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Automotive Industry

The new realities of demand & supply

Automotive Design & Production, Oct, 2004 by Kim Korth

It has been an interesting year in the automotive industry. The American consumer continues to maintain a very healthy vehicle buying level given the current economy, although they are demanding newer and more unique models to continue this pattern. OEMs have responded by continuing to look for ways to reduce their time to market while simultaneously attempting to reduce their costs. Unfortunately for suppliers, much of this pressure for change by the OEMs continues to focus on the supply chain. Relentless pressure on suppliers for cost reductions is the norm, and they are also asked to take on more design and capital requirements. The impact of these trends was the focus of a panel discussion I recently participated in at the annual Automotive Management Briefing Seminar in Traverse City, Michigan. The conclusion of our discussion is that the drive by consumers for shorter product lifecycles will have a profound impact on how the industry will operate in the coming years.

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Although this trend has been accelerating since the early 1990s, the projections for new model launches over the next five years are at historic levels in order to satisfy consumer demand. John Casesa from Merrill Lynch presented several data points during the Traverse City panel discussion that demonstrated the impact of these changes, such as one on the rate of launches (Fig. 1). While there are some analysts who believe that this level of new model launch is unsustainable, accelerated model launch will clearly be the focus of the industry for at least the next five years.

As Mr. Casesa went on to demonstrate, the impact of this level of new model launch is that the average age of a vehicle in a dealer's showroom has declined dramatically over the last 15 years (Fig. 2). While one year may not seem like much, this is a huge change over a relatively short period of time.

Finally, Mr. Casesa's analysis suggests that vehicle age has a significant impact on the level of sales for an OEM. If his analysis is correct, then Ford and General Motors should be worried about their outlook for the next five years (Fig. 3). The good news is that it appears DaimlerChrysler is working actively to regain the new model reputation that made it such a hit with consumers in the 1990s. The question is whether DCX can do this profitably.

The acceleration in new model launch and the overcapacity of vehicle manufacturers has significant impact on how OEMs and their suppliers operate. Unfortunately, most OEMs do not appear to understand the implications of this new reality.

The Reality of the Marketplace

Consumer demand for new models is resulting in continuously shorter model lifecycles with lower annual vehicle volumes. Where it was not unusual, for example, for a new model in the early to mid 1990s to last four to five years and experience 200,000-unit-plus annual volumes, in the future, two to three year life expectancies with 100,000-unit annual volumes or less will increasingly be the norm, particularly for the higher priced portion of the market.

The growth of the New Domestic OEM vehicle offerings and market share in North America coupled with the failure of the traditional Big 3 to deal with their overcapacity problems has made it virtually impossible for car makers to raise vehicle end prices. With the announced intent of the Chinese OEMs to begin to market their vehicles in the West by the end of this decade, this cap on end vehicle pricing will probably continue for the foreseeable future.

The New Reality in the OEM/Supplier Power Equation

While 2004 will go down as one of the most difficult and intensely negative environments for automotive suppliers in the last 20 years, it may also end up being the final chapter of the dictatorial cost down business model (e.g., the Lopez factor) that has been driving this industry. Evidence of this is that, based on numerous industry discussions, it seems that for the first time, most OEMs are not meeting their annual cost reduction targets. A number of issues suggest why:

* Material price increases have moved out of the steel arena and are now impacting plastics and all other key materials. Given the continued strength of the Chinese economy and record oil prices, this upward pattern is unlikely to change. While the OEMs are claiming these price increases must be absorbed by the supply base, given the marginal profitability of so many suppliers, there is little question that a significant portion of this increase will eventually end up at the OEMs.

* While there is overcapacity in several supplier segments (e.g., stamping, shoot and ship plastics), the consolidation of the supply base has resulted in fewer, more powerful suppliers in many key commodity areas. The successful supplier's power comes not from scale (e.g., revenue level) but the degree of uniqueness of its products and processes. As a result, a larger number of suppliers are able to better manage the cost-down requests of customers.

* Linked to the previous point, most successful suppliers have significantly increased their customer diversification and reduced their dependence on the Big 3. This also creates more supplier leverage in the cost-down negotiations with customers.

Automotive Industry

The new realities of demand & supply

Automotive Design & Production, Oct, 2004 by Kim Korth

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