Preliminary results of a new study of the automotive supply chain show, contrary to widely held perceptions, that mergers, acquisitions or outsourcing are the keys to suppliers’ survival and are being driven by their customers.
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Most industry-leading auto suppliers believe that execution of the business basics – developing innovative products and providing superior customer service – are the real keys to their future success in the price-pressurised global market.
The study was conducted over the past three months by the not-for-profit motor industry think tank, the Centre for Automotive Research (CAR) in Ann Arbor, Michigan.
Titled “Changing Business Dynamics in the Automotive Supplier Sector,” the study focused on four key business strategies and how these may affect the future long-term success of the supplier: mergers and acquisitions, outsourcing, supply-chain management and information technology.
In preparing for the study, interviews were conducted with executives from seven suppliers: BorgWarner, Bosch, Denso, Gentex, Johnson Controls, Magna and Yazaki, and the survey document has been completed by 35 component suppliers to date.
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By GlobalDataThe study was underwritten by gedas USA, Inc., the US arm of Berlin-based Volkswagen Group company gedas, a global IT consultancy and service provider.
While the respondents did not rule out using strategies such as mergers, acquisitions and outsourcing, the majority clearly said their “future was in their own hands and depended primarily on their ability to develop innovative products, and was not dependent on their customers’ demands or fortunes,” said CAR analyst Bernard Swiecki. “In addition, some suppliers saw their own IT capabilities as being a weak link in their organisation that could compromise their future success.”
For instance, when executives were asked to rank a variety of factors on a scale of 1 to 5 in terms of their impact on the companies’ long-term future success, “developing engineering and intellectual property unique to their firm” was ranked number one. Somewhat less important were “pursuing increased engineering and design responsibility” and “optimising (their) supply chain,” with mergers and acquisitions, and outsourcing ranked last.
The study also showed that, contrary to the widely held opinion that vehicle manufacturers are driving suppliers to take on additional design and engineering responsibility, that is not the case for the majority of the supplier respondents.
Sixty-three percent said their own management teams are the drivers and decision-makers, while only one-third said their customers are driving them to take on more engineering work.
While proprietary product development was key to their future growth and prosperity as opposed to mergers or acquisitions for instance, nearly 60% of these firms said that if they engaged in a merger or acquisition, that its successful execution would significantly impact their success.
However, all respondents noted that they would prefer to grow organically by developing their own firms’ capabilities and competitiveness.
Should the firms engage in a merger or acquisition, the reason for doing so would be to “strengthen current products or services” or to “acquire additional products or services.” Less important as a driver was “to acquire new or improved processes.”
“This is in keeping with executives’ belief that developing innovative products is the key to their future,” said Swiecki.
According to the study, the greatest challenge to successfully executing a merger or acquisition is two-fold: organisational and cultural issues, and integrating IT systems. With respect to areas that benefit most from IT applications, the respondents identified four areas of prime importance: managing finance, mergers and acquisitions; improving reporting and tracking in the supply chain; production planning; and speeding workflow. IT was seen as being somewhat less important in launch management, executing outsourcing strategy, and managing the merger and acquisition process.
“The results are not surprising to us. Most suppliers continue to have highly diverse and fragmented operations which lead to difficulties in achieving their intended return on investment for both acquisitions and internal projects,” said Daron Gifford, vice president of automotive at gedas USA.
“Automotive suppliers’ information systems today are seldom evaluated on a holistic basis, and are almost never included in the upfront due diligence prior to formalising an agreement to merge. This leads to significant and unexpected costs later on. However, if acquisition teams conduct the proper due diligence on information technology capabilities, then IT could be used as a tool to enable integration across suppliers’ operations and could drive significant benefits and competitive advantage.”
Outsourcing – both on-shore and offshore – was ranked least important to these automotive suppliers in terms of impact on their long-term success. However, of the activities outsourced, a majority of those that are outsourced go to other North American companies and are not shipped overseas.
Of the suppliers who responded, 83% said they off-shore product design, but contrary to the headlines, 91% of the respondents are outsourcing IT work and human resources functions (89%) to other companies in North America – not to India or other countries. Other business functions outsourced locally are finance (80%), and sales (71%).
However, all agreed that the reasons to outsource were price-related: “to improve price competitiveness” was ranked the number one reason, followed by “to respond to OEM price pressures” at number two. “To provide industry standard best practices” was last.
“Interestingly, the drive to offshore engineering to reduce cost would seem to conflict with suppliers’ views that product innovation and differentiation is their lifeblood,” said Swiecki. “Striking a balance between the disparate dynamics will be critical to suppliers going forward.”
The study was conducted during May, June and July. CAR surveyed a population of component suppliers with North American automotive sales over $US250 million, and 35 firms responded to the survey to date, or about one-third of the total survey population. A comprehensive final report on the study will be published in October, 2005.
