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Competitive Challenges: Collaboration or Evaporation?

You essentially have a choice. You can compete in the highly demanding market by collaborating, or you can quite probably get ready to do something else for a living.

We have all heard about the importance of collaboration within the automotive industry over the last couple years. Some people know what it means and have embraced it. Others, quite frankly, have just paid lip service to it and really don’t understand its importance. Unfortunately, our antidotal experience sees more of the people who are giving it lip service rather than those who are successfully collaborating.

Today, with the current state of the economy and its impact on the automotive industry, many companies need to reconsider the culture in which they operate. The business landscape is affected by high material pricing for things like steel and resin. Oil prices continue to be an unknown factor and are making consumers think twice about their next lease or purchase. In addition, the housing market is down and putting pressure on consumers. Exchange rates are ever changing, particularly as regards the dollar in relation to the yen, British pound and Euro. And probably the biggest unknown factors are the pending CAFE regulations and the upcoming 2008 presidential elections. These issues have put much of the industry on eggshells waiting to see what happens in the next six to 12 months.

As a result of all this, consumers are reconsidering how they spend their money on vehicles and this has become evident in recent sales data. In July, for the first time ever, foreign brands surpassed the three domestic brands in terms of sales. Many asked why. There are really three key factors driving this trend. The first is lack of designs by the domestic brands that consumers are passionate about. There are a few glimmers of hope, but the majority is struggling in today’s environment. Other factors are quality and the perception of quality. Although quality scores show that all vehicle manufacturers at near parity on initial quality, the fact remains that long-term warranty results still show a significant discrepancy when comparing the New Domestics to the Detroit Three; somewhere around $300 to 500 per vehicle. More important is the perception of quality. The domestic manufacturers lost many consumers from the dealer showrooms years ago, and getting them back has been a challenge. The truth is the domestic companies have some great products on the road like the Chrysler 300C to the Ford Mustang and Edge to the Saturn Outlook and Chevy Malibu. But unfortunately, many consumers aren’t aware of these vehicles because they have not visited a domestic manufacturer’s showroom since they bought their first foreign vehicle. The fact remains that a significant profit per vehicle gap exists between the New Domestics and the Detroit Three. When we released our study one year ago, the gap was $2,900 per vehicle and through ‘06 that gap rose to over $3,800 per vehicle. It is true, when you look at revenue, much of this gap is made up of the labor. However, reality is that the biggest opportunity to reduce cost comes from all the other factors involved in the business beyond labor.

As I have highlighted before, the rapid business model change for the OEMs consist of the consolidation of platforms, vehicle architectures, and global components. The foreign brands have a huge advantage in this area because they have commonized these elements many years ago and are reaping the reward of these decisions today. The domestic three understand this and are working diligently to right this problem. They need to commonize plat-forms and architectures quickly leading to commonize global components. With this will come significant savings in design, engineering, processing, manufacturing and supplier cost.

The impact of these decisions by OEMs will be monumental. Suppliers that are prepared for change and have globally positioned themselves from an engineering and manufacturing footprint will survive. OEMs will look to suppliers to manage more in all the major regions of the world. Those suppliers that have not embraced change and are still living in denial will be consolidated either through mergers and acquisitions, purchased by private equity, or quite simply will just go away. The pressure will be on and the squeeze will eliminate several hundred suppliers over the coming years.

So what is the solution? The fact remains that suppliers that collaborate with others including OEMs and other suppliers will have the upper hand. Major OEMs like Toyota have encouraged this behavior and have, in fact, awarded business on certain commodities to suppliers that have banded together to design and engineer common components. So is collaboration important? No. It is absolutely critical. And the ones that embrace this mindset and stop paying it lip service will survive and likely thrive long-term in this highly competitive global automotive industry. As for the others . . . 

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