In Summary

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

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