It has been difficult in the last few years to keep track of all the changes in direction in the automotive industry, both at OEM and supplier levels alike. A fundamental question is just what is the right direction for success. Throughout the 1990s, many automotive suppliers paid minimal attention to profitability and focused all of their energies on growth. As a result, in an attempt to achieve a leading market share position at the OEMs, suppliers signed up for significant price reductions and shifts in capital investment responsibility to gain major new programs. We know of one instance in 1996, for example, where a large Tier One agreed to an across-the-board 13.5% price reduction on every product they sold to a European OEM in order to secure new business on this OEM's largest platform. Since the late 1990s, however, there have been notable supplier bankruptcies that demonstrate the folly of this "growth at all costs" philosophy. Most suppliers are now focused on ways to stabilize their financial performance and improve their long-term profitability.
So how does one distinguish between a true fundamental change in industry direction and just another short-term industry fad? The key is to look for business model changes that are driven by long-term structural shifts. One of the most critical changes in the last 10 years has been the increasing pressure to shorten program lifecycles. This pressure is coming from a number of directions:
- The OEMs need to shorten their developmental lead times so that their products can more quickly capitalize on market trends. The longer the distance between development and execution, the higher the risk that the product will arrive too late.
- Shorter product lifecycles coming from the electronics and computer industry. In the mid 1990s, one of the top managers from Motorola did a presentation on their assessment of the automotive industry. He illustrated his point by referencing the comparison between the electronic business cycle and the automotive business cycle.
As illustrated in the chart (below left), he described an instrumentation program the company had recently been awarded on a major new vehicle. In this particular example, by the time the new vehicle launched in four years, the instrumentation on the vehicle would be three generations old. In other words, the significantly shorter product lifecycles in the electronics industry were incompatible with the long lifecycles of the automotive industry. The long developmental vehicle cycle did not allow Motorola to offer the best product at the time of vehicle purchase.
The conclusion many of us drew from this presentation is that the historic automotive business model is unsustainable. Vehicles are, of course, complex, highly engineered products, and there are some technical limitations to how much the overall development time can be compressed. There are many aspects of the vehicle, however, that can and will be driven closer to the electronic business model: interiors, instrumentation, and exterior fascia are just a few examples. In the six years since this presentation was given, consumers have continued to experience ongoing upgrades to their electronics, and the pressure for similar "plug-and-play" capability for vehicles has grown. In the future, while platform consolidation will continue to be a focus of every OEM, coming up with multiple variants of each platform to fit consumer needs will be a key strategy.
- The last driver to shorter product lifecycles is a major demographic change that has happened during the last 20 years. Related to the preceding point regarding the electronics industry, satisfying consumers is a much more difficult task than it used to be. The consumer has a much greater desire for uniqueness and individuality than in the past. From interior appointments to exterior image, consumers are seeking vehicles that fit their specific needs and offer some degree of personalization. A primary driver to this is the changing segmentation of the consumer. The large middle class that was once fertile ground for the automotive mass marketers has given way to a different profile of income and buying habits.
The implications of the double bell curve are enormous. This is why, for example, General Motors has had difficulty having enough $50,000 Escalades to satisfy the consumer demand but they cannot sell the Buick Century without heavy discounting. Products appealing to consumers on the higher bell curve will be driven by lots of bells and whistles and continuous changes in product offerings. Products appealing to the lower end of the bell curve will focus primarily on cost and value. Learning how to provide this degree of variation in products and still make money is a serious issue for OEMs and suppliers alike. The upside of selling to the upper bell curve, for example, is that these products will be highly value-added with limited price pressure. The downside is that these products will also have relatively short longevity (2-3 years) and the volumes will be much lower (50,000–150,000 annually).
As in any fundamental change in an industry driver, some companies will benefit from a business model shift and some will be left behind. The OEMs and suppliers that learn how to capitalize on this change should be able to create a significant competitive advantage.