Wrenching changes in the auto industry. (On Cars).
CONSIDER THE CURRENT SITUATION:
* Japan: Car sales are lower today than in 1989
* Latin America: A negative growth market for vehicles
* Europe: Growing--slowly
* China: A huge market--or at least it will be one day
* U.S.: The market strength is still there, but flagging.
Overall, there is a worldwide capacity glut of 22,000,000 units. Simply stated, the industry has the potential to build far more cars and trucks than there are people with the ability to buy them.
But guess what? Vehicle manufacturers everywhere are adding more capacity. Yes, apparently 22 million vehicles too many still aren't enough.
"These unrealistic expectations are pushed by the fact that we have so much competition," says Paul McCarthy, director, Autofacts Div., PricewaterhouseCoopers (PwC). "There is a financial incentive for people to overestimate the number of conquest sales they will get, because the auto industry makes money through higher volumes." Which also makes Wall Street happy. This relationship was illustrated in the consolidation boom of the 1990s. Twenty-three independent companies represented 95% of the global vehicle manufacturers in 1990. That number is nine today, and may be at six by 2010. The consolidation at the supplier level is even more pronounced: 2,100 Tier Ones in 1990, 700 today, and just 35 by '10. Tier 2s have gone from 21,400 to 10,000 -- and are on their way to 800.
"The industry got very fat and arrogant in the 1990s," says James Orchard, president. North America and Asia at Visteon, "because we needed scale and we needed capabilities -- even when we didn't know what those capabilities were. This," he says, "has resulted in a global buying spree that has left 40% of the supply base either for sale or on the edge of bankruptcy, and is the reason for today's profitless prosperity."
Suppliers and Demand. One of the wild cards for supplier capacity is the large amount of "patient capital," second-generation owners of the family business. They are satisfied to take home a decent paycheck, realize a modest profit, and stick it out so they can sell the business at a nice profit. "The reality," says Craig Fitzgerald, partner, Automotive Supplier Strategy Services, Plante and Moran, "is that this is happening less and less because there are too many players, and not enough plays left in the game."
On the other side sit large investors who acquire supplier assets at an attractive price. "Their financial horizon is five to seven years," says Mike Burwell, leader of PwC's Automotive Transaction Team, "so they don't look on it in terms of one investment thesis, but rather on what their exit strategy will be." That can range from buy-and-build to breaking it up and selling off the remains.
GM Wakes Up. The brutal decline in North American profitability arrived when General Motors decided to shore up its rapidly declining market share. "From the mid-1970s to 2000," says Van Jolissaint, corporate economist, DaimlerChrysler, "every participant in the U.S. vehicle market--excluding small players like Fiat and Renault--gained market share, except one. And GM's shrinkage made room for the Europeans, Japanese, Koreans, Ford and Chrysler to gain share." But when GM suddenly decided to compete rather than retreat, the bloodletting began. This was confirmed by GM CEO Rick Wagoner's recent admonition that competitors, "Stop whining and play the game." A statement analogous to announcing a switch from golf to rugby mid-game.
As Jolissaint observes, "Between 1990 and 1995 virtually every Japanese car company--except Honda and Toyota -- was bankrupt, yet none of them closed." Only two plants--one Mazda and one Nissan--were shut. As a result, capacity grew, the struggle for share began to increase, and the constant-dollar price of vehicles dropped. GM's self-imposed resurrection greatly accelerated this pressure.
"The OEMs have three main elements of cost: raw materials, labor-related costs, and purchased components," says Plante and Moran's Fitzgerald. "The last isn't only the largest element, it's also the one OEMs have the most leverage over." Over time it will take capacity out of the market. Eventually--Fitzgerald says it could be a decade before the metamorphosis is complete--supplier capacity utilization will begin to rise as their numbers dwindle. If it ever rises to the 80% range, the current adversary relationship would have to change. "The OEMs would have to become more collaborative and partnering," says Fitzgerald, "because they won't be as able to set the terms of the debate."
Change Through Fragmentation? This process may begin earlier than expected due to the continuing fragmentation of the market. According to DCX's Jolissaint, "In the next five years, we see no real change in the number of cars, but 53 new truck, SUV and crossover nameplates, with 45% of those coming from foreign automakers." Fat profits from trucks will begin to slide, which will force automakers to build more from less. "Roughly 16% to 18% of the world's vehicles are sitting on one million-unit platforms," says PwC's Mike Burwell, "but as you look out to 2007 or so, the number rises to 40%." Which means OEMs and suppliers will have to get more creative, more flexible, and share more parts across platforms.
"High production alone won't translate into higher profits," says Mike Laisure, president, Engine and Fluid Management Group, Dana Corp. "The OEMs will have to work with us such that we can create a commonality of products and processes in order to effectively utilize our assets." Some suppliers are already supplying different versions of a part--like an alternator--to different automakers, but they are building them on the same line using the same processes, and with the same capital base. This flexibility will have to transfer to vehicle architectures as well.
Leading With Product. "Every turnaround has been product-led," says Autofacts' Mccarthy, "but it won't get the same bounce this time around because it will take more than one winning product to produce the same effect, and the time you have to 'own' the market will be much shorter as everyone rushes to copy." Accordingly, execution will be more important, and more difficult in the compressed time available. More importance will be placed on working with suppliers who have systems knowledge, and can work with a number of sub-suppliers. For the supply base, this change will demand more cooperation from, and with, the OEMs. "They will have to think each step through and add the flexibility up front," says George Perry, president and CEO, Yazaki North America, "because that's much cheaper than adding vehicle architectures, tearing up plants, or standing in the way of standardizing parts and processes."
Low prices, cheap financing, and a growing North American buyer base may keep the sales trend rate at 17 million units, and support growth of 1% per year, as Jolissaint predicts. It will not, however, lessen the pain. "We are looking at a decade of playing much the same game as we are today," says Fitzgerald, "with slow and steady progress."
RELATED ARTICLE: NEW VEHICLES--like Nissan's Pathfinder Armada, its as-yet unnamed Infiniti couin, and the Titan full-size pickup--will increase bath price Competition in the light truck market and excess capacity. Each will cut the profit margins on light trucks, Detroit's most profitable sector. Ford has already suggested it will launch the 2004 F-150 with incentives in order to retain market share.
Analysts say Honda is the most flexible automaker around, but not just in terms of how many different vehicles it can build from a single architecture. Its greatest talent has been its ability to establish production facilities that trade in one of the three major reserve currencies (Euro, Yen, Dollar), and modify sourcing to chase the highest returns on investment.
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|Author:||Sawyer, Christopher A.|
|Publication:||Automotive Design & Production|
|Date:||Apr 1, 2003|
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