Global Platforms Will Dominate Vehicle Production in North America and Spur Supplier Dealmaking
Grant Thornton LLP says suppliers must position themselves in 2010 for change
-- By 2014, two-thirds of General Motors and Ford vehicles in North
America will be built from global platforms, up from 10 percent today.
-- Chrysler is following suit, but is off to a late start.
-- Total North American production will be concentrated among four
automakers, who collectively will account for 65 percent of vehicle
-- Vehicle production will continue its southward migration.
The aggressive plans General Motors, Ford and, to a lesser extent, Chrysler are implementing to switch their North American production from largely regional to overwhelmingly global platforms is going to create growth opportunities for suppliers, potentially including new mergers, acquisitions and alliances as the companies position themselves to win future business, corporate advisory firm Grant Thornton LLP said today at a meeting of the Automotive Press Association.
"The conversion to global platforms is accelerating, but to capitalize on the growth opportunity, suppliers will need to offer automakers more than high quality, a healthy balance sheet and a good track record on program delivery," said James Ricci, a director in Grant Thornton's Corporate Advisory group. "Suppliers will need to have the best technologies, the right geographic footprint, and global engineering and manufacturing capabilities. We believe they will use strategic mergers, acquisitions, alliances and even divestitures to position themselves to win the longer-term sourcing business that Detroit has to offer."
Grant Thornton's analysis suggests that the next five years will see some of the most profound changes in the North American auto industry since the post-World War II shakeout that established GM, Ford and Chrysler as dominant players.
-- GM, Ford and Chrysler plan to shrink their total number of vehicle
platforms from 40 in 2009 to 29 by 2014. Of these, 14 platforms will
be global, which means that they will be produced in North America and
at least one other region, such as Europe, Asia or South America, with
no single region dominating production.
-- Fully 65 percent of GM and Ford's North American production will be
from global platforms, up from 10 percent and 6 percent, respectively.
-- GM and Ford's business framework will be in line with Asia's largest
automakers who today derive 78 percent or more of their North American
volume from global vehicle platforms. Most of the gap is explained by
Detroit's dominance of the full-size pickup truck segment, which is a
purely regional product offering.
-- Over the same period, total North American production is expected to
grow by 2.7 million units, but production in Canada will be flat,
Mexico will add 800,000 units, and the United States will add a net
1.9 million units.
"Stricter fuel-economy rules in the United States, lack of investment capital, competitive pressure from new entrants and a focus on reducing structural cost have spurred the Detroit-based automakers to embrace global platforms," Ricci said. "The long-term benefits of this strategy will be significant. The global approach reduces engineering costs, provides flexibility, scrubs complexity from the manufacturing system and supply chain, and improves quality - all of which contribute to higher margins."
In Grant Thornton's view, these market dynamics make it a critical time for companies and investors in the auto industry to strategically assess their products and technologies and the plans to deliver them.
Roadmap to Profitability
"The obvious value of being sourced on a global platform produced by a Detroit-based OEM is with the sheer volume increase from the number of model variants built on them. It is enhanced by the fact that it normally takes a long time to penetrate the global platforms of Asian OEMs," Ricci said.
The best-positioned suppliers will be those that are considered long-term partners by their OEM customers for particular commodities.
"Some of the most interesting supplier companies to watch will be the 'pure plays' that have narrowed their focus to a particular commodity or group of commodities, such as safety, steering and fuel systems," Ricci said. "These companies tend to benefit from having highly focused product development and good economies of scale, which helps to establish clear value in the marketplace."
Investing for the Future
To further strengthen their customer relationships, companies will need to ensure that their footprints line up with those of their customers. That means following the same "low-cost regional" approach in North America that many OEMs are embracing, whether through organic growth, acquisitions, or joint ventures and strategic alliances. The largest suppliers may be the best suited to capitalize on this industry shift.
Suppliers built up through past roll-ups or acquisitions may be prime acquisition targets or alliance partners. Many of them have good facilities and technologies, but tend to have fragmented product portfolios or are not able to deliver the same products in various regions around the world.
Suppliers that haven't been sourced to global platforms or whose portfolios are heavily weighted toward regional platforms have fewer options.
"Now could be the best time to divest of noncore or regional product portfolios," Ricci concluded. "The relative value of these assets will only degrade further as global platforms will dominate sourcing decisions and fewer suppliers will be awarded the business."
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