‘Titanium Economy’ Auto Suppliers May Want To Take A Page From Tesla

They may be mostly Tier 2 or Tier 3 or even Tier 4 suppliers to automakers or to Tier 1 suppliers, but many U.S. automotive suppliers also are bits of the “titanium economy” that is responsible not only for outsized prosperity in the present but also for the hope they can shatter the myth that U.S. manufacturing is collapsing.

And they can draw their inspiration for gaining market share and more long-term traction from none other than one of the creators of the renaissance in American manufacturing, Elon Musk.

That’s the view, anyway, of the authors of the new book, The Titanium Economy: How Industrial Technology Can Create a Better, Faster, Stronger America. By “industrial technology,” the authors mean manufacturing, robotics and hardware production that are “highly specialized and focused” in about 90 of what the current and former McKinsey consultants call “microverticals.”

“We found three things that were markers or actions that titanium-economy companies took,” co-author Gaurav Batra, former co-leader of McKinsey’s industrial practice in North America, told me. “One was how they operate — how effective their operations are, how they are leveraging technology and day-to-day efficiency, not just doing things in a good way cost-wise but trying to serve customers better. Tesla is a good example of that.

“Second was how they explain and develop their business model for the investor base, what we call a coefficient of investment. That means who’s backing you today? Are they short-term or long-term folks, and do they believe in your message? That comes back to telling your message very clearly. Tesla talks about itself not as a technology company, not an auto company, and the investor base values them as a tech company.”

And the third marker of a titanium-economy company, Batra said, is that they’re seeking to create a “segment of one.” Tesla, he said, “has owned its full experience from hardware to software and batteries, and they’ve got full control of the value chain.”

Co-author Asutosh Padhi, who is a managing partner for McKinsey North America, told me the term “titanium economy” describes such companies because “they are durable; they’ve been around a long time.” Notwithstanding Tesla, “The reason you don’t see them is these aren’t the companies that get profiled on popular TV channels, but they’re real and important and under-appreciated. They aren’t the companies that run Super Bowl ads, but in many cases they are the real backbone of the U.S. economy. So how can we recommit to them and change the narrative and focus on them?”

Specifically, the book examines, amplifies and praises about 700 publicly traded U.S. companies that compete in the emerging “titanium economy” as well as about 3,500 more companies in the private sector. About 80% of them are small to mid-cap, with sales ranging from $1 billion to $10 billion, each employing about 2,000 to about 20,000 people. The top 380 private industrial companies among them posted a compound annual revenue growth rate of 4.2% from 2013 to 2018, outpacing revenue growth of S&P 500 companies, which came in at an average of 2.9%, the authors found.

“What differentiates this core of companies,” Padhi explained, “is that innovation is the core of what they do. They have a playbook around developing deep expertise, serving customers extraordinarily well, both B2B and B2C. They serve customers in an economical manner with high levels of service and quality, and reliability better than anyone else.”

Many auto suppliers pepper the ranks of the titanium economy, and it’s a particularly competitive space in American industry. Batra said they can still distinguish themselves using industrial technology such as by finding ways to create recurring revenues for themselves beyond simply supplying commodity widgets to automakers or top suppliers.

“ If you’re involved in manufacturing something for steering systems, for instance, it may be a matter of sitting down with the automotive customer and figuring out which parts of the process are related to quality and compatibility and final performance,” Batra said. “Maybe there are things you could do around product features that you could monetize or add it as a service.

“The amount of electronic components in cars are increasing day by day, of course, and with that comes the opportunity to leverage all electronic pieces to come up with a better product, in the form of better features for end customers and for auto manufacturers.”