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Looking East

In what appears to be an endless journey to capture new growth opportunities and lower production costs, the automotive industry is now heading East. Asia, especially China, and Eastern Europe have become powerful magnets attracting companies and investments. While it may seem like déjà vu to some (remember the rush to South America), Roland Berger Strategy Consultants believes that the scale and impact of today’s changes are completely new.

In what appears to be an endless journey to capture new growth opportunities and lower production costs, the automotive industry is now heading East. Asia, especially China, and Eastern Europe have become powerful magnets attracting companies and investments. While it may seem like déjà vu to some (remember the rush to South America), Roland Berger Strategy Consultants believes that the scale and impact of today’s changes are completely new.
This article is extracted from Roland Berger’s study “The Odyssey of the Auto Industry”. It looks at the changing footprint of suppliers.
The study found that the urgency of relocation to the Southern NAFTA region or to the Eastern hemisphere and the methods for accomplishing it are unique for each supplier. The risks and pitfalls associated with such moves, especially for small- and medium-sized companies, are enormous and must be carefully considered, it warns.
Rather than rushing to invest in the next new location, CEOs and COOs need to carefully evaluate how such a move helps to align their global manufacturing and engineering footprint with their corporate strategy.
To go or stay?
With new markets in Asia and Eastern Europe opening their gates to foreign investors,
the global expansion opportunities for the automotive industry are growing larger and faster than ever before. At the same time – in mature markets – new vehicle affordability has been growing for years, the number of new model launches continues to increase, and vehicle sales are stable at historically high levels.
Yet, the jury is still out on to what extent automotive suppliers will be able to benefit from this situation. Especially in North America, there seem to be significant risks. Imports of automotive parts have increased four-fold, from U.S. $6 billion in 1997 to U.S. $24 billion in 2003, and suppliers feel threatened by overseas competition. The industry’s investments seem to be drawn “East” but the feeling is that suppliers are investing in these regions half-heartedly. They seem to be motivated by the fear of being left behind rather than by the promise of a true opportunity. Suppliers that relentlessly improve their internal efficiency and consistently implement lean practices are able to protect their competitiveness even against low-labour-cost locations. This, combined with an aggressive focus on innovation, seems to be a viable strategy to combat the cost differential of emerging markets and a way to protect the domestic manufacturing and engineering base.
A global industry
Compared to the past, today’s industry migration takes place in an environment where the players and the rules of competition have become truly global. Suppliers are forced by the global perspective of their customers to develop a globally competitive business model. As a consequence, the optimisation of manufacturing and engineering footprints has become a key competitive factor and a top priority for COOs.
The increasing commonisation of parts across brands and regions is also setting the stage for a new era of global products. While it seems obvious that some commodities are more likely to be global than others, the fact that some OEMs are successfully marketing one model for the entire global marketplace indicates that the limitations of the trend toward global parts are yet to be defined.
Confronted with the increasing need to serve customers overseas in distant markets and with growing cost pressure, suppliers have realized that the traditional optimization levers of manufacturing and engineering will only take them part way toward their competitive goals. Global hub-and-spoke networks, which try to strike a balance between leveraging resources and capacity and ensuring the optimal level of “customer proximity,” are becoming the guiding design principle for best-practice footprints.
Investment destinations
Given the rapidly rising market demand and the aggressive growth plans of all major OEMs, China is the currently the primary destination of OEM and supplier investments. Yet, with ongoing deregulation, new players entering the market, declining growth rates in domestic sales and more vehicles to choose from, this market will become very competitive in a short period of time. Latest vehicle pricing trends prove this assessment. Overcoming raw material and energy constraints as well as restructuring the “traditional” supply chains with all their legacy structures and cost will be additional challenges on the way to produce parts and vehicles which meet competitive standards on global scale.
For these and other reasons, suppliers are increasingly investigating opportunities also in other emerging Asian countries. India is already an offshore location for engineering back office functions and is becoming a serious contender for production requiring high levels of engineering as well as for software engineering. Some “first movers” are also starting to explore Thailand and Vietnam as the “next havens of low-cost manufacturing” in Asia. Like China, the “new” European countries will experience tremendous growth. Market growth of around 4% p.a., experienced between 1997 and 2003, is expected to double to approximately 8% through 2010, helping the Eastern European production share grow 12.7% per year (+131%). South America’s automotive market is just beginning to recover from the financial collapse in 1997. Fifty percent of regional OEM production capacity was still unused in 2003. Suppliers have been able to alleviate this overcapacity to some extent by utilizing Brazil as an automotive export base. Some suppliers even indicated that by using the combination of automation technology and skilled workforce in Brazil, they are able to achieve the same economies and production costs they have in China. This efficiency, combined with a market that will continue to recover through 2010, will help South America’s production share to grow 19% by 2010, mostly by filling currently unused capacity. Overall, North America’s share of global factory revenue is forecast to shrink 11% through 2010. But this loss will not be evenly distributed across countries and regions. While the U.S. is expected to lose 18% and Canada 12%, Mexico will continue to thrive with an increase of 43%.
Competitive Footprints
Almost 50% of the survey respondents mentioned moving to low-labour-cost countries as a top priority for the future. However, many also named legacy costs (pensions, health care, etc.) and the inertia of their assets as primary factors preventing them from relocating more manufacturing. However, from our perspective there is no option whether to go “East”. The only option is “How” and “Which tasks”. Given the trends and opportunities listed above, optimizing manufacturing and engineering efficiency to achieve competitive cost structures are matters of survival for automotive suppliers. With labor and material being the two major cost components in the supplier business, automotive suppliers are being forced to identify and tap the sometimes significant cost advantages in low-cost emerging countries by sourcing or assembling parts outside their traditional regions.

The main findings of the Roland Berger study:

· The worldwide parts market will grow at 3.4% per year between 2003 and 2010
· Growth will vary significantly by regions – ranging from 2% per year in mature markets like Western Europe and North America to 8% per year in Eastern Europe and the Far East
· At the end of the decade, although North America and Western Europe will still be the largest markets, the regional balance of the industry will have moved East.
· The overall “weight” of mature markets on global manufacturing will be smaller and the share of manufacturing revenues contributed by the NAFTA region will decrease by 11%.
· Within NAFTA, Roland Berger expects to see a shift toward the South, with the Canadian and U.S. shares of global factory revenues shrinking 18% and 22% respectively. Mexico, on the other hand, is expected to continue to gain relevance, with its share of global manufacturing growing by as much as 43%
· The landscape of the automotive industry in the United States is expected to change as well. The traditional Midwest-centred model is becoming less-concentrated as Southern states attract more investments and jobs.
· Outsourcing has been largely explored but seems to have failed to consistently deliver the expected savings and results.
· Optimization efforts have so far been primarily directed at single factories. In a global environment, initiatives must be launched to capture the benefits that can be unleashed by aligning the entire manufacturing footprint – across business units and regions – with corporate strategy, customer requirements and the benefits of low-labour-cost locations.

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