E-commerce will bring important cost benefits to the auto industry over the next 5 years, which will come not only from purchasing, but also many other functions such as product development. "Build To Order" won't be the industry's panacea and manufacturers will evolve from the current "Build to Dealers' Lots" towards the "Build to Consumer Demand" model. These are some of the key findings of a study released at an industry seminar today by Roland Berger Strategy Consultants in conjunction with Deutsche Bank's Global Automotive Research Team. The study findings, though focused on the automotive industry, provide insight into the future for many other industries (for example, consumer products, aerospace and pharmaceuticals) where similar initiatives are undertaken.

"Many industry forecasts have suggested that the efficiency gains achievable through electronic commerce will reduce the cost of a car by several thousand dollars. But estimates of this magnitude understate the challenges that automakers and suppliers face in implementing the necessary channel changes," said Michael Heidingsfelder, a Partner at Roland Berger. "The objective of our study is to cut through the hype by presenting a realistic assessment of the impact of B2B initiatives on the auto industry. We have also identified the key factors that will separate the winners from the losers within the automotive value chain."

Heidingsfelder was speaking from Boston, where the results of the study were announced to a gathering of industry thought leaders brought together to discuss how business-to-business e-commerce will evolve in the auto industry (and other fields) over the next five years. The study itself was built on interviews with 150 leading players in various elements of the automotive sector, including manufacturers and suppliers and the technology companies servicing their initiatives. The study was conducted in the U.S., Europe and Japan.

According to Heidingsfelder, the firm's research suggests a more modest level of e-commerce-related cost savings than other expert sources have predicted -- and the growth will be more of an evolution than revolution. The survey's estimate of roughly $1,200 in savings per vehicle for the North American industry within the next 5-years compares with estimates of several thousand dollars per vehicle in many other industry forecasts. The survey dollar figure represents 4.9% of the $24,500 average price of a car in North America.

The estimates are even lower for European and Japanese manufacturers. The study's "eSave model" projects savings will be approximately $639 per vehicle for the European auto industry, or 3.4% of the $18,600 average price of a car there. For Japan the figure is $540, or 3.9% of the $13,750 average vehicle purchase price.

The savings forecast includes estimates for potential cost reduction at all levels of the automotive value chain, added Eric Kintz, Associate Partner and head of Roland Berger's e-commerce practice in the United States. Of the $1,200 per vehicle that can be cut out of the North American auto industry cost structure, he explained, only a fraction will be retained at each level of the supply chain.

"We expect most of the industry's cost savings to be passed downstream from the supplier to the manufacturer and from the manufacturer to the consumer," said Heidingsfelder. Out of the $1,200 cost savings, the consumer will get almost $900. "And we believe the pass through for an automaker is predicated by industry overcapacity; that is to say, it will be greater for mass market vehicles and smaller for luxury vehicles. The same factors will determine the pass through/retention of cost savings for suppliers."

Among the survey's other notable findings:

* Savings will come from unlikely sources. For example, purchased material cost savings will represent just a small part of the overall story -- about 30%. Instead, Berger research suggests close to 70% of the potential cost savings will come from reduced product development, inventory, manufacturing, sales, G&A, transportation, and warranty costs.

* The North American industry's transition toward "build to order" vehicles (BTO) has been exaggerated and, in light of significant physical, structural, cultural, and financial limitations, it will not progress as quickly as many industry observers anticipate. Rather, the traditional vehicle sales model, which involves the purchase of a vehicle out of a dealer's inventory, is likely to dominate for the next five years and will probably still represent more than 50% of the market in 10 years -- especially in the United States.

* Cost savings from auctions will dissipate over time as business becomes concentrated among the most cost advantaged suppliers. Reverse auctions for auto parts have generated dramatic levels of cost reduction over the past six months, but these levels (10%-40%) are not sustainable as they do not reflect the true cost of doing business within the industry.

* Tier 1 suppliers will be able to retain more of their cost savings than lower tier suppliers. The greatest benefits will accrue to companies that supply engineered, and/or highly differentiated products because they have relatively lower risk of having to pass all of their cost savings through to customers. Companies that supply commodity type components -- or products that are fabricated to specifications determined by the automaker -- are at greater risk of margin contraction.

* E-commerce tools should help automakers improve their forecasting and planning and help them better anticipate customer preferences within markets. This is achieved through real-time communication throughout the supply chain, as well as integration to B2C portals that supply updated information from dealers and consumers.

* Cost savings achieved through e-commerce initiatives could protect automakers' margins in a negative pricing environment. However, automakers will not necessarily experience significant improvement in margins after price reductions are passed through to consumers.

Though the Roland Berger/Deutsche Bank study focused on the auto industry, "it has practical implications for old economy companies in the Internet world," said Kintz. "Companies could, and should, spin off businesses that do not provide a competitive advantage because Internet technology takes away some of the disadvantages of doing this. Also, mergers and acquisitions are no longer necessary to achieve traditional synergies; instead, strategic alliances will grow in popularity," adds Heidingsfelder. Furthermore, he noted, product integration, engineering, technology and knowledge will become increasingly important over the next few years, and tangible assets will become less valuable.

Among the other participants in today's seminar in Boston were: Jim Harbour of Harbour and Associates, who discussed build-to-order issues; Richard Baker of J.D. Power & Associates, who spoke on the possible extinction of auto dealers as we know them; Brian Kelley of Ford Motor Company, who discussed Ford's e-commerce plans; Sam Kinney of Freemarkets.com, who spoke about an independent procurement exchange; and Jeff Bodenstab of I2, who discussed supply-chain services in B2B exchanges. Deutsche Bank's Jim Moore moderated a panel on the challenges of end-to-end integration and the new value-added services that will shape business models of the future. The panel participants, Rocky Stewart, CTO of BEA Systems Web Logic, Bob Lewis, President and COO of Enterworks, Ram Sriram, CEO of Nexprise and Phillip Merrick, CEO of webMethods provided a "look into the future" of web-enabled business.

With 30 offices in 21 countries, Roland Berger is the leading management consulting firm of European origin, providing strategy and implementation support for clients in the automotive, consumer goods, financial services, infotech, pharmaceutical and other industries. A world leader in e-commerce consulting, Roland Berger works with blue chips and start-ups to optimize their strategy, marketing, technology, operations and management in the Internet economy.