Chasing the “New Domestic” Business

Compared with the staid, tradition-bound Big 3 – General Motors, Ford and Chrysler – the “new domestic” OEMs blew into the North American automotive market like the warm breezes of spring. Honda, Toyota, Nissan, Mercedes-Benz, BMW — all these foreign-based OEMs that now manufacture in the U.S. and Canada are variously termed “new domestic” manufacturers or “new North American manufacturers”, but those titles are somewhat of a misnomer considering that Honda has more than 20 years of manufacturing in Ohio under its belt, and even Mercedes has been in Alabama for seven years. What sets this group of automakers apart is not that they are new to our shores, but that they represent a different way of thinking in contrast to the traditional North American automakers.

One reason the new domestics are attractive as a client base is their vigor; they are growing and changing quickly. Automotive industry watcher Dennis DesRosiers points out that Korean vehicle manufacturers will lead the pack in terms of model replacement in the next four years (see chart at left). DesRosiers is president of DesRosiers Automotive Consultants Inc. (Richmond Hill, ON).

DesRosier’s estimates of North American model launches for the next four years are also encouraging. According to his data, the number of new models launched per year has traditionally hovered in the mid- to high-thirties. In 2003 and 2004 it hit 41 and 40, respectively. From there it takes off: 51 in 2005, 65 in 2006, 55 in 2007 and back to 43 in 2008.

The new domestics are also capturing a larger share of the automotive market. By 2009, DesRosiers expects the new domestic OEMs to account for 36% of North American vehicle production, or 6 million units. That’s up from 17% in 1990. For the first time, in 2003, consumers bought more import brand passenger cars than Big 3 brands. The Big 3 still dominate sales to fleets and light truck sales.

In the face of the Big 3 losing market share and other problems that plague these OEMs, DesRosier issued a wake-up call to Big 3 suppliers in a presentation early in 2004. He said in his North American Automotive Industry Review: “Any entity that touches the Big 3 has a negative adjustment to make.”

THE SPEED BUMPS:

ENTRENCHED SUPPLIERS

Diversifying to the “new domestic” client base may be a challenge. The Asian OEMs which are well established in North America, such as Honda and Toyota, embrace long-term relationships, and they have been here long enough to have a stable supply base.

“It’s not the easiest thing in the world to become a Toyota supplier,” says Dan Sieger, spokesman for Toyota Motor Manufacturing North America (Erlanger, KY). “We believe in long-term relationships. If you come to us with a slightly cheaper part, we won’t switch just for that. We wouldn’t give up an existing relationship.” Sieger says Toyota is always looking for innovative ideas, however, and new ways to add value to a process, or a totally new process.

Asian OEMs newer to the North American manufacturing scene, such as Hyundai, will have a heavier reliance on their traditional Asian supply base, and may have transplanted some key suppliers to North America with them.

The European nameplates are in a similar position, new to North America, but with the support of global or transplanted suppliers. It is estimated that 26 suppliers set up their North American operations in South Carolina in order to partner with BMW when it established a full production facility there in 1993.

What’s more, these transplanted suppliers are now in a position to compete for other local business as well. Johnny Schooler, assistant manager of part development for Hyundai (Montgomery, AL), reports that many European-origin suppliers with operations in the southeastern U.S. have approached him seeking business from Hyundai’s new facility.

IT’S ALL ABOUT RELATIONSHIPS

It seems superficial to set the Asian manufacturers’ emphasis on long-term relationships as their defining characteristic, but the evidence in support of that is plentiful.

Larry Jutte, senior vice president of Honda of America Mfg. Inc. (Marysville, OH), told a management seminar a few months ago: “I don’t use the word relationship lightly. It think it precisely defines what is required to have a mutually satisfying and successful experience.”

Jim Phillips, Honda’s assistant vice-president, purchasing division, elaborates: “Our intent is to create a relationship that will last a lifetime, and as such, we are very diligent in improving that relationship. Such relationships are not possible without mutual respect.”

At Mercedes-Benz the objective is similar, but the language more pragmatic. Bill Taylor, president and CEO of Mercedes-Benz U.S. International Inc. (Tuscaloosa, AL) told a conference of automotive suppliers last year if OEMs don’t fully integrate suppliers, there is no way they can achieve the quality or efficiency levels needed to excel in today’s competitive environment.

To further define and strengthen the partnerships between suppliers and OEMs, Taylor believes “suppliers need to be an extension of the OEM’s business; supplier systems need to be more connected with the OEM’s systems; and Tier 1, 2, and 3 suppliers should be included in OEM training and process control.”

“The connection between the OEM and the suppliers is more critical than ever in light of product movement,” says Taylor. “If you look at our future products, they are much more complex, have more variants, more electronics, and more customer demands, which means it is crucial for these relationships to develop.”

INNOVATION WILL GET YOU IN

Last year, Honda purchased approximately US$13 billion in parts and materials from more than 600 suppliers in North America. If you weren’t one of those 600, don’t despair. Jutte notes that Honda’s supplier base is stable, but “that doesn’t mean that a supplier who is not currently selling parts to Honda has missed the opportunity. It does mean that they must come to us with a unique value proposition.”

Simple cost cutting is not enough. “We also require our suppliers to have the capability to develop with our R&D companies, be fully capable of design and development, and have the flexibility to implement design changes quickly and cost effectively,” explains Honda’s Phillips.

“Beyond technical capabilities, we look for suppliers who are committed to involving their associates in continuous improvement and business enhancement activities.”

Getting your foot in the door at the new domestics starts with getting on their database. At Hyundai, Johnny Schooler says the protocol is to fill out a supplier profile at www.hmmausa.com and send it in. “We gather information on potential suppliers. If we have a need for their services, we would initiate contact.”

Schooler notes that it is an advantage to have experience with other automotive OEMs, and to be familiar with the shortened development cycles that now exist in the industry.

Similarly, Toyota has a sign-up procedure at www.toyotasupplier.com.

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WHO’S WHERE

DaimlerChrysler will invest $600 million in a major expansion at the Tuscaloosa, AL, site of Mercedes-Benz U.S. International Inc. to double the production for the next generation Mercedes-Benz M-Class sport utility vehicle. The expansion could double production capacity of this facility to roughly 160,000 units.

Production of the M-Class began in Tuscaloosa in early 1997. The U.S. represents more than half the total sales for this vehicle, but the SUVs built in Alabama are also exported to more than 135 countries.

BMW’s production facility in Spartanburg, SC, is the company’s first full manufacturing plant outside of Germany. The BMW Manufacturing Corp. plant began production in 1993 and currently builds Z4 roadsters and X5 sports activity vehicles. On the occasion of BMW announcing an expansion to the South Carolina facility in 2000, one state government official said 26 BMW suppliers chose to locate North American operati
ons in South Carolina to partner with BMW. BMW also maintains a design firm in California.

One of the newer OEMs to manufacture in North America is Hyundai Motor Manufacturing Alabama, LLC, which is setting up a production facility in Montgomery, Alabama that will be producing the Sonata model within six months. All of the sourcing for this facility is handled by Hyundai from Montgomery.

Toyota Motor Manufacturing North America has four vehicle assembly plants in North America, with two more in the works. One of the assembly plants is in Cambridge, ON. An R&D headquarters is located in Ann Arbor, MI. The company began producing vehicles in North America in 1986 through the NUMMI joint venture with General Motors.

Honda of America Mfg. Inc. has auto assembly plants in Ohio, Alabama and Alliston, ON, plus components plants in Ohio and a vast R&D network.

Nissan North America Inc. produces vehicles in Tennessee and Mississippi

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IT PAYS TO ATTRACT AN AUTO PLANT

Honda of America Manufacturing Inc. released earlier this year a study of the company’s impact on the Ohio economy, in light of the 25th anniversary of Honda vehicle manufacturing in the United States.

The study states that Ohio provided US$27 million in direct incentives to Honda to locate and expand in Ohio. More than US$1 billion in state and local taxes have been paid by Honda of America and its associates, yielding a return on the public investment of about 40 to 1.

Honda purchases nearly US$7 billion in goods each year from its Ohio suppliers. The value of goods produced at Honda’s Ohio facilities reached US$17.1 billion in 2003.

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CANADIANS BAG NEW BUSINESS

According to the Automotive Parts Manufacturers Association, Canadian auto part suppliers have increased their market share of the North American market from 11% in 1991 to 16% in 2002.

APMA also states that Canadian vehicle production has declined from a high of 3 million finished vehicles in 1999 to about 2.5 million estimated for 2003.