In conjunction with the Detroit Auto Show that has been underway in the U.S. there has been no shortage of business media news stories related to the state of the industry. No doubt, the headline for industry and associated supply chain oriented audiences reflects on what a difference one year can make.

Readers can certainly recall that during the past global financial crisis, two of the largest automotive OEM’s were in bankruptcy and in need of large scale restructuring. Global markets were weak and many governments had to initiate stimulus programs to salvage their respective home country manufacturers along with industry jobs. Japanese brands were dominant, but Korean brands such as Hyundai were starting a thrust.

As we enter 2012, the industry has a far different picture. Both General Motors and Chrysler Group are doing superbly after re-structuring and new management. Auto sales among the “big three” U.S. OEM’s rose 13 percent in 2011. Volkswagen and Hyundai have garnered tremendous momentum while Toyota and Honda continue to respond to significant supply setbacks brought about by supply chain disruption.

From a global markets perspective, the largest growth market for autos was in the U.S. which experienced a 10 percent growth rate.  A review of individual OEM U.S. sales growth rates in 2011 reveals:

• Chrysler up 26 percent
• Volkswagen up 26 percent
• Hyundai up 20 percent
• Nissan up 15 percent
• General Motors up 13 percent
• Ford up 11 percent
• Honda down 7.1 percent
• Toyota down 6.7 percent

The state of the U.S. automotive supply chains has transformed and is in far better shape than just a year ago. OEM’s have worked hard on global-wide platform product strategies along with improved flexible manufacturing techniques that allow factories to be able to support multiple models with different market growth rates. The industry has also gained more sensitivity to positive supplier relationships and participation in globally focused S&OP planning activities.

China, the world’s other market in terms of long-term growth potential, only grew 2.5 percent in 2011 as suspended government subsidies took a toll on overall demand. Of more interest, foreign brands such as BMW, GM, Ford, and Volkswagen demonstrated healthier growth levels which indicate that Chinese consumers are very particular with the brands they ultimately purchase.

Europe’s auto sales actually contracted by more than one percent and the ongoing Eurozone financial crisis do not provide optimism that Europe’s market will improve anytime soon.  Europe continues to suffer from far too much production capacity, and industry executives such as Fiat / Chrysler chief Sergio Marchionne predict more consolidation among industry participants.

In recent weeks, as a result of these trends, as well as the worsening currency exchange and energy supply problems affecting Japan, there has been a spate of announcements from automakers who have now decided to additionally invest in U.S. production capability.  In addition to Honda’s significant announcement in December, BMW, Chrysler, Daimler, Ford and others have each announcement significant new investments in U.S. production capacity.

Hyundai has had such a spectacular growth in the U.S. and other global regions that its management has announced that it has throttled-back growth expectations to take the time to focus instead to build on process quality and customer service needs. The Financial Times last week noted that Hyundai management wants to avoid the mistakes made by GM and Toyota that put too much emphasis on growing market share than in quality.  Supply Chain Matters commends Hyundai for that decision.

A rapidly changing global economy, changed make-up of executive leadership, significant unplanned supply disruptions and continued investments in value-chain capabilities have resulted in the automotive industry being in a far different landscape in the coming months.  This is yet another reinforcement that for this economy the need for teams to have the supply chain in constant alignment to a rapidly changing set of business strategies is a continuous imperative.

In our soon to be published Supply Chain Matters Q4-2011 Quarterly Newsletter, we will provide additional commentary relative to the signs of a renaissance for U.S. manufacturing.

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

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

Since our initial Supply Chain Matters alert ten days ago regarding monsoon-related floods impacting Thailand, the magnitude of the ramifications supply chain disruption is becoming more measurable for automotive, high tech and consumer electronics supply chains, and the duration of disruption more extended.  Meanwhile, water is massing just outside the capital city of Bangkok with the provincial governor warning that heavy flooding in the city is imminent. The United Nations is now warning of pending food shortages in the regions as rice and other vegetable crops become more inundated with flood waters.

Last week, high tech electronics firms were compelled to issue business impact statements.

Thailand represents significant disk drive production output, estimated to be close to 25 percent. Some estimates that global output could fall as much as 30 percent in the next three months, which is a significant magnitude of disruption. Industry forecaster iSuppli is indicating that industry disk drive supply could constrained until Q4-2012, which is sobering. The test will be how much of residual inventory and allocation strategy can buffer the impact for those further up the value-chain.

Disk drive maker Western Digital indicated that flooding of production facilities within Thailand, which represents close to 60 percent of its hard disk drive production, is having a “significant impact” on operations and its ability to fulfill customer demand. The facility represents 10 percent of Western’s total worldwide output. Seagate Technology, another disk drive manufacturer indicated its production will be impacted in the current quarter though it indicated that its Thailand facilities remain operational.

The floods are additionally impacting component suppliers with ON Semiconductor, Hutchinson Technology and Microsemi Corp. each indicating a substantial impact in supply. ON Semiconductor indicated that its Sanyo chip operations will remain shutdown indefinitely. Severe damage is suspected but workers have been unable to assess the overall damage. According to a Wall Street Journal report, the company expects the flooding to impact earnings for a minimum of 3-4 quarters with an estimated $40 million to $60 million in lost revenues per quarter.

Both Nikon and Sony have also indicated disruptions may impact the production of digital cameras and lenses as well as delay new product launches. These producers will already in the process of mitigating disruptions from the March tsunami that impacted northern Japan.

The potential impact to PC related companies could not come at a more inopportune time.  Customer shipments to satisfy the upcoming 2011 holiday buying season are about to occur while the implication of consumer preference for tablet and smartphones threaten to erode revenues and product margins. While many PC manufacturers remain silent, Apple CEO Tim Cook was quoted that he expects an overall industry shortage of disk drives.  A statement such as this emulating from the head of Apple is a sure indication of industry concern. Industry shortages will lead to price spikes and potential hoarding if suppliers do not institute controls.  The head of contract manufacturer Jabil’s supply chain, indicated at the Kinexions conference last week that if it were not for the proactive anti-hoarding and allocation buffer policies of Japan based component suppliers after the March tsunami, the situation could have been a lot worse for contract manufacturers. The same potential situation faces PC OEM’s who procure the bulk of disk drive inventory for their respective contract manufacturers.

Similarly, automotive supply chains are now incurring the impacts of the floods. A Wall Street Journal report indicates that Toyota will reduce production hours at its plants in Japan for the remainder of this week in order to cope with expected shortages of some parts. Toyota had previously scaled back production volumes in Indonesia the Philippines and Vietnam, and three plants in Thailand due to parts shortages. An estimated 100 parts have been impacted by supply disruptions.

We often communicate the overall importance of the ability for supply chain teams to perform scenario and contingency planning.  What if supply chain component supply was impacted by 10-20-30 percent? Unfortunately, in high tech and automotive sectors, these scenarios are becoming very real. As was the case after the Japan tsunami, the resiliency and determination of supply chain teams will be ultimate test of how long and to what degree, industry supply chains are impacted by the monsoon floods that remain occurring throughout Thailand and the Asia region.

Bob Ferrari

In early 2009, during the darkest days of global recession and economic crisis in the U.S., there was quite a raging debate on the merits of corporate bailouts, particularly those related to major brand owners in the U.S. automotive industry such as Chrysler and General Motors.  The political debate got intense, especially on the merits of government bailouts of private corporations. We at Supply Chain Matters argued that the more important concern for the industry was the overall supplier base, and the concern for the cascading effects to that supply chain if one or more OEM’s went out of business.  In a later commentary, Prescriptions for Detroit’s Supply Chain Crisis, we again pleaded that more money to bailout the OEM’s would be a waste unless there was a way to insure more viable integrity of key component suppliers, which at that time, provided a more precarious scenario of multiple failures. That was then.

Yesterday, The Wall Street Journal featured an article, Smoother Ride for Auto-Parts Makers (paid subscription or free sign-up account may be required), which noted that in just a year, the surviving supplier network has begun turning the corner towards profitability with new forms of restructured businesses.  Examples noted include ArvinMeritor Inc., American Axle & Manufacturing Holdings Inc, Lear and TRW Automotive Holdings Corp.. The formulas focus on divesting of non-core businesses and further investing in emerging growth businesses and higher growth emerging markets such as Brazil, China. India and Russia.  ArvinMeritor will become more specialized in commercial truck components. Lear now has its focus on car seats and electronics.  Dana divested of frames and suspensions to focus on axles.  American Axle and ArvinMeritor opened new plants in China and India.  The takeaway for readers of the article is that many of these suppliers are now in a much better financial position, but the longer-term scenario is dependent on a rebound of the U.S. consumer in buying more autos.

We would dare say that there were other factors as well.  The OEM’s realize more than ever that a viable and functioning supplier network is in their best interests. Supplier viability is just as important as contract performance. Supplier viability may not have translated to a holding company structure on the part of the OEM. The dual coupling of the strategic interests of suppliers as well as the OEM’s has also occurred.  OEM’s may have desired more of a one-stop destination of component supply but that may have caused suppliers to have an unwieldy cost vs. revenue structure. Restructuring of costs and health benefits reform certainly played a role as well.

Let’s return to the original debate regarding the existence of a viable and vibrant U.S. automotive supply chain network.  The signs of turning the corner are obviously far more positive.  The government bailouts of Chrysler and General Motors probably saved the bulk of the industry by allowing key suppliers the time and motivation to independently restructure their business models. It has also opened the door for new or different supplier entrants or parts distribution models. The open question moving forward, however, is whether it is a U.S. supplier network or a global-based network of parts suppliers that emerges.

What is your view?  Was de-coupling of OEM and supplier interests a factor?

Bob Ferrari

If you have been following recent news regarding the U.S. automotive industry, than you may have noted that Ford Motor Company has been shopping for some months for a prospective buyer of its Volvo auto unit.  A recent article appearing in the Wall Street Journal (subscription may be required) outlines some of the plans for Ford’s preferred bidder, Geely Holding Group Company, parent of Geely Automotive Holdings Ltd., one of China’s largest privately owned auto producers. Geeley has been preparing a $2 billion bid to acquire Volvo, and the proposal has been months in the making.

According to the article, Geely has developed a turnaround plan for Volvo that targets the selling of one million Volvo vehicles globally in five years, including the selling of 200,000 cars a year in China. The plan also sets ambitious plans for selling vehicles in Volvo’s traditional European and U.S. markets.  Geely, one of China’s top ten passenger car brands, is a relatively small producer by volume, but has managed to market and produce autos for the Chinese market without leveraging an alliance with other global brands.

Plans call for high volume production to be established in China, but engineering and development would remain in Sweden.  The article cautions however that negotiation talks could still drag on, and issues of intellectual property protection remain to be overcome.

I see this proposed acquisition as a very shrewd move by Geely, for a number of business, marketing and supply-chain related perspectives. 

First and foremost, Geely stands to gain a highly recognized global brand in the premium category, one with a stellar reputation for building solid and very safe automobiles.  It’s been amazing to observe how Ford has encouraged Volvo’s safety engineering expertise to be applied to the broader offering of Ford’s vehicles.  The fact that Ford can now boast about its advanced safety features in its product promotions comes from the direct influence of Volvo engineers.  Geely stands to benefit from this same engineering expertise, and would be wise to allow Volvo engineers to apply their expertise to the entire Geely line-up. Geeley can also benefit from the global management and marketing skills that both Volvo and Ford have invested in the brand.

Second, since Volvo’s are still sold from independent dealers in Europe and the U.S., Geely stands to inherit an existing distribution channel for not only Volvo, but other Geeley vehicles in the future.  Volvo, in-turn, can gain the benefit of Geely’s knowledge of the Chinese automotive market and channels of distribution. Premium brands are becoming much more attractive in China, by evidence of the fact that brands such as Audi, BMW, General Motors Buick, and Mercedes are experiencing double-digit sales growth rates.  Audi expects to sell over 130,000 vehicles, and Buick has sold in excess of 300,000 vehicles this year. Geely has ambitious plans to make Volvo’s more appealing to the most discriminating and wealthy Chinese buyers. The acquisition of Volvo can place Geeley directly into this competitive race for attracting evolving upscale auto buyers in China.

The third benefit lies in deployment of a high-volume global production and efficiency value-chain for producing Volvo vehicles.  Geely’s initial plans call for building a new Volvo plant in China capable of producing 300,000 vehicles per year, and also leverage China’s advantages in material and labor costs.  That also implies the development of new Chinese-based suppliers. The company further indicates that it will maintain Volvo’s current manufacturing capacity in Europe to distribute to both European and U.S. markets.  My speculation is that once Geely’s Chinese manufacturing and Chinese value-chain capabilities are ramped-up and matured, that facility can be the focal point for exporting Volvo’s to other countries.

Finally, if Geely is successful in its bid, it will acquire an outlet to introduce and market autos in the U.S. without having to overcome U.S. government or consumer perceptions regarding Chinese auto companies taking over from U.S. based companies.  Consumers tend to have short memories, and Volvo buyers are a loyal group.  If Geely can maintain Volvo’s engineering and safety standards, build in additional quality, and produce in a far more efficient manner, than consumers will overcome their political objections.  That’s exactly what happened with every other foreign based brand that successfully entered the U.S. market.

Geely’s plans are both bold and shrewd, and could provide strategic advantages from a business and value-chain perspective.  But the potential for slip-ups also exist.  Future developments will tell the complete story of whether all of the strategy and operational execution will fall into place.

 Bob Ferrari