Strategies to face the rise and fall of the automotive market

Gasgoo: The rise and fall of the automotive market bring great challenges to the supply chain. What strategies have different auto enterprises adopted to facing those challenges?

William Wang: There is a long formation process for the supply chain management model of the automobile enterprises. Once the model is formed, it is difficult to make some changes. When the financial crisis comes, the advantages and disadvantages of various management models may become more prominent. But genetic mutation won’t happen to the management model. According to my observation, from the geographical and cultural point of view, there are mainly three kinds of supply chain management models in the global automotive industry.

The first model is the Community Enterprise Group with common interests, represented by Japanese automotive enterprises, such as Toyota. In such organizations, automobile companies, parts suppliers, as well as financial consortia, are the shareholders, but the OEM is the leader. The Japanese automotive enterprises enter the Chinese market with their whole supply chain. In supply chain management, although the Japanese-funded auto enterprises have a lot of advantages, they are relatively closed. Even Toyota and Honda will not share their parts suppliers sources. The cooperation enables OEM and its suppliers to achieve benefit-sharing, risk sharing, and a long-term development, even in the market with rise and fall. We can see from the spares parts pricing mechanism and JIT system in Toyota. Since both the OEM and suppliers have a common cultural background and values, it is much easier for them to communicate.

The second model is contract cooperation, represented by American-funded automotive enterprises. In such a model, there is an intense competition between different suppliers from different countries. The American-funded automotive enterprises can benefit a lot from the competition in achieving the lowest purchasing cost.

But there are disadvantages in such a model, such as short contract period, unstable quality, high cost in finding new suppliers, unstable cooperation.

Chinese-brand car enterprises are more like the U.S. supply chain model both in the supplier management capacity and their short-term profit targets.

The third model is between the first model and the second model. In this model, the OEMS and suppliers have broken through the country-specific restrictions, and they also focus on long-term cooperation relationship based on contracts.

From the above three models, we can see that the historical and cultural backgrounds are deeply rooted in the commercial logic, which makes supply-chain management different. The Japanese culture is more inclined to ethnic-based cooperation between enterprises. Their business logic is based on a deep understanding of the inherent law of things. While the business logic of the United States and China is biased in favor of more emphasis on results instead of process. Europe's Doctrine of the Mean culture can also be advertised in their car designs.

Of course, the above three models are not static. For example, the American automotive enterprises are learning from the Japanese automotive enterprises’ excellent process management and Europe automotive enterprises’ long-term cooperation with suppliers.

Delphi is also using Lean and Six Sigma to improve management to reduce costs, improve quality, and gradually convey this to their suppliers to make some progress together.
While Japanese suppliers are also making a breakthrough, with the determination to become a global supplier, European automotive enterprises are building both cost control system and quality control system. Volkswagen Group is a typical example.

Strategies adopted by different automotive enterprises to face the rise and fall of the auto market can also be classified into three categories. I will first talk about the similarities of the strategies, and then the differences.
In the financial crisis, both European and American governments have introduced policies to stimulate car consumption, and the Chinese government is no exception. When facing the unexpected rise of needs in the auto market, OEMs hold a common purpose to meet the growing needs as far as possible. This ideas can also quickly passed to the first-, second- and third-tier suppliers. Those parts suppliers are faced with common problems. Suppliers have dismissed employees during the economic downturn period. Due to the staff reduction, there are problems in inventory, production equipment, and abrasive tool management. Once they are in the overtime production status, the problems of man power, equipment and materials are prominent. The personnel recruitment, inventory shortages, and bad parts quality will absolutely have great impact on the overall quality of the car. These things are the similarities.

The first strategy is to keep the supply chain stable, with the example of the Japanese automotive enterprises. As the overall coordination of the supply chain is stronger and the process management is more mature, the WIP (work in process) inventory is low, quality of production is relatively stable. However, this does not mean that this strategy can make the enterprise safe in such a special period of financial crisis. For example, by the end of August 2009, Toyota had recalled as many as 688,300 defective Camry, Yaris, Vios and Corolla cars in China. Toyota has really suffered a lot in suppliers qualities this time.

The second strategy is to accommodate circumstances. When the needs fall in the auto market, the OEM cut off some suppliers, while the suppliers are called over when there is a rise. Such accommodation may lead to an unstable relationship between the OEM and its suppliers. Thus the quality of cars will be greatly affected. Many of China's domestic automobile enterprises are facing this challenge.

The third way is between the first and second strategy. They not only have their long-term development plan of production capacity and output, but also have better management. They have a clear view about the pre-work of spare parts supply. Although they are facing greater risks when the market situation is bad, compared with their competitors, they can seize the growth opportunities more quickly and smoothly when the market situation improves.

Of course, the purchasing managers are facing great challenges in 2009 due to the rise and fall of the market, and even some of them travel around the country for work. But this kind of busy life is far better than being fired for depression of the automotive market.

Dr William Hua WANG, Associate Profrssor, China Area Manager of Euromed Management. His research areas include industrial economy, innovation management, and internationalization and foreign direct investment of Chinese enterprises.