It is becoming apparent to all of us that the U.S. automotive industry has reached a fundamental crossroad.  The current realization of financial crisis among two of the top-three U.S. based producers is finally sinking in among U.S. consumers, and President Obama has taken a highly visible role in insuring that U.S. brands, as well as U.S. suppliers, can have yet another opportunity to compete on the world stage.

Another realization that has finally sunk in among senior industry leaders is that the future of this industry no longer lies with selling more and more gasoline-guzzling vehicles, but rather in alternative energy, hybrid, or electric powered vehicles. As the industry attempts to make this next critical transformation, one key tenet of the supply chain will become the most crucial.

There is an excellent article in April’s Fortune Magazine written by Paul Keegan (Recharging Detroit: The future of the U.S. car industry hinges on cutting-edge battery technology.) which is worthy of a deep read.  Keegan makes the conclusion, well known by our supply chain community, that whoever controls the battery industry, which will make-up a considerable part of the future value-chain of automobiles, will also control major influence over the automobile industry itself.  Whether consumers adopt hybrids or all-electrics, the common denominator will be innovative lithium-ion battery technology that can be produced in large volumes, with a lower cost.  These are tough challenges, and the article rightfully points to the conclusion that it will be battery technology that will define the next era of the modern car company, and the intellectual property and high volume production capability may not necessarily be something to outsource from the resident country.

Keegan further notes in his article that the big U.S. carmakers have been reluctant to sign a major deal with promising American companies because they are not yet convinced that they will be around for the long-term.  Ford Motor Company selected Saft Groupe of France for their technology and Johnson Controls for U.S. based high volume production.  General Motors selected a division of Korea based LG Electronics, and a $200 million plant is being built in Michigan to initially supply LG Chem-Compact Power batteries for the new Chevrolet Volt.

Chrysler on the other hand selected U.S. based A123 Systems, which currently has high volume production capability in China and Korea, but is seeking government assistance to build a high volume production facility in Michigan. Interesting enough, A123 has also been designated as a technology supplier to Chinese automaker SAIC Motor Corp. and has been reported to be in talks with French automaker Renault SA.

It would seem to me that if U.S. governmental leaders and legislators are truly committed to both a viable alternative energy transformation plan, as well as a vibrant value-chain supporting the automotive and other alternative energy related industries, than two obvious priorities come into play.  First, U.S. based battery producers need to step-up their efforts in developing innovative lithium-ion technology and production capability, including more U.S based value-chain components.  Second, the U.S. government also needs to place more emphasis on encouraging a more vibrant battery supply network to serve multiple supply chain needs.

The race is on, and Warren Buffet has one bet on BYD Company of China. For the sake of the long-term viability of a U.S. based automotive industry, let’s hope that Buffet and the industry will also select to invest in a U.S. based supplier.

Bob Ferrari

Jessie Scanlon penned a rather interesting article in BusinessWeek last week (What Can Tata’s Nano Teach Detroit?) which many supply chain professionals associated with the Detroit Big Three automakers should read.  Beyond the notions of the introduction of the Nano in India, there is the challenge of what can Detroit learn from the Tata Nano?

As the author points out: ” Tata didn’t set the price of the Nano by calculating the cost of production and then adding to margin.  Rather it set $2500 as the price that it thought customers could pay and then worked back, with the help of partners willing to take on a challenge, to build a $2500 car that would reward all involved with a small profit“.  The article further makes a case that the Big Three management are disconnected from the needs of consumers, as well as means for “rethinking the supply chain’.

I tend to agree.  Because of its low price point, the Nano ships as a kit to a local facility, where it is assembled, avoiding the need for building and operating large final assembly operations This distribution model is very similar to how foreign manufacturers have introduced their new models to the Chinese market, by shipping kits to their foreign subsidiaries. The article rightfully points out that if the Big Three wants to expand its market to emerging markets such as India and China, as well as protecting the U.S. domestic market, there are implications for rethinking the supply chain and final distribution model.

Some specific challenges come to my mind:

Why is it that the Chevrolet Volt, GM’s planned extended range electric vehicle targeted to retail close to $40,000?  Is this about targeting what the consumer wants to pay, and what the supply chain can deliver? 

Why is that Ford cannot come up with a more affordable, fuel efficient and green alternative to its workhorse Crown Victoria? Every major U.S. city has fleets of Crown Vic taxis and police vehicles, yet the market lacks affordable alternatives in fuel efficiency.

Why is it that so many Tier One suppliers are at risk of financial collapse?  Is this a failure in supplier collaboration or rethinking the supply chain?

It continues to amaze me that auto dealerships throughout the U.S. continue to be inventory stocking points for finished models. Have any other viable distribution alternatives been explored and piloted for smarter inventory management?

Perhaps we do have a management problem.  Perhaps the Big Three is too invested in past thinking about consumer needs, sales, distribution and supply chain structure.

You are welcomed to share your views in the Comments associated with this posting.

 Bob Ferrari

In a previous posting, I expressed my own view that the cost of outright failure would be too severe for the U.S. economy to absorb, but also that any financial assistance needs to come with a complete new thinking in leadership for future competitiveness.

An interesting article published in the International Herald Tribune portal by Chang-Rang Kim, a Reuters business reporter points out that executives of the top automakers in Asia would themselves not welcome the collapse of one, or even all three of their U.S. competitors.  The why is primarily related to potential cascading effects involving the web of a multitiered automotive supply chain. The article points to perceptive financial and industry analysts commentary that reflect that as many as 90 percent of current U.S. auto suppliers supply multiple globally based customers, which implies that a shutdown of any major customer would carry an additional risk of disrupting production for other Asian and European carmakers.  ‘Even as they sold assets and pleaded for a government bailout themselves, GM, Ford and Chrysler recently loaned a combined $60 million to Metaldyne, a maker of metal-based components, because the alternative of letting the Michigan-based supplier fail would have meant certain car models would not be built.”  

I’ve pointed to the above referenced article because it provides further evidence of why outright bankruptcy would only exacerbate the current problems of the big three.  The future of any of the big three U.S. automakers lies both in world-class, competitive products, but also in a vibrant supplier network that can drive higher levels of innovation and time-to-market.  As was pointed out, many of these U.S. based suppliers cater to more than one global brand owner, and thus already have exposure to needs for product innovation, world-class reliability and quality standards.  A rapid collapse would only force Asian and other global competitors to fall back on other foreign suppliers, or find alternative means of production.

Supply Chain Matters U.S. based readers should especially note the quote attributed to Tatsuo Yoshida, an analyst with UBS Securities.  “….. At the end of the day, Japanese, European and Korean carmakers are going to eat away at the Big Three market share, whether it takes three years or five years. A soft landing would make the path to that a much smoother one”.  If the U.S. government and the big three automakers need a motivation for direction, than let this quote serve as that rallying point.  Which one of the big-three can get their act together in three years?  The answer not only lies with Ford, GM, or Chrysler, but also their supply chain partners.

Bob Ferrari

A lot has been written and commented by the mainstream media and Internet bloggers relative to the impending crisis among the big three U.S. automotive companies (Chrysler, Ford, and General Motors) and their current pleas for government assistance.  There are lots of opinions relative to whether these companies should be allowed to either succumb to the natural forces of the market or be given cash to live another day.  I personally believe that the cost of outright failure would be too severe for the U.S. economy to adsorb right now, but I also strongly believe that before these companies are provided any form of assistance there needs to be a complete new thinking and culture of management leadership. Too much traditional thinking and my-boy preservation exists at the cost of global competitiveness, especially in the area of supply chain strategy alignment.

Over on the 21^st Century Supply Chain blog, Randy Littleson called attention to an MSN Money blog entry penned by financial commentator Andrew Horowitz entitled A Plan to fix the U.S. auto industry.  Andrew’s posting is interesting in that it speaks in part to supply chain management’s role in solving some structural problems related to these companies. I especially liked his first observation which points out that these industry players continue to believe that the way to sell cars is to stuff dealers with lots of finished automobiles so buyers can immediately take them off the lot. 

This notion has always perplexed me since so many other companies, both automotive and otherwise, have proven that a lean inventory strategy supported by robust demand sensing and just-in-time production capabilities can accomplish the same purpose without that entire expensive inventory.  Randy Littleson points out in his commentary that Toyota has revolutionized the industry with their relentless focus on lean manufacturing methods, grounded by “pull vs. push” manufacturing flows.  The Internet has radically changed the way many of us research and select our automotive purchases, but this hasn’t translated itself to the big-three’s finished goods inventory strategy.

We could literally add many more paragraphs commenting on Detroit’s, especially Chrysler’s insistence on a supplier management strategy driven by price vs. true collaboration and partnership.  Here again, the Japanese, Korean, and even the German automakers have all made the transition.  An article on FT.com points out that some of Europe’s largest companies, including BMW, Daimler, and Volkswagen are taking extraordinary measures to help out suppliers weakened by the current credit crisis.

Andrew Horowitz stated the following.  “These are times that require new ideas and a brave new management that will embrace a global marketing theater.”  Let’s add another requirement that this new management include innovative supply chain management strategy that will enhance global competitiveness.   No money comes without new management, especially savvy supply chain management.

Bob Ferrari