LEARN MORE


Competitive Challenges: The Next 20 Years

As I spent what was my 20th anniversary of walking the Detroit Auto Show and then a month later walking the enormous Chicago Auto Show, I reflected on the many changes in the industry.

As I spent what was my 20th anniversary of walking the Detroit Auto Show and then a month later walking the enormous Chicago Auto Show, I reflected on the many changes in the industry. The Chicago show celebrated its 100th anniversary at McCormick Center, a great location to showcase the many new products from all the manufacturers. 100 years has brought a lot of change, but so much has happened in just 20 years.

With the profitability gap continuing to widen between the Domestic 3 and the Japanese 3 based on recent financial results (hopefully for the short term), supplier struggles with bankruptcy, an economic recession in the U.S., a new landmark UAW agreement, and financial influence present in the auto industry like never before, I had to ask myself what roadmap should companies follow to be successful in today's market place.

Within a much shorter period of time than many thought, the new UAW agreement will allow the Domestic 3 to cut between $2,500 and $5,000 of cost per vehicle. With two-tiered wages and the impact of the health-care reimbursement program (Voluntary Employees' Beneficiary Association, or VEBA), the manufacturers will be much more competitive with the Japanese 3 in North America in the coming years. Each company is streamlining their operations and improving their efficiency, and now the major focus must shift to product and quality to ultimately win the customer in the showroom.

For all the work done to improve the labor agreement in 2007, manufacturers, including the suppliers that support them, are beginning to see a major drain of people and skilled resources. The baby boomers are retiring; the best people are taking buyouts and in many cases leaving the automotive industry, particularly women and minorities. Also, the U.S. education system pales in comparison to those in other countries that are graduating engineers at a rate of more than seven times that in the U.S. In the next five years, the lack of skilled labor in this industry will reach more than 500,000 people, explaining much of the migration of manufacturing to other countries.

As the Domestic 3 improve their engineering capability, purchasing efforts, and overall manufacturing efficiency, they are streamlining significantly. Market share will never be the same in North America, so change is a must. Supplier consolidation is happening rapidly with the commonization of platforms and the global sharing of components. All of this change puts pressure on suppliers to evaluate their strategic and financial alternatives. This doesn't just apply to suppliers in trouble. In order to get to the next level past consolidation, many companies face a decision regarding growth. They have four primary choices. They can maintain the status quo with little to no investment, and potentially risk their business changing and ultimately going away. Second, they can go it alone but work on rapid improvements to drop cost savings to the bottom line and reinvest those dollars back in the business and slowly transform themselves to a healthy supplier. But, this requires outstanding leadership and rapid decision making. Third, they can follow a path of partial liquidity. This can take on a couple forms. There are many investors, both strategic and in private equity, that will happily take on a controlling interest in a company that has vision, differentiation and a future. However, many business owners are reluctant to give up control. But there are, however, many investors out there that are interested in a great business and don't have to take over control, but instead want to purchase 30% to 40% and successfully work with the leadership to turn the business around. The fourth option is a complete sale of the business to a strategic buyer or private equity firm. This choice is always difficult for an owner, but in many cases, with a strong succession plan, this option looks more and more attractive in today's environment. And this, too, does not have to mean the owner rides off into the sunset but rather they may stay to run the business and see the success of the turnaround or growth.

Evaluating alternatives is probably the most difficult path for companies. And along the way there are many hurdles to consider in determining the best path to follow. Companies have to evaluate their financial and operational strength in an objective way. They must look at their business honestly and really evaluate their differentiators and ask themselves if they have the culture for change to survive and evolve in the next 5 to 10 years.

The most important aspect of a business is leadership and with the great loss of leaders this becomes more important for companies to survive the consolidation. Companies must have the right people on the bus, and they must be in the right seats making decisions rapidly to improve the business model. Companies need a balance in the alignment of their strategy, financials and operations, and this will only happen with strong leadership, speed in detecting issues and rapid decision making to improve the business.

A lot has changed in the last 100 years and particularly in the last 20. What will the next 20 years bring this industry and who will be the strong survivors through this time? 

Comments are reviewed by moderators before they appear to ensure they meet Automotive Design & Production’s submission guidelines.
blog comments powered by Disqus