Learnings from the American Auto Industry

There have been many elements, external as well as internal, that led to the troubled state for the American auto industry. Even though I don't want to make a direct comparison between the situation in America and in China. - The Chinese auto industry has a different history and is in a different stage - there are lessons to be learnt for all of us. Based on my experience from the successes and failures of the American auto industry, I would like to share the following key areas for domestic manufacturers to consider closely: Consolidation and restructuring, Cash is King, Supplier viability and the implementation of best practices.

Consolidation and Restructuring

In February of this year, BBK Global CEO, Mr. William Diehl told the Reuters Manufacturing Summit in Chicago: "General Motors Corp will survive the current auto industry downturn, but the number of auto industry suppliers could be cut in half". Diehl also said he would not be surprised if the number of auto suppliers consolidated by half in the coming year. Suppliers created overcapacity when auto sales peaked at above 16 million units a year, and capacity needs to be reduced to better reflect current reality.

The same consolidation and restructuring that is taking place elsewhere in the world will certainly happen here in China. What we have seen in the U.S. and Europe over the past few years was that several companies that were experiencing distress got rid of unprofitable operations, increased equity and reduced debt. Other poor performing companies were purchased and absorbed..

In China, competition has grown to a point where each manufacturer has a very small share of the market. Economies of scale can not be achieved given the industry being so fragmented. Gaining market share means consolidation and acquisition, yet few operations have the cash to invest in purchasing other companies. The future will require companies to adjust to remain competitive and in some cases stay alive.  Those adjustments will include implementing best practices like Supply Risk Management, Lean principles and an understanding where higher value-added services (i.e. customer service, product or material design capability) can differentiate one supplier from another.

Cash is King

As bank lending and other traditional sources of financing disappear or become too expensive, finding alternative sources of working capital (to meet payroll, to make interest payments, to pay suppliers, etc) is or will soon increasingly becoming an issue for many Chinese auto parts suppliers

Cash Flow is more critical now than ever.  'Top-Of-Mind' priorities in 2009 should be ….Looking at ways to reduce inventory … and reducing capital expenditures by looking to get more production with the same equipment.

Statistics reported by BBK show that inventory turns at Chinese suppliers significantly lag the performance of its peers in other countries. . Inventory turns is measured as Annual sales / Inventory (Finished, WIP & raw material). China suppliers have on average inventory turns of 3 versus their peers in Korea, Japan, U.S. & Europe where averages are greater than 10.

We see Inventory Management as perhaps the single greatest opportunity for operational improvement and with the increased pressure on balance sheets, an area where many Chinese Manufacturers are beginning to focus their attention….or should be!

Supplier Viability

Auto parts suppliers are the largest part of the U.S. manufacturing base, and they have been hit hard by the downturn in auto production . Government efforts to support big automakers like GM and Chrysler have not included direct aid for the suppliers.

The Chinese automotive parts industry is also destined to experience significant supplier failures resulting from the current lack of bank credit, depressed export volumes and production capacity being idled or removed. Supplier Viability could be more important than contract performance in 2009 yet recent surveys of foreign-invested manufacturing companies operating in China show that approximately 75% of the companies are pushing to realize price reductions this year through re-negotiating prices for material/parts/components. Insuring supply continuity will require allocating resources for identifying and responding to supply chain risk and being prepared to provide assistance either operationally or financially.

It can take 2 years or more for companies to recover from a supply chain failure, and in today's market - firms simply don't have that time for errors.

Best practice increasingly important

"The auto industry is not going away. The manufacturing industry in the U.S. is not going away. We have great technology", states William Diehl, CEO of BBK, when asked to share his perspective on the downturn and the future of the manufacturers. As the world is progressing, so is technology and efficient processes.

For years it seemed that virtually any plant built in China could be profitable because costs were low.  Far too many companies built factories with low levels of technology and without widespread adoption of best practices (i.e. Lean manufacturing, Six Sigma, Supply Risk Management), assuming that the low costs associated with operation in China would offset omissions.  Now those pressures are beginning to force a rethink of how these companies structure their Chinese operations and how they position China in their overall global strategy.

While China has tremendous advantages with its quality of labor, pro-business government and its large and growing domestic market, it is clear that there are lessons to be learned, for Chinese suppliers to be more competitive. A first step is to closely consider the above areas. After having worked in the auto industry for over 30 years, I know that only those who pay attention to the surroundings and adapt to the changing conditions of the market will survive.

I have no doubt that the companies who survive the downturn will come out stronger in the end - something that will not only benefit themselves but also its clients, its employees and the industry as a whole.

About the author: Duane Bolinger, Gasgoo's columnist, is Managing Director of BBK Consulting Co., Ltd. of Asia Pacific. Prior to BBK, Bolinger's senior roles with automotive companies have included Managing Director of ASIA Pacific, Corporate Finance Director, Business Line Executive, and Director of Strategic Planning for General Motors Worldwide Purchasing and Production Control.