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  • Hyundai Moves Closer to Closed Supply Chain Network Model

    In a series of ongoing commentaries we have noted how some global manufacturers seem to be turning more towards closed vs. open supply chain deployment models.  We noted the evolving concept of closed vs. open supply chain deployment models from a past article published in the Financial Times.  A closed supply chain is described as a highly integrated set of networks in which many of the technologies being applied are developed at least partially by the company orchestrating the supply chain. This is a contrast with an open supply chains, where the emphasis is on standardized components that fit together in a modular fashion. In the open concept, suppliers are generally encouraged to be the main innovators and sell the same components to a range of other customers.

    The latest clear example of movement toward a closed strategy has some rather interesting modern day parallels to the classic former Ford River Rouge complex.   Ford constructed the Rouge River complex in the late twenties to control the entire supply chain including the production of specialty steel it required. Henry Ford’s strategy was to control all of the key value-chain aspects for manufacturing a motor vehicle, including the control of raw materials.

    Hyundai Motor, which operates under the umbrella of a family-owned group of companies consisting of Hyundai Motor, Kia Motors and Hyundai Steel, recently announced a strategic supply agreement for supply of one of the most crucial aspects of its value-chain, the supply of steel.  According to a published article appearing in the Financial Times, (paid subscription required or free metered view) Hyundai is seeking innovation in specialty alloys that can decrease the weight of its new model cars by 10 percent while continuing to enable more innovative vehicle design and fuel economies.

    Rather than solely depend on two existing global steel suppliers, Nippon Steel and Posco, Hyundai is leveraging an $8 billion a family capital investment in Hyundai Steel to increase capacity for more innovative and modern blast furnaces. Hyundai Steel currently supplies approximately 30 percent of steel supply for both Hyundai and Kia, and plans to increase that number to as much as 45 percent by 2013. The new blast furnace capacity coming online and dedicated to Hyundai and Kia is designed to allow greater flexibility and speed to forge higher density steel for specific design needs and consequently more fuel efficient vehicles.

    The announcement has fueled the classic debate of whether Hyundai Motor, by its increased reliance on its own steel supplier, will have too much of a dependence and exposure to the cyclical up and down market tends of the steel industry.  Then again, having a friendly and stable supplier may serve as an advantage for Hyundai Steel, especially given the current market growth trajectory of Hyundai and Kia Motors.

    This is a development worth watching in automotive supply chains. It may produce evidence of whether a closed focused supply chain strategy in automotive provides a competitive advantage over the coming years.

    Bob Ferrari

    1 Comment

    1. As you point out, closed supply chains are a variation of the vertically integrated supply chain that many companies had at the start of most industries. For example, Henry Ford owned the forests, iron ore mines, and steel facilities that went into his original automotive vertically-integrated (closed) supply chain. Eventually, process innovation and scale (back end suppliers supplying multiple customers) led to independently managed parts of the supply chain coordinated by the OEM.

      The typical automotive OEM footprint today consists of assembly, powertrain, and stamping. This allows OEMs to control the traditional three most important customer aspects of the vehicle: quality (assembly), aesthetics (body panels), and performance (powertrain). These are also among the largest investment areas, with the body and powertrain representing about 30% of the price of a typical automobile. The rest is supplied by hundreds of Tier 1 suppliers and thousands of Tier 2 suppliers. At one time, the OEMs owned much of this production. (It should be noted that electronics is the fastest growing area of customer importance on vehicles; there are now more than 50 microprocessors on the typical car).

      There are a number of reasons companies are considering more vertical integration (closed nodes) in their supply chains. One reason is to maintain control over innovation and associated intellectual property. Another reason is to maintain some control over input pricing. Hyundai’s move for more vertical integration with steel may be a case of both. Since steel is critical to a differentiated part of the vehicle (body panels); any innovation that could drive down cost and weight might be a candidate for a closed node in the supply chain. It is also a commodity that has highly fluctuating prices, so having some control over its production may help.

      In general, Hyundai is an important company to watch – they have now moved out of the shadows into the spotlight of a top-tier automotive company. In the past ten years, they moved from the number 11 producer in the world to the number 4 producer, with 5.7M units of production in 2010. They are now ahead of Ford and just behind Volkswagen. Japanese and other companies are looking over their shoulders, concerned that Hyundai may be able to do in automobiles what Samsung has done in consumer electronics.

      Since this is a discussion about steel, it is interesting to note that steel companies themselves are seeking vertically integrated strategies. Four iron ore companies now control about 70% of the world’s iron ore output and thus exert considerable power over pricing. Steel companies are seeking to control more of the upstream pricing through acquiring their own iron ore sources while at the same time also moving downstream by adding high-value add operations that give them more pricing power in the market.

      Finally, this is another example illustrating supply chain structures need to be dynamic. Near-shore/off-shore, owned/outsourced, and closed/open are all considerations of any robust sourcing analysis and discussion.

      Kelly Thomas
      Sr. Vice President, Manufacturing
      JDA Software

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