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 / Autumn 2011 / Issue 64(originally published by Booz & Company)


Is the U.S. Auto Industry Ready for Growth?

For auto suppliers, the future is uncertain as well — not because of potential changes in industry dynamics some years down the road, but rather because of a problem they have struggled with for at least a decade: Many find themselves unable to command full value for their products. Owing to an overabundance of competitors in most product categories, many suppliers lack the leverage to set terms with their automaker customers that would allow them to earn a positive return on their invested capital. They’ve become, in effect, low-cost order takers. As a result, many suppliers find themselves too short of cash to invest heavily in research and development. But that investment is imperative if they hope to distinguish their products from their competitors’ and go beyond merely selling commodities. Not surprisingly, given the dynamics of supplier relationships with the automakers, the two most widely chosen concerns expressed by suppliers in the survey involved cost position and engineering, research, and development (ER&D)/innovation. (See Exhibit 2.)

“A product’s price is directly proportional to the value it creates,” says David Johnson, chief executive officer of Achates Power Inc., which is developing an energy-efficient engine. “Any time that you aren’t delivering a unique technology or unique features that will create market demand or fill a real need in the market, your product becomes commoditized, and the next thing you are doing is price and quality competition. That is not a long-term winning formula.”

Clearly, suppliers have a long way to go to improve their relationships with automakers and to drive more value into their products. But according to the survey, auto suppliers do not see the path they need to take to get there. When asked to name the most important keys to winning, most suppliers did not cite two facets of a business’s operations that routinely count among the prerequisites for long-term viability: a well-defined strategy and deep market insight. Understandably, no business leader would argue against the importance of achieving the low cost position or providing superior customer service. But without a well-defined strategy rooted in deep market insight, it is nearly impossible to achieve a sustainable, differentiated position — which, in the end, is key to capturing the value created.

Given the responses to the survey, and taking a close look at current conditions in the U.S. auto industry, automakers and suppliers face different priorities in the United States (and elsewhere in the world).

The automakers must:

• Focus even more intensely on building attractive vehicles and rebuilding brands. Cars and trucks are still among the most visible, emotional purchases consumers make. In the current frugal and practical environment, U.S. car buyers need to be given reasons to “fall in love” again.

• Create vehicles with exciting design and styling; superior quality, reliability, and durability (QRD); and technological innovation. Although the QRD of vehicles sold in the U.S. is better than ever, meaningful gaps still exist between the highest-ranked companies and the rest of the pack, especially in longer-term reliability and durability. In addition, as breakthrough innovations in safety, “connected vehicle,” and power-train technologies emerge, new opportunities must be created to deliver differentiated value to consumers and drivers.

• Make sure that each vehicle produces a positive return on investment. Hoping that a few blockbusters will generate most of the portfolio’s returns — as many automakers have done in the past — is no longer sustainable in a more competitive and smaller U.S. market.

• Continue minimizing relative material and structural costs while bringing new technology to market cost-effectively, earning fair returns for product innovation.

• Prepare cost structures and innovation processes for a more globally competitive landscape.

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