Roland Berger Study Says Cost Pressure on Automotive R&D Will Increase

TROY, Mich.--July 21, 2004--A strategic review of automotive product-development practices indicates that the demand to develop more vehicles with less budget will continue well into the next decade.

Automotive Engineering 2010, a research report prepared by Roland Berger Strategy Consultants, predicts that suppliers will be responsible for nearly 60 percent of the industry's research and development work by the end of the decade, compared with approximately 40 percent today.

Wim van Acker, managing director of Roland Berger's Detroit-based automotive practice, said new-model proliferation and product complexity will continue to increase along with pressure to reduce costs and product development lead times.

"Despite the tremendous price pressures on automakers and their suppliers that we've seen in recent years, cost-reduction efforts will most likely continue," van Acker said. "In order to remain competitive, companies must seek innovation and efficiency in the way they currently conduct business."

"The industry is dealing with an unprecedented growth in vehicle models and product features," he noted. Since the 1960s the number of basic vehicle segments has grown from four to more than 15. The industry's top five manufacturers alone are expected to introduce nearly 160 new models and facelifts in the U.S. market from 2003 through 2007.

The number and complexity of new-model features also continue to climb. The electronics content of an average car in the 1970s was less than 10 percent. It's expected to top 40 percent by the year 2010.

Regulatory requirements also will have a major impact on product development. Rising fuel economy, safety and environmental standards will put additional pressure on OEM product development.

Despite significant increases in product content and complexity, research-and-development budgets have remained flat and are expected to remain so in the future. Since 1998, R&D budgets as a percent of sales at five of the industry's top OEMs have remained virtually unchanged at an average of four percent of sales. At the same time, leading manufacturers have reduced the amount of time required to develop new vehicles from about 36 months in the mid 1990s to 24 months or less today.

Mahesh Lunani, a partner at Roland Berger in Detroit, noted that while costs and complexity have risen sharply in recent years, the price of an average vehicle based on the U.S. producer price index of motor vehicles has remained virtually unchanged since 1993.

To remain competitive, Lunani said automakers and their suppliers need to employ the following six strategies:

-- Develop global R&D networks,

-- Create sustainable commonization/reuse of parts,

-- Focus on electronics and emerging technologies,

-- Develop world-class product creation processes using best practices,

-- Improve integration with suppliers and

-- Increase share of electronic engineering staff.

The Roland Berger report sees a further clustering of product, system and component development into global centers of excellence. Europe will continue to lead in the development of small front-wheel-drive cars, diesel technology and luxury vehicles. Small displacement engines, multi-purpose vehicles, and hybrid platforms will be led by Japan. OEMs will look to North America for the development of light trucks, SUVs, minivans, large segment vehicles and V-6 and V-8 engine families.

Data for the study was gathered from interviews with more than 60 automotive OEMs and their global suppliers during the first half of the year. The overall objective of Automotive Engineering 2010 was to identify trends that will shape product development activities through 2010.

Roland Berger is a leading global strategy consulting firm with more than 1,600 consultants in 32 offices in 22 countries across Europe, Asia and the Americas. The company's global Automotive Competence Center of more than 100 professionals has completed more than 700 projects during the last decade. For more information about the company, visit www.rolandberger.com.