Calendar year 2010 and the first couple months of 2011 have certainly been interesting in the automotive business. Just two short years ago the industry was in a tailspin, but now things are looking up. I was at a conference recently where several forecasters were talking about 17-million unit sales by 2014. I must admit I’m optimistic, but I’m not sure I’m that optimistic.
All of the U.S.-based companies seem to be on the right path and making good profit today. Toyota has recovered somewhat from its recall troubles and consumers are pouring into the dealers like never before. So where are the risk points for the industry today, or more specifically, for the manufacturers?
Obviously, a major risk that has been brought to light is suppliers’ ability to meet growing demand. This is a problem the industry didn’t expect, but the suppliers rationalized their business when the downturn hit and you can’t blame them for being scared to add resources and grow business on a somewhat uncertain future. They are working to do more with the same, and while doing that they are making high profit but they must flex to meet demand or they run a greater risk of de-sourcing.
Ford and GM have worked diligently in product development to drive out the waste in the process by commonizing global platforms and components that the customer does not see. This process is driving huge savings into engineering and the payback to manufacturing will be significant as manufacturability becomes easier with less change from model to model. GM is ahead of Ford in this area because they started many years ago and now that their new product development lead, Mary Barra, is from GM manufacturing staff, the push to drive more downstream efficiency will be prevalent.
But with all this work in product development there is still a major problem at the domestic companies: the product development interface with suppliers and the sourcing process. It’s broken. Sure the OEMs will argue that major improvement has been made in this area, and yes I will give them credit that compared to 10 years ago much positive change has occurred. That said, one can argue that they had a long way to go compared to their Japanese counterparts, and that the gap is still monumental.
What does this mean exactly? In 2009 our study of tooling identified nine primary gaps between the Japanese and domestic OEMs that drove an over-13% cost gap for supplier tools. The underlying theme was that domestic companies place a different value on their suppliers, and that dictates the structure in which they operate with each other. This structure forces a behavior toward suppliers and ultimately the culture of the relationship. It sounds fuzzy how suppliers are valued leads to how competitive they are in terms of cost.
What’s disappointing today, as we study this two years later, is that the focus of the domestic OEMs remains lowest price. This value drives them to pit the best suppliers against each other to compete for the business rather than partner with them to drive out cost early in the process. Suppliers fight for business and many buy business knowing that they will make it up downstream with OEM inefficiency and inability to meet time lines for new programs driving engineering changes. The fact is, poor relationships have not changed to really drive product collaboration and real profit generation for all. Until one of the three domestics steps out of the box and changes their long term approach, the Japanese will still remain ahead in developing longer-term strategies and upstream success which eliminate downstream churn and wasted cost.
The products coming from all OEMs are better than they have ever been in all product segments. American consumers are getting excited again about the U.S.-based companies and they are flooding the show rooms to prove it. One risk is the industry’s ability to flex to meet the needs of this new generation of vehicle buyer. They are looking for different products, and government policies and fuel costs will play a role in their decisions.
The OEMs have invested in much better marketing platforms and are doing the right things to highlight their products, technology and even rebuild the perception of Detroit. The Chrysler Super Bowl commercial was not only a hit for the Chrysler 200, but more importantly, it told the world that the U.S. auto industry is not dead and neither is Detroit.
There are far more positives about this great industry than there have been in a long time. The caution is not to lose the lessons of the past but stay disciplined this time. Work to change the culture of the companies so as not to just talk collaboration but mean it. Let the supply base be healthy and don’t flood the market with vehicles—a little anticipation never hurt the consumer.