Driving on new ground

The automotive market is being reshaped by the twin engines of globalism and information technology and suppliers will not so much be coming along for the ride as they will be the ones steering it.

This in a nutshell was the common thread of the messages delivered by the experts at this year’s Automotive Parts Manufacturers Association annual conference, whose theme, “Borderless Economies, Vanishing Frontiers”, captured the image of the new business terrain facing today’s automotive suppliers. Yet, as these analyses show, regional differences in markets, even within North America, still remain. Globalization and new product lines by off-shore OEMs will force North American OEMs and suppliers to try to close lingering quality and productivity gaps. Not least of all, the Internet and e-commerce will become the basis of a new business model that will change forever the way cars are designed and built. And all of this is coming sooner rather than later.

Over-capacity, productivity, quality still big concerns

Since 1985, total worldwide production capacity has grown 58 percent to approximately 70 million vehicles a year. In 1999 a total of 56 million units were built, meaning there was about 20 percent idle production capacity. With capacity for another 10 to 15 million units coming on line over the next 10 years, and with relatively flat growth predicted in the mature western markets, the market will force consolidation of this excess capacity, according to Ford Motors’ Ellen Hughes-Cromwick, manager of corporate economics.

In North America, General Motors, Ford and Daimler-Chrysler have 70 percent of the market, with most the balance going to Japanese manufacturers. Trucks, vans and SUVs now account for almost 50 percent of North American production volume, with the Big Three producing 80 percent of that capacity. However the Big Three have only about 58 percent of the North American car market. The situation could leave the domestic OEMs vulnerable should gas prices remain high and/or the public taste shift away from trucks to cars, says Ron Harbour, president of Harbour & Associates, Inc.

Harbour notes that while Big Three truck and van plants are working overtime, the companies’ car plants are running at 70 to 80 percent of their capacity. He believes OEMs and suppliers need to take a new approach to designing and building production capacity.

“We need to throw out the terms car and truck and develop plants and tooling systems using new technology that have the flexibility to build cars or trucks.” He believes “hybrid” vehicles such as Daimler-Chrysler’s PT Cruiser, which combine features of both cars and trucks will push the engineers to think more in terms of vehicle design and production.

In comparison to Japanese plants in North America, GM and Daimler-Chrysler spend $1000 more for labor to build each vehicle, while Ford spends $600 more on labor per vehicle. Harbour notes that if GM operated at the productivity of the Japanese it could have doubled its profit last year. The productivity gap between Japanese and domestic companies could become a more critical issue when the Japanese launch new lines intended to directly compete with the Big Three’s bread-and-butter truck, van and SUV products.

“The companies that have made the greatest strides in productivity are the ones that have gone back upstream and worked on design of product and process, because that’s what controls 80 percent of productivity and quality,” Harbour says. He cites a new 2.3 L engine introduced by General Motors which has 330 fewer parts than the engine it is replacing as an example of the benefits of upstream design for manufacturability. With more design responsibility being placed on their shoulders, suppliers will play a crucial role in helping OEMs improve productivity through better design.

In the 1980s, the quality of Japanese-built vehicles, as measured by performance in the first 90 days of ownership, was seven to eight times better than vehicles built by the Big Three. Today that gap has nearly been closed. However, Harbour reports, when measuring long-term quality, GM, Ford and Daimler-Chrysler still fall significantly short of the standards set by the Japanese and Germans. Warranty work on most Big Three vehicles is two to three times higher than that for vehicles built by foreign-based companies. In an increasingly integrated, global market, Harbour believes both suppliers and OEMs need to make closing this quality gap a top priority.

E-commerce to change supplier relations

Connectivity through the Internet will give well- positioned suppliers the opportunity to take out unprecedented amounts of time from design and manufacturing, says Magna’s Ted Wozniak, vice-president information technology.

Wozniak and his staff have been working with GM, Ford and Daimler-Chrysler in the development of an e-commerce collaboration called Covisint. Magna is also working directly with Daimler-Chrysler on a project to see how information technology can best be used to make business run smoother and more efficiently. The project has moved into a live pilot stage and revealed the strengths and limitations of current technology, according to Wozniak, who says companies will need to change business practices to take full advantage of electronic collaboration models.

Woziak envisions Covisint as a sort of a trading centre in which various types of information are offered, exchanged and shared. The information could be vehicle design data, platform management information, testing results, warranty information, supplier ratings, production schedules or inventory information. The exchange of so much information inevitably raises some philosophical and strategic questions.

“There’s questions about how to structure such an exchange,” says Wozniak. “Maybe I don’t want a company to see some of this information, or maybe what’s important to suppliers and customers in the U.S. won’t be important in Mexico.”

Magna, which has 55 of its 166 worldwide production facilities in Canada, as well as six Canadian engineering R&D test facilities, is particularly focused on how e-commerce collaboration can be used to reduce time for design and materials and product flow.

“We now have the ability for the first time to hold interactive product launch and product development and take out significant amounts of time,” notes Wozniak. He says the process will be evolutionary, but that by as early as next year, suppliers of tooling and parts to Magna will be asked to use their Web browsers to participate in design if they’re part of a launch.

“This technology has a cost so it has to fight with all the other cost and resource allocations within an organization.” Over the long term Wozniak believes initiatives such as Covisint will provide higher returns by improving deployment of a company’s assets and resources.

“E-commerce collaboration is nothing to be feared by the supply base,” he says. “It’s about the fourth or fifth evolution in business since computers have come into the business environment, and as always, you’ll have those that come on board early and those who wait.”

Soft landing expected

In the near term, the performance of the industry will depend on consumer reaction to a number of economic risk factors, noted Ellen Hughes-Cromwick, Ford Motor’s manager of corporate economics, in her keynote address. Among these risk factors are high interest rates, the rise in oil price and the slowing of growth in a mature North American automotive market.

Despite these risks, Hughes-Cromwick predicts a soft landing from the automotive sales boom of the late ’90s, with total vehicle sales declining to about 16.5 million in 2001 from 17.3 this year. A softer landing can be expected, she believes, in part because of sound economic fundamentals which should cushion the effects of higher oil prices. Lower government debt and generally higher interest rates give the major Western economies greater flexibility to relieve stresses on consumer spending in comparison to the late seventies, when oil price shock helped t
o spur a recession. Also, in terms of real 1999 dollars, the price of a barrel of oil today is still much less than the price of a barrel of oil in 1979. She also thinks that the oil supply shortage driving up today’s pump prices may be more temporary than the supply squeeze of the late seventies.

In the U.S., dealer car inventory is stable at 52 days, however truck inventory is 72 days and on the rise, according to Jeff Schuster, senior manager, J.D. Power and Associates. The expected decline in sales is reflected in lower planned production volumes for the first and second quarters of 2001, which are expected to be 5.7 and 6.3 percent lower than volumes for their respective quarters in 2000.

North American production capacity increases are being led by transplants, with Toyota, Nissan and Honda all adding new models. General Motors’ and Ford’s vehicle production is expected to decline by 10 percent and 11 percent respectively through 2005, while BMW’s North American production will rise by 112 percent over the same time period, says Schuster.

In Canada, Schuster predicts total vehicle production will decline to 2.567 million in 2005 from 2.941 million in 2000 (See Table 1). Actual Canadian production figures may hinge on the fate of a number of facilities where the parent companies have yet to commit any long-term product. These include Ford’s St. Thomas plant, GM’s St. Therese facility and the GM/Suzuki joint venture, CAMI.