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Suppliers: Get An Overseas Presence
That's a tremendous amount of activity that runs into the trillions of dollars globally for all the support services involved in production, said Jim Gillette, director of supplier analysis for CSM Worldwide.
"It literally is one of the largest industries in the world. The way I like to look at it, if it's that big there has to be some opportunities out there somewhere. I wouldn't say the opportunities are limitless, but they're out there," said Gillette, keynote speaker at a recent World Affairs Council of Western Michigan event held at Aquinas College's Donnelly Center.
There is no way of turning back globalization, Gillette stressed.
He predicts that by 2009 nearly 44 percent of global sales growth in the industry will emanate from the emerging markets, and 69 percent of that figure will come from China.
By 2006 China is going to be the third largest automotive supplier market in the world and by 2013 it will rank No. 2 in global automotive production, he said.
North America's contribution to growth, on the other hand, will be very slow over the next few years and growth will be even slower in Western Europe, he said.
He foresees the growth in Europe coming from the "traditional countries" like Germany, France and Italy.
In terms of global production by OEMs, Hyundai, Toyota, Renault/Nissan, Volkswagen and Honda — the "New Domestics" — are expanding with new plant activity and expansion at existing facilities. Hyundai, in particular, is "really taking the world by storm," he said.
BMW and PSA Peugeot Citroen are staying the course, while the traditional Big Three, DaimlerChrysler, Ford and General Motors, address home market issues.
Both Ford and GM face production losses through 2006 due primarily to the influx of competitive light truck offerings from the New Domestics. DaimlerChrysler will see limited production recovery in 2005 with increased Mercedes output, Gillette noted.
A significant impediment to new vehicle sales, he said, is the used car market. Prices on used cars continue to decline, making them more attractive to consumers.
Volkswagen is now the largest auto producer in China. By 2009, Toyota will be the largest auto producer in the world.
The auto parts exports coming out of China in 2002 only amounted to about $2 billion, but that will change before long, Gillette said. By 2006 the total number of passenger vehicles sold by China will be about one-half of what is sold in the United States, he predicted.
"One of the things that auto suppliers going over there are finding is that they have to work very hard and build their capacity just to supply the Chinese market and its peripheral markets."
Should China be a part of every automotive supplier's strategic plan, either through partnership, licensing agreement or joint venture?
As Gillette explained, carmakers have always built vehicles around what is called high volume "platforms" of more than 1 million units — systems designed to produce common chasses and many common auto parts to achieve economies of scale.
And China has a growing role in high-volume platforms.
"The key to being a supplier is to get in on high-volume platforms," Gillette said. "If you're making ashtrays and want to produce 1 million ashtrays a year, you have to get into a program such as the large GM pickup trucks platform."
Gillette said many suppliers say they don't feel the need to have a presence elsewhere in the world.
"You don't necessarily have to have a plant, but you do need to have some kind of a sales presence. You have to have some kind of ability to capture business elsewhere in the world," he advised. "You have to figure out a way to get in to the new operations of foreign manufacturers.
"You have to (a) be aware that they're out there, and (b) you have to get in to see those people. Whether it's in Frankfurt or Tokyo, you have to have a presence there."
It used to be that the Big Three consistently captured 70 percent of the North American market share. Today, Gillette said, they're struggling to maintain 60 percent of that market. A 10-point drop in market share is the equivalent of eight assembly plants, he pointed out.
Today the average vehicle runs about $23,000 to $24,000, while the average profitability for carmakers and parts suppliers is about $100 to $200 per car, Gillette said.
With the job losses that began in 2000, U.S. automotive employment has dipped to the level it was in the 1950s.
"We're getting the production level back but we haven't added jobs. The really good news is that we've been able increase productivity at a very rapid rate to output for labor hours, so as a result of that we've been able to fight the problem of labor costs to some extent."
For the average supplier, labor represents 15 percent of his direct costs, or 15 cents out of every $1, he pointed out.
A supplier has to reduce labor costs by 6.7 percent for every 1 percent decline customers ask for, Gillette explained. So if the customer demands a 3 percent cost reduction, the supplier has to reduce labor costs by 20 percent.
"Customers don't want it just one time, they want it every year, so every year you're cutting your labor costs by 20 percent. How soon before you have no room for labor at all?"
Part of the immediate issue is that U.S. companies are outsourcing those jobs to China for 50 cents an hour, he added.
The productivity-labor cost issue puts the industry in a quandary.
"If we can continue to increase productivity at the rate we've been doing it, we're going to remain fairly competitive. If our objective is to increase jobs, then we'll be having to slow down productivity increases."
But productivity strategies are critical and they're working, he said.
He recommends that auto suppliers:
- Focus on intellectual content.
- Identify components, systems and modules where proximity counts or that are inefficient to ship.
- Take advantage of New Domestic opportunities.
Gillette doesn't believe the United States necessarily has to manufacture goods to build wealth. Intellectual content is where the value is formed, he said.
"We'll probably maintain more of the intellectual activity than the manufacturing activity," he predicted.