Bosch, Continental, ZF: Automotive suppliers are fighting for future business

This is a turning point for the world’s largest automotive suppliers. The close relationship between car manufacturers and suppliers, which has been solidified over decades, could change fundamentally within a few years. Bosch, Continental and ZF are in danger of losing their privileged status in the field of automated driving.

The logic of the car industry works like a pyramid: At the top are the manufacturers. Directly below these are the suppliers who supply car manufacturers with complete systems and modules, such as blind spot warning systems or lane departure warning systems. In the industry one speaks of “Tier 1”.

In order to be able to produce the required sensors, computing units and software, these companies are dependent on the smaller suppliers below them – known as Tier 2 and Tier 3. As a rule, value creation, profit margins and sales figures decrease with each level.

Experts see the first signs that the balance of power is changing. “The supplier industry has found itself in an uncomfortable sandwich position,” says Peter Fintl, chip expert at the consulting firm Capgemini. Between chip producers and car manufacturers there is less and less room for their own value creation.

Software holds the greatest profit potential

The suppliers would not be superfluous, explains Fintl: “You need someone who integrates the components, manufactures assemblies industrially and takes care of them over the entire life cycle.” However, this is not nearly as profitable as the chip and software business, as a look at the Balance sheets shows.

At Nvidia, for example, more than a third of sales remained as net profit last year, at just under ten billion dollars. These are margins that suppliers can only dream of. They’re happy when they get a five percent return.

In the market for automated driving, the software that makes the decisions on board is central. Both the chip companies and the suppliers want to program the software for the car manufacturers – because it has the greatest profit potential.

But because neither Bosch, Continental nor ZF are developing their own complex chips that are used in the central computers, Alexander Koster from the Boston Consulting Group also expects a shift in power. “In the case of automated driving, the tech companies could deliver highly integrated systems directly to manufacturers, with the current Tier 1 as possible cooperation partners in a new role,” he says.

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Among the major German automakers, only Volkswagen is bucking the trend. In January, the software subsidiary Cariad announced a comprehensive cooperation with Bosch in the development of hardware and software for automated driving. Europe’s largest car manufacturer and the world’s largest supplier want to create a German industrial solution for the most important question of the future of the auto industry – and largely without the help of US tech giants.

Frank Petznick, head of Continental’s driver assistance department, sees no risk of a loss of status. “The fact that car manufacturers are cooperating with chip manufacturers only leads to the fact that another Tier 1 is now appearing alongside us,” he tells the Handelsblatt. However, this would also mean that suppliers would increasingly have to share their profits with these new providers.

The country’s three largest auto suppliers are not giving up. The companies rely on very different strategies:

ZF: Rational partnership

ZF was the first German automotive supplier to cooperate with Nvidia back in 2017. The collaboration now seems to be paying off. Mercedes not only lets the Americans deliver the chips, but also program central components of the software. According to information from industry circles, ZF in turn supplies the on-board computer Pro AI, in which ZF has installed Nvidia chips since the beginning. However, central software is not included.

ZF apparently accepted the conditions that Mercedes and Nvidia set for the foundation group. According to an industry insider, ZF could at least come into play when it comes to the complex integration of the software components. The foundation group is happy to have a foot in the door to the future,

And ZF is hoping for additional business as a result of its preliminary work: “With us, the software and high-performance computers are perfectly coordinated and can allow the actuators in the chassis of the future and the optimal vehicle dynamics to interact,” emphasizes ZF boss Wolf-Henning Scheider.

ZF generally does not comment on customers. However, the company has “very, very large orders on board” for the central on-board computers, Scheider recently indicated: “We are talking about millions of units from 2024 in our production.”

Continental: Search for cooperation

For the number three in the German supplier industry, the ZF approach is out of the question. “From a value-added perspective, it only makes sense for us to supply the computer hardware for automated driving together with the associated software,” says Continental manager Petznick.

The Dax group can install chips from Nvidia, Qualcomm or Intel in its central computer for automated driving, depending on customer requirements. According to Petznick, the associated software is to be developed independently of chip suppliers.

So far, Continental has only supplied its computers and software for automated driving to individual models from various car manufacturers. However, that is not enough. In order to achieve significant margins with automated driving, the group needs a cooperation similar to that between Bosch and Cariad. The problem: Conti has so far lacked such a major customer.

From industry circles it is now said that a possible cooperation is emerging. Continental is therefore in negotiations with a volume manufacturer to deliver computers and parts of the software across platforms for several models. In addition, Continental is in lively exchange with the chip manufacturer Intel. After BMW’s decision to cooperate with Qualcomm, he should be looking for new customers in the German auto industry.

Bosch: special way with Cariad

Bosch has the most ambitious plan. The world’s largest supplier has 30,000 in-house software developers. The foundation group expects double-digit growth rates up to 2030. By then, Bosch estimates the market volume to be around 200 billion euros.

The aim of the alliance with the VW subsidiary Cariad is to bring partially and highly automated driving into widespread use. The first market launches are scheduled for 2023. VW accesses the preparatory work by Bosch in the software. However, Bosch boss Stefan Hartung recently emphasized: “Nothing is finished there. It’s quite a tiring thing.”

For Cariad, however, it is clear that the development of software for automated driving should be one of the core competencies that they want to occupy – with the help of Bosch. This emerges from a presentation of an internal strategy meeting.

According to this, VW sees itself behind the competitors BMW, Mercedes, Honda or General Motors, who are already developing large parts of the software themselves or together with tech companies for automated driving – without any significant involvement of the suppliers. The Chinese newcomer Nio is therefore further.

In the future, VW also wants to make itself independent of chips from US semiconductor companies. The example of Tesla shows how central having your own semiconductor expertise is in the long term. After years of preparatory work, the Americans are now designing their chip for the central computer themselves.

In any case, Bosch is still hesitating before launching the race to catch up. “Especially with chips that are used, for example, in the central computers of modern vehicles, we are examining strategic options for “make”, “buy” and “partner” for the future,” says a spokesman on request. Chip design is complex and expensive. In addition, it is uncertain whether its own chips will be better than those from Nvidia, Qualcomm, Intel or Tesla.

More: Intel, Nvidia and Qualcomm are pushing into the auto business with a vengeance. German manufacturers are already heavily dependent on the US chip giants.