Dave Leggett considers some of the big strategic drivers for the global automotive industry. In particular, he believes that the the shift of global demand to emerging markets and the growth of “mega-platforms” will reinforce auto industry scale economies – favouring the bigger groups.
Emerging markets cause industrial rebalance
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One trend that has become very clear over the past decade is that the global automotive industry is being reshaped by what is going on in the global economy and in particular, by the growing impact of so-called emerging markets. The impact over the last ten years has been huge (most notably with the car demand surge in China) and there is more to come. By 2020, IHS forecasts that emerging markets such as China, Brazil, Eastern Europe, Middle East and South America will represent over 50% of global vehicle capacity share. India may be pausing right now, but it has a population comparable with China’s and it seems likely that India will emerge as a global centre for the development and manufacturing of small cars. To Suzuki and Hyundai’s significant India operations, we can now add Nissan’s Datsun reprise.
Don’t get too carried away with just looking at the BRIC markets though. There are plenty of growth opportunities in smaller markets around the world, and the small places can quickly add up (Chinese vehicle makers such as Great Wall and Chery have been adept at that). Nissan has said that it will assemble vehicles in Myanmar. And some observers are now keenly interested in the next wave of big emerging markets where purchasing power for a new urban middle class of consumers could be set to rise very strongly (such as the ‘MINTs’ – Mexico, Indonesia, Nigeria, Turkey).
In a recent survey of senior auto industry executives carried out by KPMG, a significant majority of respondents see emerging markets as a major growth engine for the auto industry: 85% said that growth in the BRICs and other potentially high-growth markets is the biggest single industry trend until 2025. There’s the question, of course, of what kind of vehicles these emerging market consumers will want to buy. They are likely to be after low-cost cars, but also cars that are not seen as obviously ‘low-cost’. Tata’s Nano in India fell at that particular hurdle: it simply was not seen by many as a cool car to be driving. The marketing challenge is to present a low-cost vehicle as something that is desirable, plays to aspirations and that’s where established international car brands can have a natural advantage. Vehicles like VW’s up! and a Ka Concept from Ford point the way; the cars are designed for developed markets as well as emerging ones. As Renault has learned with Dacia, the value driven proposition can appeal to a range of customers in different market environments.
“As the BRIC countries take up a greater share of the global market, auto executives face tough choices on how to expand and who to partner with, and how to respond to growing competition,” said Mr. Leech. “However, with these challenges comes massive opportunity for both manufacturers and dealers to tap into incredible long-term potential offered by the emerging markets. Our UK premium automotive manufacturers such as Jaguar Land Rover, Bentley and Rolls-Royce stand to benefit substantially from this trend.”
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By GlobalDataIn China, the market is splitting into two tiers. The joint ventures with their foreign branded products generally are seen as higher quality and command a premium position. The local partner in a joint venture is always keen to develop its ‘own’ technology and vehicle manufacturing capability. Old generation models being replaced by later generation ones in the joint venture are frequently ripe for donation, in the spirit of partnership. The local partner may adapt the product further and market it locally under a domestic brand. Such products are generally seen as lower quality than the international brands’ churned out by the joint ventures. They are also significantly cheaper.
Elsewhere the technology and localisation issues follow a more conventional path, with assembly operations morphing into more local sourcing of parts and manufacturing as local conditions and skillsets develop, but without the overt political interference in the process we have seen in China.
| World Light Vehicle Sales | |||
| 2012 | 2013 | %ch | |
| World | 81,215,379 | 84,272,207 | 3.8 |
| USA | 14,471,721 | 15,572,933 | 7.6 |
| Canada | 1,678,312 | 1,742,142 | 3.8 |
| W. Europe | 13,100,808 | 12,855,562 | -1.9 |
| E. Europe | 4,982,459 | 4,936,208 | -0.9 |
| Japan | 5,268,981 | 5,255,449 | -0.3 |
| S. Korea | 1,508,375 | 1,504,489 | -0.3 |
| China | 19,213,601 | 21,934,109 | 14.2 |
| Brazil/Argentina | 4,430,327 | 4,466,833 | 0.8 |
| Other | 16,560,795 | 16,004,482 | -3.4 |
| Source: | |||
| LMC Automotive |
Build where you sell
Manufacturers have long sought to build (or assemble from knocked down kits) vehicles in places where they sell in significant quantities. The strategy works on many levels, but a major initial driver is to avoid tariffs on built-up vehicle imports. After assembly, localising more content over time can be a good way to reduce costs further and then there is the opportunity to develop a global sourcing strategy to maximise competitiveness. It’s also a good way to hedge against exchange rate fluctuations. If emerging markets are going to see more demand growth, then it seems logical to expect vehicle manufacturing (and component production) capacity to also move in line with that, where possible. It starts with vehicle assembly from kits and then a gradual increase to local parts sourcing, which may start with low value added things like seat foam and wiring looms before moving up the value chain to more complex components that require a degree of precision engineering, advanced skills. Ultimately, the vehicle manufacturer may add the developing and engineering of vehicles to the list of things offshored from the original base or home country.
To maintain long-term competitiveness, companies are likely to seek new ways to build vehicles for consumers with an eye towards building greater financial stability. IHS says that the industry is sourcing exponentially more vehicles and their components closer to the final consumer. Feeding the new consumers in emerging markets drives sizeable supply side problems. By 2020, IHS forecasts that emerging markets such as China, Brazil, Eastern Europe, Middle East and South America will represent over 50% of global vehicle capacity share. Can existing vehicle and part supply networks efficiently adapt to feed these new markets? How do countries grapple with the social costs of closing facilities or the fiscal exposure of offering substantial incentives to attract new facilities? Smarter countries are weighing all outcomes, IHS says.
The grab for scale and global footprint
Some automotive executives have long talked about the importance of scale economies in the industry. The fundamental economics – high costs of investment (plant, R&D), long output runs – points that way. It’s what Henry Ford’s assembly line innovation in the first half of the last century was all about; industrial organisation to maximise efficiency, exploit scale economies. Fiat-Chrysler’s Sergio Marchionne and Renault-Nissan’s Carlos Ghosn share broadly the same view as Henry in the first half of this century. Scale and footprint are vital in today’s auto industry, just as it was becoming increasingly important during the industrial progress of the inter-war period.
But Marchionne and Ghosn are in different corporate set-ups. They come at it with slightly different corporate strategies. Carlos Ghosn heads up two companies, not a merged one, as is the case for Sergio Marchionne. Marchionne’s vision is of a single company operating at efficient scale, its two major operating units able to complement each other and also provide mutually beneficial structures in areas such as shared procurement activities and some shared development work. Fiat and Chrysler are very different animals in terms of product specialisations, market geography and corporate cultures; by coming together in one corporate entity, the common financial base for their differentiated operations is stronger. For Renault and Nissan, operational overlap is a much bigger theme, at least in terms of product. Full merger, however, is not on the cards, but the two have an alliance that has undoubtedly been an automotive industry success story. In its fifteen years of existence, the Renault-Nissan alliance has brought big benefits for both participants in terms of components procurement, scale economies and shared engineering costs.
The companies have just announced that they are going to take their integration up a gear. The functions being brought closer together are research and development, manufacturing and logistics, purchasing, and human resources which will be jointly managed in future.
Purchasing has been combined significantly for more than a decade but additional convergence projects in R&D and manufacturing will be designed to drive more synergies and economies of scale for the companies.
Carlos Ghosn’s vision for the auto industry’s evolution is similar to that of Sergio Marchionne. Both believe that the automotive industry will become dominated by the big groups able to exploit scale economies on global platforms and engineering structures. These large groups will enjoy a competitive advantage over the rest and their ability to reinvest in R&D and new product will create a relentless positive feedback loop.
In Carlos Ghosn’s vision, the scale economies ahead become aligned with major technological drivers in the shape of greater electrification and autonomous control (so-called ‘driverless cars’). Being ahead in those fields is essential, he believes. Pure electric cars have got off to a slow start, but EV sales are set to rise as the technologies improve and costs come down. The autonomous car is starting to sound less science fiction now that we have cars on the market that are capable of driving themselves in certain situations.
These two carmaking groups – Fiat-Chrysler (the new company to be listed on the NYSE and in Milan) and Renault-Nissan’ Alliance are positioning themselves strategically to be ahead as scale economies become even more vital over the next decade due to rising costs and environmental challenges.
Global footprint, some argue, will also be a decisive factor in developing sales in the next wave of emerging markets. Nissan has revived the Datsun brand for India and other emerging markets; that’s going to be something to watch. Renault is already enjoying considerable success with Dacia. The key is to have the right brands, the right products and the right image in your target market.
PSA Peugeot-Citroen has been through tough times (exposed by the collapse of Europe’s market) and a recapitalisation has just been agreed involving the French government and Chinese partner Dongfeng. Again, the emphasis is on a strategic partnership that can be good for both parties and that comes with synergistic benefits as well as the possibility for the exploitation of scale economies.
And Volkswagen? That’s an interesting one. It’s an industrial giant in its own right and will undoubtedly be a part of the sometimes talked about mega-groups that are set to dominate the international automotive business. Besides its international footprint (number one in China, though the US remains a worry), the company has also developed an engineering strategy that will be at the centre of its strategic push to become the world’s biggest car firm.
Primacy of “global modular mega-platforms”
One of the main factors which will determine the winners and losers of the future will be platform modularisation. Platforms of the future will be increasingly modular and global, and more “mega” – with some able to accommodate up to ten vehicle families. In other words, these new kind of platforms will be able to field everything from SUVs to sports cars, from entry-level to luxury and from conventional-power trains to electric drives, while also allowing for significant geographic adaptions in order to respond to local requirements and enable local parts sourcing.
Consulting firm AlixPartners says that the successful platforms of the future will be able to accommodate as many as ten vehicle families. Vehicle production using such platforms is set to double over the next five years, says a study from AlixPartners, and will account for more than 88% of industry growth in that time. Meanwhile, 46% of total global production volume, or 46 million units, will be produced on mega-platforms by 2017, says AlixPartners, compared with only 30% of global production in 2012.
“After years of striving to shed brands and to become ever more ‘common,’ well-executed mega-platforms have the potential to allow manufacturers to field more brands and models, in more geographies, and to do so cost effectively,” says John Hoffecker, co-president of AlixPartners in the Americas and head of the firm’s Automotive Practice. “However, though there is tremendous up-side, companies will face monumental challenges learning how to set up and control product-development and supply systems so complex they’ll make today’s already-sophisticated systems look like child’s play. Meanwhile, quality will also be more important than ever, as just one single recall could end up affecting numerous brands and models [something learned from Toyota].”
According to the study, cost advantages from doubling production volumes off a given platform can range from 10-20% in non-recurring costs and 4-8% in recurring costs. This can translate into several hundred dollars in cost savings per vehicle, says the study – a very significant amount.
“For automakers, the key to success will be to design new platforms to be super-flexible while still maintaining cost advances, and while, most importantly, focusing on execution like never before,” continued Hoffecker. “Meanwhile, for suppliers, the challenge will be aligning with the ‘right’ platforms to begin with – because in this new world if you don’t put your eggs in the right basket, you may wind up with a whole lot of broken eggs – while looking for ways to maintain pricing power in the face of automakers likely asking for volume discounts.”
Volkswagen leads the way; will others follow?
Volkswagen, a company with plenty of experience of platform engineering across its major brands, is taking a significant lead in the megaplatforms field with the “MQB” modular toolkit. The Modular Transverse Toolkit (MQB) is the basis for vehicles whose engine is mounted in a transverse arrangement. It was debuted on the Audi A3 introduced in 2012 and has been extended to other models such as the VW Golf and SEAT Leon. More will follow. MQB covers the big volume segments, from A0 to C-segment (lower medium). VW is also planning the MLB platform, for models with longitudinally-mounted engines, and the MSB, for premium rear- and all-wheel drive models (eg Porsche, Lamborghini, Bentley). Each modular platform is designed to use a huge set of common components and be able to accommodate gasoline, diesel and even hybrid powertrains.
With the MQB, the Volkswagen Group’s modular toolkit strategy now extends from the A0 segment to the C segment. Volkswagen says is intends to produce over forty models based on the MQB in the long term and across brands, tailored to brand strategies and different market requirements. The engineering advantages claimed include reducing vehicle weight and fuel consumption, as well as being able and to offer new technologies, for example from the infotainment and assistance systems areas that have been previously reserved for luxury segments. The flexible modular architecture permits greater scale economies. VW has also married MQB with a production template – the Modular Production Toolkit (MPB). It covers the entire production process – from press shop to assembly – and sets standards for the manufacturing facilities. By installing the same components in facilities worldwide, production can be increasingly flexible across models and vehicle types.
VW claims the modular toolkits make it possible for VW Group to produce different models in different quantities and even from different brands at one plant, in the same facility. This, in turn, suggests the ability to optimise production and capacity across the entire group’s operations.
IHS Consulting managing director Michael Robinet believes that the MQB platform “could be the single most important automotive initiative of the past 25 years. It really changes the game.” The current medium-term goal for Volkswagen is to increase unit sales to more than 10m vehicles a year by 2018. VW is said to be looking to take as much as EUR1,000 out of the cost of each vehicle produced on the MQB mega-platform.
Unsurprisingly, other manufacturers are said to be watching VW’s platform strategy very closely. But it’s not been cheap to initiate. The analysts at Morgan Stanley have said that there are big costs associated with MQB that round out at a whopping USD70bn. When a German publication, Manager Magazin, suggested that VW Group would be missing its financial results as a result, a terse public statement denying the report was issued by VW. We nearly fell off our chairs. VW Group was issuing a formal press release to deny a media report. It’s an indication that the stakes are high to get a competitive advantage and make scale count. And there have certainly been some bold claims for MQB, which is at the core of VW’s strategy.
