Changes in the automotive industry and its affect on part suppliers in Asia - A
strategic Perspective - By Sutheep Ratnabhas
There is an old Chinese curse that says, "May you live in interesting times." "Interesting
times" for the Asian automotive industry have been times of chaos. The last three
years have been interesting times for many automotive parts suppliers in Asia. It
has been a period of intense competition, decreasing profits and flattening sales.
"Interesting times" in the Asian automotive industry are times when the old ways
of running a business no longer apply; times that demand a new perspective and a
new approach to doing things. Interesting times means that people who refuse to
change and adapt become extinct, and are quickly replaced by those who understand
and believe that survival and success depend on recognizing the opportunities that
change brings and adapting to the changes. These "interesting times" are brought
about because of increasing competition (both domestic and international), and a
more demanding and sophisticated customer-base who have less spending power. Surviving
and prospering in this new environment requires new approaches to the way business
In many Asian countries, in particular the Association of South-East Asian Nations
(ASEAN) region, the automotive sector has been an important driver of industrial
development, provider of technological capability, and generator of inter-industry
linkages. These linkages provide tremendous opportunities as the automotive industry
brings together various components and parts, many of which are manufactured by
suppliers in other industries, such as plastics, steel, electronics, rubber, textiles,
glass and metals. An automobile consists of more than 5,000 parts and components
that are put together using different production processes that require considerable
specialization. Recognizing the importance of the auto industry in the country's
industrial deepening process, governments of the ASEAN countries assumed a pro-active
role in its development. Often times, these government efforts to promote and develop
the local automotive industry were viewed as downright 'government intervention'.
These government interventions have often been futile in light of: global forces
that continue to affect everyone's business and personal life; technology, which
continues to advance and often overwhelm; the continuous worldwide push toward deregulation
of the economic sector. These three developments-globalization, technology advances,
and deregulation-continue to challenge the ASEAN automotive industry.
Globalization and deregulation of automotive production requires free movement of
technology, capital and key components. To facilitate this, great efforts have been
made worldwide to create a freer trade environment. While the ASEAN markets are
expected to open up, some countries still retain high tariffs and other barriers
in order to foster their own automotive industry. Lower tariffs and elimination
of non-tariff barriers with the creation of the ASEAN Free Trade Area (AFTA) will
create opportunities for exports from other areas into Asia, and could prove disastrous
for the ASEAN part suppliers.
With the trend of supplier consolidation, the numbers of part suppliers are on a
downward trend; whereas, the value-added per supplier rate is on an upward trend.
In addition to the value-added per supplier rate increasing, product changes, rapid
technological development, stiff competition and affordability pressures are increasingly
leading Original Equipment Manufacturers (OEM's) to demand that parts suppliers
take on more system design and development responsibilities. Asian parts producers
have to make basic business decisions about where in the production chain they want
to be positioned.
With continuous pressures to improve, many manufacturers have moved toward a new
way of manufacturing called lean production, which enables them to produce a greater
variety of high-quality products, at lower-cost, in less time, using less labor.
Among the elements of this new system are just-in-time (JIT) production, stricter
quality control, frequent and reliable delivery from suppliers, suppliers locating
closer to major customers, computerized purchasing systems, stable production schedules
made available to suppliers, and single sourcing with early supplier development.
The JIT inventory has changed the way companies purchase products. The goal of JIT
is zero inventories with 100 percent quality.
This article takes a strategic view in identifying the major changes occurring in
the industry and analyzing how these changes will affect automotive. Five major
strategic areas will be analyzed, and their effects discussed. The five strategic
changes include: mergers and acquisitions (M&A) in the automotive industry; the
move towards Global Sourcing; analysis of the newly defined "value" competitive
dimensions (time-based competition); the effects from the entrance of new players
- electronics manufacturers and the adoption of their "Best Practices" into the
traditional mechanical automotive industry; and the influence of E-Business on the
Analysis of the effects of Mergers and Acquisitions:
In Asia and globally, the automotive industry faces challenges as never before.
Mergers, acquisitions and restructuring are changing the industry from top to bottom.
Faced with such turbulence, it is clear that only those part suppliers who understand
what is happening will be able to plan and manage their path through difficult times
to the future. Those who are organized as efficiently as possible will survive in
good shape in the new millennium. In the automotive industry Mergers and Acquisitions
(M&A) seem to have become a part of life. Perhaps the biggest M&A we heard of in
the automotive industry in recent years was the Daimler-Chrysler M&A. With these
M&A's we see a growing bargaining power of the OEM's over the supply base. That
is, given the volume of business and the synergies that arise from the M&A, the
OEM exert tremendous pressure on the supplier. The OEM's accomplish this by the
"carrot" and the "stick" approach. That is, they dangle the "carrot" (huge potential
volume of business with global sourcing), and control the supply with the "stick"
(pressure on the supplier to continuously reduce price given the increased volume).
In the not so distant future it is the opinion of this author that we will probably
end up with 5 to 6 groups of OEM's left. All said and done, we will probably see
the General Motor group, the Ford group, the Daimler-Chrysler group, the VW & Audi
group, the Toyota group, and the Honda group. Having just a handful of groups left,
the OEMs (buyers) will try to force prices down, demand more quality or services,
and set part competitors against each other, all at the expense of supplier profitability.
Buyer's (OEM) bargaining power will continue to grow as they become more concentrated
and organized. To complicate the issue further, it is the opinion of this author
that the only Asian OEM's to remain will be the Toyota and the Honda groups. If
this opinion is correct, we can also expect to see tremendous differences arising
from the strategic differences between the Asian style of management and the Western
style of management, in particular as it relates to the way suppliers are viewed.
Most Western firms operate on a short-run profit maximization model, largely because
their current performance is judged by stockholders who might lose confidence, sell
their stock, and cause the company's cost of capital to rise. Japanese firms operate
largely on a market-share-maximization model. They receive much of their funds from
banks at a lower interest rate and in the past have readily accepted lower profits.
These fundamental differences have a direct bearing on the part suppliers. Some
suppliers would prefer working with the Western OEM's, while others would prefer
to work with the Asian OEM's, but most will be forced to work with both. Suppliers
will thus need to reconsider their strategic orientation to make sure that they
satisfy both groups of customers.
A side note, it is also a strong opinion of this author that in reality we do not
have "mergers", we simply have "acquisitions". The word "merger" is simply used
to sell the idea to the shareholders. But in reality when companies get acquired,
one corporate culture always dominates. A good case study would be to look at the
current Daimler-Chrysler so called "merger", where the Daimler corporate culture
seems to now dominate.
The next logical question after a series of M&A's seems to be -- what would or should
be the reaction of the suppliers? The logical answer seems to be a series of mergers
and acquisition that would occur at the level of part suppliers, to offset the growing
bargaining power of the OEMs. The better long-term solution, albeit more difficult,
seems to be that the supplier might select buyers who have the least power to negotiate
or switch suppliers. The better defense consists of developing superior offers that
strong buyers cannot refuse.
M&A's would also force traditional quality management systems standards to change.
Traditionally QS-9000 has been the American OEM standard; whereas the Europeans
have had their own standards, for example, VDA6.1 in Germany. With M&A's occurring
across countries and continents, quality systems standards also need to be revised.
We will continue to see "compromise" standards developing which address the various
standards of merged companies. A good example of these "compromise" standards is
the ISO/TS16949, which is a compromise between the American and European OEM's.
The next revision of this standard would also include the Asian OEM's requirements,
leading to one common quality system standards for automotive part suppliers to
OEM's move towards global sourcing in the supply chain:
Click on picture for Larger View
Deregulation, tremendous OEM bargaining power resulting from M&A of the OEM's discussed
above, and a move towards working with fewer value-added suppliers, allows for true
partnership between the OEM and the supplier to take root. There exist opportunities
for parts producers, as OE manufacturers "produce locally and source globally."
While some parts are sourced on a global basis, vehicle manufacturers generally
encourage their parts suppliers to locate close to their assembly plants. A number
of domestic Asian parts manufacturers have become global suppliers, and many are
actively considering investments in major markets.
Marketing channels connect the marketer to the target buyer; the supply chain describes
a longer channel stretching from raw materials to components to final products that
are carried to final buyers. The supply chain represents a value delivery system.
Each company captures only a certain percentage of the total value generated by
the supply chain. When a company acquires competitors or moves upstream or downstream,
its aim is to capture a higher percentage of supply chain value. In the auto industry
this was the trend in the late 70's and early 80's, when OEM's vertically integrated
into the supply chain. Today the trend is towards the selling away of these assets,
because the OEM's have realized that they are not experts in producing components.
Their basic core competencies are in designing vehicles and managing the brand.
A good analogy to this business model can be seen in Nike's Business Model, where
it subcontracts out its entire manufacturing process, often times including product
design. Nike then manages its "brand" by promoting and signing on key sports players
and paying them huge fees to strengthen its brand image. It is the opinion of this
author that over time the Nike Business Model will become more apparent in the automotive
industry. This will become more of a reality as companies move towards a modular
car that allows for "mass customization", and all the manufacturing of components
and parts are subcontracted, resulting in OEM's doing very little in house. Mass
customization is the ability to prepare on a mass basis individually designed products
and communications to meet each customer's requirements. This marketing trend will
further require that OEM's subcontract out more of the assembly of the different
In the automotive industry, the parts supplier normally deals with far fewer buyers
than the consumer market does: Goodyear Tire Company's fate depends on getting an
order from one of the Big Three U.S. automakers; that is, a few larger buyers do
most of the purchasing. Because of the smaller customer base and the importance
and power of the larger customers, suppliers are frequently expected to customize
their offerings to individual business customer needs. Sometimes the buyers require
the seller to change its practices and performance. In recent years, relationships
between customers and suppliers have been changing from downright adversarial to
close and chummy. In recent times, the purchasing function is less clerical and
more strategic, technical, team-oriented, and involving more responsibilities. The
buying groups are now more involved in new-product design and development, and participate
in cross-functional teams that are well represented. The buyers are using long-term
contracts to a greater extent. For example, in the automotive industry, OEM's want
to buy from fewer suppliers who are willing to locate close to their plants and
produce high-quality components Many companies have set up incentive systems to
reward purchasing managers for good buying performance. The system is similar to
how sales personnel receive bonuses for good selling performance. This leads to
purchasing managers increasing pressures on sellers for the best terms through the
offering of bigger "global" business to key suppliers.
Analysis of the newly defined "value" competitive dimensions (time-based competition):
A new industry structure is emerging where automotive suppliers are being requested
to work more closely within their supply chain to implement new materials management
techniques to reduce the overall cost of components. Suppliers are becoming partners
and are being requested to provide a range of services such as concept planning,
component and systems design and integration to target cost and performance metrics.
Program management techniques are being deployed to improve the repeatability and
predictability of successful launches on schedule and within budget. The race to
demonstrate such capabilities is a critical success factor for continued growth
in this changing industry. Speed is of the essence. The OEM's are faced with monitoring
5,000 components and parts often coming from 300 to 400 suppliers located around
the world (as OEM's move towards global sourcing).
The product or offering will be successful if it delivers value and satisfaction
to the target buyer. The buyer chooses between different offerings on the basis
of which is perceived to deliver the most value. We define value as a ratio between
what the customer gets and what he gives. The customer gets benefits and assumes
costs. The benefits include functional benefits and emotional benefits. The costs
include monetary costs, time costs, energy cost, and psychological costs. The best
way to envision value is to consider the ratio: Value = Benefits/Costs. Maximizing
value does not come from guessing what provides value to the customer, but from
ensuring that all activities in an organization are geared towards increasing benefit
or reducing costs. OEM's are forcing part suppliers to move towards a value-driven
perspective that emphasizes the development of a sustainable competitive advantage.
At the heart of this perspective is an awareness of the importance of the process
(business, manufacturing or design). To effectively compete, the underlying processes
must be documented, analyzed and changed where possible.
The challenge for part suppliers is to use whatever systems, technologies and techniques
are available to develop and maintain a sustainable competitive advantage in the
firm's selected marketplace consistent with corporate goals and objectives. Any
sustainable competitive advantage is built by combining four elements: quality,
speed, flexibility and cost. To effectively improve quality, reduce lead-time (in
both product design and product delivery) and enhance flexibility, the manufacturing
and design processes must be examined, documented, analyzed and changed. Reductions
in costs can be obtained not by changing the system but by forcing the system to
perform more efficiently. (Typically these savings are short-lived and easily matched
or surpassed by the competition.). The key to this concept is that the part supplier
is able to consistently and profitably please its customers. To survive, the supplier
must not simply meet the expectations of its customers - it must surpass these expectations.
In the 1970's, the focus was primarily on cost. This shifted in the 1980's to quality
(with the resulting Total Quality Management revolution). Now the quality revolution
is coming to an end, and suppliers will need to look at speed and flexibility as
the major sources of a sustainable competitive advantage.
Right now, OEM's are talking about Time Based Competition, which focuses both on
fast to market (reductions in the total elapsed lead time between the awareness
of the need, definition of the concept and product delivery) and fast to produce
(reductions in lead time between the moment that the customer becomes aware of the
need and the time that the product meeting that need arrives in his/her hands).
Flexibility focuses on increasing the variety of options that the customer demands
or desires. The part supplier is challenged to provide variety in those areas that
the customer values most. In other areas, the firm tries to standardize as much
as possible to eliminate unnecessary costs. Markets are being broken up into smaller
and smaller niches. These niches offer better-defined customer needs and expectations
and make it easier to build the products that customers demand. The strong trend
towards 'mass customization' as opposed to mass production has put a premium on
managing relationships with customers with maximum effectiveness.
New players - electronics manufacturers and the adoption of their "Best Practices"
into the traditional mechanical automotive industry:
Today, competition is not only rife but growing more intense every year. Because
markets have become so competitive, understanding customers is no longer enough.
Companies must start paying a lot of attention to their competitors. Successful
companies design and operate systems for gathering continuous intelligence about
competitors. The range of a company's actual and potential competitors is actually
much broader. A company is more likely to be hurt by emerging competitors or new
technologies than by current competitors. A company must continuously monitor its
competitors' strategy through time. When U.S. automakers just about caught up in
quality, Japanese automakers shifted to sensory qualities. A Ford engineer explained:
"It's the turn-signal lever that doesn't wobble.the speed of the power window up
and down.the feel of the climate-control knob.this is the next nuance of customer
competition". Asian part suppliers are finding it hard enough keeping track and
benchmarking themselves in the traditionally mechanical parts arena, and along comes
the electronics industry which now sets a different benchmark and redefines traditional
business objectives. Traditional parts suppliers are only now realizing that they
have been using the wrong benchmark. They have been benchmarking within their own
industry, but the new entrant coming into the industry (electronics), bringing with
it its own benchmark, redefining traditional objectives.
The entrant of the electronics industry into the traditional mechanical industry
is inevitable. With respect to their overall presence in a platform, some forecasters
see the value of electronics rising from the current 5 percent to up to 25 percent
of the total cost of a vehicle. New electronics will be developed and sourced from
a new supplier base and, to keep cars affordable, the value of other vehicle inputs
will have to diminish, further compounding problems for traditional parts suppliers.
In the automotive industry, the key area of technological development is being driven
by demands for greater safety, decreased congestion, and more efficient collection
of fees and tolls, known as Intelligent Vehicle Highway Systems (IVHS). The supply
factors pushing IVHS include the commercialization of military Global Positioning
Systems (GPS) as well as rapid cost improvements in sensor and guidance technologies.
A few electronics firms have leading-edge technologies in this area, and so have
good opportunities for developing linkages with non-traditional suppliers. This
linkage then brings the "best practices" of the electronics industry into the traditional
mechanical industry, raising the expectations OEM's have for all part suppliers,
be they traditional or not. A good example of this is the adoption of the traditional
automotive quality system standard (QS-9000) by the semiconductor industry, allowing
for an aligned quality system expectation the OEM's have for both traditional suppliers
as well as non-traditional suppliers (semiconductor components suppliers).
The influence of E-Business on the automotive industry:
According to the Office of the Study of Automotive Transportation, at the University
of Michigan, "the automotive industry has not witnessed a challenge or required
change of this magnitude since the Japanese competition redefined automotive survival
standards in the 1980's".
To truly understand the influence of E-business on the automotive industry, the
entire supplier chain would have to be analyzed. On the Business to Customer (B2C),
we see the move towards configured orders, where the Internet allows for the ultimate
level of segmentation leads to -- segment of one. Mass customization is the ability
to prepare on a mass basis individually designed products and communications to
meet each customer's requirements. This is similar to the Dell Business Model where
computers are built to customer requirements after orders are placed. It is the
opinion of this author that this business model will be used more and more in the
automotive industry, going forward. If the opinion is correct, another part of the
Dell Business Model would also be introduced into the automotive industry which
directly effects the part supplier. That is, the concept of pay on production or
consumption. Just like Dell, inventory will not be carried by the OEM, but will
only be delivered by the supplier after an order is placed. This would put further
pressure on the suppliers, reducing inventory cutting costs for the OEM's and increasing
pressures on the supplier to move towards a Just in Time (pull system) of inventory.
In the B2C side, the Web is forcing changes. By facilitating direct contact between
buyers and sellers, the Internet is displacing the car dealers who have traditionally
been the intermediaries. This is known as "disintermediation - the demise of the
middleman". Several on-line auto retailers include: www.carpoint.com, www.autobytel.com,
and www.edmunds.com. With the slow demise of only "click" (the dot com world), those
who do not possess the "brick and mortar" may find these unsuccessful, however once
combined with the web-enabled traditional dealers, a winning combination is created.
That is the move from "clicks" to "bricks and clicks".
On the Business-to-Business (B2B) side, part suppliers face an increasing need to
develop or acquire leading-edge product design and engineering capabilities to maintain
their competitiveness and survive restructuring. This will necessitate greater investment
in R&D, skilled labor and capable management. There is thus a push to get the firms
to transform supply chain performance by getting closer to customers (OEM's), collaborate
more effectively with suppliers, optimize the use of information, and take advantage
of the digital marketplaces. To a greater degree, suppliers are using electronic
data interchange (EDI) systems with their customers. Apart from the procurement
side, B2B is also used for planning & scheduling, forecasting, and product development.
Other strategic issues which affect the Asian part suppliers:
The automotive industry faces growing pressures on a number of environmental fronts:
air pollution, traffic congestion, cost of transportation infrastructure, and landfill
practices. All of these affect the way manufacturers design and build vehicles as
well as how the public uses these vehicles. In response to these pressures, vehicles
have generally become smaller, lighter and substantially more fuel efficient, and
they incorporate more recyclable materials. The development of environmentally sustainable
transportation policies will take on an increasingly important role throughout the
world in succeeding decades, which will most definitely also directly affect the
Asian part suppliers.
Sutheep Ratnabhas is the Director of Omnex Asia Operations, based in Bangkok,
Thailand. He is a QSA (Quality Society of Australasia) Certified Lead Auditor, Automotive
Sector-Specific QS-9000 Certified Lead Audked with a large numbeitor, and a registered
tutor providing recognized training for Quality System Auditors and Lead Auditors.
He is also an Omnex-SAC (Semiconductor Assembly Council) courses approved trainer.
He has worr of companies in various industries and in many countries including:
Philippines, Hong Kong, Taiwan, China, Thailand, Malaysia, Singapore and the United
States. He also has extensive experience as an ISO-9000 and QS-9000 quality systems
consultant and trainer, and is an active Member of the American Society for Quality.
He has a Bachelor's of Science Degree in Engineering Management from the University
of Missouri-Rolla, U.S.A., and a Master's Degree in Management from Sasin/Kellogg/Wharton
School of Management. His Career Objective has been to assist companies in achieving
significant improvements in productivity and in their competitive position through
the introduction of Professionally Managed quality systems.