Issue: Aug 2006


Front-End Modules and Systems Market



Growth of the Front-End Modules and Systems Market to Rely on Significant Cost Benefits of the Modular Assembly Approach

by Vigneshwaran Chandran, Frost & Sullivan

In recent times, front-end modules have been growing in importance due to the enhanced focus on vehicle safety issues and the need to comply with guidelines from the European Union (EU) for pedestrian safety. The cost efficiency achieved through savings in labour costs, product-engineering costs and logistics costs is a crucial benefit of the modular assembly approach. This is leading to the increased adoption of modularisation in vehicle assembly processes in the front-end modules and systems market in Europe.

"Innovative and cost-saving strategies by suppliers will drive modularisation in the European market for front-end modules and systems, "
notes Frost & Sullivan (http://www.transportation.frost.com) Research Analyst Mr. Vigneshwaran Chandran. "In view of the benefits of cost savings and enhanced efficiency in manufacturing and assembly processes, vehicle manufacturers (VMs) expect suppliers to offer more innovative products, functional integration of front-end components and cost-reduction ideas to embrace modularisation."

The value addition from suppliers will lead to flexibility in the final assembly as well as engineering and assembly cost advantages. Further, functional integration of components will reduce the number of components and their weight, thereby enhancing module performance and improving overall module quality and price. However, VMs are convinced that the tremendous potential of modularisation remains unrealised, thus offering further opportunities to market participants to reduce costs and improve overall module quality and efficiency.

"The modular assembly approach will also enable original equipment manufacturers (OEMs) to shift programme management responsibilities to module suppliers", states Anil Valsan, Programme Manager Modules & Systems. This is also a crucial advantage that will enable VMs to decrease their interfaces with different component suppliers. "Moreover, increased penetration of front-end modules sourcing by the Volkswagen group, Daimler Chrysler and BMW will expand the front-end modules and systems market in Europe", adds Mr.
Valsan.

Large initial investment, high overhead costs and price pressures, which are characteristic of supplying modules, will intensify the problems of suppliers and contribute to increasing pressure on return on investments
(ROI) and profit margins. Thus, with the shift of working capital by OEMs to suppliers, they will be under greater pressure to finance all the module development activities and invest in new plant locations for manufacturing and testing.

"The pre-assembly of components into complete modules by some OEMs using in-house operations remains a big challenge for suppliers and the difficulties are becoming more pronounced with increasing resistance from labour unions in outsourcing this work to suppliers," states Mr. Chandran.

In future, VMs will need to consistently evaluate the efficiency of in-house operations and subsequently, outsource non-core module assembly and programme management activities to suppliers. In addition, consolidation of module operations and the involvement of suppliers in the early stages of the design and development processes will enable suppliers to improve their profit margins as well as the overall cost-efficiency of the module.

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