Issue: Aug 2006


Roland Berger Offers Survival Strategies for Auto Suppliers



by Michael Stewart

Automotive suppliers will need to focus on key business strategies to grow, thrive and survive during the next decade, according to Roland Berger Strategy Consultants.

Critical supplier survival strategies include:
* Diversifying the customer base for revenue growth,
* Increasing revenues through higher value-added products,
* Implementing a low-cost manufacturing footprint and
* Developing effective material cost management.

"Suppliers must adapt to a rapidly changing environment and need to look beyond the North American market," says Erkut Uludag, partner at Roland Berger. "It's no secret that the North American market is stagnant, whereas the global automotive market is growing. Suppliers will need to rethink their business strategies to be successful."

Passenger car and truck production in North America is only expected to grow by 0.8 percent per year, rising from about 15.8 million units per year in 2004 to 16.9 million units by 2012, the Roland Berger executive notes.

During that same time period, the estimated growth rate will be 1.6 percent in Japan and Korea, rising from 13 million to 14.8 million units; 1.9 percent in Europe, increasing from 20 million to 23.3 million units; 4.7 percent in South America, from 2.5 million to 3.6 million units; and 8.6 percent in China, from 4.7 million to 9.1 million units, according to a recent Roland Berger study.

As traditional North American original equipment manufacturers (OEMs) lose market share, supplier bankruptcies and crippling legacy labor costs will have an important impact on the future performance of the auto supplier industry. In the midst of these shifts, OEMs also are requiring their suppliers to assume more engineering and design responsibilities.

"To cope, smart suppliers are implementing survival strategies," Uludag says. "Some have done well in penetrating transplant OEMs through acquisitions, joint ventures, low-cost manufacturing locations, growth through commonality and organic self-development."

Key supplier success factors include a global presence -- especially in Japan -- and leading-edge technology. Trust and communication between suppliers and OEMs also are critical along with continuous improvement in costs and quality, flexible and lean manufacturing capabilities, early involvement in product development and a strong reputation.

"Overall, value-added content for suppliers will increase globally, presenting growth opportunities," Uludag notes. "Key success factors for suppliers to increase their value-added potential include innovation, supply of systems instead of components and early involvement in product development."

In 2002, auto suppliers provided 65 percent (about $500 billion) of value- added content for more than 57 million new vehicles produced globally. OEMs, by contrast, provided only 35 percent, or $274 billion, of the value-added content.

By 2015, Roland Berger estimates that the supplier share of value-added content will increase to 77 percent ($840 billion) for the 76 million new vehicles that will be produced. The OEM share is expected to dip to 23 percent or $244 billion.

A solid manufacturing footprint strategy also is critical to maintaining a competitive cost structure, especially in the face of rising wages in the United States. Last year, U.S. wages rose 2.3 percent.

At one end of the global wage scale is Germany, with a total effective labor cost of $43.90 per hour, which includes $33 for hourly wages, $8 for benefits and $2.90 for liability costs. The U.S. is second with a total labor cost of $33.60 per hour, including $22.50 for wages, $4.60 for benefits and $6.50 for liabilities. France follows closely with $31.70 in total labor costs.

The countries in the next tier of total labor costs per hour are Japan at $23.90, Canada at $23.80 and the United Kingdom at $23.50.

Lower cost countries with negligible benefits and labor charges include South Korea at $11.20 of total labor costs per hour, followed by Taiwan at $5.90, Mexico at $3.20 and China at $1.30.

"Auto suppliers should focus on managing their material costs by identifying volatile and critical raw materials -- such as steel, aluminum, plastics, resins and magnesium," Uludag explains. "Suppliers need to provide cost transparency to customers and provide raw material costs to them. This might include indexing raw material costs to prices for periodic price/cost adjustments."

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