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Contact: Pierre Deraëd
Head of Corporate
Communications, Munich office
pierre.deraed@oliverwyman.com
Study by Oliver Wyman and the Fraunhofer Society:
The
new form of collaboration in the automobile industry
- Automotive
suppliers will take over 80% of R&D and production, innovative
business designs will prevail
- Auto makers
will focus on their own brands
- The
reorganization of the industry will raise EBIT margins by
3%
- In the
automobile industry of the future, Europe is the
winner
After mass production in the 1920s and "lean
production" in the 1980s, the automobile industry is undergoing a
new revolution. By 2015, automotive suppliers will have taken over
large parts of R&D and production from the automobile
manufacturers, achieving total growth of 70% in this process. During
the same period, the auto makers will give up 10% of their current
value creation—even though their output will increase by 35%. The
development and production capacities of the automobile makers will
be focused in the future on those modules and components that are
most critical to the success of their brands. These are the
conclusions of a recent study by Oliver Wyman and
the Fraunhofer Society. These trends will be driven in part by new
technologies, the growing complexity of automobiles and the
exploding diversity of models, all of which make development and
production considerably more expensive. Moreover, automobile makers
will find that investing in service capacities is more lucrative
than investing in production capacities. The heart of the study is
represented by exact modeling of the new structures and division of
work in development and production, as well as new business models
and forms of cooperation between suppliers and automobile
makers.
With 8.8 million direct jobs, both with the
automobile makers and the automotive suppliers, the automobile
industry accounts for 15% of the world's gross domestic product. And
the automobile industry will continue to be one of the world's most
important economic sectors in the future as well. The value creation
represented by automobile development and production (excluding
sales, replacement parts and service) will grow at the annual rate
of 2.6% over the next 12 years, from today's level of EUR645 billion
to EUR903 billion in 2015. During this period, the industry as a
whole will invest EUR2,000 billion in capital spending and annual
auto production will climb from the current level of 57 million
units to 76 million units. These projections are contained in the
recent study entitled "Future Automotive Industry Structure (FAST)
2015" by Oliver Wyman, the Fraunhofer Society for
Production Technology and Automation (IPA) and the Fraunhofer
Society for Materials Management and Logistics (IML).
The
future belongs to brand management
Automobiles are
emotionally charged, branded products and, therefore, the brand
image is just as important as performance and price. Already true
today, this maxim will assume even greater relevance in the period
between now and the year 2015. For automobile makers, this means
that brand management is destined to become the central aspect of
their work. They will focus increasingly on brand-specific elements
such as design, brand experience and service strategies, as well as
those functions and technologies that are central to the brand
profile. In the long term, this is the only way they can
differentiate their brands from those of their competitors.
Consequently, the roles now played by the automobile makers and
their suppliers are bound to change significantly, as auto makers
evolve into high-tech brand merchandisers and their suppliers
gradually take over all automobile production activities that are
not directly related to the brand experience.
Automotive suppliers will become a growth
engine
The value creation generated in the segment of automotive
suppliers, which includes companies like Bosch, Continental, Delphi,
Johnson Controls, Lear, Magna, Siemens VDO Automotive, ThyssenKrupp,
Visteon, ZF Friedrichshafen and others, will increase 70% by 2015,
growing from today's level of EUR417 billion to EUR700 billion by
that time. To accommodate this enormous growth, automotive suppliers
will have to create an additional 3.3 million new jobs worldwide by
2015. Most of these positions will be for skilled workers, as
indicated by the fact that additional value of approx. EUR30 billion
will be created in the pre-development and series development
activities of the suppliers.
All modules of
the automobile stand to benefit from this growth spurt, but
electrical systems and electronics most particularly. While the
value of electrical systems and electronics in the average
automobile today is EUR2,220, this value will increase to EUR4,150
by the year 2015. And because the total production output will
increase as well, the worldwide value creation attributable to
electrical systems and electronics will grow from EUR127 billion
today to EUR316 billion in 2015. Just considering the automobile
makers, this trend will cause the value creation attributable to
electrical systems/electronics to grow by 157%, bringing the total
to EUR52 billion - even though the suppliers will handle the lion's
share of 85%. All together, more than 600,000 jobs will be created
in automotive electronics in Europe alone. Furthermore, car body and
power train production will also experience substantially
above-average growth.
Innovative forms of collaboration will improve EBIT
margin by 3%
The established hierarchy
of automobile makers and first and second-tier automotive suppliers
will continue to be the dominant form of collaboration even in 2015,
but will cover only 65% of value creation in the industry. A number
of new business models such as system cooperation ventures,
production cooperation ventures, engineering service providers,
spin-offs and private label production will alter the mode of
cooperation in the industry so much that the overall value creation
will increase by more than EUR250 billion by the year 2015. The
study also identified more than 20 new forms of cooperation that
will make it possible to achieve a new level of quality in the
collaboration between automobile makers, automotive suppliers and
service providers.
If these new
forms of collaboration are systematically and jointly implemented,
they promise to deliver significantly higher returns than those that
can be achieved through traditional forms of cooperation. The
average EBIT margin of automobile makers over the last 10 years has
been 4.8% and that of the top automotive suppliers 6.5%. The
findings of the Oliver Wyman "FAST" study suggest that profit margins will
come under serious pressure if the traditional cooperation forms are
continued. Innovative business models, in conjunction with a new
quality of cooperation, will counteract this erosion of profit
margins. Oliver Wyman and Fraunhofer simulated the influence of these new
forms of collaboration in the framework of an industry business
model and determined that they can produce cost savings of between
EUR600 and EUR1,000 per vehicle. Thus, automobile makers and
automotive suppliers can improve their EBIT margins by around 3% and
their return on capital employed (ROCE) by 4% to 10%.
The discussions
with senior automotive industry executives conducted as part of the
"FAST" study have shown that the majority of them are firmly
convinced of the coming structural changes and the new quality of
cooperation. Some executives, however, still see high barriers such
as existing investments in plants, the influence of trade unions or
the risks of change. The model analysis performed by Oliver Wyman
suggests, however, that serious competitive disadvantages of a kind
that automobile makers can no longer afford will result if they
hesitate to transform their structures.
The new
division of work in the industry
The concentration process
affecting the automobile industry is slowing. The current number of
5,500 suppliers will shrink to about 2,800 by 2015, and of the 12
independent automobile manufacturers today (BMW, DaimlerChrysler,
Fiat, Ford, GM, Honda, Porsche, PSA Peugeot Citroën, Renault/Nissan,
Rover, Toyota and Volkswagen), presumably about 9 to 10 will remain
independent. In the future, automobile makers will devote much more
attention to post-production activities, such as sales, service and
customer support. A number of reasons will prompt them to focus on
this "downstream" business:
- Contact with
customers and brand image are destined to become the critical
success factors in competition. The high level of international
production standards and the faster rate of obsolescence of
technology allow less and less room for product differentiation.
Thus, brand differentiation will increasingly be sought in the
brand experience.
- Downstream
investments in sales and service require less capital than
investments in new technologies and production equipment and
promise significantly higher returns - especially considering that
the capital intensity of the automobile industry is very high in
comparison to other industries.
- The 800
million vehicles already in the market represent a potential for
business opportunities and customer loyalty reinforcement that has
not yet been adequately tapped.
As automobile
makers focus more and more on the downstream end of the business,
development and production will be shifted increasingly to the
automotive suppliers. Already today, automobile makers develop and
build only about 35% of their autos themselves; at present, the
self-produced content of an "average automobile" is only about
EUR4,000 and by the year 2015 this share of production will sink to
EUR2,670 or 23%, the rest being built by suppliers and service
providers. The vehicle components most affected by this trend will
be the body, sheet steel, paint and chassis. Furthermore, automobile
makers will increasingly withdraw from the production and assembly
of modules. The amount of money that auto makers spend on
pre-development and series development activities will remain nearly
constant at about EUR30 billion; they will continue to invest
heavily only in automotive electronics. All in all, therefore, the
"dependency" of auto makers on their suppliers will continue to
grow.
Automobile makers will focus on the characteristics
of their brands
In the future, the
positioning of the automobile brands will be the decisive factor
determining which areas of production will be retained and which
will be outsourced. In fact, 80% of the senior executives questioned
by Oliver Wyman expect that the areas of production which the
manufacturers will keep for themselves will be closely linked to
brand and product differentiation strategies. In the "FAST" study,
70 brands were plotted in clusters along the dimensions of
premium/mass-market, sportiness/comfort and price/quality. This
analysis showed how differences in the brand character influence the
areas of production that will be retained, instead of outsourced, by
the automobile makers. In the premium/quality/sportiness cluster,
with brands like Audi and BMW, the share of production retained by
automobile makers will be 25% higher than in the cluster of
mass-market/price/comfort, with brands like Daihatsu, Kia and
Rover.
This analysis
also revealed that only very few automobile makers intend to
increase their own production through 2015 in absolute numerical
terms. In particular, the mass-market brands will decrease their own
production share by up to 30% and their total own production in
absolute terms will fall by 15%. This trend will affect brands like
Chrysler, Ford, Citroën and Nissan. Premium brands like Audi, BMW
and Mercedes-Benz, on the other hand, will increase their own
production in carefully selected areas. Finally, all brands will see
a significant increase in the volume of outsourced production that
has to be managed, which will more than double in some
cases.
Europe
to become the world's most important region for
automobiles
The regions of the world
that will experience above-average growth include China, India and
Europe. And yet the growth rate of Chinese production is often
overestimated. Today, 1.8% of global automobile production is
realized in China; by 2015, it will grow to 4.8%. In absolute terms,
Europe will come out the winner in the next decade. Today's
production of EUR204 billion will grow to EUR318 billion and the
current 30% share of global automobile production will be slightly
extended.
Experiencing an
absolute increase of EUR114 billion euros, Europe will assume the
world's leading role in the development and production of
automobiles, clearly overtaking the NAFTA zone, which will see its
production increase only slightly from EUR227 billion to EUR267
billion by 2015, while Japan's automotive production will stagnate.
The Japanese manufacturers are siting their new plants and
development centers in Europe and the United States. The success of
the European automobile industry can be attributed first of all to
the strong innovation capacity of the Europeans and secondly to
their dominant position in the segment of premium brands, which have
experienced strong growth.
The growth in
automobile production and development in Europe will also have an
impact on jobs. By 2015, 1.2 million new jobs will be created in
Europe alone. It should be noted, however, that this scenario is
likely to materialize only if the legal and regulatory conditions
applicable to automobile sales and employment in Europe do not
worsen further. An international industry like the one in question
can easily shift their capital investments, and the jobs that go
with them, to new plants in other countries of the world.
Consequences for business
strategies
The revolutionary changes
affecting the automobile industry will also have a tremendous impact
on the strategic objectives of industry players in the next few
years:
- The premium
brands are destined to become the flag-ship of the automotive
groups. This is where the automobile companies will seek to build
and maintain their core competence and groom their management
successors. Technology and expertise will flow from the premium
brands to the mass-market brands.
- In the
future, every brand will need a precise value creation
apportionment strategy setting out the production to be retained,
as opposed to outsourced, and the necessary competencies,
capacities and partnerships.
- Most of the
automobile makers have already introduced a module strategy. This
creates obvious interfaces with suppliers and allows for seamless
transitions between model and innovation cycles.
- Manufacturers
and suppliers will form close-knit networks. The key success
factor will be to build lasting relationships with the right
partners at an early stage of the game. The shared goals and the
distribution of duties will have to be clearly defined if a new
quality of cooperation is to be achieved.
- Early on,
automobile makers will have to identify and build up promising
business models in their networks in order to gain competitive
advantages. They will also have to reinforce key strategic areas
of competence and hand off peripheral areas to viable cooperation
ventures.
- The component
manufacturing plants of the automobile makers will act as the
direct competitors of the automotive suppliers; they will supply
not only the brands of their corporate group but also third-party
brands as well. In the long term, they will survive as component
production plants of the automobile makers only if they are vested
with strategically vital core competencies.
- In the
future, suppliers will carry the brunt of capital investment
activities. But even today their capitalization is inadequate.
They can solve this problem by offering stock to the public,
accepting investor groups as partners or obtaining start-up
assistance from the auto makers. Suppliers need to start working
on suitable financing strategies before it is too late.
- In the
premium brand segment, electrical systems and electronics already
account for more than half the vehicle's value. To date, neither
the auto makers nor the suppliers have developed adequate
strategies for keeping abreast of the development process and
accommodating the expected growth of EUR189 billion by
2015.
Main
points of the new forms of collaboration
- After mass
production in the 1920s and "lean" production in the 1980s, yet
another production revolution is underway in the automobile
industry.
- The auto
makers will restrict their own share of production to components
that are crucial to the success of their brands.
- Mass-market
brands will reduce their own production depth to a greater degree
than the premium brands, which require more exclusive features.
- Suppliers and
service providers will take over large parts of R&D and
production; they can nearly double their revenues by 2015.
- The
traditional roles of manufacturer and supplier have outlived their
usefulness. New forms of collaboration will emerge.
- The new
quality of cooperation will boost EBIT margins by around 3% and
return on capital employed by around 4% to 10%.
Background information on the
study
The study entitled "Future Automotive Industry Structure
(FAST) 2015" was based on 60 interviews with decision-makers at
automobile makers, first and second-tier suppliers and service
providers, plus a detailed analysis of all available data sources
and the model strategies of the brands. All 70 of the significant
passenger automobile brands were analyzed and the automobile modules
and production stages that are critical to the success of their
brands were identified. The projections for the automobile makers
and automotive suppliers were derived from a simulated model of the
production system from 2002 to 2015, related to brands, vehicle
clusters, vehicle modules, production stages and regions. The study
formed the basis for detailed conclusions concerning the future
development of individual segments and regions. In addition, more
than 20 new forms of cooperation, which can bring about a new level
of quality in the cooperation between automobile makers, suppliers
and service providers, were identified.
Contact:
Pierre Deraëd
Head of
Corporate Communications
pierre.deraed@oliverwyman.com
Oliver Wyman
Marstallstrasse 11
D-80539 München,
Germany
Phone: +49(0)89 939 49 599
Fax: +49(0)89 939 49
507
http://www.oliverwyman.de/
We will also be
happy to send you this release by e-mail. Just request it at pierre.deraed@oliverwyman.com.
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