The annual Automotive News Europe (ANE) Congress took place earlier this month in Barcelona, Spain. The event attracts high level speakers from the industry and has also become a useful forum for the discussion of the major issues affecting prospects for the automotive industry in Europe. Dave Leggett, just-auto’s managing editor, went along.
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The nice people at Crain who organise these things tend to choose attractive venues for the annual industrial get-together in Europe and this year’s choice of Barcelona was no exception. Delegates and speakers alike knew that if they had any spare time, Barcelona is a vibrant city with no shortage of things to see and do. The ANE event was also scheduled to coincide with the Barcelona motor show (its big model debut being the showing of the new Golf-sized SEAT Leon) and the Spanish Formula One Grand Prix (which didn’t quite go to script with national hero Fernando Alonso coming in second).
Yes, Barcelona seemed a fitting venue. As Dr Eckhard Cordes of Mercedes expressed it in slightly flowery language: Barcelona is a city that combines local pride (it is the proud capital of the Catalunya region) with an outward facing global sensibility, to provide an engine of creativity in industry and in the arts. Indeed. There are certainly worse locations to wash up at for such events.
Don’t worry about China (too much)
Phil Dunne, from AT Kearney (a major sponsor of the event), kicked things off with some thoughts on rising competition from China. The message was that European carmakers need to embrace the opportunities offered by globalisation in order to keep costs down and be globally competitive. To keep prices competitive western car firms must source parts from low-wage countries and build cars in the markets they sell in.
Dunne said that western automakers must make their operations in China even leaner and more efficient to maintain their lead in the country. European suppliers must quickly become more global to compete, including manufacturing in China, Dunne said. But he seemed quite optimistic that the European automotive industry can meet the challenges presented by the emerging Chinese groups. And he also pointed out that when viewed on a variety of standard auto industry metrics, European OEMs are not so different from Asian ones. At least it was a reasonably upbeat start to the proceedings.
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By GlobalDataExchange rates and raw material costs can bring Europeans down
John Lawson of Citigroup Smith Barney then brought us back down to earth with an overview of the financial situation facing the industry, with a particular focus on the European automakers. It made for slightly uncomfortable listening and he had some interesting observations on European carmakers’ pricing in the North American and European markets and how that sits with exchange rate assumptions and hedging activities.
Lawson pointed out that European makers are selling their cars at much lower prices in the US marketplace than in Europe and are being bailed out by exchange rate hedging contracts. He estimated, for example, that the Porsche Cayenne Turbo is some 22% cheaper in the US than in Europe. With Porsche locked in at a dollar/euro rate of 1.10 Lawson reckoned that an actual rate of 1.30 yields a big hedging profit for Porsche – he estimated that 51% of Porsche’s profits come from currency hedging, with hedging accounting for some 28% of BMW’s profits and a substantial share of Volkswagen’s and DaimlerChrysler’s.
But the worrying rub is that Lawson pointed out that these favourable hedging contracts will not last, or the degree of protection falls off, and the weak dollar against the euro will come back to haunt the Europeans who have put a generation of vehicles onto the North American market on the wrong exchange rate assumptions (but might they not get some relief as the dollar strengthens over the next few years?). Build where you sell, or sell at higher prices…
Lawson also discussed the impact of higher raw materials costs; something that he felt was a particular issue for the components industry which cannot pass on higher costs to its customers. But he noted the exception of the tyres industry with its aftermarket business and its ability to fully pass on costs to its customers with little resistance.
Lest the industry continues to take solace in its high-margin financial services divisions, Lawson warned that higher interest rates could present a problem.
The outlook was for continued accelerated cost reduction programmes amongst all the big groups, with a focus on purchasing – the first 35% of savings sought, according to Lawson. And ‘New Europe’ – that’s more about used cars rather than new and suppliers looking to reduce their cost base. 2005 will be a tough year for the industry, Lawson said, with the combined impact of exchange rates, higher costs of raw materials and downward pressure on new vehicle prices set to remove some €6 billion of profit from Europe’s carmakers.
‘Germany and France need changes in labour markets regulation, taxation’
Franz Fehrenbach, chairman of the board at Robert Bosch, gave us an interesting supplier industry perspective. Big picture man and I like that. He began by pointing out the need for Europe to get its act together in terms of labour market regulation and corporate taxation. Fehrenbach pointed out some interesting differences in Europe, with the UK and Ireland leading the way in terms of labour regulation, while Germany and France are laggards. Western Europe needed to adapt its industrial framework in order to be globally competitive, he said, in remarks that would be echoed later by Mercedes-Benz’s Eckhard Cordes.
Fehrenbach also referred to ‘highly annoying’ quality cases and said that he wanted people to take responsibility and ‘stop finger-pointing’. Bosch already faces the prospect of paying damages to Mercedes-Benz after the company recalled 1.3 million vehicles to fix problems with batteries, alternators and brakes supplied by Bosch. Fehrenbach acknowledged that there could be compensation on top of what is covered by agreed terms and conditions to account for the damage to Mercedes’ image. Fair play.
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First public day at the Barcelona motor show was busy |
Fehrenbach also seemed to be pleading for a more collaborative approach to problems and he, perhaps a little predictably, criticised carmakers who disclose the name of the supplier whose parts cause problems (but sometimes it is fairly obvious!). He also set out the Bosch model for OEM-supplier relations based on long-term partnership rather than the price-driven contract, pointing out that the OEMs who perform best in the marketplace and in customer satisfaction surveys are the ones who have adopted long-term partnership relations with suppliers. ‘Innovation leadership’ safeguards Bosch’s competitive position, he said.
To be honest, I was – a little unexpectedly – warming to the man. No point in just hanging your head and taking your punishment. A bit of welcome spirit.
New era for Jaguar heralded by XK in 2006
Joe Greenwell, chairman and CEO for Jaguar and Land Rover, set out a vision for Jaguar that shifts the company’s strategy away from the pursuit of higher volume and towards more profit per unit sold. The company has already cut production so that it can reduce the discounts on its cars, particularly in the US market. (The X-type has been particularly disappointing in sales number terms for Jaguar, undershooting targets in the US and in Europe – discounting has been very substantial in the US. Last year the company produced 118,000 cars in total and will produce even fewer cars this year. Jaguar executives used to talk about a medium-term volume of 200,000 units pa for the brand – see ‘Interview with Jonathan Browning, Jaguar MD’ conducted in 2001 https://www.just-auto.com/features_detail.asp?art=565
The Jaguar and Land Rover brands are also the epitome of what the West needs to do in meeting the low-cost challenge from Asia: develop high value-added products and premium brands. He was on a roll. Moreover, Greenwell maintained that there is an opportunity to get these brands into emerging markets too.
The Chinese have already mastered low-cost production, he said, and they are gaining ground fast. He had a couple of interesting statistics to illustrate the challenge from Asia and China. Of the 2.8 million science degrees awarded around the world last year, 1.2 million were gained by Asia students in Asian universities. And in China last year, some 46% of all degrees were in engineering subjects – which compares with 5% in the US. Yikes!
Greenwell also outlined a ‘new era’ for Jaguar under the design direction of Ian Callum and beginning with the new XK sports car in 2006. Gorgeous cars are coming, he maintained, and they will not be conservatively styled. The new XK (previewed by Jaguar’s Advanced Lightweight Coupe concept) will be ‘uncompromised, innovative and drop dead gorgeous’. Future designs will be similarly bold.
So, what about the X-type then – was it a mistake? Greenwell said that developing the X-type it was a ‘reasonable step at the time’ and that it was part of a volume-based growth strategy that has to be seen in that context. He sounded in a hurry to draw a line under the hapless X-type and forget it.
What about the thumping Jaguar losses (around half a billion dollars in 2004) – when might breakeven be achieved? There was no quick fix Greenwell said, adding that it will be a tough slog and that industry headwinds have got tougher. There will be no breakeven before 2007, was his bleak conclusion. He’d also said that Jaguar has plenty of support at Ford. No kidding.
At least the corporate ‘let’s get behind the X-type whatever’ front is no longer being maintained. I tried to grab Joe on the way out for a few quick supplementary questions, only to find his precious time being taken in the lobby by a fawning delegate who is a very grateful Jag customer. And after I’d briefly said who I was, he was being led by a Ford PR minder to a waiting taxi. Oh well, maybe I can catch him in UK sometime.
Early involvement of suppliers with OEMs seen as a good thing (stop the press)
In the session devoted to procurement issues the panel discussion revolved mainly around issues connected with OEM-supplier relations. To listen to everyone (OEMs and suppliers) agreeing with each other on the need for things like the early involvement of suppliers in OEMs’ programmes just had me thinking I had heard all this before. We’re all in this together, let’s talk more, building partnerships, shared responsibilities, collaborative solutions, lets take waste out of the system, Volker Barth describing the Delphi company mission yet again, and suppliers complained about the problems of volume variability… – you get the picture.
I always get the feeling that these conference discussions are conducted at such a general and top-level that you either have to try very hard to spot subtle meanings (maybe it’s all over my head) and different emphases or it’s just rather a waste of time with motherhood statements that never penetrate to the sub-level where the real meat and debate is to be found – the actual execution of the business and where that sometimes goes awry. The devil’s in the detail and all that.
Platitudes along the lines of ‘we have to have trust’ were not exactly in short supply.
The session did threaten to get interesting though when Paul Stokes, executive director of European purchasing operations at Ford, was asked whether, given the bad feeling generated, Ford’s controversial ‘Terms and Conditions’ imposed on its suppliers last year was a worthwhile exercise. The audience gasped. Limp bodies dozing after lunch straightened. I’d swear some people at the back were chanting, ‘fight, fight, fight…’
[More on Ford’s Terms and Conditions to global supplier contracts:
UK: Ford to get an earful from French suppliers
https://www.just-auto.com/news_detail.asp?art=44838
UK: Bosch ignores new Ford terms and conditions, but wins new contracts anyway
https://www.just-auto.com/news_detail.asp?art=44449]
Stokes rose to the challenge. Yes, it was worth it, he said. Who made the fuss, he asked? Newspapers and just a few suppliers only, he suggested. Blown out of proportion. When Ford went through the new terms and conditions with its suppliers they understood things better, he said, and ‘all leading suppliers’ were signed up. And Ford’s terms were not much different from other carmakers Stokes maintained, adding that he had seen more draconian contractual terms meted out by Tier 1s to their suppliers. He did acknowledge that there had been some difficulties with some suppliers, but he said that a good dialogue had resulted. And he said that no Ford supplier had lost business due to the terms and conditions issue.
Just talk to me, Stokes later proclaimed. He seemed to be saying something along the lines of: I’m a nice friendly, cuddly chap, who likes nothing more than a cosy fireside chat with a troubled supplier – c’mon, let’s work out our problems together! If the Blue Oval’s attitude is so enlightened, then why did Ford get such a mauling in the supplier survey presented to the conference the next morning? Just a hint of iron fist in velvet glove.
GM’s brand-led strategy in Europe
We had a pretty general presentation from Carl-Peter Forster, president of General Motors Europe, looking at some of the division’s more interesting products, segments and technologies. There was nothing all that new and maybe I should get used to not expecting anything especially different in such presentations. He went through the market environment (pointing out along the way that even if you have got it right with a product such as Astra, others with overcapacity getting it wrong and having to discount affects you on pricing too), technical developments with new propulsion technologies, increased electronics (35% of car’s production costs by 2010, he forecast, versus 22% now) and the GM Europe brands and major models.
Does GM have too many brands? It seems a reasonable question, with the addition of Daewoo/Chevrolet at the entry-end and Cadillac being added into the mix in the crowded European premium segments. Is Cadillac a step too far in Europe? Forster maintained that Saab and Cadillac appeal to very different customers and that they are therefore complimentary brands. Hmm. He may well be correct in that analysis, but the question then becomes more pressing: how big is that discrete part of the market that is attracted to ‘new’ luxury brands and might conceivably opt for a Caddy? He pointed out that Cadillac is a quintessential US luxury brand representing the US way of life and that is something that appeals to a group of European premium brand consumers. No doubt, but how many?
He also said that the brand switch from Daewoo to Chevrolet had worked well in Europe, the only slightly negative effect being in Spain where ‘people had got used to Daewoo’.
And will GM make money in Europe in 2005 (in spite of some fairly radical cost-cutting, breakeven in Europe has lately proven elusive for GM – the GME division lost a whopping $742 million in 2004, when breakeven had earlier been the year’s goal)? He just pointedly ignored that one and said absolutely nothing. I guess that means no.
Supplier survey: BMW and Toyota are liked by suppliers – Ford, GM and Fiat disliked
I guess it was all too predictable really. Suppliers like some manufacturers and consistently dislike some others. We can probably guess who the respective good and bad boys might be. In an Automotive News Europe/SupplierBusiness.com survey presented to the ANE Congress the main finding was not too surprising: They like BMW and Toyota and really dislike Ford Europe, General Motors Europe and Fiat. Some of the detail in the survey is interesting though.
“The results show the difference between adversarial and collaborative relationships among automakers and suppliers,” said Colin Whitbread, editor of SupplierBusiness.com. “Those carmakers that suppliers prefer have a more collaborative model. They are easier to work with.”
“Which carmaker would you like to do more business with?” – 84 mostly Tier 1 suppliers who responded rated Toyota and BMW the highest. The same group said they wanted to do less business with Ford Europe, Fiat, GM Europe and Seat – the only negative scores among the fifteen European brands.
Suppliers are shifting business away from less-favourite automakers to those they prefer. Suppliers identify those they are shifting business from as also having the most costly and time-consuming negotiating processes. That extra administrative time is priced into the prices suppliers charge those automakers, Whitbread said. GM Europe and Ford were picked out as being the companies least likely to reward cost saving ideas, and together with Fiat suppliers said they required the most costly and time-consuming negotiations on new contracts.
Which carmaker is placing the greatest pressure on reducing prices at the moment? The answer, according to the survey, is Ford in Europe, followed by Volkswagen and General Motors. The next highest pressure comes from Mercedes-Benz. Among the companies that are emphasising price least in Europe are those that are currently most successful and growing fastest – Toyota, BMW and Honda.
Suppliers also prefer premium brands. They rated most mass-market brands lower than luxury brands. Volvo scored better than its sibling, Ford. Within the Volkswagen group, Seat and Skoda scored lower than the VW brand and Audi got the best scores of the VW group members.
Suppliers also prefer automakers that are growing. Top-rated brands Toyota and BMW are also rapidly expanding European production. Those at the bottom of suppliers’ preference – Ford, Fiat, GM Europe and Seat – have flat or falling volume.
A profitable customer seems to have good supplier relations – which way round is cause and effect, I wonder?
Cordes: Mercedes quality problems ‘okay now’
Dr Eckhard Cordes, board member at DaimlerChrysler responsible for the Mercedes Car Group, delivered a presentation that dealt mainly with the macro issues facing the European economy focusing on the regulatory environment, taxation, social security and so on. He wants a better business environment to help Europe’s global competitiveness and to free up an inhibited private sector. The approach needs to be more rational, he said, with greater harmonisation within Europe (in an automotive context he mentioned the ‘Cars21’ EU initiative which will examine regulatory costs affecting the auto industry).
According to Cordes, consumers in Europe are losing confidence in the future and they are afraid of change, afraid of losing the social security safety net. But we need to look further, he said, and see the global context of the drive for profits.
Cordes maintained that there is still ‘enormous potential’ to cut costs in Germany. In response to quality concerns, he said that the cars coming off production lines now are all okay. But some Mercedes cars recently sold are not, he acknowledged. However, following the 1.3 million-car recall all will have been put right, he said.
In response to a question about newly slimmed down Smart, Cordes said that the brand would not be a full-line one in ten years’ time. The focus would be on certain core values and a small number of models that go with that.
Cordes also gently rubbished the JD Power customer satisfaction survey, saying that being number one was not necessarily a goal for Mercedes (in 2004 it ranked 10th out of 37 brands sold in the US). He made the point that the survey is bound up with customer tastes, so that you could be marked down for having too many buttons on the steering wheel. Well, yes, there have always been these concerns about respndents’ perceptions in these surveys – but hey, they are the customers. So being number one in JD-Power isn’t really so hot? Of course not and Mercedes doesn’t care about that. And pigs really can fly.
Moving on to China, he said that the company would be making CKD cars in China starting in 2006 (C- and E-class). Cordes said he wanted Mercedes suppliers to follow Mercedes into China so that acceptable quality standards would be maintained. However, he ruled out exports of Mercedes cars from China in the foreseeable future, saying that premium cars would be the last, if ever, to be exported from China. But he said that another group brand might be more likely for export from China.
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Volvo’s all female YCC team present findings at ANE congress dinner |
For more information on YCC:
SWEDEN: All-female team designing Volvo’s next concept car
https://www.just-auto.com/news_detail.asp?art=42793
Spring is coming for some – report from Geneva
https://www.just-auto.com/features_detail.asp?art=935
