Key Challenges in North America Facing Japanese Automotive Suppliers

Key Challenges in North America Facing Japanese Automotive Suppliers

Deloitte Consulting

This is the second and concluding part of the article published in April 2008.

Economics

Despite the current state of the global automotive market and the environmental, consumer, product, industry and competitive pressures impacting all automotive suppliers, Japanese suppliers are uniquely positioned to take advantage of market opportunities and continue to outperform US and European suppliers. Japanese suppliers have higher operating margins than US and European firms. Average revenue growth for Japanese suppliers in 2006 was 9 per cent, while European suppliers had a 1 per cent decline between 2005 and 2006, and US suppliers averaged about 3 per cent revenue growth during the same period of time (Figure-14).

Suppliers continue to be under margin pressure due to rising commodity prices and the steady decline of automotive parts in the US between 1998 and 2005 (Figure-15).

The impact on suppliers has been significant. Visteon has agreed to provide specific average price reductions to its largest customer, Ford, for most North America sales through 2008. Price reductions from TRW Automotive Holdings have impacted sales and profit margins and are expected to do so in the future. For the past three years, Delphi has been challenged by commodity cost increases, most notably steel, resins, aluminum and copper. Finally, raw material costs for Michelin rose by more than 60 per cent in the course of the last four years at constant currency, with a hike of 15 per cent in 2005 alone.

The ongoing pressure from OEMs for price reductions for automotive components coupled with increasing prices for raw materials will continue to limit profitability for automotive suppliers.

Driving Success

So how do Japanese suppliers put the puzzle together and develop strategies to manage the investments required to keep pace with growing OEMs while continuously reducing costs? Opportunities will primarily come for increased requirements for advanced technology inside tomorrow's vehicle. In-car navigation systems, infotainment, and hybrid/fuel cell technologies all present significant growth opportunities for suppliers. Stringent new regulations relative to fuel efficiency and environmental impact will also present opportunities for suppliers. As the OEMs look to develop products that meet changing consumer desires and comply with regulatory changes, they will look to their suppliers to help develop strategies that create new value in the manufacturing process. In addition to developing products that meet demand, OEMs will look to their suppliers to also aid in driving efficiencies in the manufacturing process, not only efficiencies in the parts and modules automotive suppliers manufacture, but also operational efficiencies that include logistics, delivery, etc. to help drive down the overall cost of the manufacturing process.

To excel, suppliers should focus on challenges and opportunities along four major areas.

1. Revenue Enhancement: Suppliers should strive to differentiate products through innovation by focusing on value addition through innovations around comfort, safety and environment and pursuing niche markets (e.g., specialty parts). Suppliers should also sell integrated systems/modules to increase their share of value from OEMs, allowing suppliers to realize maximum prices from OEM and aftermarket operations. Finally, suppliers should establish or expand their current infrastructure to facilitate more efficient and agile engineering collaboration with OEMs (Figure-16).

2. Margin Realization: Suppliers should work to improve margin by reducing direct and indirect costs. Potential solutions include establishing low cost sources for inputs and developing value-engineering reviews to reconsider make/buy decisions. Operationally, suppliers must develop excellence in the manufacturing process and institute enterprise-wide lean thinking. In the complex manufacturing operations of a multi-product environment, effective and efficient management is achieved through pricing, costing, and operational improvements (Figure-17).

3. Risk Mitigation: Mitigating currency and supply chain risks by developing enterprise risk management processes to identify, plan and manage currency and commodity risks is a critical issue for suppliers. Suppliers should also proactively address potential risk of supply disruptions from key lower tier suppliers, as well as manage investments across markets, customers, and projects.

In order to remain competitive and grow in the market, suppliers need to incorporate strategic flexibility to manage high-risk investments. Suppliers should look at current trends, for example China's growth to become the second largest market for cars by 2011 or electronics accounting for 40 per cent of vehicle content in 2010, and make investments that position them favorably for future growth. For example, establishing manufacturing operations in China or acquiring electronics capabilities (Figure-18).

4. Management Excellence: Like many companies, talent is one of the most important issues to Japanese automotive suppliers. Managing talent requires a consistent and holistic approach across all the dimensions, from defining to discovering, developing and deploying. It is important to have a coherent human resource management cycle that coincides with an individual's career cycle. In order to succeed, suppliers must employ and retain talent. Suppliers should invest in advanced technological skills, and staff growth and development programs. Cross-functional teaming should be promoted within the organization to address cross-organizational business issues. Also, manage financial and operational performance by establishing financial management processes to measure performance (Figure-19).

Regardless of the strategies and investments Japanese suppliers make, we are witnessing a transformation in the automotive industry and suppliers are positioned to either succeed through innovation and creating value in the supply chain, or fail by not understanding the growing complexity of the automotive industry and navigating the environment effectively. One thing is for sure; there is no middle ground to simply stand aside and watch. Those suppliers that do will not perform successfully in the next five years.