Incorporating intelligence. As virtually every industrial sector — transportation, power grids, robotics, and construction, among others — demands smart products to drive more sophisticated applications, the intelligence of embedded software will differentiate products from their competitors. In this environment, industrial manufacturers must learn how to think and act like software companies, relying on agile R&D processes for enhanced innovation, speed, and continuous improvement, and putting in place research and development cycles, tools, and testing to maintain high quality standards in products.
- Rebalancing cost structures. Leading industrial firms have already taken a close look at whether their overall cost structure is in line with their size, scope, and direction, which may have changed radically or subtly during the recession. They are now reassessing their product portfolios to identify the most profitable segments, and ensuring that their capabilities — processes, systems, tools, and skills — are appropriate to sustain and enhance those segments. There will probably be further pressure to reduce labor costs (salaries and benefits), which have continued to rise haphazardly in many companies even in difficult times, creating an imbalance that poses risks for both workers and employers. With proper execution, a reassessment of compensation throughout a company can generate net labor savings of 15 to 20 percent.
For industrial firms, the changes described here have been on the agenda for years, but given the fast pace of growth in emerging nations and the slow recovery in the West, they can no longer be sidestepped. This year offers a crucial opportunity to finally address the fundamental obstacles that separate merely good industrial companies from great ones.
Among industrial companies, the automotive sector merits special mention, given its historical significance and its position at the epicenter of the globalization battleground. After an unprecedented downturn, the American automotive industry is beginning to recover. The dislocations of bankruptcy and restructuring are mostly finished, credit is becoming more readily available, and many observers expect demand to grow as the cars already on the road age. Long-term industry fundamentals are improving now that the Detroit Three have greatly reduced legacy costs and are introducing more competitive passenger vehicles. Further, Toyota appears to be recovering from its recall crisis, and South Korean automaker Hyundai is gaining market share with an impressive line of new products.
By and large, suppliers are enjoying a similar turnaround. Several large Tier One suppliers have emerged from Chapter 11 bankruptcy, and some suppliers are benefiting from the revival in industry volumes and improved product portfolios, which are generating solid profitability and cash flow.
Yet automakers in North America and elsewhere still face significant obstacles to achieving sustainable profitability over the long term. Competition is fierce across most segments. Hyundai has launched a compelling lineup at attractive prices. Honda is fighting back with aggressive lease deals on its aging Accord, and Toyota is working to reestablish its reputation for industry-leading quality while using incentives to maintain share and volume.
The Detroit Three face a separate set of obstacles. GM, Ford, and Chrysler still confront the difficult task of closing the cost gap with advantaged global competitors. Despite union concessions, wages and benefits for current hourly workers are still well above benchmarks established by new North American plants. In addition, the unions are working hard to reverse recent concessions, which could erase hard-won gains.
The Detroit Three also have a quality perception gap to overcome. Although the quality, reliability, and durability (QRD) statistics for U.S. automakers are closer than ever to those of their Japanese counterparts, Booz & Company research shows that car buyers can take as long as 10 years to catch up to the quality data. Despite smart investments by GM and Ford in new automobile interiors and other feature and performance improvements, including a raft of technology enhancements, some entries still lag behind other global brands. Finally, GM and Chrysler need to rebuild their financing capabilities and dealer relationships, which were both badly damaged during the bankruptcy process.