Technological advances that lie just beyond the boundaries of our imaginations will emerge at an extraordinary pace. The global economy will rapidly develop as E-business approaches the speed of thought. Competitors will emerge in areas we have yet to imagine and consumers will exercise extraordinary economic freedom (and the power that goes with it) in markets we have not yet conceived.
Executives and Boards will be challenged to deliver returns to investors and create consumer relationships that are the envy of their competitors. They will need to develop and rapidly execute strategies to propel their companies and supply chain partners into the future.
Also, Executives and Boards will continue to face a rapidly changing competitive landscape. Competitors can match or incrementally surpass most innovations, particularly innovations in the product, virtually at will. Hence, the period of commercial advantage attributable to product innovation is significantly shorter than in Henry Ford’s day.
Moreover, E-business practices are likely to increase the pace of product innovation and thereby shorten the duration of competitive advantage even further. Ultimately, the cost of rapidly innovating and delivering new products will force competitors in the industry to re-think their competitive positions…some will fail, some will be acquired, and some will merge with another competitor.
The auto industry will sell more than vehicles. It will identify and service widely diverse, geographically, economically and culturally differentiated “consumer lifestyle” needs and aspirations over time. In mature markets, it will relate to and entertain consumers. In emerging markets it will continue to offer the first prospect of the freedom of basic personal
Although Economies of Scale strategies will continue to dominate the thinking of executives searching for greater returns to investors, the companies most likely to succeed in the Second Automotive Century will be those that innovate the way they develop, design and deliver products and services to the consumer.
The Automotive Enterprise of the Second Century will have completely rethought, realigned and re-deployed its competencies and assets among the competencies and assets of its supply-chain partners. OEM’s will configure themselves into Vehicle Brand Owners (VBO’s) re-deploying much of their manufacturing and assembly assets and resources to a few mega suppliers.
Second Century VBO’s, mega suppliers and distribution/retail partners will eliminate the redundancies that exist between them by outsourcing key roles to the most efficient and most capable member of the extended enterprise. They will leverage their streamlined configuration of assets and competencies to generate greater returns for investors and fund innovation in their respective areas of competence.
Picking the right partners will be
key. Identifying which assets and
competencies should stay and
which should be re-deployed or
eliminated will be difficult.
Identifying and creating new
consumer centric competencies
will be crucial. Leveraging emerging
Globalization and Emerging Markets:
Nearly 70 per cent of anticipated growth in light vehicle output between 1999 and 2006 is expected to come from outside of North America and Western Europe.
In the long-term, rich opportunities exist for mature enterprises in emerging markets where car density is low, such as Russia and China. Despite today’s downsides of economic instability, political volatility, and protectionism, and the fact that it will take many years for consumer demand to reach mature market levels, many auto makers are aggressively pursuing
volume growth in emerging markets. Investors are asked to take a long-term view.
The objective is to gain incremental volume leveraging “know-how” from other parts of the world, i.e. grow volume over a relatively stable cost base. However, typical globalization strategies involve significant incremental capital investment especially when the incremental costs of co-locating the supplier communities in the new assembly sites are considered.
Ultimately the cost base increase in equal proportion to, if not greater than, the volume increase. At an industry level the net effect is neutral at best, negative at worst.
Today, excess production capacity is estimated at 24 million units globally… the equivalent of 96 assembly plants. The total industry volume of 45.7 million units in 1990 was spread over capacity of 57.0 million units, representing 423 assembly facilities with a hypothetical average investment of US$400 million and average output of only 108,000 units per facility.
During 1999, the total industry volume is expected to be 52.9 million units, spread over capacity of 76.8 million units, representing 573 assembly facilities with an average output of 93,000 units per facility. Over the last decade, the volume/capacity relationship has worsened, with utilization decreasing from 80% to 69%.
This asset intensive approach, delivering marginal volume growth coupled with high investment costs, in pursuit of scale economies, will not work in the Second Automotive Century. Successful strategies of the Second Automotive Century will leverage the manufacturing and assembly assets of a few mega suppliers servicing multiple VBO’s globalization requirements.
The objective is to decrease the cost base supporting relatively stable volume, usually through the elimination of duplication in assets, such as the number of production facilities and suppliers. Several major consolidation initiatives are underway today including DaimlerChrysler and Renault-Nissan.
The success of a consolidation strategy is dependent upon many factors. Ultimately speed plays the most important role. Even after decisions are made about where the opportunities for eliminating redundant assets exist, the execution of the asset reduction is complicated by organizational behavior issues that abound in post-merger situations. In organizations
the size and complexity of today’s major auto makers and suppliers, the barriers can appear almost insurmountable and speed suffers.
In the Second Automotive Century, consolidation strategies will dominate much of the industry. Those companies that succeed will adopt an asset reconfiguration approach to their consolidation efforts. Key roles and assets will be redeployed to members of an extended automotive enterprise where they are most capably handled. Each member of the extended enterprise will focus on a relatively smaller set of competencies – ultimately reducing complexity. Widely employed E-technologies will enable reliance upon fewer but more capable members of the extended enterprise to do the rest.
Only those that can operate reliably at speed will succeed. Hence, we expect that the number of today’s companies engaged in the automotive industry will be much smaller in the Second Automotive Century.
The objective is to provide a broad end-product range across a smaller number of basic design structures, thereby leveraging development and other costs for a presumably greater volume opportunity. While platform development costs themselves have not decreased, the diversity and number of products associated with a single platform have increased
significantly. However, despite considerable progress, platform volumes are predicted to reach their ceiling at a level much lower than where optimal cost leverage is achievable. Optimal benefits are envisaged at around 1.5 to 2.0 million units off a common platform. Only two global platforms are expected to generate individually volumes in excess of 1.5 million units by 2005, and both belong to the VW Group.
In the Second Automotive Century, platform strategies will be employed fully by successful VBO’s and their extended enterprise partners. Mega suppliers of the Second Automotive Century will play a prominent role in the development of platforms for VBO’s. As mega suppliers develop further capability in this engineering and manufacturing asset intensive area, they can be expected to exert significant influence over the VBO product concept design effort. The successful Second Automotive Century mega supplier will need to develop extensive capabilities to work with multiple VBO’s
simultaneously. E-technologies will play a vital role and contribute to speed and flexibility. Hence we expect that only a few of today’s largest suppliers will have the scale and agility to succeed in the Second Automotive Century.
The Global Six
Today there are six auto makers who have achieved sufficient critical mass to separate them from the remaining volume manufacturers.
Two different patterns of “globalization” are evident in their global production footprints: Renault-Nissan and DaimlerChrysler have adopted a “Global Balance” approach in which they are building production distribution in line with the perceived regional share of global output. GM, Ford, Toyota and VW are combining domestic market dominance with global reach. This strategy entails building and maintaining a substantial domestic regional presence, targeting selected strategic global markets for secondary strong footholds to counter cyclicality and then using this solid foundation to penetrate other global markets.
Additionally, it is debatable which globalization strategy, if either, confers clear benefits. If a significant market presence is required to be viable, then in time, some rationalization of priorities is likely, even for the most prominent of players.
Beneath the global six rank a further eight auto makers of scale, without the scope to be individually global, but pursuing selective internationalization strategies based on their current market position and perceived strengths. Honda, while admired for its production capability, innovation and profitability is overexposed to the North American market and may not have sufficient critical mass to remain independent. Like other Japanese auto makers, it is relaunching to become more mainstream in Europe.
PSA and Fiat are targeting specific emerging regional markets to promote volume growth, primarily South America and East Europe, but have foresworn the possibility of a return to the mature and highly competitive North American market. Hyundai, including Kia, has yet to develop a substantial presence outside of its native Korea. Mitsubishi lacks substantial market penetration outside of Asia, despite a positive presence in key long-term growth markets. Daewoo’s fate has yet to be determined, but is certain to be sold.
BMW, admired globally for its BMW brand equity, has yet to prove that its purchase of Rover was not a poisoned chalice, and lacks any realistic potential for significant volume growth or global reach without consolidation with another auto maker. Suzuki, with little substantial penetration outside of Asia, despite a key position in the Indian market through its association with Maruti, is the smallest of the eight, but linked to GM through a strategic, although non-controlling, equity stake.
Under today’s economic and
business circumstances, the second
tier auto makers are more likely to
consolidate than compete in the
wider global marketplace.
Future structure of manufacturing
Mergers between leading assemblers will be part of the new scenery. Dynamic supplier networks will auction their capabilities to these survivors, helping them innovate, manufacture and even brand their products and services. Enabled by E-technologies strong networks will buy the vulnerable. Agile companies will devour the slow.
The mergers will provide suppliers and new retail channels with a chance to fill capability gaps, assume some of the asset risk of redeployed structures and leverage the savings of shared cost operations. Imagine the economies of scale derived from building Golf and Corolla, plus potentially related niche vehicle derivatives such as the Beetle and RAV4, off the same platform.
Consolidation will also affect suppliers. Suppliers are becoming competent in large component integration and demand effective communication of customer needs from VBOs. As the few mega-suppliers gain the size and sub-supply base to survive and begin to utilize their asset base for more customer VBOs, they will re-balance power in network relationships.
They will demand and get a higher level of linkage into the traditional OEM/VBO operations. In fact they will begin to occupy much of the traditional OEM/VBO space as the current assemblers of vehicles outsource more operations and move their attention toward building brands, new retail channels and aftermarket alliances.
By 2010, there will be no more than 20 to 30
major systems suppliers globally.
For most consumers, the main point of contact with an auto maker is via the dealership. But a recent survey revealed that consumers rated visiting a car dealership as worse than visiting the dentist. The fact industry has yet to develop a customer interface to customer satisfaction.
The lack of investment in infrastructure required for Internet retailers brings a new “democracy” to the retail environment through the reduction of barriers to entry. This enables new entrants, such as Yahoo, to start selling cars. Using information from existing web-sites such as car dealers, manufacturers and third parties, such companies can offer a single point of entry for information. As a result, they are also able to build up a picture of the market demand for many products. However, there is as much opportunity for auto makers to take advantage of the Internet to establish direct relationships with customers as there is for new operators. Already, new car buying services which cut out the franchised dealer from the customer relationship have been launched.
The cost of the overall distribution network represents 25-35% of the price of a car. The auto maker of Second Automotive Century will gradually move marketing and sales activities off into lower-cost, more effective portals than the franchised dealer network via the Internet. However, although the capital investment infrastructure of the current retail environment will change, more of the assets and intellectual capital of the total enterprise will be dedicated to the multi-faceted consumer interface and to interpreting consumer requirements in future. Both the medium and the message will change. The inherent need for maintenance of vehicles – an issue which is almost feasible to engineer away – could be the last residual need for ‘local’ representatives of the vehicle manufacturer in developed markets. Engineering out the need for maintenance obviates the need for a large dealership network and offers the opportunity to pass on the cost savings to customers, or shareholders, or both in some measure.
So what of the future of the
dealership network as we know it?
In some markets it will almost certainly be consigned to history, or at least stripped of its broad functionality. Capturing customer orders and marketing to potential customers is better done through what is effectively a one-to-one relationship, than what used to be a ‘one size fits all’ approach. Despite the paradox inherent in de-personalizing the consumer contact in order to personalize the package, the Internet consumer is relieved of the perceived pressure of the traditional sales environment and empowered through both the availability of new information and choices, plus the capability to decide for themselves. The information revolution brought about by the Internet is resulting in a more educated consumer. Many consumers no longer go to their local car dealerships to find out information about their next purchase. They access the Internet, obtaining significant quantities of information before they ever set foot inside the showroom, if indeed they set foot inside the showroom at all.
– The Extended
Henry Ford reduced the amount of time taken to assemble the Model T by 90% through mass-production in 1913 and created a shock-wave that tore through the industry and changed the face of it forever. E-Technologies will have no less an impact. Enterprises that innovate consumer centric practices which engage the consumer in an enduring relationship will enjoy a more sustainable period of advantage. However, its effects will not be confined to the consumer interface. E-Technologies will also transform the intra-enterprise landscape, enabling the fundamental redefinition of business processes and altering the balance of power in relationships within the “extended enterprise”.
Reallocation of roles
Consumer centric transformation challenges many of the existing beliefs about what each segment of the industry does and how the long chain of participants partner.
Up to now many companies in the industry have essentially told consumers “You buy what we make.” Looking ahead, consumers will be saying to the companies, “You make what I order, my way, when I want it.”
Today, the auto industry operates as a chain of suppliers, manufacturers, distributors, and retailers. The simple boxes will not exist as we know them today, although clearly all these capabilities will be present in some form. In the Second Automotive Century, the requirement for new approaches to generate better returns and more positive shareholder
value, will lead to the re-deployment of assets and capabilities among members of an enterprise group.
Development and engineering assets will concentrate in a few key suppliers. Assembly operations as well. Large segments of Retailing are likely to gravitate toward today’s manufacturers along with newly developed consumer relationship capabilities. E-Technologies will have a critical and multi-functional role in this process. E-Technologies will allow members of the enterprise group to operate and interact more fluidly, rather than at arms’ length, and will therefore underpin the transformation of relationships as well as processes.
Given a history of vehicle manufacturer dominance, it is likely that the VBOs will be the early enterprise leaders. However, with the anticipated reallocation of responsibilities, it is conceivable that the enterprise leaders of tomorrow could be mega-supplier groups, countering the traditional balance of power.
The strongest gravitational pull within an enterprise grouping is arguably around the brand, given its critical market connectivity role. As such, a single Vehicle Brand Owner supporting multiple brands might well find itself within multiple network environments in support of its differentiated product range offerings.
As suppliers now assemble larger sub-systems prior to delivery, the role of the “vehicle manufacturer” is shifting to coordination, sequencing, final assembly and other related roles. But much of the coordination and sequencing responsibility, as it exists today, would disappear with the migration to a “pull” production system. Additionally, these skill sets are already extant in the supplier elements of the enterprise and therefore will not be required of Vehicle Brand Owners under future scenarios. Re-deploying to suppliers vehicle assembly assets related to production planning, procurement, sequencing, line balancing, maintenance and warehousing is a very attractive option which could considerably lower the break-even point of production.
For customers, they should not be concerned, so long as the arrangement is transparent and the package they receive is consistent with the their expectations and on song with the value proposition of the brand. There is strong evidence from other industries where brand DNA is critical, that this approach can work extremely successfully, notably in the clothing industry. A high fashion brand such as Armani does not own manufacturing facilities for the clothes or other branded accessories such as spectacles and perfumes that are sold. Equally, sport-shoe brand NIKE does not own a single manufacturing facility. All production and assembly is out-sourced to competent suppliers. They recognize that their skill is in product development and brand management, and devolve responsibility for other activities to specialists.
So if vehicle manufacturers become “Vehicle Brand Owners”, who becomes responsible for engineering? Increasingly this will pass out to the supply network, and will eventually rest with the mega-suppliers, the vast systems supplier groups that are establishing themselves. Their principal challenge will be how to get the scale of best practices while maintaining ‘Chinese walls’ of confidentiality within their different relationships with VBOs.
The relationship between VBOs and suppliers is pivotal to the restructuring process. This will have the biggest effect from shareholder value point of view, and will require vision on both sides.
The Second Automotive Century
could well see today’s auto
makers leave auto making to
others in favour of consumer
centric business activities.
The Consumer Centric Enterprise
By 2005, VBOs will have shifted from being engineers to becoming automotive conglomerates within an extended automotive enterprise. As responsibilities in manufacturing shift with the functional rationalization and the redeployment
of assets, the role of the VBO will migrate downstream towards the consumer interface where it will be focused on innovation in products and services consistent with the DNA of strong brands. The success of strong consumer companies such as Procter and Gamble is built on a series of strong consumer relationships based on brand loyalty.
A2C enterprises will look to points in the customer relationship where they can interact with their customers to build closer relationships. New service businesses will be added, bringing the advantage of vast amounts of new customer information. These ‘touch points’ become information portals, where it is possible to capture information about the consumer and use this information to generate dialogue or configure products and services more closer aligned with consumer preferences. Consumer centric enterprises will use the information they gather to seek multiple levels of dialogue with their customers in pursuit of extended and more intimate customer relationships. Customer data will be translated into information to
create the knowledge to promote interactive and enduring consumer relationships, based on the provision of innovative products and services.
Fuel companies could assume a stronger role here, capturing information every time a customer fills up the tank. The car itself could be configured to feed back information via a satellite communications link, which downloads data from the engine management system to a central computer system. Credit cards could also be another medium.
The smart A2C enterprise will recognize that a car supports a lifestyle. The best ones will want to move their brands and businesses from association with a product-service package, to one which supports the lifestyle of its customers. This creates the potential for VBOs to be providers of “transportation” and other lifestyle services rather than mere facilitators of “vehicle ownership”.
In the Second Automotive Century, foresight will be a key attribute of the successful. Creating capabilities to operate reliably at speed using E-technologies will be crucial. Establishing networks and relationships with capable partners will be essential.
PricewaterhouseCoopers can help. This is the executive summary of the full report.