different kinds of opportunities: external and internal. On the external side, any new digital strategy must contend with a series of disruptions we characterize with the acronym ACES: autonomy, connectivity, electrification, and shared mobility.2 These changes mean suppliers have to think about a wide range of potential new approaches for engaging with customers.

Most suppliers have traditionally sold only on a B2B basis to OEMs but now can consider how they might interact directly with end users. One potential offering might be extended warranties that cover components produced by a supplier. But regardless of the customer being targeted, any external digital strategy has to be anchored on delivering a superior experience.

Internally, the primary sources of value reside in the cost-intensive areas of procurement and manufacturing. Internal strategy should focus on how digital technology can optimize underlying business processes. For example, this might mean a supplier applying advanced analytics to identify sources of manufacturing defects or digitizing the ordering process for OEM customers.

To make a digital strategy practical, it needs to be translated into a clear roadmap with specific actions that trickle down to key people in the organization, who will execute them. To track progress and maintain speed, leadership should put in place quantifiable key performance indicators (KPIs). Sample KPIs include the absolute number of digital products and services in the pipeline or the amount of R&D spending on digital technologies compared to total outlays.

At many automotive companies, there is a strong bias toward backing safe projects that yield incremental improvements. Focusing on a KPI like spending on digital R&D can help the business focus on riskier ideas that also have the potential to provide a bigger payoff. Good KPIs should also address cultural issues like employee satisfaction, organizational measures, or capability-related metrics like the percentage of digitally trained staff or digital-talent turnover.

B) Organizational structure for the digital transformation

In our experience, businesses are most successful in pushing through a digital transformation by organizing around one of three primary archetypes (Exhibit 2).

Governance options for digital transformation

While establishing a new, separate digital unit (archetype 1) or embedding a digital business within an existing business unit (archetype 2) are valid options, establishing a digital center of competence (archetype 3) is most relevant to auto suppliers (since units typically are large and operate relatively independently). The digital center of competence (DCoC) is responsible for setting direction and ensuring that learning is widely shared. In this structure, the competence center does not have P&L responsibilities, but it does have its own budget, and each business unit (BU) owns its own internal digital initiatives. The DCoC assumes three important functions to develop products and services, build skills across BUs, and create external networks (Exhibit 3).

Digital center of competence plays vertical, horizontal, and external roles

Such a structure provides a way to survey existing digital initiatives, identify opportunities for synergy, eliminate overlapping initiatives, target new initiatives, and prioritize new capabilities to be developed or acquired. Most companies that choose the competence center structure also appoint an empowered chief digital officer (CDO), who reports directly to the CEO or CTO.

C) Pilot projects that use a test-and-learn approach

While digital transformations need to be broad in scope and scale, the action “on the ground” revolves around launching digital pilot projects. This happens when small, cross-functional teams create a prototype of something new, such as a novel way to connect with customers or an envisioned process improvement, tests it live to gather feedback, and then iterates based on what is learned.

And, to be fair, most suppliers have already launched some digital pilots. But the mind-set of failing fast and moving on that is central to the test-and-learn approach has not caught on at nearly the scale necessary to accelerate transformation. One reason is that it is a major departure from the slower, waterfall method of development, which requires full definition up front followed by programming and debugging, and fits with a culture of precision engineering and zero defects that has understandably been highly praised.

To help overcome such cultural roadblocks, it makes sense to start with a mix of process improvements and customer-facing initiatives. The former require fewer resources and, when successful, provide increased process quality and stability. The latter can be more complex but offer a large upside. Automation and predictive analytics can also help reduce concerns by more quickly and effectively isolating issues.

Undertaking an ongoing series of test-and-learn pilot projects is what gets the digital transformation started. Critical actions for making these pilots work include:

  • Ensure initial funding. Allocate funds from the central CDO budget to avoid unnecessary delays in starting the project.
  • Build effective teams. Staff teams initially with in-house talent, augmented by external staff as needed. Partnering with start-ups also helps, since they can provide capabilities automotive companies often find difficult to recruit or develop in-house. When the internal staff complete their work on pilot teams and return to their prior positions, they can become ambassadors for the new way of working and also serve as links to the digital unit.
  • Strictly follow the test-and learn-method. Be clear about protocols and accountability so that teams understand how to fail early and rethink the idea based on lessons learned from the failure.
  • Demonstrate success. Drive for early results, which can create enthusiasm across the organization.

While the pilot projects are being fielded, automotive suppliers also need to standardize the approach for scaling digital solutions across broad domains—such as predictive maintenance, IoT, or core business processes. Standardization can help accelerate projects by reducing confusion and creating common tools that broad groups of people can use. To do this, IT experts should identify the pilot projects already in the pipeline and develop a common technical platform that lays out key specifications, such as how data gets accessed and algorithms are stored. In this way, suppliers can support more tests at once and more quickly scale up those that are successful.

D) Talent and capabilities

Digital transformations often require technical capabilities (software development, sensor processing/fusion, cybersecurity, artificial intelligence) that legacy organizations lack.

To attract talent, incumbent suppliers need to offer appealing work environments and the right incentives. In cutting-edge areas like machine learning or analytics, locating offices close to technical hubs allows talent to be near like-minded experts and also helps better position a company as part of the digital ecosystem.

While automotive suppliers can locate software developers offshore, many find it better to have ideation and prototyping teams physically close to the core business. This facilitates cross-functional communication and helps to spread an agile way of working within legacy business units.

There may be lot of knowledge and creativity within the existing employee base, as well. Activating this talent is another factor insustainable digital transformation. For example, a leading tier-one supplier launched an internal innovation challenge to engage all employees in digital ideation. The competition generated more than 300 submissions within a few weeks, and the best were invited to make pitches in front of a senior-management jury. The winners received funds to develop a minimum viable product (MVP) and visited a start-up hub to discuss their ideas with potential partners.

E) Ecosystem

Given the myriad disruptions in the automotive industry, success today requires an ability to collaborate in new ways with former competitors from the auto sector and new digital players, who are often based in tech hot spots (Exhibit 4). No longer will competition be limited to a stand-alone technology stack; instead, a company’s value proposition will become increasingly dependent on its ability to attract the right partners.

VC investments signal digital ecosystems hotspots

To tap into tech hot spots, one global tier-one automotive supplier provides start-ups with access to resources such as office space, tools, and media assistance. Such an approach allows a company to establish close relationships with innovative companies and thereby gain access to their new ideas and entrepreneurial energy.

One effective way to connect with tech hot spots is to establish a well-funded digital hub that can identify relevant technologies and link them back to the core business. Getting close to tech hot spots can allow automotive suppliers to scout for new ideas, test them, and secure and scale needed IP. A lighter-weight mode of connection is a digital-experience tour, in which key executives visit a tech hot spot and meet with start-ups and venture-capital firms. Such visits can expose executives from automotive suppliers not only to new technologies but also to novel ways of working and thinking.

Once prospective partners in the ecosystem have been identified, there are a variety of ways to work with them, ranging from collaborations that involve a limited financial commitment to outright acquisitions (Exhibit 5).

Collaboration approaches for engaging with tech partners

F) Culture change

Automotive suppliers are typically bastions of conservative, traditional perspectives, so it’s critical to foster changes in culture and mind-set. Several large suppliers have launched change programs to establish a digital mind-set and culture geared toward agile ways of working across all its BUs and at every level of the organization.

Three key actions can reinforce an organization’s commitment to cultural transformation:

Foster understanding and conviction

Define what “digital” is and create excitement by providing clarity on new digital opportunities and how they could transform the supplier and reshape the industry. In practice, this means making big bets and allocating real money and resources to back them up.

Establish reinforcing mechanisms

Build structures that support innovation and the supplier’s digital goals; focus on memorable digital events to foster a sense of community. Empowering front-line workers is crucial—for example,providing data to help them make better decisions when interacting with customers—according to our research. The other side of this coin is holding people accountable for their work.

Feature digital role models

Reward publicly and often role models who act innovatively and digitally both at work and in their lives outside work.


The automotive sector is undergoing the kind of upheaval not seen since the industry’s infancy a century ago. Automotive suppliers that can manage successful digital transformations will position themselves to win in the new world that is emerging.

About the author(s)

Ondrej Burkacky is a partner in McKinsey’s Munich office, where Dominik Hepp is an associate partner; Bernhard Mühlreiter is an associate partner in the Vienna office, and Johannes Deichmann is an associate partner in the Stuttgart office.

The authors wish to thank Andreas Cornet, Dirk Breitschwerdt, and Daniel Beiderbeck for their contributions to this article.

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