The global automotive industry is at a crossroads. Traditional risk management strategies aren’t enough in an era of rapid technological advancements, geopolitical tensions, and supply chain upheavals. Carmakers saw abrupt changes in consumer demand during and after the COVID-19 pandemic and continue to grapple with persistent supply chain bottlenecks and transformative technological trends like electrification and autonomous driving. Geopolitics, with its trade barriers and potential to limit companies’ access to critical materials, is making things even tougher. For automakers, the stakes couldn’t be higher. It’s time to rethink the road map.
Industry players will need to make substantial capital investments even as they face higher risks. Spending on electric vehicle (EV) batteries alone is expected to rise by 27 percent annually, reaching $400 billion by 2030. Similarly, the development of autonomous-driving technology will demand significant investment. Meanwhile, shifts in demand mean the value chain will need to evolve from a more resilient supply chain and sourcing strategy toward a more flexible and trade-resilient production and distribution network—all tied to long-term capital commitments. How quickly these changes are materializing is evident in China’s vehicle exports, which, according to data from the China Association of Automobile Manufacturers, were five times higher last year compared with 2020, while exports from the United States and Japan fell. Brand perceptions are changing, too, as evidenced by the declining demand for foreign cars in China.
These challenges have forced industry leaders to rethink their strategies and ask difficult questions: How can we be better prepared for future uncertainties and anticipate disruptions earlier? More important, how do we adjust our approach to reducing risks while staying competitive?
To address these questions, business leaders should adopt an assertive, agile, and strategic approach to risk management, with scenario plans for a wide range of disruptions. Forward-thinking automakers are embedding resilience into every aspect of their business strategy, from investments to supply chain planning. In doing so, they are paving the way toward growth (see sidebar “Perspectives on the importance of resilience in the automotive industry”). They are also providing comfort to their boards by ensuring that their strategic risk profiles are well articulated, well understood, and commensurate with the company’s capabilities and resources. In this article, we explain what they’re doing and how others can start doing the same.
Embedding resilience into strategic planning
Embedding resilience within strategic planning means understanding where and how uncertainties evolve, across which dimensions or areas a company can strengthen its resilience, and then dynamically linking the two in an agile strategic-planning approach.
Identify the broad, long-term trends that often produce short-term disruptions
Disruptions are hard to predict, but business leaders can identify the areas from which they are likely to emerge. The World Economic Forum’s 2024 risk report highlights trends in technology, the environment, geopolitics, and socioeconomics that can lead to risks. In our view, the automotive industry faces 25 to 30 core strategic risks in these areas. Leaders can assess each of these risks for its impact, likelihood, and ways to limit the fallout. For instance, geopolitical risks affect market access, supply chains, and long-term production stability. Government policies can also affect access to technology, which is part of the growing trend of political protectionism and bargaining. Other risks include demographic shifts, energy transition policies, and changes in economic growth that influence demand for cars and EVs.
Mapping how these strategic risks could affect the organization’s strategy can help leaders focus on the most urgent scenarios or those tied to critical strategic decisions. Typically, this analysis should highlight three to four high-priority scenarios each quarter to guide strategic decisions around major investments or changes to existing plans. Forward-thinking automakers, for example, monitor geopolitical developments, such as trade restrictions or tariffs, and establish relevant markers designating when to adjust production so they can access markets and maintain supply chains. They also explore flexible production models to adapt to shifting demand. This is a break from the past when automakers planned sales volume and priced cars according to available production capacity.
Define the company’s highest-priority resilience dimensions
Specific risks do not affect just one aspect of an automaker’s operations. For example, trade restrictions don’t just challenge companies to think differently about production networks; such restrictions force a broader strategic response, touching everything from finances to operations to reputation management.
Most organizations view resilience through six main categories: financial, operational, digital/technological, organizational, business, and reputational. Each has its own subset of risk dimensions ranging from operational stability to strategic competitiveness. For instance, if leaders are considering the operational resilience of their supply chains, the focus might be on keeping specific parts and components flowing. But strategically, they will also need to consider how to design supply chains that can adapt to today’s volatile environment—be it geopolitical tensions, trade restrictions, conflicts, or climate-related disasters. In the past, the focus may have been on minimizing supply chain costs in a global free-trade environment. Today, the focus for supply chain leaders must be on planning for flexibility, additional redundancies (backup resources), and strategic sourcing options for rare materials, components, and technology. Each dimension of resilience offers short- and long-term opportunities for targeted improvements and greater organizational preparedness (Exhibit 1).
Through systematic reviews of these resilience dimensions, senior leaders can spot potential opportunities and vulnerabilities. One example in the automotive industry involves the rapid evolution of the software being developed for cars. In this case, two cultures are coming together—the more iterative and error-tolerant software engineering culture and the safety-oriented engineering culture associated with traditional car manufacturing. Given the constant upgrades to automotive technologies, carmakers will need to understand how to combine and integrate new technological skill sets and business models into their organizations—factors that managers often underestimate—and balance them against the economic reputational risks associated with potential technology failures.
Link uncertainties to structural resilience factors to further define priorities
Investing in resilience is costly, so prioritizing these investments is essential. Leaders will need to align their resilience initiatives with current and emerging risks. In this way, they can shape their quarterly agendas to include discussions about strategy and portfolio risks.
Consider the regulation of new technologies: For carmakers, managing new regulations and legal precedents on product liability will be critical for realizing advances in autonomous driving and AI. Automakers should weigh the potential benefits of being first movers against the potential legal and reputational risks of early adoption. Similarly, changes to environmental laws will influence the energy transition and its pace. Companies can take three actions to effectively link these and other uncertainties with structural resilience factors.
First, they could imagine the future, going beyond basic sensitivity analyses to consider a wider range of realistic possibilities. These may include low-probability but high-impact events, such as bans on combustion engines. By monitoring regulatory changes, consumer trends, and geopolitical developments, leaders can more easily identify when a scenario is becoming more likely and generate more informed responses more quickly.
Second, automakers could evaluate potential opportunities in these scenarios, applying the following tests to guide their preparedness:
- Minimum preparedness. Is the scenario realistic enough that it will be hard to argue afterward that the company did not prepare to a minimum level? Are there low-cost investments that make sense based on the minimum probability of occurrence?
- Derisking strategy. Is there a way to invest that focuses on reducing risk, even if it doesn’t maximize profit? For instance, is it better to partner with a technology company or others in the auto industry rather than build a technology end to end alone—even if it means sharing profits or reducing product distinctiveness?
- Time value. Can decisions be delayed at minimal cost to maintain risk safeguards or investment opportunities?
- Competitive view. How do our choices compare with those of our competitors, and can we justify our approach? Are we in a class of one with our decisions?
Forward-thinking automakers, for example, benchmark their risk exposure using KPIs across impact and likelihood categories. Supply chain risks might be assessed by country exposure (both direct and indirect, including tier-one and tier-three suppliers) and dependence on single sources. For each significant risk, leaders set targets, establish tracking mechanisms, and define their appetite for risk. In the case of supply chain risks, the targets might include the maximum time an assembly line can remain idle, or the minimum long-term production capacity needed.
Third, it’s important to look back after a crisis. When uncertainties unfold, companies should reassess their strategic positions and question whether their original assumptions still hold. A company could adjust strategies in response to structural changes, such as shifts in the energy transition, the rise of remote work, and consumer trends following crises (like the pandemic and the Ukraine conflict).
Building a resilience muscle
Incorporating resilience into strategic planning is just the beginning (see sidebar “Getting started: How to get on the road to strategic resilience”). Companies, especially in the automotive industry, need to build a resilience muscle—that is, they need to develop flexible and strong processes and systems that go beyond traditional static approaches to strategy planning and risk management. What’s more, they should be open to challenging past assumptions about their strategies and their own capabilities.
Regularly review strategy and investments against risk
Companies should develop a view of strategic risk on a quarterly or semiannual basis. This risk report should outline the organization’s resilience profile and include updates to strategic risk questions. It should present a clear view of risks, prioritized by impact and timeline, and include updated scenario analyses. In this way, the board can ensure that the company’s risk profile aligns with its risk appetite and that management can make informed decisions.
The report should test strategic initiatives against a range of different scenarios, not just the usual base, upside, and downside cases. Scenarios that are unlikely but still possible should be included to avoid surprises—for instance, a potential increase in the prevalence of ride-sharing and robo-taxis may mean that fewer customers want to own a car.
Amid the risks, companies should regularly review their resilience capabilities and compare them with those of their competitors. The auto industry regularly contends with issues such as production volume dependency, cost flexibility, and access to materials and technology. Setting specific targets against these factors, tracking them with clear metrics, and benchmarking themselves against others can help automakers manage these risks effectively.
In today’s environment, traditional three- to five-year plans often become outdated in a matter of months. By contrast, quarterly reviews and updates allow companies to respond quickly to external developments as well as internal experiences and challenges. When a new scenario emerges, companies will have a set of options in place and action plans ready. Financial planning is a particularly critical area—one that warrants more frequent reviews by automakers, allowing for staged investment decisions and detailed resource allocation.
Track progress with the right tools
Companies’ resilience needs to be regularly tracked with KPIs and key risk indicators (KRIs). Some automakers, for instance, rigorously monitor potential supply chain risks created by their reliance on single suppliers or exposures in certain countries. They track key metrics associated with these risks, update senior management, and intervene if there are significant changes. Indeed, these KPIs and KRIs should be linked to the company’s costs and the probability of disruption.
Today’s finance models and planning tools enable detailed budgeting and resource allocation. However, they often overlook how strategic risks can affect the organization. A strategy-oriented planning model for risk and resilience should consider important risk factors across the organization—from the supply chain to procurement to production and sales. These are typically expanded models, built in collaboration with the finance team, and they can help leaders assess risk scenarios and make informed decisions. For instance, learning from past disruptions, some carmakers have adopted 24- or 48-hour timelines as a benchmark to respond to disruption. During this time, they can assess the impact from, say, a sudden loss in sales or supply chain shortages caused by geopolitical events.
Lead with resilience and get everyone on board
The quest to build a resilience muscle starts in the executive suite and boardroom (Exhibit 2). Leaders should question long-held assumptions, encourage critical and challenging discussions, and allow for regular review and adjustment. The ability to adjust and quickly correct strategic decisions is arguably the most important factor in building organizational resilience.
It’s equally important to ensure that middle managers understand the shift from fixed strategy and execution cycles to a more agile approach. They, alongside senior leaders, should encourage regular communication and constructive feedback with employees across the organization. Disruptions and the need to make strategic adjustments will only become more frequent, given higher market volatility and changes to the structure of the industry—such as the shift from gas-powered vehicles to EVs. Automakers should ensure that their employees are aware of these shifts and prepared to respond quickly. Training programs and frequent communication about the need for resilience can help everyone understand why changes are necessary and how they contribute to helping the company stay competitive.
While senior leaders may have some of these practices in place, relying on traditional approaches isn’t enough to build a resilient automaker—or any company operating at global or international scale today. The stakes are higher and uncertainty is growing, yet resources and management capacity remain limited. Temporary task forces can help handle immediate disruptions, but they can also exhaust the organization over time. Even the most capable leaders will find it harder to stay competitive without a more systematic approach.
In the long run, resilience will be the key factor that distinguishes industry leaders from those that fall behind. To grasp the necessity of resilience, leaders need only look at past disruptions, such as the financial crisis. As changes become more frequent and wide ranging, developing a robust resilience strategy will become even more critical for achieving success.
