The post-Lopez era – new strategies for automotive suppliers

Interview with Werner Beneken, Hella KG Hueck & Co., member of the Management Board, Corporate Division Sales Automotive

The demands made by the automotive industry on suppliers are becoming tougher all the time. This demand situation has lead to enormous cost pressure and to a concentration process in the supplier branch. What is the market position for suppliers really like at the moment?

Following the crisis in the European automobile industry in the 1990s and the subsequent phase of consolidation, the present is now marked by global concentration processes. The world-wide presence of automobile manufacturers has become a strategic key factor for survival and future success. The globalisation of the automobile manufacturers and the creation of world-car platforms requires suppliers to orientate themselves globally too, in order to be able to be available as a partner to their customers in the vicinity of their different manufacturing locations around the world.

“A supplier must be in a position to manufacture a front end not only in Europe but in other regions of the world as well”

The trend towards purchasing complex systems and modules from suppliers rather than individual components is also continuing. A supplier must be in a position to manufacture a front end not only in Europe but in other regions of the world as well. To make this possible an international network must be built up with the appropriate supplier management. This supplier management is one of the absolutely essential pre-conditions for getting complex module concepts and their necessary integration off the ground. A great change must be expected here as far as the requirements are concerned.

But the biggest problem suppliers have is financing. How is all this change going to be paid for? This outsourcing I have just been talking about means that the necessary funding initially has to be provided by the suppliers. And this is a real problem. In my opinion, this enormous cost and price pressure on the supplier industry can no longer be accepted in this form. We have to get together with the automobile industry and find new models that generate the necessary cash-flow, in other words: the financial risk must be divided more fairly, for example through up-front payments for development and tools or lifetime considerations after series production has started.

It has now been predicted that the selection process will continue in the next few years. The study carried out by Rolfs & Partner showed that of around 1,000 main suppliers only about 300 will survive. Two possible ways of surviving are available: either buy up other companies or try to grow organically and enter into strategic partnerships. Which of these could be relevant for Hella?

“”Cooperation rather than concentration” is the strategic approach”

Although Hella was able to double its turnover in the 1990s, our turnover of about 3 thousand million € makes us a medium-sized automobile supplier. On top of this we are one of the very few independent suppliers of this size who have managed to hold onto this status.

This presumes a strategy on the basis of which Hella can successfully further develop. For us, “Cooperation rather than concentration” is the strategic approach, the formation of internal and external networks the way. One criterion for success is: what benefits can a supplier such as Hella offer its customers, suppliers and other automotive suppliers as a network partner? We have already started to build up pioneering cooperations, such as the one with Behr in the field of front ends and air-conditioning systems, with Siemens in the electronic components Aftermarket business, with the Japanese headlamp manufacturer Stanley and the on-board network specialist Leoni, which puts us in a favourable starting position for the competition against mega suppliers.

Let me come back to globalisation for a moment. You spoke about the competitive pressure resulting from this. This will effect sales philosophy, surely. If I act nationally I have a manageable sales network. This is much more difficult on a global scale, of course, and much more demanding. What is going to change in Hella’s relationship management and what are you planning in this case?

“We have one sales manager worldwide for each individual customer”

Relationship management is a special challenge these days as a result of the global structures of the automobile manufacturers and the necessity of having to deal with people from different cultural backgrounds. The relatively high rate of customer staff replacement must also be taken into account. Our sales structures for the OEMs take these special features into consideration. We have one sales manager worldwide for each individual customer. In addition, we have regional and local responsibilities as cross-sectional functions. Here the direct cultural relationship to the customer is the main factor. Just as important, however, is direct contact to the decision makers in the respective corporate headquarters. Because in order to be able to operate  successful customer relationship management it is absolutely essential to be given relevant information at the right point in time and then to come to an appropriate agreement with the right partner. To be successful it is also important to understand the customer as a whole. This expressly includes his relationship to car buyers. Because this is the starting point for the strategy the automobile manufacturer then pursues with the supplier as well. A German automobile manufacturer has a different strategy and a different philosophy than a Japanese or American manufacturer. And this should be analysed in order to build up a differentiated and thus successful strategy.
 

You spoke about wanting to understand the customer. I must admit that I’m somewhat sceptical here. In my experience, understanding is a process that is relatively unlikely. In everyday life we often do not work with understanding but make do with misunderstandings we can live with. If you think you can find out in the end what customers really want using this network, are you not underestimating the difficulties here a little perhaps?

It’s not as if we just go along to visit customers without having prepared ourselves. We think long and hard in advance about what is relevant for the customer and for ourselves. The right tools are necessary for this process, in order to summarise all the relevant information both from a sales and from a technological point of view. This information is then compressed, and our overall strategy is derived from this in cooperation with the relevant departments within the company.
 

Let us turn now to the topic of brand strategy. In his study on the subject of e-commerce and marketing in the automotive supplier industry, Professor Dudenhöffer supported the hypothesis that pure price and cost advantages will not be enough in the mid-term. In his opinion, only those suppliers will survive on the market who not only undertake cost reduction measures but who also pursue intelligent marketing concepts. The survey also contains one result according to which 54 percent of all supplier companies think that in future they should reach end customers themselves using their own communication strategy. What is your brand strategy in this respect?

“We are reaching more and more end customers through the Internet”

Hella is one of the strong brands in the vehicle world, which made its mark in times when auxiliary headlamps with covers and brand logo were an everyday sight on our roads. These days we are the market leader in xenon headlamps and still one of the leaders in auxiliary headlamps. End customers connect technical progress in vehicle lighting, such as is being made with xenon light and with intelligent headlamps for the future, with the name Hella, as surveys conducted by Emnid in 1997 and recently during the IAA 2001 by the FH (Polytechnic) in Worms have confirmed. Without doubt, Hella stands for quality and innovation and is now the only German headlamp manufacturer left. On this basis, and supported by unique technical solutions for leading automobile manufacturers around the world, we want to continue to make our mark with our brand image.
We are reaching more and more end customers through the Internet, where we have an interactive light testing facility available, for example, where customers can see the difference between halogen and xenon headlamps for themselves. A further component of our communications strategy is to sit down with automobile manufacturers and their marketing experts and consider how the advantages of xenon light can be made clear even more intensively to car buyers, for example. Because most cars are of course bought during daylight hours, and the advantages of top-quality lighting can only be experienced in the dark.
 

Key term “automobile manufacturer-supplier relationship”. The demands made by the automobile companies are becoming tougher all the time, for example their call for the reduction of the time taken for new developments from 42 to 18 months, for delivery times from 65 to 15 days. How well are you coping with these demands?

Requirements really have increased enormously. In the past, the life cycle of a vehicle was seven or eight years. These days, a facelift is available after an average of three or four years and Hella is nearly always involved, providing modified headlamps and combination rear lamps. On top of this is the fact that within this significantly shortened development time we are still being continually confronted with modification requests by the customer, right up to shortly before SOP. In order to be able to react adequately to these requests we have to provide a lot more resources in the development stage. This again has an effect on costs, of course, and the price pressure is still enormous. But one thing must be made clear, and we tell our customers this again and again: if they do not want to become dependent on the large mega-suppliers, the only capable alternative they have are the medium-sized, flexible and innovative suppliers and their cooperations. But they have to give us a chance to survive, which means we are not going to keep accepting orders at all costs, rather our primary objective will be to make sure we do not lose sight of our yield targets.

  

Could you imagine that within the relationships between car companies and suppliers there could be a kind of anti-Lopez effect? By this I mean that when certain cost reductions measures have simply been exhausted and the number of suppliers has been reduced that this will only leave a few heavyweight companies in the branch, that this could lead to a kind of shift from demand to supply power? Is such a development imaginable?

I do not believe in an inverted Lopez effect. It is clear that something has to be changed in the relationships between the automobile industry and suppliers, but the competitive pressure in the supplier branch will remain. We will not be able to achieve a unique position. There are still a total of five or six large headlamp manufacturers on the market, and the strong price war and stiff competition between these companies will remain. And the automobile manufacturers themselves are also facing greater cost pressure all the time, so that there is little room left for suppliers to take advantage of.

 

Summary: demands for a new model for the automotive supplier branch Werner Beneken, General Manager Automotive Sales at the automotive supplier Hella KG Hueck & Co. in Lippstadt, is demanding a new model for the relationships between the automobile industry and suppliers. As Beneken went on to emphasise, cost and price pressure for suppliers has now reached a pain threshold that can no longer be accepted: “We need models that generate the necessary cash-flow, in other words: the financial risk must be divided more fairly, for example through up-front payments for development and tools or lifetime considerations after series production has started” said Beneken. The steadily increasing demands made by the automobile industry for shorter and shorter development times and an immense cost and price pressure represented a danger to the future of the branch, in which a drastic selection process is imminent anyway. He also sees problems with increasing globalisation which forces supplier companies to position themselves world-wide as well. According to Beneken, only very few of these are actually in a position to do this.