2005 may end up being a watershed year for the North American market, so assessing the key issues is particularly important. The following are not numbered because that would imply priority, and the importance of their impact depends on whether you are a successful OEM, a struggling OEM, a distressed supplier, or one of the top 25% of the supplier industry that will continue to have positive financial performance.
Oil prices will remain a headline issue for the industry. Continued record high oil pricing affects things including consumer confidence, material prices and vehicle segments with low fuel efficiency.
This may be one of the few issues that affects everyone in the industry. It is also one of the few where the higher you are in the food chain (e.g. a Tier 3 vs. a Tier 1), the worse your position. Given the dramatic increase in steel prices over the last 12 months, many smaller suppliers have demanded (and in many instances gotten) relief from steel surcharges and steel price increases. Unfortunately for most Tier 1's, they have been much less successful getting relief from their OEM customers. This is mainly due to the hypercompetitive nature of the North American market where OEMs do not believe they can pass any material price increases onto the consumer. Absorbing price increases at the Tier 1 level has caused bankruptcy filings (e.g., Intermet) and dramatic declines in profitability for others. While steel will continue to be a major issue, there is a similar pattern emerging in the dramatic rise of plastic resin pricing over the last three months. With oil prices likely to stay at record levels, the plastics situation will probably continue to deteriorate. Until this is dealt with as an industry rather than as one Tier vs. another, the situation won't improve.
While the increase in new vehicle offerings is clearly a positive trend from a consumer perspective, it places enormous financial pressure on both the OEMs and suppliers. Very few OEMs or suppliers have business or program launch processes capable of supporting this level of vehicle diversity. Many analysts believe this degree of new product activity is unsustainable and will further weaken some of the key industry players. The faster suppliers and OEMs can redesign their business models to support shorter lifecycles and smaller production runs, the more likely they are to survive.
In this instance, I am not talking about traditional automotive electronics (e.g., the trend towards drive-by-wire) but the impact of multi-use electronics such as satellite radio and portable electronic devices (e.g., the iPod). The separation between home, office, and car, and the devices used is becoming increasingly thin. Plug-and-play units are becoming the norm and automotive designers need to factor in the impact of the fast design cycles in consumer electronics. We may be heading toward the era where the traditional suppliers and OEMs are the hardware/commodity suppliers and the differentiation is increasingly found in the electronic devices and software.
Distress in the supply base leading to record merger and acquisition activity Merger and acquisition (M&A) activity may hit record levels in 2005. The difference from the late 1990s (the last hot period for automotive M&As) is that most of the activity is for distressed suppliers. Large Tier 1s are spinning off non-performing and/or non-strategic units and many suppliers that are still primarily dependent on the Big 3 are struggling to stay alive. While this may lead to additional consolidation in some sectors, it will mainly keep a high level of churn in the automotive supply base. With large players like Delphi and Visteon still weighed down by contractual obligations from their spin-outs, some disruption in supply in 2005 is likely.
China will continue to have an enormous influence on the industry. From its huge consumption of materials to its growing domestic industry, China's impact will require all auto industry participants to assess what that will mean to them.
Most companies have not made the transition from being multi-region organizations to truly global operations. This is particularly true for European parents of North American subsidiaries. They are notorious for being insensitive to differences between the North American and European markets and treating their North American arms as merely extensions of the home office. Then they wonder why their North American companies are never as successful as they had envisioned. If you are going to be a successful global company, you must have an authentic global strategy. Determining that strategy and then ensuring that there is an organizational infrastructure to support it needs to be a top priority for every leader.
For years, the North American market was viewed as more of a vehicle market than a powertrain market. Great-looking vehicles with sophisticated interiors were normally enough for the American consumer. Not anymore. Consumers have demonstrated that if the powertrain is not viewed as sufficient to support the vehicle, they will not buy it. A recent example is the Ford Five Hundred/Mercury Montego, which carried over the 3.0L Duratec engine from the Taurus/Sable. This has hurt the new vehicles' sales performance, since they need a larger engine with more horsepower to compete effectively against others in the full-size sedan segment. There have been some big wins for the domestic players—think Hemi—but North American OEMs have historically been at a powertrain disadvantage relative to their Japanese and German competitors. The need for multiple powertrains to fit the expansion in new vehicle offerings will also put an additional strain on OEMs.
The popularity and buzz surrounding hybrids takes them out of the powertrain category and into their own. It is no longer possible to deny the growing consumer demand for hybrids. This is particularly true in terms of consumers 40 and under. Both OEMs and suppliers need to factor in the speed with which this is happening and the potential impact, both positive and negative, on their business.
Management changing of the guard at suppliers and OEMs
At the 2004 Management Briefing Seminar in Traverse City, CAR's David Cole noted that 45% of the OEM middle and upper management retired between 1995 and 2003. This will probably have a greater impact on the industry than any of the other issues examined here. Learning how to move from the highly adversarial relationship between the various levels of the value chain (from the dealers to the suppliers) to one of cooperation and focus on the end consumer is one of the great industry challenges of the next five years. Being an eternal optimist, I am hopeful that new blood will lead to a new opportunity to change the nature of the relationships and establish a more collegial environment. It is in everyone's interest if people stop being concerned with getting the upper hand and work toward developing the next generation of vehicles.