GERMANY: Profit opportunity shifting to suppliers - GM
Magna's planned buy of a majority stake in shows carmakers have lost the upper hand in the industry by outsourcing development work to suppliers and relying on them for technology, GM vice president Carl-Peter Forster said in Frankfurt.
"The fact is the balance of power has somewhat shifted," he told a dinner hosted by the American Chamber of Commerce in Germany.
Currently head of GM Europe and tipped to run Opel, Forster said carmakers needed to re-evaluate their strategy, according to Reuters.
"We all had the vision that the OEMs should just assemble bits and pieces, do a little bit of marketing, a little bit of design and all the rest would be done by suppliers," he said.
"That was a nice vision. It sounds very lean, but the profit making opportunity is also shifting to the ones that have the technological know-how. That is in very many cases now the supplier industry."
While volume carmakers in good years at best book an operating margin of 4% to 5%, suppliers that control exclusive technology can make double-digit returns.
"As a manufacturer you have to ask yourself is this the way you want to handle your business or should you consider choosing areas you want to move back into? And interestingly enough one of the areas is electrical propulsion," Forster said.
Except for its lithium-ion cells, the battery powering the Chevrolet Volt is developed and manufactured by GM, he cited as an example.
Forster's view is that Magna, which once counted Russian oligarch Oleg Deripaska as a large shareholder, did the deal not so much out of a desire to compete with customers directly but the huge opportunities awaiting its supplier business in Russia.
"You need to manufacture in Russia to be able to serve the market, one of the reasons being the 25% import duty but you can never profitably produce in Russia unless you have a local supply industry and there is virtually no - or very little - supplier industry," Forster said.
"I think one of the reasons why Magna is interested because together we can develop it ... Our experience shows that it is by no means easy to really attract suppliers to Russia."
Correctly picking trends, launching successful models and building a brand determined success rather than managing costs, productivity or even real - as distinct from perceived - quality since disparities were minute to average car buyers.
"The difference between a right and a wrong product is a 10, 20 or 30% difference in margin per unit, it's a make or break. You have to focus everything on it," he said.
"Fortunately with every new product that is working fine, we see our revenue per unit going up 15 to 20%. This delta revenue typically has a margin of 50%. That's where you make your money," he said.
According to Reuters, Forster also promised Opel would remove unnecessary installed production capacity to lower crushing fixed costs that force factories to churn out cars regardless of demand, but he warned against thinking a collapse of Opel might solve the industry's underlying problem as some experts suggest.
"Let one manufacturer die and all the others will live happily ever after because now the pricing pressure is all gone. Can I be very honest? I think this argument is either very oversimplified or almost naive," he said.
Lower wage costs combined with massive and deliberate political intervention with exchange rates in South Korea and Japan were the real problem, he said. Any capacity taken out in Europe would just reappear in emerging markets like China.
"On average the margin on a Chevrolet imported from Korea priced 15% below Opel is higher than an Opel. That's where the pressure is coming from," Forster said.