The world has changed.
Detroit's Big Three automakers remain mired in difficulty, and unprecedented challenges are sapping the strength of the supplier industry.
``The world has turned upside down,'' IRN Inc. President Kim Korth said.
The Grand Rapids, Mich.-based consultant analyzed the changing environment for automotive suppliers in her presentation at the Plastics News Executive Forum, Feb 25-28 in San Diego. And many of her points, she said, apply to processors serving other sectors as well.
``Most suppliers do struggle to remain profitable, and the outlook for large portions of certain sectors - straight stampings and simple plastics, for example - is grim,'' Korth said.
At a macroeconomic level, personal- and household-debt burdens finally may have reached their limits. Commodity prices have been extremely volatile, and the new-vehicle consumer price index reveals deflationary pressures. Declining manufacturing segments have been largely unable to pass price increases along to consumers. Although high gas prices have not greatly influenced purchasing habits, new-home sales, which IRN says historically correlate with those for pickup trucks, may signal a chilling in the auto market. And, she said, unfortunately the market is likely to decline further this year before it rebounds.
Meantime, the new domestic automakers - Japanese, South Korean and German transplants - have seen steady growth in North America.
In the latest example, on the day after Korth's presentation, Toyota Motor Corp. announced a $1.3 billion investment to build a new vehicle assembly plant near Tupelo, Miss. The Japanese value chain is winning for good reasons, she said.
``They have consistency of vision and execution and a focus on cost vs. price. They understand the cost is primarily set in the design phase and, therefore, look for breakthroughs through design and change the cost structure,'' Korth said. She noted Japanese carmakers currently have targeted cost cuts of 20-35 percent.
``Depending on the company, either engineering or manufacturing drives the key decision; therefore, product decisions are rarely sacrificed for short-term financial gain, and product design and execution are much more integrated and seamless,'' she said.
Ultimately, it is the product that wins customers.
Korth said the overall key to Japanese success in North America in the past 10 years has been the ability to design products that American consumers want to buy and buy again, because of experiencing few quality problems. Japanese automakers succeed so consistently because of an effective program launch process and an ability to provide a high degree of product customization at mass-market pricing, she said.
Despite the downturn of the consumer market, the mere size of the auto supply industry still creates opportunities. ``The good news is: The scale of this industry, which is $950 billion worldwide, is so vast that there can still be large numbers of highly successful suppliers when the overall industry is struggling.''
Consequently, she said, the industry environment has become polarized: ``The weak are getting weaker and the strong cannot keep up with demand.''
The top-performing 25 percent of the auto suppliers make 60-70 percent of the profits, Korth said. ``The middle two quartiles bounce around between 1 and 5 percent. And the bottom 25 percent should be stamped out of existence, but financial [support] just continuously keeps them alive artificially.''
Automotive has huge barriers to exit, she said. ``When a company doesn't have a clear or good business design, it's difficult to get it to go away.'' That adds to the overcapacity, keeps the price pressure on and makes profitability difficult.
To take advantage of the growth potential, Korth suggested adapting new perspectives.
``The traditional tiering model is dead,'' she said. ``Tier three - the process-driven manufacturers - are in the best place to make money.''
But more importantly, the lines between the traditional tiers are blurred. In the new model of organic tiering, where suppliers sometimes will deal with an original equipment manufacturer, sometimes in a tier, companies need to be more sophisticated with the positioning of the product.
The competition is not limited to the U.S. The globalization of the industry has occurred in a very brief time period, she said.
``We believe you'll end up in three regions: Asia, where the low-cost location right now is China but will probably end up being Malaysia and other smaller locations; Europe, where the low-cost location is now Eastern Europe, although increasingly we are seeing a lot of development in Africa; and North and South America, where the low-cost location will be Mexico.''
Although a fair number of components and parts still are being made in China and shipped back to the States, Korth said she expects that will decrease in the long term.
``A lot of the pressure on North American companies to go to China has little to do with shipping back into North America. It has everything to do with giving [General Motors Corp. and auto makers in general] a vibrant base in the place where they make those products,'' she said.
The bottom line is that cutting costs from manufacturing in other regions is not a way to survive and prosper in the long term. ``You need a strategic reason other than labor cost and price differentiation to be in China,'' Korth said.
To devise a sound global strategy, ``think defensively first.'' Companies need to consider how to help protect their core domestic business and how distribution and industry changes globally will impact it, Korth said.
``You need to make a strategic vs. a tactical decision. There has to be more than just short-term cost advantage.''
``Companies need to focus externally rather than internally. Get to know how your end users use your products through your own channels, rather than relying on middlemen.''
Expanding globally also is likely to affect the organizational design in terms of being multiregional vs. global, and the biggest mental obstacle could be the mind-set of the home office.
Speed is the key in the fast-changing global marketplace.
Korth said most companies underestimate top management time required to go global.
Coordinating global decision making is also a challenge, including, but not limited to, ``keeping everyone on the same page at real-time fashion, given all the time-zone changes,'' she said.
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RULES for success
Kim Korth, IRN Inc.
Rule 1. Suppliers need to act more like businessmen and less like salesmen. Investigate and analyze cost and return rather than accepting any order or program, particularly when struggling with top-line revenues. The principle is to eliminate unprofitable business. ``There is no reason for you to rationalize not making money.'' Suppliers need to say ``no'' to customers, and transfer focus from sales to profit; from share of market to share of market value; from product power to customer power; from technology to business design.
Rule 2. Selecting your customer and program are critical. ``Reduce your dependence on dysfunctional customers. Do your financial homework on the front end. And make program launch and management a key organizational competence.'' Spend more time on smaller accounts that have potential and on good, reliable customers.
Rule 3. Have a deep understanding of the competitive position. ``What the customer is willing to pay is less important than what the competition is willing to charge.'' The speed of change catches many companies off-guard.
Rule 4. Increase the sophistication level of the ``go-to market'' mechanisms, using a proactive sales approach to pull customers, instead of push products.
Rule 5. Concentrate on competitive products. By expanding the product line, suppliers add unnecessary complexity to the organizations, create too many layers and make the relationship and functions of departments less clear.
Rule 6. Strategic leadership with long-term vision can steer the company in the right direction. Unlike the execution-focused, old-fashioned approach, leaders need to see patterns, imagine opportunities, take risks, manage strategic dialogue, act decisively, manage ambiguity and paradox, and have a personal passion about the future. ``Long-term competitive advantage comes from constantly changing.''
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Watch the Plastics News Executive Forum Web site at www.plasticsnews.com/forum2007 for speaker presentations, video interview clips and a slide show from the event.