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On Strategy: The Key Challenges for N American Truck Mfg, 2006 & Beyond

Automotive suppliers striving to grow and thrive must focus their business strategies on key initiatives that will ensure their long-term survival in a turbulent global marketplace.

Automotive suppliers striving to grow and thrive must focus their business strategies on key initiatives that will ensure their long-term survival in a turbulent global marketplace. There is light at the end of the tunnel for suppliers which can successfully implement these survival strategies. These critical supplier survival strategies include:

  • Diversifying the customer base for revenue growth
  • Increasing revenues through higher value-added products
  • Implementing a low-cost manufacturing footprint
  • Developing effective material cost management.

To compete effectively and profitably, suppliers must adopt to a rapidly changing environment and new realities. They need to look no further than the North American market. It’s no secret that the North American market is a stagnant one, whereas the global automotive market is growing. While market share of passenger cars and light truck production in North America is expected to grow by only 0.8% per year through 2012, it is expected to grow 1.6% in Japan and Korea; 1.9% in Europe; 4.7% in South America; and 8.6% in China.

In this new environment, North American automotive suppliers face a number of challenges, including a lack of pricing power, high legacy and labor costs, decreasing volumes and increasing raw material costs. At Roland Berger, we believe the combination of decreasing revenues and increasing costs will put various suppliers in financial risk in terms of liquidity and capital costs. Moreover, the financial institutions already discount the automotive industry more aggressively than expected.

What brought us to this point? NAFTA-only suppliers have been losing market share to global suppliers. And they have become overly dependent on GM and Ford with commodity-like products. As a result, we are currently going through a supplier shake-out, which presents potential for pricing opportunities for remaining healthy suppliers.

Declining market shares at GM and Ford, supplier bankruptcies, and crippling legacy labor costs will have an important impact on the future performance of the auto supplier industry. In the midst of all these shifts, OEMs also are requiring suppliers to assume more engineering and design responsibilities. Automotive supplier industry performance has been polarized, with only a few suppliers generating strong results in a difficult environment.

But in this difficult current environment, there is some light. Revenue growth opportunities exist for suppliers as the transplant OEMs increase market share and production capacity in North America. From the pricing perspective, increased distress among bankrupt suppliers has started to provide pricing opportunities for the remaining healthy suppliers. Also, by increasing the value-added content, suppliers not only increase their revenues but also gain further control of technology and mitigate their customers’ threat of re-sourcing. Finally, high-profile bankruptcy cases may spark positive changes, such as more competitive labor rates for OEMs and suppliers.

How are smart suppliers implementing the four survival strategies I outlined at the beginning of this column? Let’s take a look. Some suppliers have done well in penetrating transplant OEMs through acquisitions, joint ventures, low-cost manufacturing locations, growth through commonality, and organic/self-development. Key success factors required for these suppliers include a global presence—especially in Japan—and leading-edge technology. Also critical are open trust and communication; continuous improvement in cost and quality; flexible and lean manufacturing capabilities; early involvement in product development, and strong reputation.

Overall value-added for suppliers will increase globally, presenting growth opportunities. Among the key success factors for suppliers to increase their value-added potential include:

  • Innovation
  • Supply of systems instead of components
  • Early involvement in product development

A solid manufacturing footprint strategy is critical for having a competitive cost structure. Rising wage and health care costs are the primary reasons for rising costs at suppliers in the U.S. For example, employer health care premiums rose 9.2% in 2004. Hourly manufacturing wages rose 2.3% in 2005.

Finally, suppliers should focus on managing their material costs with customers. Roland Berger Strategy Consultants suggest a three-pronged approach. First, identify the volatile and critical raw materials, such as steel, aluminum, plastics, resins and magnesium. Second, provide cost transparency to customers—develop the cost breakdowns and provide the raw material costs to customers. Third, develop cost pass-through arrangements with customers. This might include indexing raw material costs to the price for periodic price/cost updates with customers. Sure, it’s a tough market. But a coherent strategy, executed effectively and tenaciously, will make the difference between success and failure. 

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