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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 is run.

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 automotive industry.

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 follow.

OEM's move towards global sourcing in the supply chain:

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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 modules.

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.


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