In broad terms, the first Japanisation phase of re-structuring the automotive components and materials supply chain saw a factor ten reduction in the numbers of such suppliers per model or per plant, from 2-3,000 to 2-300. The modularisation phase will see the emergence of another factor ten reduction in numbers, with perhaps 20 to 30 suppliers per model or per plant. In practice, there will still be more direct suppliers than this, for example those supplying bolts or screws to the final assembly line, but the bulk of the (increased) outsourced value will be captured by the few modular suppliers.
In this respect, modularisation represents a tremendous opportunity for the automotive components industry, as an ever greater proportion of the value of the car is outsourced by the vehicle manufacturers. Moreover, it provides a framework whereby independent suppliers may compete with in-house suppliers of components. It is now the case that, for a new model, the different assembly plants of a vehicle manufacturer actually have to bid for the right to undertake the assembly work – this principle is increasingly extended to in-house components operations.
Vehicle manufacturers are now receptive to offers by the components industry to take over certain in-house operations. Indeed, in some cases the vehicle manufacturers have actually allowed suppliers to install their component on the final assembly line, though there are potential difficulties with this approach which have constrained its further adoption.
As noted above, not only is it likely that the structure of supply will change, so too will the composition of the supply base. New entrants may emerge alongside new technologies, existing firms may find the materials and/or components they offer increasingly surplus to requirements – such a fate has already occurred to many suppliers of cast iron components. New entrants may also appear in the space created by vertical disintegration by vehicle manufacturers which has tended to run in parallel with modularisation. As the VW case illustrated above shows, modularisation may include in-house operations, though it must be suspected that in practice such in-house module suppliers that are not concerned with core technologies must be vulnerable to further change.
Modularisation will also create new pressures on the investment strategies of the components producers, in that as we have shown above, in many instances the vehicle manufacturers are looking for major modules to be supplied as sub-assemblies closely sequenced to the production process. So, components producers will have to balance the economic benefits of operating a single plant, against the proximity demands of the vehicle manufacturers. To add to the complexity, many manufacturers are moving towards a globalisation policy with production in non-traditional parts of the world. This in turn is likely to lead to the emergence of many dedicated final sub-assembly operations, or systems integrators, alongside vehicle assembly plants, even though actual manufacturing of some or all of the parts required for those sub-assemblies happens elsewhere in a centralised facility. Indeed, some seating suppliers already follow this pattern.
The future for the components industry around this theme of modularisation is therefore one of considerable turbulence and uncertainty, but also one which offers significant prospects for those who are able to embrace the concept. Of course there are clear dangers and costs for the automotive components industry in having to make investments to support modular sub-assembly operations alongside their customers.
Given that these investments will be, in effect, tied to the market success or failure of a particular model there will clearly be cases where the components industry will have to decide on preferred customers on the basis of a risk assessment. Moreover, there is always the danger that, come a new model and a new supply contract, the supplier will not win the new contract and thus their investments will be wasted.