Over the last three years, IRN has written several articles for AD&P focusing on the continued globalization of the automotive industry. For obvious reasons, there has been a particular emphasis on the rapid emergence of China, both as a growing new market opportunity and as a major competitive threat to many North American suppliers. While China has dominated most of the media, the other major issue driving globalization in the automotive industry has been the continued consolidation of the automotive OEMs. While we would argue that the only truly global OEM player is Toyota, there are now a number of multi-region organizations such as Daimler-Chrysler and Nissan-Renault that are driving the industry to think beyond regional boundaries. 2005 has become something of a watershed year in terms of globalization. Virtually every major industry issue—from the rapid rise in price increases for steel, oil, and plastic to the design of future platforms and powertrains—can be traced to some kind of global driver. The key for any company is to figure out which issues to ignore and/or monitor and which ones may have a profound impact on your business.
Keeping Globalization in Context
There is a very popular book making the rounds right now called: The World is Flat: A Brief History of the Twenty-First Century by Thomas L. Friedman. It takes a look at a number of current trends and economic disequilibriums and makes some fascinating predictions about the future. It takes much of current conventional wisdom about what our new global world will look like and turns it on its head. It makes a compelling case, for example, that some of the current major global outsourcing trends will become equally significant insourcing trends in the not-too-distant future. This book reminds us of numerous books that came out in the mid- to late-1980s predicting the total economic dominance of Japan. As with all books of this type, they did quite a good job of describing current issues and a pretty lousy job using these issues to accurately predict the future.
Our obvious point is that business leaders need to be careful making too many macro prognostications about the future. Most of the time you are going to be wrong. At IRN, we are great believers in reading everything possible about an issue so long as you follow a core belief of a colleague of mine: "All theories and models are wrong; some of them are useful." The automotive industry has a very bad track record of jumping on the latest conventional wisdom and making numerous bad business decisions as a result. Given all the economic pressures of the last 2-3 years, we are concerned that we have entered another one of those periods of treating theories about the future of this industry as if they were facts. A few of the key "factoids" that appear to be driving major industry decisions:
All Significant Manufacturing Globally Will Soon Be In China
There is no question that China will continue to grow as a major base for manufacturing and that for certain segments, the ability to compete with China from manufacturing bases in either North America or Western Europe is unlikely. It is equally true, however, that there are compelling reasons why certain sectors and types of manufacturing are likely to continue in these developed regions. One of the best books ever written on globalization is Michael Porter's The Competitive Advantage of Nations. One of the fundamental theories of his book is that the least sustainable competitive advantage is lower labor rates. While we are aware that there is a lot more to the explosion of Chinese manufacturing in the last 10 years than just lower labor rates, it has been a huge competitive advantage for China in the short term. The question is how long this advantage will last and when will the success of their economy begin to bring their cost structure more in line with the rest of the world.
Which leads us to one of IRN's fundamental automotive theories (which means it may be wrong but hopefully it is useful). We believe the industry is on track for three major automotive-producing and -consuming regions: North and South America, Europe and Africa, and Asia (there is some debate on whether you put India in the European region or the Asian region, but for purposes of this discussion, it doesn't really matter). Based on this assumption, it is likely that each region will need a local supply and assembly base to support their needs. It may be economically viable to produce some highly commoditized parts such as low-end fasteners and wire harnesses in one region and then ship them globally, but even these types of products are likely to end up in the low-cost location for each region. This would suggest that eventually Mexico and Central America will end up being the low-cost region for North and South America and that most Chinese facilities will be supporting the Asian region. Whether this happens in two years or 10 years is the predictive challenge.
High Gas Prices Will Drive Homogenization of Vehicles Globally
I have been involved in a number of conversations lately where some key industry leaders suggest that the steady rise in global oil prices is likely to lead to a reduction in the number of platforms and powertrains over the next 10 years. The theory is that it will be impossible to be economically viable if certain vehicles or powertrains are only produced for certain regions of the world (e.g., large pick-up trucks for North America). We agree that if the oil price situation remains highly volatile or worsens, it will drive some commonization of powertrains and overall platform configurations. What it will not do is reduce consumer choice. It will force every remaining manufacturer to become much more systemic about how they design and build vehicles so that they can provide this "mass customization" and still make money. The demand for regional variation is likely to increase, not decrease over the next 10 years.
The only automotive OEM that is really capable of providing huge vehicle and powertrain variation economically across its entire product line is Toyota (which is why we refer to it as the only truly global OEM). It is Toyota's underlying marketing/design, engineering and manufacturing approach that is the source of its enormous competitive advantage and the core competency that has allowed it to steadily grow worldwide market share. It is also the competency that will be the most difficult for competitors to duplicate. The implication to the industry is that Toyota will continue to raise the bar on more vehicle variation, shorter product lifecyles, and more sophisticated powertrains. The question is how many of the current OEMs can successfully compete on this basis.
Underestimating or Overestimating the Impact of Hybrids
In the last few years it has been very difficult to have a rational conversation with anyone regarding hybrids. There seem to be two major camps. On one side there are the "cult members" who loathe conventional combustion engines and who look at every new OEM announcement about their hybrid plans as final proof that the dominance of the old technology will soon be over. The other camp takes a "When pigs fly" attitude and totally dismisses every OEM announcement about hybrids as primarily public relations and not anything to take seriously. As is typical, the truth lies somewhere in between. We believe the development and expansion of hybrids as alternate powertrains will take on greater momentum over the next 10 years and any OEM or supplier who is not taking these developments seriously (particularly suppliers making parts for conventional engines) is ignoring a huge potential business risk. It is also clear, however, that during this same time frame, the vast majority of vehicles will continue to be powered by conventional means. How this relates to globalization is that developments regarding hybrids are likely to first occur in Japan and Europe vs. North America. It becomes another reason why most companies need to have a thorough global perspective even if they do not have a global presence.
Ford and General Motors Will Never Get Their Acts Together
While I am tempted to say that, based on history, this is the closest thing to a fact we have, that would be both a cheap shot and overly simplistic. While the continued struggles of General Motors and Ford are not a globalization issue per se, I would argue that the speed of their decline is a direct result of their dependence on vehicles designed for developed markets. The vibrancy of the North American market over the last 20 years allowed both companies to avoid the pain of transitioning to becoming global players and developing credible product in segments that appealed to non-North American markets. The result? A "bet-the-farm" product strategy most clearly demonstrated by the coming GMT 900 launch for General Motors. While we remain cautiously optimistic about the outlook for the GMT 900, no OEM should have such a heavy dependence on one platform. The abdication by Ford and General Motors of numerous vehicle segments has been a major contributor to institutionalizing their high cost structure and accelerating their market share decline. The ability to turn around these negative trends is in question and the scale of improvement required in the short term is daunting. While management should shoulder a lot of the blame for not addressing these key issues when all of their truck products were still highly profitable, it is also important to recognize that these are both still significant players in this industry and they are likely to remain major players over the next 10 years. The key will be to deal with the likely short-term volatility as both companies are forced to address their systemic problems.
How Do You Plan If You Cannot Predict the Future?
Another of our favorite concepts from Michael Porter is that strategic planning is a compass direction and operational planning is a road map. Many companies' strategic planning is futile because it is designed as a road-map exercise. Projections on what the future global world will look like are helpful in setting compass direction as you determine which of the current theories you support and which ones are relevant to your business. But they should never be used as the basis for making major business decisions. The only current absolute is that the speed of change has accelerated dramatically and that current theories have a shorter shelf life than in the past. The key to future success for any organization is to "hedge your bets" and put your company in a position that they will be successful regardless of what theory turns out to be true.