Automotive Industry to Focus on Reorientation in 1999
10 December 1998
PricewaterhouseCoopers Peers Into New Year: Automotive Industry to Focus on Reorientation in 1999
DETROIT, Dec. 9 -- While the automotive industry adjusts to
DaimlerChrysler and other major mergers, new dynamics in the automotive supply
chain, from raw materials to retailing, will likely be the industry's focus in
1999, say automotive consultants at PricewaterhouseCoopers.
"During 1998, the news media has been talking consolidation when in fact,
the industry really has been reorienting -- changing structurally -- to meet
shareholders' demands for value as well as customers' value and price needs,"
says J. Ferron, Partner and Automotive Consulting Leader at
PricewaterhouseCoopers in Detroit. "The mergers and acquisitions, buyouts and
sellouts have not happened just so companies can gain size and power," says
Ferron. "What's happening is that entire automotive supply chain is
restructuring from end to end to better respond to consumers' demands for
value, choice, and a more satisfying purchase process."
Says Ferron, "The changes are structural, permanent and one way! For
example, on the retail side, the needs of vehicle users are changing every key
process from the way vehicle information gets to the customer, to the way
customers signal their individual wants and desires."
Even as the industry faces structural revolution, it has not thus far
dealt well with production overcapacity, which is still a key global concern,
says Ferron. "Vehicle production from 630 assembly plants is well documented,
but the impact is not well understood. Even if the industry radically
attacked global overcapacity right now, there remains a dangerous potential
for new excess just because new factories are more agile."
Ferron says the next threat is from consumer demands to "pull" products
they want -- not to have manufacturers "push" vehicles that only nearly fit
their aspirations or needs. "In essence, the pressures are building for the
industry to behave differently, at a lower cost structure, with fewer
incentives and more agility. The 21st century race for survival is well
underway."
Adds Ferron, "Unfortunately the push-to-pull transformation will be led by
a few enterprises who learn how to configure their design modules, services
and networks to a 'rational' customer whim." This is how the "whisper of the
customer" will connect linkages throughout the supply chain.
On another front, problems with material flow due to potential Year 2000
computer bugs will be surmounted but at a huge cost to the supply community,
says Ferron. "The greatest cost will come from employee stress and overtime
needed to work around solutions. And no easy solutions exist because fixes
require the open communications and trust which are often missing or strained
in current relations. The higher a supplier is in the integration chain, the
greater the level of stress until we get past those first few weeks in 2000."
Ferron also warns that while electronic data interchange between supplier
and customer may be "old news" for much of the industry, a big issue for 1999
will be how electronic channels will produce customer product and service
loyalty. "Existing dealerships are merely another customer in this electronic
regime as new channels emerge."
Training, largely ignored in the best of times and then cut in down times,
is, in fact, the primary route for field organizations and retailers to change
behavior and then to change manufacturing. "The successful dealerships will
be those that are quick to understand and manage the benefits of 'pull'
marketing. Eventually this will cause the end of 'push' products and 'push'
training. However, for dealers in 1999, how to sell services that customers
expect or want will be more important than how to sell vehicles without a
reason for coming to a dealership."
It's Wait and See on Mergers and Acquisitions
Globalization and consolidation mania continued to sweep the industry
during the first two quarters of 1998. But neither a slowdown in the stock
market nor the resulting economic uncertainty, particularly in Asia and Latin
America, is believed to have seriously weakened the trend in the beginning of
the third quarter.
According to Mike Burwell, Automotive Transactions Services Partner, "The
merger market is alive and well in the last quarter of '98, but there appears
to be a more wait-and-see attitude among CEOs as they weigh the potential
impact of the current economy's fluctuations."
Surpassing last year's 750 auto deals -- for an astounding $28 billion --
will be hard, but significant deals announced in 1998 read like an industry
who's who list: Daimler/Chrysler, Dana/Echlin, Valeo/ITT, JCI/Becker Group,
Federal-Mogul/Cooper Automotive, VW/Rolls Royce, Lear/Delphi Seating,
SPX/General Signal.
Burwell says suppliers must meet or exceed a revenue threshold of $500
million annually in order to absorb cost shifts from vehicle manufacturers to
Tier 1 suppliers. He says, "Vehicle manufacturers are looking to enhance
shareholder value and narrow the range of the P/E multiple between themselves
and suppliers. Costs are shifting from the original equipment manufacturers,
downstream, to the supplier tiers. The results are smaller supply chains,
logistics are becoming more important, and the big will become bigger."
Other reasons for the pace of global consolidations are the Asian economic
turbulence and widespread overcapacity and reduced growth forecasts in the
established North American and Western European markets.
Another factor is strategic actions by suppliers who believe they must
widen market share especially in Europe, Latin America, India and China.
The rapid and massive consolidation within the retail side of the industry
in 1998 leaves many unanswered questions and challenges going into 1999.
Retailers have not sufficiently tracked the evolution of the changing retail
structure, leaving some to wonder if bigger really is better.
Consolidation to Yield Spotlight to Branding
According to Dave Nathanson, Director, Retail Automotive Operations,
consolidation will slow in 1999 from the pace established over the last two
years as retailers focus on branding. "Retail chains have yet to optimize
national and regional branding. Now that they've established size, building a
meaningful brand, as well as a consistent operating structure, will be key to
their success," says Nathanson. "The sluggish market is driving this shift in
focus, leaving little available capital for acquisitions."
As the retail structure continues to evolve, the battle for ownership of
consumer data will escalate between retailers and OEMs. "Dealers are
reluctant to share this data for fear of losing control to the OEMs," says
Nathanson. "OEMs, on the other hand, need this information to meet real-time
demand and to help streamline the supply chain." While OEMs have added
capacity to handle demand in emerging markets, economic conditions in 1998
have been forcing them to re-channel the product until the markets fully
develop. Access to "downstream" point-of-sale data will facilitate the OEMs'
ability to build to customers' orders, optimizing the utilization of this
capacity.
E-commerce is another factor that will increasingly impact the retail
structure. Franchise laws, which impact in varying degrees the OEMs
involvement in owning and controlling the retail network, will be challenged
as consumers use the Internet to make purchases. This channel may hold
promise for retailers, faced with increasing pressure on profit margins in
spite of recent developments in the retail model. "In the traditional retail
structure, consumers sometimes have to go from the salesperson to the closing
manager, used car appraiser, and finally to the finance and accessory sales
representative. They don't see much value in this, so the on-line alternative
becomes safe and attractive. Consumers can conduct research and have a
virtual shopping experience on-line," says Nathanson. This will ultimately
redefine the traditional "borders" established within existing franchise
regulations.
Further Consolidation, Gradual Improvements in South America, Latin
America
As the automotive industry becomes increasingly globally competitive, more
companies will combine resources through strategic alliances. According to
Chris Benko, Managing Director, The AUTOFACTS Group, the most telling event in
1998 was the Daimler-Chrysler merger. "The consolidation of Chrysler and
Daimler-Benz was seen as a breakthrough because it was a case of two winning
companies getting together, not a stronger company acquiring a weaker one."
Benko says that alliances like this are not necessarily about building a
global empire but about leveraging capabilities and extending resources to
overcome rising development costs and downward price pressures in an industry
saddled with severe global excess assembly capacity.
Another trend that will affect the industry during 1999 will be the
continued deterioration of market conditions in the Asia Pacific region and,
to a lesser extent, South America. "Economic fundamentals remain shaky in
these high-potential regions, and though conditions will improve gradually
over time, the restoration of prosperity will be a lengthy process" says
Benko.
Looking to 1999, Benko says, "This could be a volatile year for the North
American automotive industry as there are a number of factors that could
combine to cause the industry to stumble.
"From the demand side, there's the underlying risk of a global recession
as world markets become increasingly integrated. From the supply side there
are two big risks. First, 1999 is a national contract negotiation year, with
all eyes focused on how General Motors fares with the UAW. Second, Year 2000
computer system snafus will become evident as the year progresses. It is just
a matter of degree of how badly they affect the industry."
Benko adds, "As recent events have illustrated clearly, the industry's
supply chain is tightly linked, and any disruption -- be it due to labor
strike, systems failures or various other complications -- will have a domino
effect up, down, and across the chain."
In any event, Benko says, competition in the new automobile market in the
United States will only intensify, with marketing tools such as sales
incentives continuing to influence demand patterns. Benko says, "Look for
growth in leasing to peak as manufacturers now recognize that the practice can
be a double-edge sword. Though aggressive leasing strategies can boost volume
by making vehicles more affordable to consumers, accurately setting residual
values has proven to be a challenge. Further, a boomerang effect of high-
volume leasing is the flood of low-mileage, well-maintained off-lease
vehicles, which represent a valid substitute to new vehicles."
As a result, manufacturers are likely to become more selective with their
leasing strategies. However, the use of sales incentives will not abate in
this era of well-educated, value-sensitive buyers. The peril here is one of
timing -- high incentivization has brought tomorrow's sales forward today.
Says Benko, "This means that 1998's strong results may have come at the
expense of 1999's results. And even if this is not the case, the continued
dependence on incentives to shore up demand only strengthens all
manufacturers' need to focus on continued cost-cutting strategies. Further,
in the automotive market of the future, quality is required but not
sufficient." It will be innovation that will win the day.
Enhancing customer value and shareholder value will continue to drive the
automotive industry in every component of the supply chain through 1999.
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