is widespread uncertainty and disagreement in the automotive industry about
the impact of e-commerce and e-business on the sector. In a major new study,
just-auto – in alliance with Auto Business – reviews and assesses the key factors
and processes which will shape the future of the automotive industry.

“Every so often,
the auto industry latches onto a new idea that it thinks will change everything.
In the 1970s robots and automation were supposed to slash labour costs
and drastically improve quality; a decade later, Japanese manufacturing
techniques such as just-in-time inventory management and lean production
were supposed to do the same; the 1990s brought global platforms, modular
assembly, and brand management. None of them did much in the greater scheme
of things”.
Detroit Goes Digital, Fortune, April 17th 2000

“The auto industry
is asset intensive, has cyclical markets, and sells goods whose purchase
is very deferrable; this [the creation of Covisint] won’t change that
equation at all”
James Mateyka, A.T. Kearney, April 2000

“There are a
bunch of guys who understand electrons who think the way to improve industry
returns is to spray a layer of e-commerce over this creaky existing mess.
Where they go wrong is forgetting that the auto business is about molecules
– products”.
James Womack, The Lean Enterprise Institute, January 2000

Impact of e-commerce
on the automotive industry has sparked much debate –

The opening quotes suggest
less than unanimous agreement among automotive industry observers about the
impact of e-commerce and e-business on the sector – high levels of scepticism
fostering suggestions of overstatement and overreaction.

The fact that e-commerce
is customer-driven could be key

The key point is that the
impact of e-commerce on the automotive industry is customer-driven and not industry
driven – a very crucial distinction. The new ideas referred to in the opening
quote (robots, Japanese manufacturing techniques, platform-based development
etc) were driven by the desires of OEMs (primarily) and suppliers to become
more efficient developers and producers of vehicles – even if the end products
were often out of step with real customer desires. This was all part of pushing
vehicles through the supply chain, albeit at lower costs and with improved efficiency,
productivity etc.

E-commerce is different
because the voice of the consumer can be heard much more clearly and acts as
the dominant force for pulling desired vehicles through the supply chain. In
other words, the automotive manufacturing industry is – through the increasingly
wide use of the Internet’s power by consumers – being forced to become much
more consumer-centric in the real sense.

This means not merely pushing
out a plethora of models in inflated numbers, however efficiently, which require
price incentives to make them acceptable to purchasers. Fortunately for the
industry, the same Web-based technology which is being harnessed increasingly
by consumers (even if just for pre-purchase research at present), can also be
harnessed by OEMs and suppliers to improve the overall connectivity of the supply
chain – resulting in some fairly dramatic changes to business processes along
the way.

Supply chain structures
may have to change dramatically –

E-commerce, which is really
a subset of e-business in total, has to be seen as more than just trading (buying
and selling) of goods on the Internet. E-business initiatives in the automotive
industry have the potential power to change supply chain structures dramatically
– even if these fall short of the developments already seen in other industries
(e.g. Dell in the personal computer sector) and even given the scale of legacy

– and problem solving
will take on additional dimensions

Problem solving is moving
to an additional and higher plane for suppliers. The demands in traditional
areas will remain (involving product development initiatives, market share and
development, pricing, manufacturing cost control etc), but many suppliers now
realise they are at a crossroads – with current business designs and organisational
models probably being inappropriate to meet the challenges of doing business
in the e-commerce era.

This is a fundamental challenge
to managers of suppliers’ familiar and comfortable with many years of fine-tuning
business processes which have allowed them to evolve successfully in the face
of consistent OEM-driven initiatives for greater efficiency.

Value is increasingly
found in intangible assets

Many analysts now concede
that the ability to streamline corporate structure, and to influence and control
the information flow, is significantly more powerful and cost-effective than
moving and manufacturing physical products.

Value is being found less
in traditional tangible assets – although clearly these remain crucial to any
automotive-related business – and more in intangible assets such as brands,
customer relationships, supply chain integration, and key information assets.

The success or failure of
suppliers in the future will, therefore, probably revolve more around successful
value creation in these intangible areas than in traditional ones, but in truth
the most successful will need to optimise both.

Optimal e-business model
choice requires rigorous analysis

Achievement of an optimal
e-business model requires rigorous and objective self-diagnosis of status, strengths,
weaknesses, and aims ahead of decisions on e-business architecture. For many,
this architecture will build upon legacy enterprise or business applications,
with enterprise resource planning suites provided by SAP and other software
vendors as the core.

Focal areas are likely to
be customer relationship management (CRM), supply chain planning/management
(SCP/M), and e-procurement. Software providers such as SAP, i2 Technologies,
Siebel, Oracle, Commerce One and Ariba are now able to offer increasingly comprehensive
and integrated solutions to these e-business model needs.

Studies have already
highlighted cost saving potential of B2B initiatives –

Although many suppliers
are still wrestling with fundamental concepts related to e-commerce-related
challenges, and even the more advanced tier 1 companies are tackling e-business
issues on an almost daily basis, some studies of the financial implications
of these changes for the supply chain have already been undertaken.

These have concluded that
cost savings in the upstream segment of the supply chain, driven by B2B initiatives,
could in theory be substantial – although the vast majority (70-80%) of these
savings would inevitably flow through to consumers in the form of lower vehicle

– although retention
of these in the supply chain will be modest

Retained savings in the
supply chain would principally accrue to OEMs and tier 1 suppliers, and these
could contribute to some improvements in pre-tax profits in the medium term.
Earnings improvements at the lower tiers could prove elusive, and more pessimistic
assumptions regarding cost saving retention levels could see profits in this
area fall – pointing to the greater likelihood of further industry consolidation.

Cost savings attributable
to the adoption of B2B initiatives are likely to cover a broad range of supply
chain functions, but the focus is likely to be on elimination of inventories
between the different supply chain levels resulting from optimisation and integration,
and savings resulting from e-procurement processes (in both non-production and
production goods areas).

Build-to-order question
has provoked widespread disagreement –

Analysts disagree about
the likely timing of a major Internet-driven shift to build-to-order (BTO) and
the extent to which it may come to dominate the vehicle retailing and manufacturing
scene. Many also question whether it is what consumers really desire and whether
they would be prepared to pay for it, even if this is in the form of lower cashbacks
and other incentives.

– although the theoretical
benefits are widely acknowledged

However, most concur that
the theoretical benefits to consumers, OEMs and suppliers could be immense once
substantial barriers to change (from the traditional “push” model)
are overcome. These barriers comprise the current industry structure and its
“push” nature.

A fully realised build-to-order
system would probably need to transform this structure dramatically – raising
the prospect of OEMs which focus only upon design and marketing, suppliers which
control key elements in the dominant design, contract assemblers which build
vehicles for multiple OEMs, and new kinds of intermediaries for retailing and

BTO could take off in
the right circumstances

As far as consumer acceptance
of BTO is concerned, J.D. Power and Associates has shown that in the US around
7% of current vehicle purchases are BTO through dealers, but that this would
rise to 16% using an eight-week BTO period/same negotiated price as a benchmark
(only 2 percentage points from BTO online).

The switch to BTO from buy-from-inventory
(BFI) appears to be quite sensitive to changes in negotiated prices and delivery
periods – even with unchanged prices it appears that a shortening of the delivery
period to just three weeks, a not unrealistic target in the US, pushes the percentage
of customers willing to move to BTO to 31%.

This figure rises to 59%
if accompanied by a 10% reduction in negotiated prices. Such a price reduction
may be unlikely, but 5% may be achievable if the estimated full cost reduction
effects of the move to B2B/B2C throughout the automotive sector are realised.

Trade exchanges seek to provide wide array of services to users

So-called net markets have
evolved quickly in the last 12 months, providing a Web-based virtual meeting
place for buyers and sellers. However, it is clear that trade exchanges which
have appeared in the automotive sector, and which are still undergoing an evolutionary
process, go far beyond the basic net market concept.

Media interest has generally
focused upon the buy/sell area of exchanges – most notably the reverse auction
process and what it might mean for participants – but exchanges will increasingly
seek to harness the full potential of B2B initiatives in numerous areas outside
narrow purchasing or broader procurement.

The objective will be to
use Web-enabled tools to increase efficiency and cost savings throughout the
upstream (and downstream) supply chain, providing a package of models and solutions
for participants at all levels.

Covisint will offer three
key functional areas –

Covisint, owned by Ford,
GM, DaimlerChrysler and Renault/Nissan, is potentially the principal automotive
trade exchange. When it becomes operational it is expected to have certain functions,
which are likely to be core for all serious automotive exchanges. The three
primary objectives of these functions will be: a reduction of product prices;
reduction of supply chain process costs; and reduction of new product introduction

– but its birth is proving
laborious –

A number of key issues at
Covisint remain unresolved at present, and these may defer the exchange’s operational
launch until late in 2000/early 2001. Among these are clearance from EU authorities
and determination of the technology platform to be used. The latter requires
that a common agreement be reached between rival software providers Oracle,
Commerce One and SAP.

– and competing exchanges
look set to evolve

Covisint has many impressive
backers, including the OEMs noted above, and many tier-one suppliers have pledged
support. Nevertheless, rival automotive exchanges appear inevitable – especially
as Volkswagen appears intent on marshalling European support for its own exchange

A number of supplier-inspired
exchanges are also at the planning stage, for example, which
is sponsored by the largest suppliers in the tyre and rubber sector.

B2B may change the traditional
linear, hierarchical supply chain –

The analysis of B2B in the
automotive industry underlines the strong conclusion that there are likely to
be winners and losers resulting from the growth of Internet-enabled initiatives.
This analysis has assumed a continuation of the traditional linear automotive
supply chain however, an assumption which could prove unrealistic in the short

Rather than a continuation
of the trends which have been evident across the industry for some years – trends
which amount to a progressive honing of efficiency or leanness within the traditional
supply chain model – B2B developments could drive the evolution of a new business
model which reflects reallocated responsibilities when compared with the current
extended enterprise.

– with existing players
taking on new roles

The precise structure of
this new model is impossible to forecast at this stage, although the development
of a community-type blueprint is thought likely. In this arrangement, instead
of the current pyramid of OEM-supplier relationships, all members can communicate
with all other members.

This could act as a catalyst
for the development of separate communities, or business models, focused on
core competencies. Some companies could see their core capabilities in engineering
and design, some in manufacturing, and others in areas such as marketing, distribution,
or finance.

The logical conclusion to
this might well be a fundamental disaggregation of traditional and current OEM
structures which, because of restricted communications capabilities to date,
have comprised disparate functions such as accounting, project management, operations
and maintenance, engineering, human resources, manufacturing, and procurement.

It is conceivable, for instance,
that OEMs could in future focus upon vehicle engineering (design, packaging
etc), and selling and marketing of complete vehicles (brand management, CRM
etc) whilst leaving module and system engineering and manufacturing to suppliers
in other areas of the community model. Leaving capital/asset intensive activities
to specialists would have its advantages and could extend the contract manufacturing
concept to its logical end, allowing suppliers such as Magna and Dana to develop
and manufacture complete vehicles on a very significant scale and at superior
cost levels.

Pace of change will be
very slow to start, but could accelerate

In reality, such ousting
of the extended enterprise business model in favour of value communities, even
if possible, is many years away. Nevertheless, it is certain that highly efficient
Web-based communications technology provides a necessary condition for this
to happen.

A nibbling at the edges
of the traditional business models is the most likely development in the short
term, and this may evolve into more generous bites once the impact of any disposals
of asset-intensive, cycle-dependent, and low margin activities begins to be
reflected in company valuations.

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