The events of the past 12 months have shell-shocked even the most ardent industry participants - a crisis by anyone's gauge. Many wish that the crisis would have come and gone with little fanfare - change is difficult for everyone. In fact, Henry Kissinger, the former U.S. Secretary of State once noted, "There cannot be a crisis today; my schedule is already full." Our collective schedules were already full, but the recent vehicle demand meltdown led by confidence and credit issues coupled with the extreme financial liquidity issues at General Motors, Chrysler and a host of key suppliers has brought this industry to a precipice.
Most want leave the recent events behind to forge ahead and better understand the industry before us. Changes have been and will be dramatic with unprecedented speed. In 1997, while we have oft heard the "bigger is better" mantra drive our industry, 10 OEMs accounted for the top 80% of total output. By 2015, 11 OEMs will account for the same portion, which is little real change. For many, as the automotive infrastructure continues to globalize, one would expect fewer OEMs as economies of scale take hold and drive weaker competitors out. Consolidation will occur, though these efficiencies have been afoot for several years.
Several factors are at work beneath the waves. It was once thought (in the 1980s and early 1990s) that each OEM needed to be everything to everyone. When the industry was more regional in scope (North America versus Europe versus Asia), most OEMs were expected to field a wide array of products, from small cars to commercial vehicles. The lack of scale in any one segment was a lower consideration as a full breadth of coverage was more important to allow dealers an entry in key mass market segments. This led to regionalized vertical integration, a trend in which only a few global OEMs took advantage of the scale possibilities offered by fielding a platform with slight regional modifications. Most OEMs focused primarily on their core region or allowed operations outside their core region to run autonomously - not the best recipe to lower risk and gain economies of scale.
There are scores of key examples of this shift towards wider geographic production and sales breadth combined with an increased focus on building global economies of scale in key B-, C- and C/D segments. The accompanying chart outlines the localization underway at three such OEMs from 1997 to 2015.
At Ford Motor Company, including Mazda, the portion of production in its home market of North America was 54% in 1997, though this level is slated to decline to 35% by 2015. At Renault/Nissan, when one counts Japan and Europe as the home regions for the consortium, production accounted for over 80% of volume in 1997. Fast forward to 2015 and this is expected to decline to less than 50% as the French/Japan consortium builds a footprint in virtually every major market. Toyota has shifted and will continue to shift more focus away from Japan as their concentration declines from 72% to 39% over the same 18-year period.
Combined with the shift to broaden the scope and spread the geographic risk of these OEMs is the constant drumbeat of platform consolidation. Driven by the competitive need to do more with less, substantial consolidation has occurred in global segments B through D - those segments with the greatest volume and highest applicability to extend common platforms to several markets. Within these core segments, accounting for 73% of volume by 2015, the platform consolidation has been nothing short of astounding. At Ford, volume per platform (over 25,000 units per annum) is estimated to rise 185% over the same time period to 719,000 units. Toyota's improvement is higher, marking a 216% improvement to 835,000 units per platform by 2015. Lastly, the fruits of the French/Japanese consortium are manifest in a 380% improvement in economies of scale within the B- through D-segments. All three of these OEMs are well ahead of the industry improvement of 70% over the same 18-year period.
The industry is also littered with OEMs seeking broader product coverage while reducing risk. In the past most OEMs would go it alone - not heeding the lessons of higher volume. Over the past decade, common sense has prevailed. Several joint commercial van programs in Europe (e.g., PSA/Fiat or VW/Daimler), compact pickup truck programs in North America (e.g., Chrysler/Mitsubishi or Nissan/Suzuki) or the scores of shared A-segment offerings in Japan (e.g., Suzuki/Nissan): these are all designed to fill portfolios with a minimum of risk while driving scale economies upward. These trends are bound to increase as OEMs refocus their capital.
Increased geographic diversification, extended principally to lower-cost locations, combined with sharply enhanced economies of scale in core segments are critical to success. One can understand why General Motors is working fervently (as of this writing) to maintain access and some control to their core C- and C/D segment platforms emanating from Opel. It is critical to their future in many regions. Also critical to success is the ability to efficiently meet stricter emissions and fuel economy standards escalating in most jurisdictions. OEMs are starved for capital and thus need to cost effectively build strategies to meet future standards while still utilizing the current infrastructure. A combination of new engine and transmission strategies with mass reduction throughout the vehicle will be a substantial challenge for industry participants.
The building blocks for success in tomorrow's marketplace actually started several years ago when most discovered the benefits of strong economies of scale and flexibility in cost-effectively meeting customer's needs. The improvements in platform consolidation and focusing on the core of the market are manifest in startling gains in economies of scale - gains at Ford, Toyota and Renault/Nissan have been outlined. Diversifying risk in lower-volume niche segments through license agreements and affiliations, spreading risk of being too focused on one region and sticking to the basics of flexibly building economies of scale in high-volume sectors are core building blocks for success. Crisis or not, real change in our industry takes longer than 12 months.
Michael Robinet can be reached via e-mail at michaelrobinet@csmauto.com .
