Supplier of the Future

What happened to the rules of economics?

Market growth, OEM consolidation, cost pressure, more of the value chain controlled by suppliers … almost everything that has happened in the worldwide automotive industry in recent years was predicted.

The automotive industry has just emerged, at least in the mature markets, from an unprecedented period of volume expansion, and the share of the average vehicle value provided by suppliers has reached 70%, according to some analysts.This would seem to be an ideal situation for suppliers, one in which the supplier industry should thrive.

Yet, this has not happened. What we witness instead, is an industry that struggles to get the right attention from the capital markets, with very few successful and solidly profitable players that stand out in a landscape dominated by companies with either razor-thin margins or losses even in booming volume-years.

Though many struggling suppliers have returned to profitability this year, uncertainty still reigns, as the expansion cycle – at least in the mature markets upon which the industry still depends – is in doubt. As one top executive we interviewed candidly admitted, “We just cannot predict where our industry will go –we think it will go in a certain direction, but we realize it could be the opposite.We place our bet, but it could go either way.”

This study should help suppliers place the right bets, and it looks as if our efforts could not be more timely.

The results follow.

A – Executive Summary – Value can be created, but only with significant effort

Financial analysts have been unable to send very positive messages about the automotive industry to Wall Street and the other major stock markets for some time now. Leaving exceptions of excellent performance aside, the industry as a whole has not been among the favorites of private and institutional investors in recent years. Too much bad news about disappointing results, unmatched forecasts, unsuccessful mergers, huge overcapacities, tremendous price competition in the markets, high investment requirements to get the product on the road,highly unsuccessful vehicle designs, and even the headlines about a “broken”business model have pounded this industry for some time.

With this study, we want to describe a scenario of how we believe the industry will, or simply needs, to develop over the next decade, as it continues to face tremendous challenges and paradigm shifts. Our intent is to provide a window into the key strategic decisions that suppliers in North America, Europe and Japan must make, and to define a list of actions to guide them forward.

As in previous Roland Berger studies about the automotive industry, and after conducting more than 140 interviews with industry executives from across the world, sharing our perspective with many of the industry’s leading experts, we embarked on a quantitative assessment of the industry to build a solid business case for our scenario.

Our main conclusions are:

• The industry business model can be improved. It is not our intention to paint a rosy picture and play down the enormous challenges that lie ahead for OEMs and suppliers alike. Costly and disciplined actions will be necessary to successfully master these challenges, and not everybody in the industry will survive.There are still many suppliers in the market that can provide the necessary technology and manufacturing capabilities. Unfortunately for some, with emerging markets like China increasingly coming into the picture, more will come. Nobody in this industry has a lifetime assignment – not even the most technologically advanced suppliers. Nobody is indispensable. But, and this is the good news we submit, suppliers have the opportunity to adapt their business models to the new and future requirements. The key questions are just“who will?” and “how fast will they do it?”

• Potential for improving profits does exist within different supplier clusters along the value chain. Without predicting a new industry boom, suppliers in different regions can expect to return to the better profitability levels they have experienced in the past by adapting their business model and carrying out the required actions and measures quickly, consistently and comprehensively.

• To return to higher profitability levels, suppliers will need to be more focused and efficient than ever before. Regardless of the region and their position in the value chain, success for suppliers will depend upon eliminating non-value-added resources and focusing on what they do best, i.e., being a system integrator, a technology-driven supplier, or an expert in highly efficient manufacturing and supply processes.

To define the road that suppliers in North America, Europe and Japan must travel over the coming decade, we started our research by identifying the key industry drivers, focusing on those that are likely to have a lasting impact:

1. OEMs must and will become more flat, agile and responsive to changes in the marketplace

In an increasingly volatile and fragmented market, the speed of organizational change is a competitive advantage. In the coming years, we will witness OEMs embracing organizational models that will allow them to further extract costs from the value chain and to become more responsive and agile.

2. OEMs accelerate the streamlining of their global structures and further leverage their global affiliates

After the wave of consolidation of the second half of the 1990s, and after harvesting the low-hanging fruits of purchase-bundling and overhead reduction, OEMs will accelerate the leverage of their global structures far beyond sourcing.Integration will extend to design and development processes, manufacturing networks, logistics, and IT systems.

3. The OEMs battle over market share and expansion intensifies, with no end game in sight

With stagnating growth rates expected for the triad markets, OEMs will intensify their market share battles in non-traditional regions and increase the number of launches in mature regions.

4. OEMs continue to focus on external and internal cost-cutting initiatives

Cost-cutting initiatives will not subside but are likely to move to another level.From pure price-down requests, OEMs will focus on achieving cost savings through part sharing and commonization within their own network as well as in collaboration with other OEMs. At the same time, OEMs will need to increase the flexibility of their manufacturing plants to rapidly adapt and switch production volumes to meet actual market demand.

5. OEMs continue to shift responsibility and risk to the supply chain

The overall balance of responsibilities will continue to tilt toward suppliers.What OEMs will shift to suppliers will not be as much additional product content (e.g., manufacturing outsourcing), but rather product lifecycle responsibilities and the associated risks.

6. The complexity, speed and scope of innovation complicates OEMs’ technology assessment

Ever-shortening innovation cycles and the ever-increasing spectrum of available choices make technology decisions extremely complex and investments difficult to justify. OEMs need to increase the leverage of internal and external resources through networks of cooperation with technology specialists.

7. Strategic brand management becomes a top priority as OEMs attempt to protect market share and margins

OEMs who have built broad brand portfolios will struggle to effectively balance the trade-offs between cross-brand synergies and product differentiation requirements.

8. Regulations alter market dynamics and push technology and risk management to the limits

Regulators increasingly influence market dynamics and development. Regulations generate both opportunities and costs, and unless proactively addressed, will increase risk for many players in the market.

Maneuvering through this dynamic landscape will be a treacherous endeavor for OEMs and even more of an adventure for the supplier community. This is nothing really new for this ‘old’ industry: the automotive world has always been about change and new challenges, often driven by new product and process technologies, and these days more and more by fierce competition and pricing pressure. Although one always feels that the current changes are more severe and far more ‘life-threatening’ than ever before, something seems to be true about this impression today. The supplier industry must embrace change and “fix” its business model quickly. Or – as mentioned above – there will always be plenty of alternatives from which OEMs can choose.

We believe that with the proper vision and strategy in place, and the necessary resources for implementation, supplier executives can successfully accomplish the task of steering their companies back to product and process excellence. And,of course, back to profit levels that are far more appreciated by Wall Street and private investors than the levels witnessed today.

We therefore continued our research and defined a roadmap for superior supplier performance in North America, Europe and Japan over the coming decade. There are 12 distinct and relevant areas for each of the three categories of suppliers –system integrators, technology satellites and process satellites – which describe this roadmap:

1. Suppliers need to develop their own long-term visions

Without a clear vision, a supplier’s capabilities and resources will be diluted and inefficiently utilized. Successful suppliers will balance a long-term perspective with the ability to react to crises whenever they arise.

2. The breakdown of the classic supply base pyramid into a satellite community

The traditional industry structure will shift to a model polarized around system integrators and technology- and process-focused “satellite” suppliers. For each kind of player, focusing on core capabilities and shedding marginal ones will be key to future success.

3. Suppliers need to decentralize decision-making and responsibilities

Suppliers will move from hierarchical organizations to more decentralized entrepreneurship models, similar to their OEM customers, but likely in less time. Cost and profit responsibilities and business decision-making will be pushed further down the organizational hierarchy of supplier companies. Transparency of cost and profits – especially profits by program and customer – will become a key element to manage these future structures successfully.

4. Suppliers need to establish global structures

As OEMs start to leverage their affiliate networks beyond procurement, it will become vital for suppliers to establish global interfaces to their customers. To manage an account globally, major changes will be required for supplier organizations and processes.

5. Suppliers need to develop more diverse customer portfolios

Building a more diverse customer base will become a necessity, either by penetrating existing OEM customer affiliate networks more deeply or by targeting new ones. Considerable sales and marketing and product development resources will be dedicated to achieve this goal. Payback can only be expected in the mid-term.

6. Suppliers need to define new business models to handle both high- and low-volume programs

Significant investments will be required to enable supplier plants to deal with diverse programs. Together with these investments, the complexity of dealing with multiple programs will force suppliers to rethink their internal skill set.

7. Suppliers need to increase manufacturing flexibility and value chain connectivity to face continuous requests for cost reduction

Pressures on supplier costs are not at all likely to ease and can only be countered by a continuous effort to take waste out of industry processes and create a moreflexible and collaborative value chain. Successful suppliers will continually innovate and adopt effective methods to optimize their business processes.

8. Suppliers need to take on more product creation and lifecycle responsibilities

In the next wave of outsourcing, OEMs will shift more product lifetime responsibilities, from design and development to warranty and liability costs to their supply base. To handle these increased responsibilities effectively, most suppliers will have to fill significant gaps in their organization and internal processes.

9. Suppliers need to develop business models and capabilities along more focused technology portfolios

Defining the area of technology in which to focus and the portfolio that surrounds it are the fundamentals of a successful technology strategy. Well-defined technology roadmaps are core blocks of this process. Rebalancing internal skill sets and leveraging co-opetition networks will be necessary steps for suppliers to compete.

10. Suppliers need to develop technology solutions within partnership communities rather than in-house

The high investments and risks associated with technology selection and development will drive the industry to a model based on networks of innovative, but financially independent suppliers. Project-based collaboration partnerships will be just an interim solution. Mid- to long-term relationships will dominate cooperative efforts.

11. Suppliers need to learn to support their customers’ brand efforts through adequate component and system technology

Suppliers need to deepen their understanding of how their products influence the brand attributes and consumer preferences of their customers and incorporate this perspective into their technology strategy and product development approach.

12. Regulations create additional opportunities and threats for suppliers

Few suppliers currently go beyond a “waiting” mode to anticipate potential opportunities and threats from regulatory rulings. This must change for suppliers of systems that are likely to be heavily affected by regulations.

All of these facts will have a significant impact on the revenue stream, the cost structure, and the bottom-line of all types of suppliers in the three regions covered by the study. The same is true for the automotive supply base in South America and China (refer to Chapter D for more insights on these emerging markets).

As in previous Roland Berger studies, we therefore ran a number of financial scenarios to assess how suppliers will be impacted on their bottom-line by these industry trends and changes. Based on the results of our multidimensional revenue, cost and profit simulation model, we expect:

• Across North America, Europe and Japan, system integrators and “satellite”suppliers to see pre-tax profits increase over the next decade, but at a different pace and at different rates across categories and regions.

• System integrators in North America to grow pre-tax profits to 6.9 percent by the end of the decade, compared with 5.2 percent in Europe. In Japan, they will improve slightly above their current profit levels of around three percent after a slowdown in the next several years.

• Technology satellites across all regions to be the main winners in terms of an improved bottom-line, with pre-tax profits in 2012 ranging from 5.9 percent in Japan, to 7.4 percent in Europe, to 9.6 percent in North America.

• Process satellites to also experience pre-tax profitability growth in every region.

• Profitability growth to be largely driven by the rationalization of, and shifts within, the supplier cost structure rather than by revenue growth potentially triggered by a broader customer portfolio or a better utilization of available technology.

Finally, we have translated the opportunities that we have identified into a hands-on “to do” list for any industry CEO to verify his or her company’s readiness to define and face the challenges ahead and act to overcome them. Following this roadmap to success will be crucial to remain in business, although each supplier has to define its own one based on its status quo, product portfolio, technology reach, global presence and customer base.

As mentioned above, we do not foresee an ‘easier’ future for any of the supplier categories, in any of the regions. CEOs have to achieve these goals with the right measures at the right time. It may sound easy now, but unfortunately it’s not!

The good news is that the payback will be well worth the effort, and …

… we are here to help!

For more information ,please click on the link below:

http://cn.gasgoo.com/Upload/Define/201331314433Upfile.pdf