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Auto Suppliers Continue to Embrace Diversification as Survival Strategy

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When the 2008-2009 severe economic recession impacted the automotive industry in the United States, Supply Chain Matters featured commentaries noting how various suppliers had turned to broader product innovation and industry diversification strategies to buffer severe impacts in domestic automotive related business. In many cases, these strategies insured survival as a supplier. Some automotive suppliers began to broaden their presence in other geographic markets as well as supply components to other offsetting industries such as medical devices or alternative energy. While large OEM’s may garner the attention of the government to protect a strategic industry and thousands of jobs, suppliers within other tiers of the supply base are less protected during times of severe recession. That was certainly the case in the United States.

Thus it was with interest that we once again noted an article published last Friday in the Financial Times which reports that some of Europe’s car part suppliers are embracing a flexible future through industry diversification. (paid subscription or free metered view) This article notes that in the midst of tough times for Europe’s automotive industry, suppliers based in Europe also carried learning from 2008-2009 toward broader international supply diversification and other offsetting strategies. The article cites suppliers such as Germany’s Bosch and Continental electing to move away from commoditized products to more value-added technologies such as safety, fuel efficiency and infotainment systems. Strategically, that positioned these suppliers to be able to take advantage of current automotive OEM’s global platform strategies and have access to broader geographic markets such as China and the United States.

As an example, the article draws a contrast among two French suppliers, Faurecia, the largest maker of vehicle interiors which is heavily exposed to the European market decline, and whose stock has declined 30 percent. That is contrasted to that of rival Valeo which has only a quarter of its production in Europe, and whose stock is risen about 12 percent over the past year in the midst of the European automotive market decline.

While larger suppliers may have the resources cited to exercise global diversification, smaller suppliers have limited resources, and thus the stakes are higher for those who have a business model that is dependent on a single OEM customer, domestic geographic market or commoditized product. The article cites small suppliers based in Italy or Spain who are now trying to expand business with other OEM’s with diversified international business.

This author will therefore reiterate recommendations shared in our 2009 commentary. Diversification has to be evaluated from a perspective of overall supply chain competency, current or future.  Your company may well have the design and production capabilities related to product technology, but the open question to be addressed is whether you have the supply chain business process capabilities to compete with other existing players in your new industry venture.  High volume, make-to-stock is quite different than low-volume, make-to-specification.  Packaging for high volume, just-in-time assembly lines is far different than packaging for a variety of different channels.  If your demand forecast or replenishment signals come from but a few large OEM’s, it can be far different when your demand signals are buffered by other upstream players in the value-chain, the classic “bullwhip” effect. If you about to compete with existing players who have invested in more flexible supply chain fulfillment capabilities as well as value-chain visibility, than be realistic as to what your company needs to work on in addition to new products.

Don’t get me wrong- we encourage organizations to evaluate diversification, but do take a broader view of what is required. That should be included in all of the business media articles that report on these strategies.

Bob Ferrari

 

 

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