The annual Automotive News Europe Congress has become a firm fixture in many diaries. It’s a useful occasion to take on board summit views, stand back and reflect, hear presentations from industry leaders and get in a bit of networking with fellow delegates. This year the event returned to the agreeable location of Montreux, Switzerland. Dave Leggett went along.
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There is something quite captivating about the geographical position of Montreux. The small resort nestles at the bottom of some pretty big hills on the large croissant-shaped Lake Geneva (Lac Léman to the locals) at the opposite end to Geneva. The spectacular view from Montreux looking south across the calm and very blue waters of the lake is to the mighty Savoy Alps. I have to admit that there were times when the prospect of leaving the Montreux Palace hotel’s delightful lakeside terrace to descend deep into the bowels of the conference centre for the next Congress session was just a little less than fully appealing.
But there were some excellent presentations, some good Q&A and overall, plenty of food for thought in terms of the global auto industry, Europe’s place within that, the challenges facing the industry’s companies and strategic issues ahead. What follows is a personal summary of some of the speaker presentations and key points raised.
Indego
AT Kearney’s Steve Young (AT Kearney was the major event sponsor – even above ‘platinum’ to be described, exclusively, as a partner on the conference blurb) kicked off the speaker presentations, focusing on the work that AT Kearney has recently done on the Indego ‘next generation car company’ project. Ex-Ford’s Martin Leach had also worked on the project. Steve had actually outlined the findings to me a couple of months ago, so it wasn’t exactly new to me (in fact, just-auto members can download an Indego presentation here).
The basic concept was to take a clean sheet of paper and come up with a new business model for the auto industry – the obvious analogy is with the low-cost airlines who have entered that industry in such a big way in recent years. Could a similar new entrant do something similarly radical in the automotive sector? Maybe the auto industry looks ripe for that? Think of low returns and an industry value chain that is, let’s face it, characterised by some pretty entrenched ways of doing things.
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By GlobalDataIndego is pretty radical. What are we talking about here? A cheap car for sure; lean and flexible manufacturing; direct distribution from manufacturer to customer; multiple assembly plants close to market; a mobility package that reflects whole life costs; extensive outsourcing – low vertical integration; a new brand with a ‘clubby feel’ – a little like smart or Mini; a car that is ‘good enough’ to meet the market need rather than ‘best in class’. And the high operating margin claimed (21.7% which compares with 16.7% for super-profitable Porsche) has a lot to do with retaining customers for high margin peripherals way past the traditional industry pattern of first-owner then gone.
And we’re talking single flexible platform, four models (straddling segment B through C) and ultimately, 250,000 units annual production – but if you set that against global B and C seg annual sales of around 20 million units, maybe that is not such a lot. The company hangs on to its vehicles from production to scrappage – eight years. Customers are on two or three year contracts, depending on what they want.
One thing that Young stressed is that Indego is about strategic change, rather than operational. But that doesn’t mean that there will not be companies performing well under existing business models – that’s a question of execution. Some companies execute well, others don’t.
How relevant is Indego to the real world? Clearly elements of the analysis along the value chain can be picked up by existing players. Could someone with entrepreneurial spirit and sufficient resources be prepared to come in from outside the industry and implement something like Indego? If the business model makes sense, there’s an opportunity. Next speaker Martin Leach was asked that question. He believes it will happen in the long-term.
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Martin Leach |
Leach on product development and the Maserati niche
Martin Leach’s presentation focused on product development and in particular, the management of the product development process in a car company. But he began with some pertinent industry observations. One is that the industry is crowded and nobody is getting out, which means everyone is chasing the last unit – ideal conditions for customer incentives. He also pointed out that making cars remains a fundamentally scale-related business and that premium brands enjoy a fundamental margin advantage over volume brands.
The implication of this is that as manufacturers look to grow volume by getting into other segments, the premium brands perhaps have an advantage in that they can still get higher margins – than volume players – in smaller vehicle segments (see A-class, 1 Series).
But here’s an observation that deserves some thought. Leach said that the proportion of motorists just wanting to go from A to B in comfort and as efficiently as possible, rather than to have an enjoyable driving experience, is rising. Those two things aren’t entirely mutually exclusive but we get the point. That’s what motoring for the masses, rather than a small band of enthusiasts, is about. But here’s the rub. That is making the customer more rational, more driven perhaps by economics, and, from a product development perspective, more difficult to understand and ‘turn on’.
He then described the typical car company tendency to see PD in terms of the ‘PD Factory’, something that engineers and designers rail against, seeing an association with the production process.
But Leach wanted to debunk the ‘myth’ of the PD Factory. PD should be about managing a two-stage process – product creation and product realisation. He went into quite a bit of detail on how he believes the PD process needs to be organised and managed. A point he stressed was the need to reuse existing intellectual capital in various forms. This includes component reuse, design templates and standardised platforms. But he conceded that ‘design for manufacture’ is easier to say than practice. It all amounts to ‘managed delivery through system competence,’ he said.
Leach has only been at Maserati for a matter of weeks, but he offered some thoughts on Maserati’s market niche. There is very definitely room for Maserati, he said, adding that the brand’s customers are motivated by the historical legacy of the brand. Motor-racing history and pedigree are important. The customers are ‘buying into an exclusive lifestyle and Italian-ness image.’ Maserati’s modest volumes suggest room for growth, he said, with a sporty connotation that differentiates it from many of the luxury brands of today.
A question from the floor: how is being a part of the Fiat Group a potential help to Maserati in terms of things like parts procurement? Leach must have liked that one. It gave him the perfect opportunity to demonstrate his credentials as custodian of the brand and stress Maserati’s independence within the group. It was ‘difficult to see synergies, [with Fiat]’ he said.
What about taking Maserati into smaller cars? He was cautious rather than dismissive, but it sounded like nothing is planned in terms of a move downmarket to higher volume. Clearly there’s no Jaguar template at work here.
One small post-script on Martin Leach. He stuck around to talk to people, which was nice and all too rare where big-name speakers are concerned. I seem to remember he was on good form over cocktails and then in Montreux’s Harry’s bar until pretty late.
Thierry Morin – Valeo’s technology-based growth strategy
Was Thierry Morin, Valeo’s CEO, ever really a CFO? To listen to him talk, it’s just a little hard to believe. No disrespect intended to CFOs here, but they tend to be stereotyped as conservative types who are perhaps not overflowing with enthusiasm for end-product, creative juices and vision. That’s not an accusation that can be levelled at Morin. Maybe he was always something of a square peg in a round hole. ANE’s editor, Arjen Bongard, recounted an enthusing M. Morin getting a Valeo flat-blade wiper out when he visited his office. I had the same experience when I interviewed him last year (to read that interview, click here).
In fact, much of Morin’s presentation had a familiar ring to me. At heart, it’s a technology-based strategy and, let’s face it, the strategy has been pretty good for Valeo – a company in big trouble before Morin took the helm. He talked about the reorganisation of the company into technology ‘domains’ and away from the more conventional geographic and functional-based (and, also, failing) organisation that he inherited. For him, technology is a differentiating factor with a focus on end-user – that’s the vehicle driver rather than the OEM customer.
The three Valeo technology domains are: (i) for safety, the Driving Assistance Domain; (ii) for environment, the Powertrain Efficiency Domain; and (iii) for what he described as ‘well-being’, there is the Comfort-Enhancement Domain – which embraces increased convenience of vehicle use with things like HVAC and (and I loved this phrase) ‘easyness to feel well’.
Morin said that the previous company organisation had eleven branches, but these three domains meant that the more short-term vertical culture was replaced by greater synergies and a prevalence for longer-term thinking and strategies. He then outlined a few of the highlights in terms of Valeo product (can’t really blame him for doing that). Under Driving Assistance we had a quick run-down on things like heated windscreen wash, those flat-blade wipers that he is so fond of, lane departure warning systems and adaptive front lighting. Valeo’s Lane Departure Warning System will be in the Nissan Infiniti, start-stop in PSA’s Citroen C3 and there are several European customers for adaptive front lighting. There are NA customers for blind spot detection.
He mentioned Valeo’s strategic partnerships with other technology leaders – including Ricardo (42v hybrid prototype), defence firm Raytheon (radar technology) and Parrot (Bluetooth).
Thierry Morin then went up a gear to stress the importance of R&D productivity gains for a company such as Valeo (15% pa productivity gain is the target). That means more simultaneous engineering, ‘round the clock management’ and investing in low-cost R&D centres in places like China. And the gains from increased productivity need to go back into R&D, he said. Valeo needs to be everywhere because the OEMs are. And that means having the right technologies for all markets. He also made a point of saying that Valeo also wants to bring technologies to the aftermarket, not restricting the business to OE.
In conclusion, he maintained that technology is the basis of profitable growth for Valeo. Investment must be maintained to keep the innovations coming. Good to hear that from an accountant. It was convincing stuff, delivered with conviction, from a guy who has a pretty good record and has got results.
In the Q&A, he neatly sidestepped a question about Ford’s new Terms and Conditions for its suppliers by stressing Valeo’s commitment to partnerships with its Tier 2 suppliers – ‘help them to lower their costs, not prices’. I supplied a question asking for his views on NA Big Three product differentiation and Valeo’s NA business prospects. I remembered that he was pretty outspoken/aggressive on that subject last year when I spoke to him and I wondered if he would be so again. He kept it pretty short and measured, but yes, the US domestics needed to have more product differentiation, cars are not commodities and, well you can guess the rest – Valeo can help!
Garel Rhys looks on the bright side
We were treated to the academic perspective from Professor Garel Rhys, which was quite refreshing. Rhys began by imploring the industry to look on the bright side. More vehicles will be made in the next ten years than in the previous 110-year history of the industry, more plants will be needed to satisfy rising demand – an additional 180 in fact, each operating at 300K pa, and required new capacity investment sum of $80 trillion was quoted. Industry overcapacity a problem? Just depends on how you look at it I guess – where it is and your timescale. Anyway, Rhys seemed to be saying ‘hang on to your hats kids, the future is bright’ and that’s not something we hear very often.
Rhys then moved on to a look at demand fundamentals in generating market size -things like car prices, incomes, the availability of consumer credit and, something which is often overlooked, the used car market. He maintained that without the used market and the steady flow of transactions to the new market that it supports, the European new car market would be around a fifth of its current size. Let’s hear it for the unsung hero.
Rhys pointed out that, when looked at globally, Americans should count their lucky stars in terms of road congestion. Western Europe and Japan are congested, he said, but by comparison North America is not. And that congestion is encouraging the development of technology that is aimed at ‘alleviating misery’ for the harried driver stuck in a jam. He referred to some of the standard elements that fall under the broad heading of telematics -navigation aids, vehicle guidance systems, the intelligent highway.
The professor then want on to say that developed markets are becoming increasingly contestable, with more players and heightened competitive behaviour – there is nowhere for the inefficient to hide, he said. ‘Foreign’ content increases every year as people in nationalistic markets look for best products. Price leadership in countries with big national player share is increasingly rejected by consumers and he showed some slides showing highly fragmented markets and brand shares to demonstrate this.
Other points:
- Toyota’s share gain reflects the fact that it has filled out its product range;
- European dealer structures look vulnerable to some change. Sales per outlet in France, Italy, Germany and Spain are in the 140-170 range but UK is at 440. Even allowing for different market conditions, that gap looks wide.
- Lower labour costs in central Europe and Asia looks scary, but Rhys said that the threat looks smaller when you look at costs per unit produced.
- Europe still enjoys a large comparative advantage when it comes to heavy trucks;
- Looked at in terms of the global Big Six, we’ve seen something of a European fightback. Three of those groups are European-controlled – DC, Renault-Nissan and Volkswagen. Ford and GM are US and Toyota is Japanese.
- People in developed countries are getting older and richer. In developing countries too, there are more people with higher income and wealth – ideal conditions for executive and luxury brands.
- Lean production alone is not enough for upmarket players – you need scale and BMW wants to get to two million units annual production.
- Without PAG, it would be German hegemony in luxury markets. The ‘main event’ is PAG vs. BMW, M-Benz, Audi and Porsche. Supporting event is PAG and the Germans vs. GM, Lexus, Fiat. And at the margin are volume makers at the top of their range – eg Nissan, Honda.
- Weak prices and poor profitability for the industry generally in NA and Europe signify a supply/demand imbalance which will force restructuring in all forms in the future – look for more mergers, liquidations, JVs and outsourcing.
After the hang on to your hats, the future’s so bright you’ll need your Ray-Bans start, Garel Rhys therefore concluded his presentation on a slightly more subdued note than he’d begun it. It was less ‘hang on to your hats’, more like ‘hang on to your jobs’ if you can in the turmoil that lies ahead. But that’s the auto industry for you, as we all know. Nothing stands still.
And who – amongst the OEMs – is at greatest risk in the future? Rhys plumped for troubled Mitsubishi Motors and Fiat, adding a tad cryptically that he believed that Daewoo’s relationship with GM ‘could change’. Not sure what that meant.
How long before domestic Chinese brands are stand-alone and selling vehicles in world markets? No more than a decade, he said. Then look for the Indians and Russia also. Very open third world markets – Asia, Africa – will be attacked first, with low-cost heavy commercial vehicles. After that, Europe and then USA, if products are appropriate.
Hesterberg: Ford Europe doing okay in a difficult market
Earl Hesterberg, Ford of Europe’s VP for marketing and sales, seemed to start his presentation with a whole load of negatives. Fair play to him in a sense, as I prefer that to marketing hype, but I wonder of he overdid it just a tad. Maybe he could have started with just a few Ford stats that would have sounded good. I’d swear I could hear violins playing in the background as he listed the familiar Euro market problems: Europe’s a stagnant market and has been since ’99; premium brands and low-cost brands are squeezing volume brands; there’s a proliferation of product offerings and bodystyles; net pricing is moving relentlessly downwards and retail incentives are going relentlessly up (they’re still lower than in the US perhaps, but average revenue is ‘much higher in the US’).
And then there are ‘real sales’ versus ‘monkey-business sales’, otherwise known as dealer registrations (perish the thought that Ford would ever offer dealer incentives that might encourage this..). He referred to the German new car market. Less than 50% of it is retail he said.
The German new car market – 2003 – breakdown, he said, looks like this:
- 49% – private customer
- 21% – dealer regs
- 17% – fleet
- 8% – rental
- 5% – company regs
And besides monkey regs, advertising spend is going up, power is shifting to consumers and they have more info at their disposal than ever before. Phew, what a lot to contend with: flat market; overcapacity; negative pricing; increasing marketing costs; aftermarket parts and service competition increasing. In Earl’s words, it’s a ‘brutal marketplace’. Suicide-pill anyone? Maybe, I wondered somewhat cynically, this is his standard ‘lower their expectations’ speech for Detroit? Stop it Leggett. Actually, I was warming to him. He was starting to remind me of the ‘Winchester’ character in the MASH TV series from the 1970s. Yep, looks like him and sounds like him. Moving swiftly on…
Now, at last, we were onto the relatively positive stuff. The weapon for car companies is product. It was time for ’45 in 5’ – forty-five new Ford products in the space of five years. Fiesta ST brings ‘brand excitement’ and Streetka is ‘visually different’. To the Ford Fusion (‘jacked up Fiesta estate’) critics – Esterberg had a simple message: check the volumes. Fusion he said, is doing 100K pa and the vehicle it replaced at the Cologne plant, the Puma, was on 30K. C-Max has quickly achieved 13.4% market share in its segment, vindicating the view that Ford does have product hits and is capable of hitting market segments with right product (but, I wondered, how many sales in the European compact MPV market were lost due to lack of product before C-Max?). The Volvo XC90 was trotted out as another example of Ford product-to-hot-segment success, as was the Transit Connect panel van.
In some contrast to previous speaker Garel Rhys’ remarks about dealer network consolidation, Esterberg then maintained that dealer network is key and stressed the importance of the local dealer in continental Europe. Business is local, with customers often loyal to dealer rather than brand and with a high degree of value attached to sales and service competence.
Best of the rest – main points
Hans-Olov Olsson, president & CEO, Volvo Car Corporation
- Swedish roots are key – unwritten assumption is that Volvo’s are designed and made in Sweden. That limits overseas assembly for Volvo brand cars. He also said that a ‘holistic’ approach to cost and need to protect the brand, means that one should consider the whole value chain and that to get premium results developers and engineers should be close to the people who build them. He’s clearly no big champion of outsourcing.
- Olsson said that there is 20-40% lower cost on S40/V50 through sharing technology with Ford and Mazda.
- XC90 is now at 90,000 units production per annum and total VCC production this year is expected to be 450K (+10%).
- Long-term goal is 600K pa – 300K Europe, 200K NA and 100K NA and RoW.
- VCC is rare example of auto industry M&A success, because Ford knows how to manage without interfering with the brand’s Swedish roots.
- When Torslanda and Ghent produce over 500K pa combined, that is the time to look at some new capacity – in either China or North America.
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Bob Lutz |
Bob Lutz, GM Vice Chairman & Product Development Chairman GM NA
- West Europeans are apparently lazy, enjoying the good life and need to adapt fast. The Chinese, said Lutz, are bearing down on us ‘like a freight train’ and he kept saying that we had better wear our warm clothes. Their ability to reverse engineer is terrific and quality is not an issue anymore. The motorisation shift from two wheelers to cars is taking place in a compressed schedule in China – three to four years rather than the twenty that might be expected. They’re getting the volume and the products for world markets are coming. The Chinese are the new competitive reality and ‘we have not yet begun to see ways in which they will affect global competition’.
- GM’s European reorganisation will mean integration of Opel, Vauxhall and Saab operations, but not, Lutz said, at the expense of brands. See, feel and touch areas have to be focus of differentiation, but there are ‘huge’ duplications that need to be streamlined. Ultimately, Lutz added, ‘we want one [global] GM.’
Wilhelm Becker, Senior VP, Product Line Small Cars, BMW
- On industrial/corporate philosophy – ‘it’s not the big that eats the small, but rather the fast that eats the slow’.
- Mr B is a fan of the economist Schumpeter and emphasised the importance of innovation and ‘turning old into new’.
- BMW mission remains to bring ‘sheer driving pleasure’ whilst also meeting all dynamics, safety and ecological requirements.
- In answer to a question that was having a slight dig at iDrive, Becker maintained that it is ‘now appreciated’.
- BMW plans to build ‘more than 1.4 million cars in 2008′.
Nevio di Giusto, Senior VP Product Development Fiat Auto SpA
- Small car innovation is a Fiat strong point.
- Customers are becoming more demanding in small cars. They want more performance, more features, connectivity – things that a short time ago were the preserve of large car segments.
- Connectivity – infotainment navigators – is an example of something that is currently seeing accelerating transfer to the low-end.
- Scale is crucial in looking to lower unit cost in transferring innovations to small cars.
- Pedestrian impact regulations could have adverse implications for small car design – leading to increased size, weight, cost and fuel consumption. Front-end design is the area that he highlighted.
He ended with some interesting observations and said that ‘today’s paradoxes can become tomorrow’s added value. Paradoxes? Yes, paradoxes – such as stress-free urban congestion, on-board quality of life in a small econobox, or ultra-lightweight cars that cannot harm pedestrians, or easily personalised ‘mobility’ products. ‘Only innovation can transform paradoxes into paradigm jumps.’ Thoughtful presentation.
Dr Massimo Furlan, Marketing Director, Brembo SpA
- I did wonder whether di Giusto and Furlan had perhaps coordinated a little – two Italians back-to-back and there was a nice dovetail with that word paradigm figuring heavily again.
- Brembo is a company that is keen to look for new solutions, think in other ways, increase productivity and there was prominent mention of a ‘knowledge-based value chain’. It all adds up to the search for ‘paradigm shift’. Maybe the company tagline in the footer on his slides sums it up: Brembo: more than brakes.
- Good example of a paradigm shift in technology – cell phone. Delivers the same basic end product as a landline, but technology to do it represents a paradigm shift.
- It did sound as if Brembo takes its R&D very seriously and is devoting plenty of resources to it – and R&D is something that the company sees in a broad sense, as indeed, it views its working relationships with customers.
Dr Takis Athanasopolous, Toyota Motor Europe
- Toyota hit 6.78 million unit global sales in ’03, along with record profits.
- Europe has seen seven years of consecutive growth since ’96, taking European sales, including Lexus and LCVs, to 835,000 units in 2003 – approaching 5% market share and making the company a big player.
- The business community values Toyota highly, creating high investor expectations.
- Toyota wants to sell 1.2 million units pa in Europe by 2010.
- QDR – Quality, Desirability, Reliability – plus perceived quality equals Superior Quality. QDR is rational. Superior quality is rational and emotional.
- Toyota range in Europe will be further filled out next year with Sub-B model from its PSA JV in Czech Republic.
- D4-D diesel engines are also key to growth in Europe and beat Euro IV emission limits by a wide margin already.
- Toyota takes global challenges on CO2 and alternative energy sources seriously. Wants to be seen as part of the solution as well as part of the problem.
- Toyota owners in Europe are more loyal than other brands, but Toyota brand awareness is very low. Toyota is investing heavily in communication to attempt to improve that.
- On dealer network, Toyota prefers concept of Customer Driving Area to Dealer Territory. But ‘fewer and bigger is not sufficient; better is needed for a superior customer experience’.
- ‘Toyota Way’ principles govern Toyota behaviour. See Toyota corporate website for a full explanation, but in organisational terms, it is claimed that Toyota Way enables an organisation to break away from perceived trade-off constraints to break compromise patterns. Toyota Way yields ‘both and more’.
