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Buying and Selling I.T. in a Down Market

Year 2001 is certainly a watershed period in auto/I.T. history. Multiple events, but especially the dotcom crash and the World Trade Center disaster, will forever leave their marks.

No doubt about it. The auto industry is in a recession. This downturn is placing pressures on both buyers and sellers of information technology (I.T.) the likes of which neither side has seen before. The tough economic conditions are leading to across-the-board changes for both. A number of factors make this recession more severe than others. Given these conditions, I.T. buyers and sellers need to adjust to current realities. Some bright spots remain despite the gloom. The current down turn is worse than previous recessions in a number of respects. On the I.T. side, users had enjoyed a huge benefit during the 1997-2000 "dot-com era." Wall Street dollars poured in, inflating I.T. research-and-development (R & D) budgets; this, in turn, flooded the auto market with bargain-priced (or free) e-business products and services.

Many I.T. vendors were giving away products and services merely to grow market share. That era is over. In fact, I.T. vendors are now slashing R & D budgets. Users should expect a drought of new products in 2002. The decline in offerings from the I.T. industry will seem even more severe because it will be dropping from unprecedented high levels. Competition among I.T. vendors could diminish because of mergers and consolidations. For instance, two of the four dominant, engineering/design software firms are now one: EDS/UGS and SDRC. Lastly, buyers today are delaying or canceling major purchases. An example is the supplier Hayes-Lemmerz putting off its planned purchase of PTC's Windchill product.

On the auto industry side, the Big Three automakers cannot spend today assuming that they will return to the high profitability levels they recently enjoyed. This is particularly true because Japanese automakers—especially Toyota and Honda—are taking away market share. Further dampening prospects is that in the past, each geographical region could swing independently of the others. For instance, European auto sales could enjoy a boom when the North American sales foundered. With today's tightly interlinked global economy, however, it appears that all regions will swing together. Lastly, the political instability caused by the World Trade Center/Pentagon attacks will likely aggravate an already fragile economy.

Given these conditions, what should an I.T. buyer do? First, because it is a buyer's market, great bargains are now available. This is especially true for big-ticket items such as enterprise resource planning (ERP,) supply chain management (SCM), and product data management (PDM) packages.

However, buyers now need to closely evaluate and monitor the financial stability of their I.T. vendors. Some firms have already disappeared, and many more will follow suit over the next 18 months. (A notable recent example is NexPrise.) I.T. buyers should not rule out smaller vendors when shopping for I.T. Some start-ups, for instance, have unique, high-value offerings. I.T. buyers should insist that smaller vendors have contingencies in place to diminish risk to the buyer. An example is a relationship with a larger vendor to take over operations in case the small vendor gets into trouble. In that situation, the larger vendor steps in and provides uninterrupted support to the customer. DaimlerChrysler, for example, has such a relationship with a small United Kingdom-based security vendor. Siemens is this UK firm's "big brother."

I.T. vendors must readjust to new realities on their side. For example, some vendors will have no choice but to operate at a loss for this year, consuming profits realized in previous years. It is also necessary for vendors to protect their most valued assets: their people. Vendors cannot spend now assuming the auto-industry's I.T. purchases will rebound to the high spending levels of the 1997-2000 era. Vendor attention to cash flow will be most critical. This is especially important for startups that had in the past relied on the financial markets (especially easy venture-capital money) to float their operations.

Speculative large, presales expenditures will also not be possible. For instance, several I.T./consulting firms last year spent millions of dollars preparing a $480-million order-to-delivery (OTD) proposal for General Motors. Despite all the vendor spending, GM decided not pursue a large-scale OTD effort, thereby leaving the vendors holding the bag. Another recent example was NexPrise's investing millions of dollars to satisfy Covisint-specific requirements. The Santa Clara, CA-based firm essentially did so without compensation from Covisint. Its lack of attention on cash flow contributed significantly to NexPrise's eventual demise. Furthermore, despite the "supreme sacrifice" it made, Covisint still gave it the boot, replacing it with arch-rival MatrixOne as Covisint's key, design-collaboration partner.

Some bright spots remain, however. Expect original equipment manufacturers (OEMs) to not slash spending in customer-facing systems. These reach out to dealers and consumers. Likewise, suppliers will continue to launch projects to satisfy OEM requirements. A recent example is equipment maker Jervis B. Webb implementing an OEM mandate to put its electronic catalog on the Covisint hub. I.T. vendors should take solace in that some major purchases by manufacturers are not optional. For instance, Brain North America has sold a number of ERP systems already this year, for instance, to customers that must replace aging BPICS systems.

Year 2001 is certainly a watershed period in auto/I.T. history. Multiple events, but especially the dotcom crash and the World Trade Center disaster, will forever leave their marks. Prudent companies, however, will manage their businesses well in this downturn. In doing so, they will position themselves to come out of the recession in strong form.

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