Auto OEMs Jeopardizing Their Own Future: A BCG Study Finds Industry Purchasing Practices Harming Competitiveness

Consolidation of the supplier industry is endangering automotive OEMs' access to critically important innovation

BOSTON, April 19 -- Consolidation in the automotive industry -- driven by intensive cost pressure from OEMs -- is threatening those same OEMs' competitiveness. Over the past decade, automotive OEMs have outsourced central functions, which has left them dependent on ever fewer suppliers and their innovations. A new study by The Boston Consulting Group (BCG) shows why OEMs need to rethink their interfaces with suppliers. For the study, "Beyond Cost Reduction: Reinventing the Automotive OEM-Supplier Interface," the BCG authors surveyed 80 members of top management from all major suppliers and OEMs in Europe, North America, and Japan. "If automakers want to stay competitive, they will have to stop focusing their purchasing strategies primarily on cost and put more emphasis on differentiation with new technologies," says one of the authors, BCG vice president Andreas Maurer.

The number of suppliers will be halved

BCG's analysis shows that more than 60 percent of the automotive industry's value is created by suppliers. Patent registrations convey a clear message, too: in seminal areas, suppliers now register more than three times as many patents as OEMs. At the same time, conditions for innovation in the industry have worsened for suppliers. Exposure to OEM cost pressure has forced their prices down by 3 percent annually for the past ten years. The average supplier has seen its profitability slashed almost in half. BCG predicts that of today's 1,500-plus suppliers, under half will survive to 2010. "In their own interest, OEMs should see to it that their supplier base remains diverse," says BCG vice president Frank Dietz. "That is the only way they will be able to cover the entire range of vital innovations."

The BCG authors ascribe the industry's current quality problems to the tense situation with suppliers. In the last decade, the number of product recalls doubled. In 2002, nine of the ten biggest recalls were a result of difficulties on the supplier side. "It doesn't take long for supplier problems resulting from cost pressure to hurt the OEM's brand; conversely, cooperative dealings with suppliers pay off," stresses BCG vice president Maurer. The BCG study team's research showed that there is a connection between suppliers' satisfaction with their OEM customers on the one hand and car buyers' satisfaction on the other. Thus automakers with good supplier relations enjoy higher customer satisfaction with vehicle quality and innovation than do those with poor supplier relations.

Six levers for better interface management

How can the interfaces between OEMs and suppliers be improved? In its study, BCG identifies six levers:

   -- Stabilization of the innovation-purchasing process. The BCG authors
      distinguish between two purchasing strategies: while GM, Ford, and
      Volkswagen mostly use their market clout to exert pressure in
      bargaining, others, such as Toyota and BMW, take a collaborative
      approach, garnering price advantages with technology and process
      analysis. Independent of their market positions, the study asserts,
      OEMs should take a cooperative stance in negotiating for components
      that are important for brand and product differentiation, and should
      foster partnership concepts to secure future technologies.
   -- Differentiated remuneration of suppliers' R&D expenses. Suppliers are
      prepared to invest in new technologies only if they can be assured
      that their innovation will be appropriately compensated and their R&D
      costs covered. BCG's study describes ingenious ways for suppliers and
      OEMs to share R&D costs.
   -- Construction of innovation platforms. Besides seeing the Internet as a
      medium for component auctions, the BCG authors view it as a platform
      for innovation exchange. A positive example is BMW's Virtual
      Innovation Agency (VIA), which gives outside engineers the
      opportunity to offer ideas to an expert committee for online review.
   -- Trend and supplier scouting. Many recent innovations, such as the
      TouchSense technology in BMW's iDrive infotainment system, came from
      outside the auto industry. OEMs need to use trend scouting to
      identify promising technologies and companies and to encourage early
      partnerships between outside innovators and traditional suppliers.
   -- Early involvement of suppliers in the innovation process. Because of
      shorter timetables-by 2010, the development time for a new model will
      shrink from the current 30 months to 18-suppliers need to be brought
      into the concept phase early on.  One possibility is resident
      engineers, who are dispatched from the supplier to work at OEM
      facilities.
   -- Cooperation between and collocation of internal R&D and purchasing.
      Currently, the OEM purchasing department becomes involved too late in
      product development, resulting in costly changes in essential
      components for reasons of price. Better integration of purchasing and
      R&D can boost suppliers' motivation to provide OEMs with cutting-edge
      innovation.

The Boston Consulting Group is a management consulting firm. It was founded in 1963 and now has 60 offices in 37 countries. Its primary focus is corporate and business strategy, including operational and systems strategy. It has served companies in all major industries and developed countries and also has offices and clients in several developing countries. Please visit its website at www.bcg.com which contains a subscription service for its publications