i

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ii
With special thanks to the co-authors who helped in making this book: Axel Koch, Dr
Sari Abwa, Juri Wagenleitner, Norbert Dressler and Thorsten Mattig, Roland Berger
Strategy Consultants.

Publisher’s note
Every possible effort has been made to ensure that the information contained in this book is
accurate at the time of going to press, and the publishers and authors cannot accept respon-
sibility for any errors or omissions, however caused. No responsibility for loss or damage
occasioned to any person acting, or refraining from action, as a result of the material in this
publication can be accepted by the editor, the publisher or any of the authors.

First published in Great Britain and the United States in 2007 by Kogan Page Limited

Apart from any fair dealing for the purposes of research or private study, or criticism or
review, as permitted under the Copyright, Designs and Patents Act 1988, this publication
may only be reproduced, stored or transmitted, in any form or by any means, with the prior
permission in writing of the publishers, or in the case of reprographic reproduction in accor-
dance with the terms and licences issued by the CLA. Enquiries concerning reproduction
outside these terms should be sent to the publishers at the undermentioned addresses:

120 Pentonville Road 525 South 4th Street, #241

London N1 9JN Philadelphia PA 19147
United Kingdom USA
www.kogan-page.co.uk

© Bernd Gottschalk, Ralf Kalmbach and individual contributors, 2007

The right of Bernd Gottschalk, Ralf Kalmbach and individual contributors to be identified
as the author of this work has been asserted by them in accordance with the Copyright,
Designs and Patents Act 1988.

ISBN-10 0 7494 4575 0

ISBN-13 978 0 7494 4575 1

British Library Cataloguing-in-Publication Data

A CIP record for this book is available from the British Library.

Library of Congress Cataloging-in-Publication Data

Mastering automotive challenges / Bernd Gottschalk, Ralf Kalmbach, [editors].
p. cm.
Includes index.
ISBN-13: 978-0-7494-4575-1
ISBN-10: 0-7494-4575-0
1. Automobile industry and trade -- Management. I. Gottschalk, Bernd,
1943 – II. Kalmbach, Ralf.
HD9710.A2M376 2007
629.222068--dc22
2006030580

Typeset by Saxon Graphics Ltd, Derby

 iii

Contents

Preface by Bernd Gottschalk and Ralf Kalmbach v

Part I Major challenges 1

1 The automotive industry sets the course for the global economy 3
Bernd Gottschalk
2 The automotive power play moves into its next round 25
Ralf Kalmbach
3 The globalization challenge – is the automotive industry raising
the champions of tomorrow? 46
Dr Thomas Sedran
4 The value chain challenge: networks, the strategy for success 69
Marcus Berret
5 The technology challenge: progress or pitfall? 103
Silvio Schindler
6 The market challenge: who will gain strategic control? 146
Jürgen Reers
7 The sales and after-sales challenge: capturing value along
the car lifecycle 171
Dr Max Blanchet and Jacques Rade

Part II Case studies 217

8 Partnership as a model for success 219
Franz Fehrenbach
iv Contents

9 Brand differentiation on the basis of platform and module

strategies 241
Dr Bernd Pischetsrieder
10 New impetus for General Motors in Europe 252
Carl-Peter Forster
11 How electronics is changing the automotive industry: from
component suppliers to system partners 270
Peter Bauer
12 The next evolutionary step for the automotive industry is just
around the corner: factors for sustainable success in the
interplay of OEMs and suppliers 290
Siegfried Wolf
13 BlueTec: the path to the world’s cleanest diesel 314
Thomas Weber
14 Bharat Forge: emerging players from emerging regions 334
Babasaheb N Kalyani
Conclusion 345
Ralf Kalmbach

Index 368
 v

Preface

The automotive sector is the key industry in almost all industrialized

economies. It is one of the driving forces behind globalization. Major
macroeconomic factors, including economic growth, employment, tech-
nological progress and the pace of innovation, are all strongly influenced
by the automotive industry, whose products are both produced and sold
worldwide. Globalization, however, is accompanied by radical changes
that present serious challenges to automotive companies.
Production in the Eastern European and Asian growth markets is
constantly expanding, while the global footprint is increasingly deter-
mined by cost efficiency. Not only traditional production sites, but also
tried and tested development and manufacturing structures are in inex-
orable decline. At the same time, political developments such as EU
enlargement are creating new opportunities to redesign the global foot-
print, as companies seek to exploit the advantages now opening up in
other locations.
Component suppliers are increasingly responsible for creating value
and providing expertise. Some already have the capability to develop and
manufacture entire vehicles, and they are making full use of their engi-
neering design skills. In fact, some of these companies are visibly
catching up with the vehicle manufacturers in terms of know-how.
Partnerships between original equipment manufacturers (OEMs) now
require an active exchange of important vehicle modules such as the
engine or the gearbox. This makes it much easier for new competitors to
enter the market or reposition themselves within the market.
The automotive industry develops and produces highly complex
products. Driven by the dynamic innovation of recent years, this new level
of complexity demands a new management approach. Without it,
companies will not cope. We are also seeing important changes in
vi Preface

customer behaviour, as consumers abandon their traditional car-buying

habits. In addition to mobility criteria, customers are increasingly guided
by lifestyle choices when selecting their vehicles. And companies are also
adjusting their product lines in response to this change.
Sales structures are also facing upheaval. With competition getting ever
tougher and markets ever tighter, sales, customer service and financial
services are becoming increasingly important. Retail is the face to the
customer. It is here that the foundations are laid for brand perception, and
ultimately profitability. And now that the new rules under the Block
Exemption Regulation are in force, auto makers must reexamine and
overhaul their retail strategies.
Manufacturers and suppliers are investing increasingly in greener tech-
nologies. Manufacturers are redoubling their development efforts to
improve environmental and safety features. This is partly because their
customers expect cleaner cars, and partly because they need to respond to
legislative initiatives by the EU or, for example, the state of California.
And this trend is creating new areas of technological competition.
So far, the automotive industry has always been able to take on and
overcome similar challenges. It has responded successfully to oil crises,
sluggish economic growth and difficult market conditions. But the present
situation is special: it now looks as if many different underlying
economic, political and ecological factors are changing simultaneously.
Most publications on the subject of automotive management deal only
with individual aspects and questions raised by the management agenda.
A wider, holistic perspective on the industry is still lacking. The aim of our
book is to fill this gap. It is intended to provide guidance for automotive
managers and to offer practical help for practical management by giving
examples of best practice and recommendations for action.
The first section presents a number of contributions on the central
problems to which automotive managers must find answers. In the second
part, top managers from major auto makers present some case studies to
illustrate their strategies for tackling the challenges already outlined –
strategies that have won international acclaim. The final section sums up
the key success factors for overcoming these challenges and presents
concrete recommendations for practical implementation.
We believe this book can provide significant support in meeting the
challenges you face in the automotive industry.
Bernd Gottschalk
President OICA and VDA
and
Ralf Kalmbach
Roland Berger Strategy Consultants
 1

Part I

Major challenges
2

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 3

The automotive industry

sets the course for the
global economy
Professor Bernd Gottschalk, President of the International
Organization of Motor Vehicle Manufacturers (OICA) and the
German Association of the Automotive Industry (VDA)

THE GLOBAL AUTOMOTIVE INDUSTRY –

THE SIXTH BIGGEST ECONOMY

The growth prospects of a national economy are largely determined by its

key industries. In recent decades, the automotive industry in many triad
countries has proven to be one of the strongest drivers of technology,
growth and employment. If it were a single country’s economy, the global
automotive industry – with total sales of around N1,900 trillion – would be
the world’s sixth largest national economy. More than 8 million people are
directly employed in the process of manufacturing vehicles and parts
alone. That equates to over 5 per cent of all people directly employed in
industrial manufacturing, and many times more than that if those indirectly
employed in the automotive industry are included. More importantly,
though, the automotive industry is now the world’s biggest innovator,
investing an estimated total of just under N70 billion a year in research and
development. This makes it a driver of technical progress and is the main
factor behind the increasing technological connectivity between industry
segments. Original equipment manufacturers (OEMs) are also among the
biggest contributors to national revenue, pumping some N450 billion a year
4 Major challenges

into state coffers in 26 countries. This proves that the automotive industry
has also assumed sociopolitical responsibility, and its contribution to the
future of our national economies is greater than that of almost any other
industry. The car is indispensable to society, and the automotive industry is
equally indispensable to the development of our communities.

GERMANY AS A BUSINESS LOCATION:

A TRADITION AND A FUTURE

Germany has the world’s leading automotive industry, and not just because
the car was invented there. The country is also a major automotive
production location and sales market. The automotive industry alone
accounted for N235 billion of the manufacturing sector’s N1,300 billion
total sales in 2005, not including the sales generated in upstream industry
segments, from plastics to steelmaking. Of Germany’s N162 billion export
surplus in 2005, the automotive industry alone was responsible for N89
billion. The external component accounted for 0.7 percentage points of the
0.9 per cent ‘growth’ of GDP in 2005. This means that approximately 0.3
percentage points of this rise – or a third of the previous year’s increase –
would not have been possible if the automotive industry had not been so
successful on external markets. Moreover the automotive industry is one of
Germany’s biggest employers, providing 766,600 jobs. If the indirect
workforce employed in the automotive-related upstream and downstream
industries is counted, the total rises to 5.3 million jobs.
The structure of Germany’s economy and industry is dependent on the
automotive sector. For this reason, the conditions for doing business in
Germany have to support the automotive industry’s further success. There
are some heartening signs of progress on this count in the wake of EU
enlargement, which has increased competition between countries:

ᔡ Unit labour costs have been slashed in the last three years, mainly due
to lasting productivity gains, but also because Germany has finally
stopped granting workers sizeable pay rises. As a result, the country
now leads the field ‘only’ in absolute wage figures. This was a
necessary step by unions and management, and one that will gradually
improve Germany’s ability to compete on cost.
ᔡ At the same time, the average operating time in the German metal
working and electrical engineering industry rose from 45 hours a week
in 1989 to just under 59 hours in 2004.
 Setting the course for the global economy 5

ᔡ The Pforzheim 2004 wage agreement in the German automotive

industry laid down a number of special rules. These opened the door to
more flexible solutions, longer working hours to suit individual
business requirements and flexible working hours, particularly in the
area of research and development.
ᔡ ‘Plant protection agreements’ between manufacturers or suppliers and
their employee-elected representatives, designed to keep a plant alive in
exchange for worker concessions, also contain provisions that represent
important steps toward regaining past levels of competitiveness.

However, we must bear in mind that these positive changes are late in
coming and are being made in an environment where the countries
competing to attract new businesses are not letting up in their attempts to
become more competitive. That is why the right strategy and a consistent
business promotion policy cannot be based solely on companies’ restruc-
turing efforts and the improvement of the taxation regime. Nor can it
centre only on cutting bureaucracy and regulation, improving conditions
in the labour market and lowering non-wage costs. Trade unions and
company management must also take responsibility as the parties to
wage agreements. Now more than ever, wage agreements must help
make sure that the country remains an attractive place for companies to
do business.
The crucial factor – and this is a tricky aspect of the public discussion
in Germany – is not only how much effort is put into correcting mistakes,
liberating companies from outmoded burdens that the market is no
longer willing to bear the cost of, and making the framework for wage
agreements more flexible. The key is the relative speed with which the
conditions for business in Germany change compared with conditions in
other countries. It is about how quickly Germany manages to stay
competitive compared with new and attractive potential business loca-
tions in Eastern Europe. The latter may, of course, see their cost advan-
tages erode – albeit very slowly – as wages and price levels approach
those in Western Europe. But they have correctly recognized the need to
offset the smaller gap in labour costs by redoubling their efforts to attain
a more highly qualified workforce, by strengthening their R&D capac-
ities, by developing their infrastructure and by improving the conditions
for production logistics.
This is why the factor that determines Germany’s relative competitive
position is not the next round of wage agreements alone; it is the whole
package of moves that set the political framework. Will Germany be able
to stay one step ahead with first-rate road and transport infrastructure?
Will German universities and their graduates remain some of the best in
6 Major challenges

the world? And will manufacturers and suppliers still be able to maintain
the technological lead in the automotive market that they have achieved
together over the past decades? It is not just the ‘automotive business
model’ that will decide how much of the industry’s future value is created
in Germany – a comprehensive ‘Germany business model’ is what will
determine this.
One thing is certain: political attempts to talk Eastern Europe into
raising taxes and wages, or to label foreign investments by German
industry (which depends on global networks) as unpatriotic, are not likely
to protect jobs in Germany, and nor are penalties on value created
overseas. These are actions by countries that have already admitted defeat
in the battle to stay competitive. Germany has no need for them.

CAPACITIES AND NEW COMPETITORS

The pressure on Germany as a location for building cars is on the rise for a
number of reasons:

ᔡ Passenger car plants in Germany are still far from working at optimal
capacity. And production capacities in Europe will go up from 18.6
million to 20 million cars by 2011, an 8 per cent rise.
ᔡ The new production sites being opened by French/Japanese and
Korean OEMs in Central and Eastern Europe (with additional capac-
ities in excess of 1 million cars a year) present a new challenge for the
competitiveness of the German automotive industry, especially in the
lower and mid-range price segments.
ᔡ National boundaries are becoming blurred: value chain links that
would previously have been clearly allocated along national lines are
becoming ‘multidomestic’.

The cost competition affects the main car-producing nations of Europe in

the wake of ‘European globalization’ that has followed EU enlargement
and the increase in competition it has brought between member states. But
it also affects the North American OEMs, who face enormous competition
from the Japanese, Koreans and Germans. In the not too distant future, the
presence of Chinese or Indian car makers and brands on the world’s other
car markets will cause competition to intensify once again, just as the
presence of German products in China or India is creating new market
opportunities for German industry.
 Setting the course for the global economy 7

As one of the world’s biggest industries, with production of its global

brands accounting for some 22 per cent of worldwide production, the
German automotive industry is an example of a growth industry in a state
of flux. The 1992/93 crisis was more a crisis of R&D and production
processes, which resulted in full-scale reengineering that saw the focus
firmly placed on the core manufacturing activities, and processes reor-
ganized. Today, though, we are rather faced with a process of adjustment
caused by globalization. However – and this does not make the strategic
answers easier – the pressure to adjust to globalization is accompanied by
a number of other challenges. While these may not be new, they do require
many different answers for many different companies.

CHINA AND INDIA – THE NEW GROWTH

CHAMPIONS

In 2005, battles over prices and terms were fierce and companies saw their
market shares fluctuate rapidly. This proved how difficult it is to predict
how the emerging markets are going to develop. It also showed how fast
previously successful strategies need to be modified under massive time
pressure, and huge efficiency-boosting programmes need to be imple-
mented even in a market like China, which is supposed to offer the benefit
of rising volumes.
German car makers and suppliers were among the first to do business in
China, long before the market took off. However, the structural shifts in
the Chinese market, the rapid differentiation of market segments, and of
course the attractiveness of new providers, have caused German OEMs’
share of the Chinese market to decline in recent years. This was absolutely
to be expected, as a large share of a sheltered market can never be main-
tained to the same extent after the market has been opened up. But
German OEMs are rising to the new challenge by renewing their product
range, adjusting their structures in procurement and sales, and organizing
their cooperation with their Chinese partners and their German partners
on the supply side.
The Indian market has reached a volume of more than 1 million cars,
putting it on a par with Mexico and Russia. The number of commercial
vehicles sold in India already exceeds that sold in Turkey and Russia.
German OEMs entered the Indian market at a later stage than they did
China, but their Indian business is now ramping up nicely.
8 Major challenges

Another way in which India differs is perhaps still more important. At

present, China is the scene of a major fight for the Chinese domestic
market, though vehicles and parts are not yet being exported from the
country in any magnitude. India, on the other hand, is becoming a real
and relevant global player, particularly in the supply industry. India is
already delivering just-in-sequence parts to German car makers, and
Japanese and Korean cars are being manufactured on the subcontinent
and shipped to the European Union. These examples illustrate India’s
consistent global orientation and development of export capabilities,
and show that India is now a player in the global automotive business.
This is driven by consistent orientation toward competitive prices and a
remarkable R&D focus, now visible in areas other than India’s global IT
supremacy. As a result, and quicker than many had expected, India is not
merely in the process of becoming an important and fast-growing
market, it is exploiting the opportunities that the global market and the
markets in Europe, including Germany, offer Indian manufacturers and
suppliers. And it is doing this more conspicuously than any other Asian
growth market.
The German automotive industry has taken up the challenge offered by
the Indian market. In Skoda, a company from a German conglomerate
already holds a leading position in the Indian market’s premium segment,
and BMW is now joining the likes of DaimlerChrysler in the top segment.
More will follow. MAN’s entry in the Indian commercial vehicles market
is an indication of the growth of the market for technically complex, state-
of-the-art vehicles.
German companies and their partners account for 15 per cent of the
sales generated in the parts industry in India. What is more, these firms
saw sales jump by 20 per cent last year, which testifies to the opportunities
the country holds for the German automotive supply trade. And these
opportunities will be seized; this much is proven by the contacts between
small and medium-sized enterprises in particular, which are set to
intensify greatly in the coming years.
Nevertheless, a systematic rise in exports from China can be expected
in the next few years. The eleventh five-year plan sees the automotive
industry not merely as a key industry, but as a growing automotive export
nation. Furthermore, China can be expected to make ambitious plans with
regard to modern, environmentally friendly engine concepts. This will
turn China and India into global players to be reckoned with – and chal-
lengers to established competitors.
 Setting the course for the global economy 9

EXPORT STRATEGY AND GLOBAL BUSINESS

LOCATION STRATEGY:
THE GERMAN AUTOMOTIVE INDUSTRY IS
FORGING ITS OWN PATH

Of the passenger cars produced in Germany, 71 per cent are destined for
the export market. In the past 10 years, exports from the German auto-
motive industry have risen 54 per cent. This sounds like the traditional
model of ‘Germany, the export champion’, but it is only one aspect of the
full picture. In future, the picture will be marked more by global presence,
operating production plants directly in foreign countries with a close rela-
tionship to research and development activities at home.

ᔡ The number of German OEMs’ foreign production sites and licensees

has increased by more than 250 per cent since the early 1990s, to over
2,000 today.
ᔡ German companies alone supply 600 production sites in Western
Europe, 300 sites in Central and Eastern Europe and 300 throughout
NAFTA.
ᔡ The extent of their presence in China and the rest of Asia has also
skyrocketed in recent years.

This development is not without consequence for the value chain

structure. Today, 40 per cent of the value created from exports is a direct
result of purchased materials and services that were previously imported,
primarily from low-cost countries. This import volume – and this is the
telling figure – has risen by 143 per cent in the last 10 years. Engine and
automotive parts imports also grew by 9 per cent last year (worth some
N32 billion), more than double the growth of exports, which saw a mere 4
per cent rise. This shows that the importance of internationally purchased
materials and services is still growing; and it will continue to grow, the
longer it takes for the conditions for business in Germany to improve. Or,
to put it in positive terms, there will be no automatic process of deindustri-
alization in Germany as long as it can actively improve its standing in the
key competitiveness factors of labour costs, working hours, flexibility and
non-wage costs.
While 130,000 new jobs have been created in the German automotive
industry since the mid-1990s, it is important to point out that 160,000 new
jobs have been created at its manufacturers and suppliers in Eastern
Europe. This, in turn, has created a global manufacturing network, which,
10 Major challenges

by combining the advantages of Germany with the low costs of Eastern

Europe in particular, has brought product costs down to competitive levels.
By moving early, consistently and quickly into Central and Eastern
Europe, German companies have given themselves an advantage over
their global competition. Without it, they would have lost their ability to
compete on cost. In the automotive industry more than any other, the idea
that new jobs in low-wage countries destroy jobs in Germany is
completely unfounded.
However, the restructuring programmes present no prospect of
continuing the upward trend in employment in Germany to bring quick
productivity gains. But it is worth noting that although the manufacturing
sector has seen 15 per cent of its jobs disappear in the past decade, the
German automotive industry has proved to be a ‘job machine’. At the
same time, productivity has improved dramatically thanks to investments
in technology and capital stock. Sales per hour worked have risen by 66
per cent. The rise in production in the automotive industry in the past
decade is not a result of rationalization investments, but is rather due to the
fact that sales have doubled.

THE GERMAN MARKET

The weak market of the past five years is a key factor in Germany’s
relative importance as an automotive market, and indeed production in
this country coming under pressure. Although 2004 and 2005 saw the first
small signs of growth returning, the danger has not passed. This growth
was generated exclusively by growth in the commercial customer
segment. No fundamental U-turn can be seen yet in the private car
owner’s decision to continue saving rather than buy a new car, resulting in
the further ageing of the vehicle population. German OEMs’ and their
suppliers’ success in boosting sales and revenues in Germany can
therefore not be attributed to higher volumes. Rather, it is a result of the
higher value of each car: in other words the result of qualitative growth.
The premium segment, the greater numbers of diesel cars and the higher
standards of driving comfort and safety have led to substantial value
growth in the German market. This growth has exceeded that indicated by
the low-volume development.
The commercial vehicle segment did see genuine growth in the German
market, though. The export-driven investment dynamic in Germany’s
industry has also hit commercial vehicles in their capacity as capital goods.
For the second year in a row, Germany’s commercial vehicle market is
 Setting the course for the global economy 11

seeing a significant upturn. In the last two years, new vehicle numbers have
risen by 20 per cent. Supported by the rise in demand for low-pollutant
vehicles and the launch of digital tachographs and new vehicle concepts,
85,500 vehicles over 6 tonnes were sold in Germany in 2005. In the inter-
national markets, German car makers achieved a new export record in
2005, selling 115,800 vehicles over 6 tonnes. Thanks to their strong inter-
national business and the continuing positive sales balance in Germany,
manufacturers of vehicles over 6 tonnes saw their production in 2005
increase by a further 5 per cent, to a record volume of 168,800 vehicles.
This took them past the 400,000 mark for the first time, with a total of
407,500 commercial vehicles manufactured in Germany. Internationally,
too, German OEMs produced more commercial vehicles than ever before.
Trans-European logistics and the need for modern commercial vehicles
that meet the latest emissions standards even before they become law are
forcing commercial fleet operators to renew their fleets. German
commercial vehicle manufacturers have been extremely successful
because they meet these growing demands and focus rigorously on tech-
nology leadership.

THE GERMAN SUPPLY INDUSTRY:

A FAVOURITE IN THE COMPETITION

A consistent focus on technology leadership is also what made the

German supply industry strong. Big corporations and small firms alike are
among the global technology leaders of the day. An export ratio of 42 per
cent and a high worldwide presence through production sites and joint
ventures underscore this point, with German suppliers engaging in almost
1,800 business arrangements across 74 countries.
With sales of N68 billion in 2005, Germany’s supply industry is the
world’s third biggest, behind Japan and the United States. In the past 10
years, it has proven to be a growth engine: since 1994, revenues have
grown by more than 8 per cent a year on average. And 90,000 new
workers (net) have been taken on. Over the last 10 years, the supply
industry has, first and foremost, helped the automotive industry beat the
downward trend seen in other industries in terms of employment figures.
The number of jobs in the industry increased by 31 per cent between 1995
and 2005, rising approximately 3 per cent a year.
So the doubling of the scale of the industry’s foreign involvement
clearly did not have a negative impact on employment at home. On the
12 Major challenges

contrary, it strengthened the production sites in Germany by making them

more competitive. This is the only explanation for the exceptional rise in
export sales. In Germany, too, the industry’s revenues grew much faster
than their customers’ revenues.
Besides the substantial improvements in vehicle equipment, particu-
larly the improvements in safety, comfort and environmental friendliness,
this can be traced back to the suppliers’ greater integration in value
creation processes. Since 1994, German OEMs have reduced their vertical
integration levels by 10 percentage points thanks to outsourcing. They
have transferred one third of their original value creation onto their
suppliers, and the supply industry’s share of value creation in Germany
now exceeds 75 per cent.
The process of outsourcing is expected to continue on a global scale in
the years to come. This promises more good growth opportunities for the
German supply industry, both in the growth markets and in Germany.
Despite the sacrifices that may have to be made in the short term, the
German supply industry is expected to be a stabilizing factor in the devel-
opment of the economy in the medium to long term. It will also be a driver
of technological innovation.
Still, the press is full of stories of industry consolidation trends. With
OEMs having already gone through this process, the supply industry
offers considerable scope for consolidation, as it is characterized by a high
proportion of small and medium-sized enterprises, international as well as
national. The liberalization of markets and the possibility of linking up
international activities reinforce these tendencies. This is exemplified by
the increasing involvement of international capital funds, even with
smaller suppliers. Nevertheless, there has not been a significant reduction
in the number of supplier companies.
Nor does this seem surprising in view of the industry’s attractiveness.
Impressive growth rates and technological progress, particularly in the
field of electronics, tend to attract companies in adjacent industries. No
industry has such a varied range of materials and products as the auto-
motive supply industry. From steel to software, almost all branches of
industry are involved in the manufacturing of a car. The industry is diverse
– what binds it together are the challenges it faces from competitors,
customers and the economic framework.
For the German supply industry, sustaining technology leadership is the
key factor in competition. This alone is what will allow production to
continue in a high-wage country that is also marked by a high tax burden
on businesses. Another major challenge is the fierce competition in the
automotive markets, which sees customers faced with rising cost pressure,
and higher material costs squeezing revenues. The equity ratio in German
 Setting the course for the global economy 13

companies is low by international comparison, which makes the position

even more difficult. Investments in new products and process improve-
ments, as well as spending on research and development, are high and
need to be financed. Ultimately, suppliers and car makers need to work
together to maintain their competitive position.

A TESTING TIME FOR SUCCESS STRATEGIES

It is true that ‘end of days’ prophecies, like those issued by the Club of
Rome, or ‘winner and loser’ predictions, as developed by James P
Womack, Daniel T Jones and Daniel Ross, the authors of The Machine
that Changed the World (Rawson, New York, 1990), have been overtaken
by reality. But it is equally true that the changes set in motion by global-
ization necessitate a different economic and political framework, call into
question conventional location structures, and make new business models
imperative for automotive companies.
That is why so many strategies, decisions on the location of production
sites, and historic supply and production structures in the German auto-
motive industry are currently being put to the test. And that is why diverse
cost-cutting and restructuring programmes are ultimately the answer to
the challenges that globalization is throwing at us. Regardless of which
strategy is best for each individual company, there are certain clear devel-
opment lines that will shape the coming years:

ᔡ Productivity at traditional production sites in the home market must be

increased to safeguard the basis of Germany as a business location –
still attractive overall – and at least soften the trend in production
offshoring to low-wage countries. The actions to increase efficiency
that companies are now implementing minimize the difference in unit
costs that sets us apart from alternative business locations when taken
together with all cost factors. In spite of the strengths of Germany’s car
manufacturing sites – outstanding technological performance and
flexibility combined with a direct line to the innovation process – there
is only justification for bringing large production volumes to the
country if car makers cut production costs and make working hours
more flexible. These are difficult processes and some of them are
painful, particularly for the workforce in Germany. Interestingly, the
so-called traditional automotive plants – some of which have their own
in-house wage agreements but all of which certainly have elements far
in excess of national wage rates – are under growing pressure from
14 Major challenges

modern, leaner plants and efficient working models, such as 5000 x

5000 at Volkswagen.
The adjustment processes currently under way prove that the
industry is being proactive and optimizing its organization in the face
of much tougher global competition. Some companies are already
proving that they can regain market share and achieve stronger
revenues after such a process of restructuring. But what is also clear is
that foreign manufacturing is also on the increase, and it will grow at a
faster rate than domestic production.
The German automotive industry will increase its global presence.
In 2005, German OEMs were already producing more cars worldwide
than ever before, with 10.7 million vehicles built in 23 countries. That
was 3 per cent more than the previous year. The passenger car segment
beat its previous year’s record by 2 per cent, taking the total number of
cars produced to 9.6 million. Commercial vehicle production leapt 16
per cent to a total of more than 1.1 million. Including Chrysler,
German OEMs increased their 2005 production volume by 3 per cent
to 13.45 million automobiles. This means that more than one in five
(21 per cent) of all vehicles manufactured in the world were built in the
production halls of German automotive corporations. The automotive
industry’s strategy is basically a network strategy: thanks to its strong
position in the German home market, it is strong on exports. This
protects additional jobs, while simultaneously safeguarding business
through a network of production sites in low-wage countries. These
enable car makers to gain access to local markets and achieve a better
production cost level. Improved competitiveness now sees as much as
40 per cent of the export value originating from supplies shipped from
low-wage countries to traditional German production sites.
ᔡ German OEMs will defend their role as world champions in diesel.
The Germans hold 51 per cent of the Western European market for
diesel vehicles, which now accounts for 49.5 per cent of the total auto-
motive market. This means that German brands are responsible for 63
per cent of the market’s 4.1 million growth in vehicle numbers over the
past 10 years. Accounting for 47.4 per cent of passenger car
production in Germany, the diesel has also dramatically increased the
relevance of Germany as a production location. Today, it is the
Germans’ key technological advantage over their competitors, particu-
larly as demand is growing in this sector.
The fact that German car makers now account for 82 per cent of the
market for vehicles with diesel particulate filters in Germany under-
lines the contribution to future competitiveness made by clean
exhaust emissions technologies. Selective catalytic reduction (SCR)
 Setting the course for the global economy 15

has already prepared the ground for the next technological leap in the
reduction of nitrogen oxides (NOx), which can help the diesel engine
make a decisive breakthrough in other markets, primarily the United
States. Clean diesel is the key buzzword that will boost the presence
of this technology in emerging markets that do not yet have a sizeable
diesel segment, such as China. The growth market of India already
has a high share of diesel vehicles, and this represents an opportunity
that will be exploited by German OEMs. Some of our global
competitors may be putting their efforts into other engine tech-
nologies. Admittedly, they will gain a positive image as early starters,
but this is because they do not have the same technological potential
with the diesel, on either the manufacturing or the supply side. SCR
technology combined with the additive Ad Blue® (VDA’s Ad Blue
trademark is now registered worldwide as a fuel as well as the related
vehicle technology) or the Bluetec technology show that the German
automotive industry was also the first to tackle the tricky subject of
removing NOx from diesel emissions, the last remaining environ-
mental questionmark.
ᔡ The global market for premium products has grown at double the pace
of the global automotive market since 2000, registering 10 per cent
growth. A market potential of almost 10 million vehicles worldwide
seems realistic for 2010. This growth is primarily down to the ever
wider distribution of models with premium features outside the tradi-
tional domain of premium and executive cars as well as sports cars.
Premium features are increasingly being offered successfully in the
compact and sport utility vehicle (SUV) classes. And growth is set to
continue in the years to come.
ᔡ No other industry sector invests as much in new technologies as the
German automotive industry. It has invested N16 billion and employs
86,000 people in R&D, including one-fifth of all the engineers
working in German industry. Most importantly, the German auto-
motive industry occupies the top spot in the number of automotive
patents. Giving up this position, or letting cost, quality and tech-
nology leadership do battle against each other, is unthinkable.
Although electronics have been particularly helpful in developing
safety features – ABS, ESP, airbag, collision avoidance radar, night
vision and so on – doing away with them would lead directly to
simpler technology. This would make it easier to achieve stable
processes, which is a basic requirement for quality. However, it would
meet neither the heightened demands of the customers nor the general
framework in high-wage Germany. Treading this path would already
be very difficult for the German, and even for the European or North
16 Major challenges

American automotive industry. In the future, it would be completely

impossible because of the new competitors from China or India: we
would find ourselves stuck in a no-escape situation as the Asians
played out their cost advantage against us. The German OEMs’
premium position requires them to be a step ahead of the market on
technology while at the same time ensuring good quality and
acceptable cost levels.
ᔡ The homogeneous economic cycles in the automotive industry that we
saw in the 1970s and 1980s are more or less a thing of the past. They
have been replaced by individual economic cycles for each OEM,
created by model cycles or innovations. Consequently, 30 to 50 per
cent of 2005’s market demand in Germany was created by new
vehicles and engines. So new models are one thing; concept inno-
vation is a decisive step further. Concept innovation will continue to
hold a significant and probably growing relevance for the German
automotive industry in the future. Social change – be it in the age
structure, the population or consumer habits – has fragmented or indi-
vidualized the product offering and differentiated the product range.
While there were 340 models available in Germany in 1990, by 2005
the number was already up to 510. The supermini segment is growing,
largely driven by the wider range of models. The compact class is also
gaining weight, while the traditional midsize category is shrinking
slightly. The biggest winners are SUVs, 4×4s, innovative spatial
concepts, four-seater convertibles, new models straddling the line
between passenger car and commercial vehicle, and the new cross-
utility category. While niche vehicles made up just over 15 per cent of
all new cars five years ago, they now account for almost 27 per cent.
The upshot of this development is that the complexity that car
makers eliminated by reducing their vertical integration back in
1992/93 has now returned, with all of its consequences for higher
costs, especially overheads. Manufacturers must ask themselves how
they can continue to exploit economies of scale in view of the growing
variety of niche vehicles. Another method of keeping costs under
control in the face of growing complexity and differentiated niche
products, besides the intelligent mix of production locations
mentioned above, is so-called modular, platform or unit assembly
strategy. Such a strategy enables smaller, yet still economical, batch
sizes to be produced, although this does necessitate a higher degree of
flexibility. Intelligent outsourcing and the integration of various
partners – all the way through to the logistics stage – are a suitable way
of keeping complexity down and at the same time handling product
diversity, international procurement and site management.
 Setting the course for the global economy 17

ᔡ The market for cars costing less than N10,000 is growing in Europe,
and even more so globally. Many of the world’s markets, like India,
will increasingly focus on vehicles around the N5,000 and perhaps
even the N2,000 mark. These categories are only feasible on the cost
side if considerably more value is generated in low-wage countries.
However, even in Germany, this market segment is more than 50 per
cent served by German products – although some are made in Brazil –
so there are clearly considerable opportunities to be had here. Behind
this development lies the fundamental question whether Germany
might only be able to manufacture premium cars in the future, perhaps
being forced to give up the production of volume vehicles.
ᔡ In the automobile business, finance and leasing are unavoidable to
enable large swathes of the population to fulfil their desire to have
their own car. Cheap financing deals are driving the new growth
markets in particular. Around 75 per cent of new cars registered in
Germany are bought through leasing or financing, with half of the
deals arranged by automotive banks. This activates an important area
of growth and employment potential in this key industry, which is
basing more and more of its future business on automobile-related
services. In addition to the 770,000 people directly employed by car
makers and automotive suppliers in Germany, a further 18,000 work at
financial subsidiaries in Germany, 11,000 of them at manufacturers’
own banks and leasing companies.
Financial services have thus become a significant source of revenue.
Even when automobile sales have been slow, automotive banks have still
enjoyed good growth rates. Automotive banks and leasing firms have
more than doubled their total assets in the past 10 years, and they now
total almost N80 billion. The total assets of Germany’s five automotive
banks and leasing firms alone exceeded N63 billion in 2004. OEMs’ own
banks account for more than 70 per cent of financial services sales, with
85 per cent of that amount coming from the leasing business. Car
insurance, the third largest segment in the insurance industry, represents
a further pillar of automotive financial services, with annual sales in
excess of N22 billion. Insurance brokerage by car dealers now accounts
for about 30 per cent of policies taken out – a figure that continues to rise.
Car-related services are one of the most important trends to have
been recognized by the German automotive industry early on. The
growing separation of car ownership and car usage is another. 76,000
people were registered with car-sharing organizations in 2005, their
numbers rising by more than 10 per cent over the previous year. This
market is growing disproportionately fast, although for the time being
it remains a small part of the total market.
18 Major challenges

THE POLITICAL FRAMEWORK: CARS 21

The success of a strategy is not decided by the market alone. In developed

economies, the automobile is now the most regulated product of all. In
emerging markets, the degree of regulation is growing faster than most of
the markets are. In the past, it was largely the self-regulation and creativity
of engineers that kept giving the development of the automobile a tech-
nology push at ever shorter intervals. Nowadays, progress is determined
by the targets politicians set for the industry in the belief that these targets
will reduce fuel consumption or cut emissions faster.
New environmental and safety regulations can be out of sync with the
car industry’s innovation cycles, and sometimes they are even mutually
exclusive. The latter can occur when, say, regulators require additional
safety features on the one hand while insisting on weight reductions and
lower CO2 emissions on the other. In the fiercely European markets, this
gives car makers a major disadvantage over those in countries with much
lower levels of competition, such as Japan or Korea. In these countries,
companies sometimes even receive government support.
The CARS 21 process, spearheaded by European Commission Vice-
President Günter Verheugen, clears the way for the global competi-
tiveness of an industry to become one of the key criteria determining the
direction and speed of new EU regulations. The CARS 21 group was
made up of high-ranking representatives from the European
Commission, Member State ministries, the European Parliament, the
automotive and the oil industry, as well as other non-governmental
organizations (NGOs) such as consumer protection organizations. The
result is a series of joint recommendations aimed at improving the
European automotive industry’s ability to compete on a global scale, but
also supporting further improvements in road safety and lessening the
impact of the car on our environment. CARS 21 defined an integrated
approach that will be used to bring the diverging requirements, many of
which are only ever seen together when they reach the developer’s desk,
into line with each other. Their consequences will then be assessed
during the legislative procedure itself.
The group’s recommendations are intended specifically to improve the
legislation governing new vehicle registration by simplifying the
processes involved. This includes, for example, integrating the ECE
regulations into the body of European law, which at the moment contains
almost identical EU directives that are meant to run in parallel. The plan
is to replace 38 EU directives with ECE regulations. In addition to this,
vehicle and parts manufacturers will be allowed to self-test their
 Setting the course for the global economy 19

products’ compliance with certain regulations, and the use of ‘virtual’

testing (such as computer simulation) will also be permitted. Work on
international harmonization of vehicle regulations will be intensified,
with key markets and growth markets being more closely involved in the
harmonization. Furthermore, the comprehensive approach also means
that transitional rules based on product lifecycles will be defined for
when new regulations come into force or existing ones are modified.
Moreover, the impact of regulations already in force will be reviewed
after a certain period has elapsed.
The group also discussed a number of ways of reducing exhaust emis-
sions for light vehicles (Euro 5) and heavy vehicles (Euro 6). Commission
proposals are planned for both of these regulations, and will be presented
in 2006 (in the case of light vehicles) and 2007.
The integrated approach is particularly thorough when it comes to
efforts to reduce CO2 emissions, with all stakeholders being addressed
(the automotive and the oil industry, automobile workshops, as well as
drivers and the relevant authorities). Besides engineering the vehicles
themselves to be more efficient, the introduction of information systems
such as gear change indicators and consumption meters, and even training
in eco-driving, are among the solutions being considered. Biofuels
(mainly admixed with regular fuels) will play a key role, with special
emphasis being placed on what are known as second-generation biofuels
(for instance BTL, biomass-to-liquid), since these are expected to provide
the greatest potential at acceptable cost levels.
Hence, the recommendations of the CARS 21 group provide a new
basis for optimizing the political environment in Europe. They aim to
safeguard the competitiveness of Europe’s automotive industry and
simultaneously bring further improvements in road safety and environ-
mental protection by applying a comprehensive and integrated approach.
The CARS 21 road map of upcoming legislation to be initiated by the
European Union in the automotive sphere brings the chance of greater
reliability and predictability on the part of European lawmakers. It
remains to be seen how the European Union performs on this count in real
legislative action.

WELCOME TRENDS IN BETTER VEHICLE SAFETY

The automotive industry has been successful at constantly improving the

automobile’s safety and impact on the environment. In spite of increasing
traffic on our roads, the number of deaths in road traffic accidents since
20 Major challenges

1991 has more than halved, with just under 5,400 people killed in
Germany in 2005, and the downward trend is continuing.
However, there is increasing evidence that the most important
potential for further improvements in vehicle safety can only be realized
if partners work together and share the workload intelligently. That is
why CARS 21 advocates an integrated approach in this area too,
involving not just vehicle technology but the road infrastructure and road
users as well. The Commission will present suggestions for the
successive introduction of vehicle regulations. These include things like
the electronic stability programme (ESP), safety belt warning indicator,
brake assistant, as well as direct and indirect visibility, ISOFIX child
restraint systems and daytime running lamps. In terms of road infra-
structure, it will recommend a monitoring and evaluation system that will
help all parts of the road system adjust to the more exacting standards. It
will even include the criminal prosecution of those driving under the
influence of alcohol or drugs, or speeding, especially since these are
among the main causes of accidents. And finally, positive opportunities
like the e-Call system should be used to make a big improvement to
emergency services callouts. It is of the utmost importance that the
injured are treated within the first hour of an accident.
In the past, German automobile manufacturers and suppliers were
pioneers when it came to road safety, and road safety has since become a
key means of differentiation, proof of technology leadership and therefore
of a brand’s position. Efforts to improve safety will therefore continue to
be one of the Germans’ strategic priorities.

THE GERMAN AUTOMOTIVE INDUSTRY SETS

ITS SIGHTS ON BIOFUELS

Keeping our society supplied with energy is one of the greatest chal-
lenges for the future. We have no choice but to reduce our dependency on
oil. This is also part of the industry’s responsibility toward climate
protection, nationally and globally. At the same time, making sure that
resources remain available and affordable in the long term is one of the
keys to remaining competitive. Being less dependent on energy supplies
and thus achieving greater supply security coupled with price stability
are therefore long-term, primary goals. Innovation is the industry’s alter-
native to regulation, and to prices rising to new thresholds and increasing
the burden on drivers.
 Setting the course for the global economy 21

German OEMs are not about to put all their eggs in one basket in the
hope that it is the right one. What they will adopt is a more varied approach:

ᔡ greater use of first-generation biofuels, such as biodiesel and

bioethanol, and admixtures of up to 10 per cent (that is, going further
than the European Union’s target of 5.75 per cent by 2010);
ᔡ introducing alternative, second-generation biomass fuels (BTL);
ᔡ further efficiency improvements in highly efficient clean diesel and
gasoline engines;
ᔡ customized application of all hybrid technology options;
ᔡ using natural gas as a fuel;
ᔡ developing and introducing alternative engine systems;
ᔡ considering hydrogen as a long-term prospect.

The Germans are not starting from scratch. On the contrary, increasingly
efficient engines have been reducing our dependency on oil for years. The
average fuel consumption of a new German car is 25 per cent lower than it
was in 1990 and a massive 40 per cent lower than in 1970. Half of all new
cars made by German OEMs in 2004 run on less than 6.5 litres per 100
kilometres. More than 250 models of German cars consume less than 6.5
litres, with 48 models even managing to keep their fuel consumption
under 5 litres. These cars have played a big part in the continuous
reduction of CO2 emissions from road traffic since 1999. By 2004, CO2
emissions were 15 million tonnes lower than in 1999. This makes road
transport the sector with the highest CO2 reduction over this period.
Furthermore, exhaust emissions were also cut by up to 97 per cent.
Hybrid technology represents another focus for R&D activities in the
coming years. The German automotive industry sees the hybrid being
used primarily in areas where it can play to its advantages. Where there
are rapid changes in driving speed, such as driving in city traffic, a hybrid
engine can save fuel and cut emissions. The American and Japanese
markets are leading the way in terms of hybrid vehicles. By 2015, hybrid
vehicles are expected to account for about 15 per cent of cars on the road
in the United States. In Europe, the hybrid is competing against a strong
diesel market, which is making its breakthrough much more difficult.
German car makers are already working in partnership with each other
and in collaboration with global partners in this area. And it is not true that
they are late in starting, or that they have the wrong strategic priorities.
The United States, for example, has two to three diesel cars to every
hybrid vehicle. Therefore, manufacturers that have a lower than average
presence in the diesel segment should be the ones asking themselves if
they missed the boat.
22 Major challenges

In the long term, environmentally friendly hydrogen from renewable

sources is set to become the main energy carrier. In the short to medium
term, the German automotive industry is focusing on combining a whole
range of different technologies. Moving away from oil involves more than
the cars themselves; it entails looking at the fuels that power them. The
German automotive industry is therefore pushing the use of alternative,
renewable sources of fuel energy.
Admixtures with 10 per cent biofuel can cut the amount of CO2 released
into the atmosphere by the cars on the road today by more than 15g/km.
For this reason, the German automotive industry has already begun
getting cars ready to take admixtures of up to 10 per cent. So the German
car industry has clearly started doing its homework for the future. Fuel
standards will need to see further development in parallel.
The German automotive industry will continue to offer vehicles that
can run on even higher admixtures. German car makers are world leaders
in the production of bioethanol vehicles. With their so-called flex fuel
vehicles, they have cornered almost 70 per cent of the market in Brazil,
the world’s biggest bioethanol market. Some OEMs are even selling these
cars in Europe, including Germany.
To leverage this potential for the benefit of our climate, the task now is
to tackle the challenges on the raw materials side:

ᔡ Biofuels already account for 3 per cent of fuels in Germany today. By

2020, the German agricultural sector alone will, with the right focus
and suitable production methods, be able to substitute as much as 10
per cent of the fossil fuels it uses, with the figure rising to over 15 per
cent by 2030. Translated into carbon dioxide emissions, this equates to
potential savings of over 10 million tons for Germany alone by 2030.
ᔡ European Commission calculations indicate that almost 10 per cent of
the fuel used in the European Union can already be substituted by
biomass. In 2040, the figure should exceed 35 per cent.
ᔡ The global market holds even greater potential for substitution, with a
larger quantity of usable space and more favourable climatic condi-
tions in many cases.

Cutting CO2 emissions by 80 to 90 per cent is a realistic proposition for

the fuels of the future. Key factors are the profitability of energy crops, the
intensity with which raw materials and their waste products are used, and
the conversion rate – that is, the efficiency with which fuel is produced
from biomass. In this respect, synthetic BTL fuels and fuels made from
ligno-cellulose fibres have shown the best results. The return per hectare
can be optimized through the cultivation of energy crops. These fuels are
 Setting the course for the global economy 23

also capable of processing a wide range of biomass products. Moreover,

the biomass is converted into fuel at an effective rate – especially since
every part of the plant can be used.
However, technological suitability and a good environmental balance
are not enough. New fuels must also be economically feasible. Some
biofuels can already be produced at prices similar to those of fossil fuels.
In most cases and particularly in Europe, biofuels can only be produced
competitively because they qualify for tax exemption, but almost all
biofuels display the potential to reach the price level of fossil fuels.
Ethanol is already at least as cheap as comparable gasoline, if you
consider the global market price. Biodiesel too can already be produced at
a competitive price if it is made from waste fats that would otherwise have
to be disposed of at considerable cost.
The raw materials market is of key significance for biofuels. As the
materials used to make biofuels cannot exclusively be bought in Germany,
the raw materials market should be considered both nationally and inter-
nationally. It is important to successively prepare the global business of
selling raw materials to meet this new demand. The growing number of
potential raw materials suppliers represents a considerable advantage,
from farmers in Germany to agricultural markets the world over. Long
term, this provides a broader basis for our energy supplies and enables us
to be less affected by political crises or OPEC-style monopolies.
Finally, the right legal and, even more importantly, fiscal framework
must be in place. The focus must be placed firmly on a reliable policy of
promoting biofuels – one which is based on a clear set of criteria such as
the potential for reducing CO2. Trying to manage the transition to biofuels
with compulsory conversion rates and forced admixture ratios will not
result in success and is likely to lead to higher prices for drivers. Taxation
based on CO2 efficiency and sustainability criteria is the best approach –
this will put the market entry requirements in place for the second gener-
ation of biofuels, and prevent funds being misallocated in the future to
promote biofuels that have no impact on CO2 levels.

THE GERMAN AUTOMOTIVE INDUSTRY:

EQUIPPED FOR THE FUTURE

Lasting success in the automotive industry will depend on comprehensive

and highly complex integration processes. Hence, automotive companies
and suppliers are facing enormous challenges because they must:
24 Major challenges

ᔡ integrate the requirements of the markets in completely different

stages of the development process and different structures;
ᔡ manage a global production and supply network that can no longer be
organized along the lines of home and export markets;
ᔡ integrate the requirement for ever greater levels of innovation in the
supply chain and ensure reliable quality of the highest level;
ᔡ keep core competencies in Germany, from R&D to production, while
also optimizing efficiency levels;
ᔡ develop several technologies at once to cut emissions and
consumption levels and provide greater security in terms of high-
lighting synergies and overlaps, as well as show when incompatible or
competing targets are being pursued;
ᔡ take society and the political world’s changing expectations of the
product development process into account from an early stage, and
conversely, work proactively to shape the general framework.

If companies nowadays are looking at their established organizational

structures and processes and adjusting them faster than they did in the
past, this is primarily because they know they need to stand up to the
requirements of the future. The German automotive industry is on the ball
and is, in spite of all the challenges, well equipped to tackle the intensi-
fying international competition.
 25

The automotive power

play moves into its next
round
Ralf Kalmbach, Partner, Roland Berger Strategy Consultants

Automotive engineering is one of the key industries in virtually all

developed economies. It has a profound impact on economic output,
employment, technological development and a raft of other factors that
are critical to a nation’s economic performance. It is also one of the
driving forces behind globalization. Car makers have long been marketing
and selling their products around the world. Accordingly, the industry’s
worldwide networking strengths and global presence are way ahead of
those in other sectors.
Automobiles are very special products to the individual too. Highly
complex in terms of the technology they embody, they meet the basic
human need for mobility, which in turn is a prerequisite for the intensive
exchange of goods. On another level, cars are also status symbols that
awaken desires and make dreams come true. They are (or can be) both an
expression and an integral part of their owner’s lifestyle. They are also
expensive: in many cases, they are one of the single largest items their
owner will ever buy.
The tremendous importance of the automotive industry both to
developed economies and to the individuals who drive cars makes it very
prone to change. A given market’s propensity to invest may shift.
Purchasers’ preferences may vacillate. Operating costs may rise.
Governments may introduce new laws that alter the playing field. All
these factors – and many more besides – have a direct impact on the
complex business systems and value chains that characterize the auto-
motive industry. This fact alone presents a significant challenge to an
26 Major challenges

industry that is so capital-intensive and whose tributary systems mean that

it can only respond slowly to change. The corollary is that the automotive
industry can only operate successfully in a stable context that is conducive
to reliable planning.
Over many decades, far-reaching changes have repeatedly shaken and
challenged the industry: the oil crisis in the 1970s; Japanese superiority in
the early 1990s, which posed a massive threat to European and American
manufacturers; the severe political and economic crisis in South America
that abruptly put a line through everyone’s astronomical sales expecta-
tions – the list could go on indefinitely.
Today, however, a new dimension of challenge is emerging. Fundamental
political and economic changes are coinciding, and automotive companies
are feeling the full force of both shifts. Traditional structures and ‘rules of
the game’ no longer apply. The entire global industry is in transition.
The automotive power play, in other words, has moved into its next
round. Managers in the industry now have but a brief window of oppor-
tunity – one or two years at most – in which to lay the foundations for their
companies’ future survival and success. It is time for them to find strategic
answers, and to focus business systems on the new challenges that lie
ahead. First, however, they must grasp the nature of the changes that are
currently buffeting their industry.

GLOBAL SHIFTS IN AUTOMOTIVE MARKETS

Just a few years ago, the car industry knew for sure which markets inter-
ested it. The United States, Japan and Western Europe – the ‘triad
markets’ – stood at the centre of all strategies and plans mapped out by
vehicle manufacturers and their component suppliers. Indeed, a 70 per
cent share of global vehicle sales in 2000 certainly justified this keen
focus. New markets such as South America had frequently aroused great
expectations in the past, yet such expectations seldom translated into
successful strategies. Many manufacturers had to learn this lesson the
hard way. Some, in fact, are still suffering from the legacy of misplaced
investments back in those heady days.
The triad markets have been stagnating for years, however. And this is
forcing the automotive industry to realign its strategic thrusts and concen-
trate more on up-and-coming countries and economic areas: China, India,
the Asian ‘tiger economies’, and Eastern Europe. All these markets have
grown rapidly in recent years and are the only ones that will, in future,
continue to post significant growth rates (Figure 2.1).
 The next round 27

China, India, Indonesia, Malaysia, Western Europe, United States, Japan

Philippines, Thailand, Eastern Europe (the ‘triad’)

CAGR CAGR
-0.6% +1.8%

42.3
CAGR 39.9 39.0
+12.5%
CAGR
+13.5%

19.2

10.8
6.5

2000 2004 2010E 2000 2004 2010E

Figure 2.1 Vehicle sales in selected regions, 2000–10 (millions of units)

Sources: JD Power, Roland Berger Strategy Consultants

There is a catch, however. Auto makers and component suppliers who turn
their attention to these new markets will only meet with success if they do
not see them as new sales regions only. Each one of these markets has its
own highly individual economic structures, sociodemographic layers and
customer needs. The example of the four tiger economies – Indonesia,
Malaysia, the Philippines and Thailand – powerfully underscores this
contention (Figure 2.2). Which vehicle types people most prefer varies
considerably. Pick-ups are the most popular purchase in Thailand, against
SUVs/minivans in Indonesia and the Philippines, for example. Also, the
import quota in three of these countries (Malaysia is the only exception) is
upward of 80 per cent (Figures 2.3 and 2.4).

Population GNP per capita, GNP growth Cars per 1,000

2004 (million) 2004 (US$) 2004 (%) inhabitants

Indonesia 242 970 5.1 15

Malaysia 24 4,601 7.0 207

Philippines 87 975 6.1 9

Thailand 65 2,490 6.2 39

Figure 2.2 Macroeconomic data in selected East Asian countries

Sources: CIA World Factbook, Deutsche Bank Research
28 Major challenges

Indonesia 17 65 9 6 2

Malaysia 7 13 41 37 1

Philippines 12 53 6 23 1 5

Thailand 38 32 2 26 1

Pickups SUV minivans Subcompact Mid-range Luxury Other

Figure 2.3 Market segmentation by vehicle type (per cent)

Source: JD Power

Indonesia 87 14 5 2

2
Malaysia 22 12 63
1

Philippines 81 9 4 4 2

Thailand 84 7 4 5

Japan USA Europe Korea Local/other

Figure 2.4 Market share by country/region of origin (per cent)

Source: JD Power

It follows that viable strategies for these markets necessitate specific products
for specific countries or regions, suitable sales channels, and appropriate
communication with the buyers. It is vital to accurately anticipate both
demand structures and the factors that influence purchase decisions, and then
to supply products tailored to precisely these needs. In Asia’s upwardly
mobile economies, vehicles do not normally need quite so much elaborate
 The next round 29

technology. The technology they do have must not be obsolete, however.

Vehicles sold here must be functional and have a modern design. Behind this
‘profile’ is the standard buying pattern that low disposable income still
dictates in all emerging markets: people want ‘value for money’. Accordingly,
entry-level segments in particular are experiencing above-average growth,
while concurrently exerting heavy cost pressure on manufacturers.
This trend is most evident in China. In the years ahead, the low-end
segments will continue to enjoy above-average growth. Vehicles in the
classes A00 through A will therefore corner 70 per cent of the market by
2010 (Figure 2.5).

CAGR 4,490
+21%
1% D
12% C

17% B

2,640
1%
12%
40% A
24%

34%

611 25% A0
11% 1%
26% 22%
39%
8% 15% 7% 5% A00
2000 2004 2010E

Figure 2.5 Sales of passenger cars in China, 2000–10 (millions of units)

Sources: CAAM; Roland Berger Strategy Consultants

China’s home-grown car industry is enviably positioned in this segment. It

has made stunningly fast progress in the past few years, energetically
asserting its place on the Chinese market – and also laying plans to export
the fruit of its labours. Collaboration with established auto makers is
enabling Chinese original equipment manufacturers (OEMs) to develop and
build attractive products in short order. The reason is that they have recourse
to the same external links in the value chain (component suppliers, devel-
opment service providers etc) as foreign OEMs. As a rule, they can also tap
substantial cost advantages by sourcing and manufacturing locally. This
30 Major challenges

configuration enables them to sell attractive products at prices well below

the cost of their imported counterparts (Figure 2.6).

84%
79%
74% Production costs1

65% Local content

55%
45%

2001 2002 2003

1) Assumption: Production costs = 100% if local content = 0

Figure 2.6 Correlation between production costs and local content

Source: Roland Berger Strategy Consultants

Production of the Chery QQ in China provides a good illustration of how

vehicles can be positioned very successfully, and at the same time, trigger
price erosion across entire market segments. This subcompact model sells
for less than the equivalent of €3,000 and was, in the first quarter of 2005,
the best-selling car in China. Volkswagen’s cheapest model right now –
the Brazilian-built Fox – costs more than twice as much, at the equivalent
of €7,000.
European and American OEMs’ hopes of selling their products in
these new growth markets and absorbing excess capacity will therefore
come to nothing. The problem of overcapacity in their traditional
markets must be dealt with at source. Meanwhile, new business models
are needed for the new markets (Figure 2.7). Without local devel-
opment and production, foreign OEMs will not be able to gain a
foothold.
The battle for the emerging markets is therefore still wide open.
Established auto makers will only score lasting successes in these
markets if they can formulate and systematically apply suitably adjusted
business models (in terms of brand positioning, product portfolios,
pricing strategies and delivery systems). The winners in this race will be
few in number.
 The next round 31

Capacity growth, 2004–10

0 1,000 2,000 3,000 4,000 5,000 (000 units)

Asia and Pacific 78 4,814

EU 1,209 78

North America 504 79

Eastern Europe 439 63

South America 384 55

0 20 40 60 80 100
Capacity utilization in 2004 (%)

Figure 2.7 Global capacity growth through 2010 and capacity

utilization in 2004
Sources: PricewaterhouseCoopers, Roland Berger Strategy Consultants

THE SHIFTING BALANCE OF POWER IN THE

AUTOMOTIVE INDUSTRY

New markets are not the only factor that is forcing the automotive industry
to adapt. The balance of power within the industry itself is likewise expe-
riencing a shift of seismic proportions:

ᔡ New suppliers are rewriting the rules of the game.

ᔡ Traditional customer segments are dissolving.
ᔡ As the level of outsourcing increases, car makers and component
suppliers are becoming more and more heavily dependent on each
other.
ᔡ External conditions and constraints (a more environmentally aware
public, the limited availability of fossil fuels, more pronounced
political interventions in the form of laws, taxes and tolls) are forcing
the industry to address new issues.
32 Major challenges

New suppliers are rewriting the rules of the game

Whenever the automotive industry engages in trials of strength, it always

does so on a global scale. In the 1980s, ‘cheap’ Japanese cars posed an
existential threat to the American and European incumbents. In the mid-
1990s, highly successful Korean manufacturers brought a new challenge
into the fray, whose market share rose to 4 per cent in North America and
3 per cent in Western Europe in a few short years.
In building up production capacity in their target markets (North
America, Western and Eastern Europe, China and India), these companies
have already done the groundwork for further expansion. They are thus
gradually establishing themselves as local vendors. In many cases, their
superior business models or production systems enable them to supply
vehicles whose prices and quality are more attractive. The challenge to
home-grown car makers’ market share is obvious. As if that were not
enough, these new upstarts are actually defining new success factors in the
markets they target. Local players thus have no choice but to face up to
their new rivals and accept that the rules of competition have changed.
Toyota, for example, is currently rolling up market after market and is
well on the way to becoming the world’s leading auto maker. Even
General Motors (GM) and Ford are being cast in the Japanese giant’s
shadow in the United States (see Figure 2.8).

Growth rate
Q1 2005 against Avg. sales: 500,000
Q1 2004
15
Nissan
10 Toyota

5 DaimlerChrysler

0 Avg. market
Honda
growth: -0.4%
-5 Ford GM

-10 VW

-15
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 Car sales in
Q1 2005

Figure 2.8 Passenger car sales and growth rates for the largest OEMs
in the United States, first quarter 2005
Source: Roland Berger Strategy Consultants
 The next round 33

Hyundai is likewise in the process of becoming one of the leading

manufacturers in North America and Europe. Over the next few years, it is
forecast to achieve 6 and 10 per cent growth respectively in these two
markets. The company has a very powerful presence in China in
particular. Here, its market share has shot up from zero to 8 per cent in just
three years. Anticipated average annual growth of 40 per cent in the next
three years will give Hyundai an even firmer foothold.
A number of other vendors are already on the starting blocks. It is only
a matter of time before Chinese OEMs begin to penetrate the triad markets
with knock-down prices, and before consumers begin to regard vehicles
from India or the ASEAN countries as viable, economical alternatives.

Traditional customer segments are dissolving

Only a few years ago, marketing experts in the car industry could still
delimit their target groups fairly clearly on the basis of social strata and
purchasing power. Today, customer behaviour no longer fits into neat little
patterns and decision modes, and is therefore much more difficult to
predict. Traditional segmentation patterns are simply no longer valid.
Two interlocking developments have precipitated the erosion of tradi-
tional customer segments. One is buyers’ growing penchant for ‘smart
shopping’. The other is the increasing supply of niche products from
manufacturers.
Smart shopping has become a discipline that shapes every purchase a
buyer makes. That naturally also applies to such major investments as the
purchase of a car. Smart shoppers trawl multiple sources to retrieve
copious information about products and market prices. Ever keen to
secure the best value for money, they tend to shrug off the influence of
past purchasing decisions. This undermines customer loyalty, forcing
vendors constantly to create attractive new offerings if they want existing
customers to buy successor models too.
In the fierce battle for new market segments and niches, auto makers
have no choice but to pursue creative new strategies in order to set their
vehicle ranges apart. To retain existing customers and win new ones, they
thus market all kinds of niche products that hold out the promise of
‘personal’ mobility and lifestyle solutions. These offerings go far beyond
regular, off-the-peg products and are designed to lure buyers irrespective
of status and purchasing power. Examples of such successful niche
products include the BMW Mini and the Toyota Prius.
Even so, it is becoming ever more difficult to predict whether and to
what extent buyers will accept new products. Not every purchase decision
34 Major challenges

can be explained in rational terms. An automobile is, after all, still a very
emotionally charged product whose benefit is perceived to far surpass the
mere guarantee of mobility. Seen from this angle, every planned product
launch is in effect a gamble whose probability of success or failure can at
best only be guessed. And big gambles inherently go hand in hand with
high risks.
The growing economic implications of these risks pose a serious
problem to car makers. With competition merciless and profit margins
often razor-thin, one or two flops can often spell doom for the company.
Without the financial backing of DaimlerChrysler, the Smart subsidiary,
for instance, would long since have suffered this fate.
The crucial issue is therefore the ability to devise visionary brand and
product strategies for highly unpredictable markets. Solid planning struc-
tures and processes are a must, obviously. To anticipate the trends that will
really take off and translate these into just the right products nevertheless
also demands a good nose, the ability to take bold entrepreneurial deci-
sions – and a decent helping of good fortune.
The key focus should, however, always be on clear answers to two
questions. What exactly does the brand stand for? And what attributes can
and do existing and potential buyers want to associate with the brand?
This issue has often been neglected in the past. Jaguar, for example, learnt
the painful lesson that ‘British luxury’ cannot simply be mapped onto the
volume segment, even if the brand itself rightly belongs in the premium
segment. Conversely, the VW Phaeton shows how hard it can be and how
long it can take to gain a foothold in new premium segments that break
with brand tradition. Interestingly, customers evidently perceive that the
VW Touareg – itself an expensive, luxurious sport utility vehicle (SUV) –
is more authentic and fits better with the brand. Although the Phaeton and
Touareg share a lot of the same technology, it is the latter that is scoring
impressive sales successes.
True, there are no patent recipes. Even so, formulating a successful
brand and product portfolio strategy remains the pivotal challenge to car
makers today.

Car makers and component suppliers are becoming

ever more interdependent

Specialization in the automotive industry goes back a long way. In today’s

heavily integrated and tightly networked value chains, car makers naturally
still bear responsibility for development and production. A good 70 per
cent of product value is added by external component suppliers, however.
 The next round 35

Relentless pressure to cut costs and innovate in this industry will drive
up the proportion of outsourced value further still. By focusing on their
specific core competencies, specialized component suppliers can improve
quality and achieve scale effects that benefit the entire value chain.
This compulsion to specialize throws up a series of strategic questions
to which auto makers must again find clear and consistent answers:

ᔡ What does the brand stand for?

ᔡ What technological unique selling points (USPs) does the brand
demand?
ᔡ What systems, modules and components are needed to realize these
USPs?
ᔡ Which links in the value chain must be handled in-house?
ᔡ Which component suppliers and partners can take care of the other
links?
ᔡ How should collaboration with component suppliers and partners be
designed?

This pronounced shift in the value chain has, however, already triggered
extensive consolidation in the component supply market. In terms of size,
global footprint, skills and innovative strengths, many of today’s
component suppliers certainly rank as equals with the car makers they
serve. In many cases, they dominate certain systems, functions and tech-
nologies to such an extent that OEMs have no choice but to live with the
resultant dependencies (see Figures 2.9 and 2.10).

Vehicle production 57 m 64 m 77 m

Value contributed by 60–70%

component suppliers/ 65–75% 70–80%
service providers

Value contributed 30–40% 25–35%

by OEMs 25–30%

2002 2005 2010

Figure 2.9 Trends in the automotive production value chain, 2002–10

Source: Roland Berger Strategy Consultants
36 Major challenges

32,757
27,852
25,017
22,811
21,998 21,462
18,934 18,409
18,020 17,084

Bosch Denso Delphi Magna Bridge- Johnson Michelin Good- Aisin Lear
stone Control year Seiki

Note: Currencies are translated at the value dates for the financial statements in each financial year.

Figure 2.10 The 10 largest automotive component suppliers, 2005/06

(sales in US$ millions)
Source: Bloomberg, company information

If anything, auto makers will in future have to give even greater consider-
ation to component suppliers than in the past. Complementing their core
competencies in development and production, OEMs will also have to
concentrate heavily on forging strategic partnerships and designing effi-
cient collaborative processes and structures. Success will, by definition,
become a collaborative achievement.

Tighter conditions and constraints impose limits –

and create opportunities

The future of personal mobility will not be shaped first and foremost by
faster or more powerful vehicles. Social and environmental issues will
instead be the determining factors. Traffic density and pollution have
already reached or exceeded critical thresholds in many places (see Figure
2.11). Innovative solutions such as London’s city-centre toll zone bear
witness to governments’ attempts to prevent private transport infrastruc-
tures from collapsing altogether. Other large cities and conurbations will
follow suit.
Political regulation takes effect via the ratification of prescribed
pollution thresholds and safety standards, via taxation and via prohibi-
tions. At the same time, consumers too are fuelling demand for more
economical, environment-friendly cars. This bottom-up trend is therefore
likewise obliging automotive firms to adopt a greener stance.
 The next round 37

EURO 4 limits
Emission
limits
100% Petrol, LPG, natural gas
HC 0.10
80% NOx 0.08
CO 1.00
60%
Diesel
40% Diesel NOx 0.25
HC + NOx 0.30
20% CO 0.50
Partikel 0.025
0%
1975 1985 1995 2005
In g/km
(CO = carbon monoxide; HC =
CO HC HC + NOx NOx hydrocarbon; NOx = nitrogen oxide)

Figure 2.11 Trend in vehicle emissions in Europe, 1975–2005

Sources: Volkswagen, VDA website

The industry has long since accepted such political influence.

Accordingly, traditional selling points such as performance, design and
price are increasingly being complemented by environmental and safety
aspects. Today’s key innovations revolve around the need to optimize fuel
consumption, reduce harmful emissions and improve vehicle safety.
The ever greater traffic density, and in particular the higher volume of
traffic in major conurbations, nevertheless often more than offset any
positive effect from such innovations. Further norms, prescriptions and
regulations are therefore bound to follow. The recent EU directive on
particulate matter is only one example.
The automotive industry will accept this development too. Indeed, it
will have to throw its weight behind the initiative. After all, the industry
itself benefits from regular statutory decrees that oblige drivers to fork out
for new features if they want to avoid stiff penalties relating to obsolete
car technology. In a similar vein, safety and environmental issues provide
car makers with new ways to set themselves apart through innovation, and
thereby to strategically reposition their brands. Thanks to its Prius model,
Toyota, for instance, has successfully cultivated an image as an envi-
ronment-conscious brand. Rivals worldwide have been forced to respond
to this astute move. Peugeot achieved a comparable effect by quickly and
systematically introducing diesel particle filters.
38 Major challenges

THE WINNER TAKES IT ALL

Such upheavals bring fundamental change to whole industries. Not all

companies handle or, in particular anticipate, the corresponding opportunities
and threats with the same measure of success. Few are able to adapt to changed
conditions and bring their business systems into line with new constraints.
Current developments will bring lasting change to the automotive
industry. There will be winners and losers. Some companies will lose or
have to relinquish their independence. Others will grow faster than ever,
and above all profitably. The gap between ‘good’ and ‘bad’ will widen.
Mediocre firms – and this goes for auto makers and component suppliers
alike – will be the first to hit the wall (see Figure 2.12).

OEMs Automotive component suppliers

60 50,000

50 50 (1950)
40,000
40
30,000 30,000 (1988)
30 (1980)
30
20,000
20
13 (2000)
10 10,000 8,000 (1998) 5,600 (2000)
2,800 (2010)
0 0
1950 1980 2000 2010 1950 1980 2000 2010

Figure 2.12 Number of independent OEMs and independent automotive

component suppliers, 1950–2010
Source:Automobilproduktion

The process of concentration in the automotive industry will continue.

New players, especially those with roots in emerging markets, may take
the field in the short term. In the medium term, however, they too will
experience the workings of global market mechanisms that are even now
separating the men from the boys.

The example of China

The Chinese car industry presents a fine study of the early stages in this
development. Issued in 2005, the new Chinese automobile directive will
 The next round 39

considerably speed up the pace of market concentration. Small, local OEMs

will no longer be competitive under the new provisions. They will either be
absorbed by larger indigenous companies that are able to compete in the
international arena, or they will be forced out of the game. Merger activity
will increase – witness SAIC’s acquisition of China National Automotive
Industry Corporation and the current talks between Hafei and Changhe.
Global OEMs will play a part in driving this development. Rather than
go under in the wave of consolidation, they will reassess whether existing
partnerships will help them to survive and remain competitive. Where
necessary, they will have to revector their collaborative activities.
Consolidation in the industry will probably leave four or maybe five big
players that dominate the market. Hundreds of smaller firms will not
survive. The same goes for other ‘new’ markets such as India and the
ASEAN countries, where just a handful of companies will likewise rule the
roost. These winners will not necessarily be today’s incumbents, however.
Some new players have the potential to overtake their less agile prede-
cessors and outmanoeuvre them at their own game and on their home turf.
This story reminds us of how the dinosaurs died out, albeit with one
crucial difference; back then, the smaller, more nimble mammals survived.
By contrast, the global auto business requires companies to achieve a
certain critical mass if they are to operate profitably. Only large companies
can exploit the economies of scale, fully utilize their production capacity,
build up expensive, ubiquitous sales and service networks, and deliver the
volume needed to keep them running. The ability to combine size and
agility will therefore be decisive in the battle for survival.
A comparison of Toyota and GM underscores the point. Toyota has
already risen to second slot in the worldwide automotive business and is
giving GM a hard race for pole position. Though both groups are of a similar
size, the discrepancy in terms of performance could not be more striking.
While GM is fighting to stay alive, Toyota is smashing record after record.
For all its size, GM right now looks ill-placed to survive in the face of
fierce global competition. Company pensions and other pension commit-
ments add US $1600 to the cost of every vehicle that rolls off its
production lines. Following mistakes in model policy, GM cannot even
sell its cars on its home (US) market without conceding heavy discounts,
and not even this sales strategy is paying off: in 2004, the company sold
only 50,000 more vehicles than in the preceding year. Its market share in
the United States is dropping toward 20 per cent. Margins are dwindling
and cashflow is negative. As things stand, the Detroit-based giant cannot
compete with the Koreans on price, with the Japanese on quality, or with
the Europeans on technological performance.
40 Major challenges

Toyota, however, has managed to position itself as the quality and envi-
ronmental technology leader. It is selling cars that customers want to buy.
It is also growing profitably: In 2004, volume sales jumped 10.5 per cent
year on year, while sales revenues were up 7.3 per cent. Another plant is
slated for construction in the United States in the near future in order to
accommodate growing demand in this market (see Figure 2.13).

GM Toyota

Year founded 1908 1937

Employees in 2004 (000) 321 260

Vehicles sold in 2004 (million) 8.1 6.7

Number of brands 2005 13 5

(Chevrolet, Pontiac, Buick, (Lexus, Toyota, Hino,
Cadillac, GMC, Saturn, Daihatsu, Scion)
Hummer, Saab, Holden,
Opel, Vauxhall, Daewoo,
Isuzu)

Sales in 2004/2005 (US$ billion)1 1622 1653

EBT 2004/2005 (US$ billion)1 -6.62 15.13

Market cap. at June 15, 2005 (US$ billion) 20.3 128.9

Rating in June 2005 (S&P) Junk bond AAA

1) Financial years end December 31, 2004 (GM) and March 31, 2005 (Toyota)
2) Automotive and other operations
3) Non-financial services business

Figure 2.13 Comparative view of GM and Toyota

Sources: Company data, Bloomberg, Roland Berger Strategy Consultants

Top performers and low performers

Toyota may be a classic example of a successful company, but it is by no

means the only one. Many car makers and component suppliers are
evidently succeeding in their attempts to establish and refine business
systems that keep them prospering in the long run. Other companies are
falling at precisely this hurdle (see Figures 2.14 and 2.15).
What makes the difference between top performers and low
performers? What do the former have in common? What are the obvious
success factors? Which business systems are superior? Which need to be
revamped if companies are not to drift into oblivion?
 The next round 41

CAGR sales,
2000–04 Avg: 4.6%
20%

15% Porsche
Kia Hyundai
10% Suzuki Toyota Nissan
Mazda Honda
5% Peugeot
BMW Avg:
GM VW 4.5%
0% Ford
Renault
DaimlerChrysler
-5% Fiat

-10% Mitsubishi

-15%
-5% 0% 5% 10% 15% 20% Avg EBIT
margin,
2000–04

Figure 2.14 Sales and profits at selected OEMs, 2000–04

Sources: Bloomberg, Roland Berger Strategy Consultants

Avg.:
10.8%
Δ ROCE,
2000–04
(%)

Top
performers
29%
Avg.:
0.5%

Low
performers
38%

ROCE, 2004 (%)

Figure 2.15 Change in return on capital employed (ROCE), 2000–04

and 2004, at the largest component suppliers
Sources: Bloomberg, Roland Berger Strategy Consultants
42 Major challenges

The top performers’ success factors

In a large number of projects, Roland Berger has been able to identify
certain features that are common to all top performers:

ᔡ in-depth customer knowledge;

ᔡ a clear vision and clear goals;
ᔡ a long-term perspective;
ᔡ a strong focus on customer loyalty;
ᔡ consistent delivery on the promise of value for money in the low price
and premium price segments;
ᔡ consistently high quality;
ᔡ a global presence but a regional orientation;
ᔡ an entrepreneurial spirit.

We have already singled out Toyota as a fine example of a top

performer. BMW too belongs in the same bracket. Ever since the
German car maker got rid of Rover, it has consistently posted earnings
before interest and tax (EBIT) of over 8 per cent. Sales revenues have
risen 15 per cent since 2001, while volume sales of group-owned
brands have leapt 33 per cent.
BMW’s key strengths are its ability to innovate and its successful
premium brand strategy. The company covers every premium segment,
from the compact class to luxury sedans, and nets high margins across the
board. The BMW brand has become synonymous with something special
– an achievement reflected in its vehicle strategies. Dynamism, agility, the
joy of driving, exceptional design and technology on the highest level are
BMW’s typical values. And customers believe them. For years, the
company has ranked top in the ADAC AutoMarxX ratings on driving
attributes and design.
BMW’s vision and goals are determined by a sharp focus on the
premium segment. The longevity of its goals and decisions is underpinned
above all by the company’s shareholder structure: 47 per cent of BMW’s
stock is family-owned. The company remains rigorously committed to the
demands of its customers, who expect a great deal in terms of technology,
quality and safety. Target groups are analysed very precisely and products
are tailored specifically to them. (Occasional exceptions, such as the
iDrive system, only confirm this rule.) BMW customers’ satisfaction
expresses itself in above-average loyalty, as evidenced once again by Cap
Gemini’s Car Online Study in 2005.
 The next round 43

The problems of low performers

The low performers have a hard time activating these levers of success.
Many of them fall at the same hurdles:

ᔡ failure to identify fundamental trends;

ᔡ failure to redesign business systems (too little or too late);
ᔡ no long-term corporate strategy;
ᔡ a lack of vision;
ᔡ a focus on short-term profitability;
ᔡ no distinctive profile;
ᔡ failure to deliver value for money;
ᔡ inconsistent brand management;
ᔡ a lack of entrepreneurial courage;
ᔡ no early-warning systems.

DaimlerChrysler, Fiat, Ford, GM, Mitsubishi and Volkswagen all figure

below-average stock market performance. These companies’ recent
history clearly shows where the problems lie.
DaimlerChrysler’s global strategy has not worked. The merger with
Chrysler and its acquisitions in Asia have destroyed value instead of
creating it. Expensive corrective action has been and still is necessary as a
result. Since the merger with Chrysler, the value of the company has
plunged by 60 per cent.
Fiat has been struggling with quality, brand and image problems for
years. Compared with other market players, its dealer network also under-
performs. The group has been spilling red ink since 2002. Rumours of a
takeover by Chinese OEMs are doing the rounds in the press.
Ford is straining under three main burdens: the spin-off of Visteon,
unimaginative models (especially in the United States) and the unprof-
itability of Jaguar. The factories that Visteon handed back to Ford in 2005
are generating added costs of some US $2 billion. And although cars sold
in the United States are subsidized to the tune of around US $3,500 on
average, market share is continuing to shrink. PAG subsidiary Jaguar
received an injection of US $750 million in 2004, and more is still needed.
Jaguar is not scheduled to break even until 2007. Ford’s market capital-
ization has sunk to just US $20.6 billion, and Standard & Poor’s has
downgraded its stock to junk bond status.
The brands in the GM group do not have a clear enough profile, either in
customers’ perception nor in the way the group itself demarcates its brands.
Vehicles whose appearance and content is very similar give customers little
incentive to buy. Recently, GM’s share of the US market slid to 25 per cent.
44 Major challenges

While the other Japanese manufacturers have occupied niche positions

in Europe, Mitsubishi has tried to build an image as a volume provider.
Since 1998, the company’s sales volume in Western Europe has fallen by
around 28 per cent. Over the same period, the sales of the four other major
Japanese OEMs have grown by 14 per cent.
Volkswagen was too slow to move into forward-looking niche
segments. Until recently, the company had no SUVs (only multi-purpose
vehicles, MPVs) and no attractive soft-tops in its portfolio. In China, VW
has lost ground because it had no solution that was agile and flexible
enough to accommodate local developments. Once other Western and
Japanese OEMs had flooded the Chinese market with new models, the
successful but aging Santana was no longer able to defend its once-
impressive market share. In 2005, only 17 per cent of all new vehicles on
the streets of China bore the VW logo – against 46 per cent in 2000.

Success factors for component suppliers

Most of the success factors discussed above apply to both vehicle
manufacturers and component suppliers. In a 2004 study entitled
Patterns of Success for Automotive Component Suppliers, Roland
Berger investigated the requirements that specifically concern the
component supply industry. Top and low performers were identified on
the basis of their return on capital employed (ROCE) for the years 1997
to 2002. Their strategic orientation was also examined. The study found
that successful component suppliers differ from the others in five
specific areas:

ᔡ Company size: the largest companies succeed thanks to economies of

scale and their powerful negotiating position. The smallest succeed by
occupying niche positions.
ᔡ Product portfolio: on average, the top performers account for 90 per
cent of sales revenues with just one product group.
ᔡ Customer portfolio: on average, the top component suppliers earn 66
per cent of revenues from their top three customers, against 45 per cent
for the low performers.
ᔡ Research and development spending: successful component suppliers
invest 70 per cent more in R&D than low performers.
ᔡ Vertical integration: successful component suppliers add more value
in-house (see Figure 2.16).

The question is, how can these success factors be condensed into a
framework that can provide clear orientation to managers in the auto-
 The next round 45

Sales Sales Sales

1 Company size
< US$ 0.5 bn < US$ 5 bn > US$ 0.5 bn

2 Product portfolio Focused Diversified

3 Customer portfolio Focused Diversified

Low Medium High

4 R&D spending
(< 2% of sales) (2–4% of sales) (> 4% of sales)

5 Vertical integration Low Medium High

Successful component Less successful

suppliers component suppliers

Figure 2.16 Key areas in which top-performing component suppliers

differ from low performers
Source: Roland Berger Strategy Consultants

motive industry? Answering this question and the questions outlined

below is the purpose of this book.
Part I outlines the main challenges to which industry managers and their
companies must find answers today:

ᔡ The globalization challenge – is the automotive industry raising

tomorrow’s winners?
ᔡ The value chain challenge – networks: the strategy for success.
ᔡ The technology challenge – progress or pitfall?
ᔡ The market challenge – who will gain strategic control?
ᔡ The social challenge – increasing social and political acceptance of the
automobile.

In the case studies featured in Part II, top managers of leading auto makers
describe how they are rising to these challenges, what problems have to be
surmounted, and what opportunities are opening up.
46

The globalization
challenge – is the
automotive industry
raising the champions
of tomorrow?
Dr Thomas Sedran, Partner, Roland Berger Strategy Consultants

General Motors (GM), Ford and Chrysler have lost more than 15
percentage points of their North American market share since the early
1980s. It has gone primarily to Toyota and other Japanese original
equipment manufacturers (OEMs), but also to the Koreans. Apparently,
even in their home market, the ‘big three’ of yesteryear are putting up little
opposition to the Japanese invasion, as evident in their continued loss of
market share. Even in Europe, Asian brands have passed the 17 per cent
mark in terms of market share.
Now Chinese and Indian manufacturers such as Geely and Tata have
declared their intention to conquer the world’s key automotive markets.
On the supplier side, new competitors are springing up in emerging
markets as well. They are growing at incredible speed through joint
ventures and acquisitions. Buying the latest technologies, they are going
up against established vendors and snapping up orders.
Is the automotive industry raising the champions of tomorrow as glob-
alization progresses? Who will emerge triumphant out of the globalization
battle – only those who buy and drive the cars? What are the key chal-
lenges established suppliers and newcomers face as a result of global-
ization, and how can both groups master them?
 The globalization challenge 47

GLOBALIZATION IN CHANGING TIMES

Although globalization has taken on a growing importance in recent

years, the topic is as old as the Industrial Revolution when it comes to
developing new sales, production and sourcing markets. The British East
India Company, which acquired the exclusive right to trade between the
Cape of Good Hope and the Strait of Magellan on 31 December 1600, is a
good example. Despite – or perhaps because of – the fact that executing
this right necessitated sometimes lengthy and fierce conflicts with other
colonial powers, the East India Company evolved into a key source of
wealth and power for the British Empire in the centuries that followed.
Some of the effects of this can still be felt today. Similarly, the global-
ization activities of the Venice of the 17th and 18th centuries contributed
significantly to the city’s prosperity and power.

THE AUTOMOTIVE INDUSTRY –

TRADITIONALLY A GLOBAL INDUSTRY

With the exception of its very earliest days at the end of the 19th century,
the automotive industry has been a global industry almost from the start.
The pioneers of globalization were GM (see Figure 3.1) and Ford, which
established distribution companies in numerous countries in the early 20th
century. In the 1920s and 1930s they set up or bought production sites in
one country after another across Europe and Asia to be better able to serve
these ‘remote’ sales markets. This globalization was driven by three key
motives that still apply today:

ᔡ developing sales potential in growing markets;

ᔡ taking full advantage of lower wages and factor costs;
ᔡ leveraging the high fixed costs in vehicle R&D and production.

Ford, GM and Chrysler’s global presence gave them access to competitive

advantages. By the mid-1960s they dominated 52 per cent of the world
market, with their plants manufacturing around 10 million vehicles in
total. However, at the time, the vast majority of the automotive demand –
more than 90 per cent – stemmed from North America and Western
Europe. As demand for vehicles grew in Japan, Korea, Brazil, China and
other countries, the regional focus shifted enormously. Today, Japan and
the new sales markets make up more than 35 per cent of the world market,
48 Major challenges

1912 • GM Export Company established to handle sales outside the United States
1920 • Manila branch established dedicated to Far East marketing
(relocated to Shanghai in 1922)
1924 • Chevrolet production site opened in Copenhagen to supply Scandinavian,
Eastern and Western European markets
1925 • Vauxhall Motors Ltd, England, acquired
• General Motors do
• Additional sales branches opened in Europe
1926 • Subsidiary in South Africa established
• Five Australian production plants built
1927 • Plants in Berlin, Germany and Osaka, Japan, built
1928 • First car plant in India opened
1929 • Adam Opel AG acquired
1930 • GM Overseas Operations (GMOO) established to coordinate production and
marketing activities outside of North America

Figure 3.1 General Motors globalization milestones 1912–30

Source: General Motors

and this tendency is likely to rise considering the growth rates being
observed in China, India, Russia and the ASEAN countries.
Moreover, Figure 3.2 highlights the growing amount of networking
in the automotive industry across the regions. While just 8.7 per cent of
the worldwide demand was handled cross-regionally in the mid-1960s,
the figure exceeds 15 per cent today. As excess capacities grow in
China and Eastern Europe, this rate will continue to increase in the
years to come.

The Japanese and Koreans conquer North America

and Europe

With the increasing demand, particularly in Asia, the balance of power in

the global automotive industry has shifted massively in recent decades.
The biggest winners were the Japanese and Korean OEMs. This devel-
opment was bolstered by the recession of the early 1980s, when Toyota
and other Japanese auto makers acquired many new customers outside
their home markets thanks to attractively priced, high-quality and low-
consumption vehicles.
 The globalization challenge 49

1964 2004
North America Western Europe North America Western Europe

0.25
8,37
8.37 7.28
7,28 6,62
6.62 14.71
0.6 1.11

1.76
1.79
0.24 1.13
0.14 0.98 0.19
0.04

0.63 1.4

1.31
0.9 11,99
11.99 8.48
0.6 0.05

Other regions Japan Other regions Japan

Export Production Demand

Figure 3.2 Regional distribution of car production and demand

worldwide 1964–2004 (million vehicles)
Sources: R L Polk Marketing Systems, Global Insight, VDA, Roland Berger Strategy
Consultants

North America – an easy game

Established car makers did not have any competitive offerings ready in
these segments, specifically in North America, and opted instead to
bypass the issue by focusing on larger vehicle segments (primarily
pickups, sport utility vehicles (SUVs) and vans), which at the time
delivered excellent margins and substantial growth. The strategic impor-
tance of these portfolio gaps then – and now – is shown in the devel-
opment of market share over the past 10 years. Thanks to the good
experience car buyers have had and the ability of Asian manufacturers to
gradually adapt their vehicle offerings to American tastes, they have since
been able to boost their North American market share to over 30 per cent.
Asian OEMs no longer depend on price for their business success. Price
was their main selling point up until the early 1990s, when their ‘cheap’
cars taught the ‘big three’ the meaning of fear. The Asians successively
took advantage of the flexibility afforded by the quality image they had
created, which is extremely important in North America, and increased
their prices. Toyota and their Asian counterparts can now afford to keep
out of the crippling price wars, and still succeed in gaining market share.
Emulating the successful strategy of the Japanese OEMs, Korean
brands managed to get a foot in the door and quickly expand their position
in the US market. With more than 30 per cent and 10 per cent compound
50 Major challenges

ROW 3% 3% 4% 5% 6% 7% 7% 8% 8% 8% 9%

Asian 23% 23% 24% 25% 26% 28% 30% 31% 33% 34% 34%

‘Big 3’ 74% 73% 71% 70% 68% 65% 62% 61% 59% 58% 57%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Note: The ‘big three’ are GM, Ford and Chrysler. Asian = Japan + other Asian OEMs

Figure 3.3 Market share by brand in North America 1995–2005

Sources: JD Power, Roland Berger Strategy Consultants

annual growth rate (CAGR) respectively in the period from 1994 to 2004,
Kia and Hyundai were the fastest-growing car brands in the United States.
Similar to Toyota, the Koreans are also upgrading their brand perception
on the back of quality, which consequently enables them to raise their
prices. Kia and Hyundai have already progressed to the lower midsection
of the market in terms of price. The entry-level market segments they have
‘freed up’ extend an open invitation to the burgeoning Chinese auto
makers, which will soon begin to follow these proven patterns to develop
a presence in the American market. Besides the growing market opportu-
nities created by the upward price movement of the established Asian
manufacturers, the development is accelerated by the current excess
capacities of 2.5 to 3 million vehicles in China (with a rising tendency), as
well as the growth of the market in China itself, which is lagging behind
expectations. Initial announcements of companies’ intentions to import
hundreds of thousands of vehicles into the United States to sell locally
have set things in motion.

Increased pressure on the European fortresses

Japanese and Korean brands have also launched a broad frontal attack on
European markets. No segment is being spared. Even in the premium
category – traditionally a segment dominated by European OEMs – Lexus is
 The globalization challenge 51

in the process of completely repositioning itself, defining a new brand core

with hybrid engine technology. According to the press releases, Nissan’s
premium brand Infinity is about to be introduced in Europe. In the medium
term, Nissan is planning to exceed Lexus’s present market share. Thus
competition is set to intensify, even in the premium segment. Yet ‘escaping
upmarket’ into ever more complex technology does not seem to do the trick
these days given the recent experience of Mercedes-Benz and others.
As a result, Asian auto makers have established themselves as
permanent players in the European market as well. There are, however,
some significant differences between Europe and the United States, which
have so far restricted their success in the world’s second largest economic
zone. These are:

ᔡ Europe has a strong local car-making industry with traditionally high

brand and customer loyalty.
ᔡ Europe is the home base of the biggest premium OEMs.
ᔡ European volume manufacturers maintain a stronghold in the entry-
level segments and defend their market positions with product blitzes
and, in some cases, very successful cost-cutting programmes.
ᔡ Innovation and brand perception still play a significant role in people’s
purchase decisions.

However, since Europe’s economy has become stuck in a rut and the big
nations have begun reforming their social security systems, the
consumption climate and customer priorities have shifted in favour of
lower-priced offerings. Asian OEMs are also reaping the benefits of failed
strategies implemented by some European OEMs, such as Volkswagen,
which wanted to sell ever more technology at ever higher prices. In some
instances, such strategies have resulted in a dilemma. Although customers
demand cost-intensive features (for example airbags), they are not very
keen to pay a premium for them.
Moreover, Asian companies have cleverly adjusted their designs to suit
European tastes – frequently with the assistance of Italian automotive
body engineers such as Pininfarina, which have greatly influenced auto-
motive design trends for many years. Simultaneously, Asian auto makers
are getting an additional boost from their superior quality positioning,
which often drives critical purchase impulses in the embattled volume
segment. As a result of these factors and developments, Asian OEMs, after
suffering a setback in 2001, have been able to expand their European
market share to 19 per cent as of 2005.
Just like in the United States, there is a certain time lag between Korean
OEMs and their Japanese competitors in terms of market launch.
52 Major challenges

25% 23%
31% 28% 28%
33% 32% 33%
ROW 38% 39% 41% 41% 37%

16% 19%
15% 14%
13% 13% 13%
Asian 8% 14%
8% 11%
11% 11% «

23% 23% 25% 25% 23%

22% 22% 21%
French 26% 24% 23%
20% 20%

32% 33% 33% 32% 34% 34% 33% 35%

German 28% 29% 29% 28% 28%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Note: Cars only

Figure 3.4 Market share based on OEM origin, Europe

Sources: VDA, JD Power, Roland Berger Strategy Consultants

Recently, however, they have displayed dynamism. In Europe as well as

the United States, Kia and Hyundai are now the fastest-growing brands.
Nonetheless Toyota, globally considered the toughest competitor for
European and American OEMs, will continue to produce unfettered
growth rates of around 8 per cent in Europe over the next few years.
In a stagnating market, this obviously means that some players will be
forced out. Consequently, four Asian auto makers now rank among the
world’s top 10. In 2006, Toyota will very likely overtake GM as the
world’s biggest OEM. With total market capitalization of €150 billion, it
exceeds the combined value of GM, Ford and DaimlerChrysler. Other
leading Asian manufacturers have pulled into the fast lane as well. Selling
2.5 million vehicles (an increase of 11 per cent year on year), Hyundai, for
example, generated after-tax profits of €1.9 billion (up 7 per cent) in 2005
– another record-breaking result. And the company is budgeting for even
more growth – at least another 10 per cent in 2006.

Is this a case of déjà vu with new OEMs from China, India

and Eastern Europe?
The rapid growth of the automotive markets in China and India goes hand
in hand with the emergence of new car makers that are also receiving
support through government policies. What opportunities do these
newcomers have in competing with the big automotive conglomerates
 The globalization challenge 53

globally? Will the meteoric rise of the Japanese and Koreans now be
followed by the decade of the Chinese and Indians?
There are certain arguments to support this assumption. Asian manufac-
turers have used the growing acceptance of Japanese and Korean brands
in North America and Europe to adjust their prices upwards. In recent
years, this has created a gap in the price spectrum, which now opens the
door for Chinese, Indian and Central and Eastern European OEMs. Initial
indications that they will fill the gap are emerging.
China’s largest auto maker, SAIC, has secured key technology and
brand rights from Rover. Nanjing Automobile bought the Rover plant,
complete with its English workforce with their automotive industry expe-
rience. Brilliance, BMW’s joint-venture partner, will offer its flag ship
‘ZhongHua’ car, with its C and D class ambitions, for the incredibly low
price of €19,000 on the German market. The Dacia Logan, built in
Romania, exceeded Renault’s first year sales forecasts by far, selling
almost 13,000 vehicles. Theoretically at least, Chinese and Indian manu-
facturers benefit from very low-cost production factors, especially
personnel costs but in other cost areas too, given that statutory regulations
concerning the equipment and safety of workstations, for example, are
minimal. Indian car makers Tata and Maruti are also preparing to enter the
European market.
Another catalyst that will aid the rapid rise of Chinese and Indian manu-
facturers is their easy access to know-how. Thanks partly to mandatory
government requirements (such as licence regulations) and supported by
the outstanding growth opportunities in emerging markets with no
existing brand loyalties, new car makers from the emerging markets are
finding partners at minimal cost who will help and guide them in the low-
cost production of good cars that are also suitable for selling in established
markets. The current stagnation of the triad markets further aids this
development, given that the growing demand in China and India makes it
possible to continue to employ highly competent workers in the short term
at reasonable cost.
At first glance, very little seems to contradict the fast emergence of the
Chinese, Indian and Central European newcomers, especially in view of
the enormous progress made in recent years coupled with the will that
these countries have to propel themselves into a better future. On the
other hand, many ambitious companies’ expansion strategies have failed
in the past. With the exception of Hyundai, no newcomer has made it into
the premier league in the past 20 years. The list of those that failed to
make the grade is long: Proton from Malaysia, Avtovaz/Lada from
Russia, Kia and Daewoo from Korea and Mahindra from India. Many
others have been taken over or play only a regional role.
54 Major challenges

What special challenges do newcomers have to overcome to be able to

play a critical role in the global race for success? How can established
manufacturers take advantage of the opportunities in the emerging
markets without fostering unwanted competition? What options do
European and US manufacturers have to defend their home markets and
market share against increased attack from Asian manufacturers? Can
established manufacturers utilize new markets to improve their cost base
and thus their competitive positioning on a global level?

SURVIVING BY SUCCEEDING IN THE NEW

EMERGING MARKETS

In a liberalized world without major restrictions to trade, the future of

OEMs and automotive suppliers will be decided in the newly devel-
oping markets of Asia and Eastern Europe. These are the only places
where demand will grow in terms of absolute volumes and sales; they
are the only places where auto makers will find the low-wage workers
they need to remain globally cost-effective and competitive in their
traditional triad home markets in the era of hybrid costing. Those who
miss the opportunities in these booming markets will be left with very
little room to manoeuvre in the continued consolidation of the auto-
motive industry.

Growing demand is restricted to emerging markets

While the demand for vehicles continues to stagnate on a high level in

North America, Western Europe and Japan, demand will increase
significantly over the next few years in emerging markets, especially in
China and India, but also in Brazil and Russia. The key drivers of this
development are rising household incomes among the population, the
stabilization of basic economic indicators, and the continuous
expansion of (highway) infrastructures, as in India. Moreover, citizens
of these countries have a strong desire not only to meet their individual
mobility needs by purchasing a vehicle, but also to express their
growing prosperity. The sum total of these factors translates into
average growth rates of more than 7 per cent until 2015 in these
emerging markets.
 The globalization challenge 55

Basic economic indicators India's highway infrastructure project

GNP 6.5% CAGR 723
[USD bn]

355

1995 2005

Exports
[USD bn] 10.6% CAGR
83.2
42.3

2000 2005

Inflation
[%] 10.2%

4.3%

1995 2005

Figure 3.5 Development of basic indicators and highway infrastructure

in India
Sources: Economist Intelligence Unit, Investment Brief (Indian Embassy)

Sustained cost advantages in emerging markets

In addition to the development of local sales potential, labour cost savings

of a factor of 10 to 20 are the primary drivers behind companies offshoring
the manufacturing part of the value chain to emerging markets or estab-
lishing production sites there. Differences in the education levels of the
available staff, infrastructure deficits (such as unreliable power supply),
added logistical costs and measures to protect the firm’s legal position
(such as intellectual property rights) wipe out a substantial part of the
impact that labour cost savings have on production costs. Nonetheless,
even considering these factors and risks, clients’ projects still yield
savings potential of 15 to 20 per cent over the total cost of production and
development at sites in established markets. From a Western European or
North American perspective, complete offshoring to China or India is
unavoidable or expedient in very few cases only. It frequently makes the
most business sense to develop sites in Central and Eastern Europe or
Central and South America. For instance, absolute savings at a production
site in Central China compared with one in Eastern Romania total just 50
cents per hour. In other words, the labour cost savings would be offset by
the higher logistical costs.
Experts project that the difference in hourly wages will hardly change in
the medium term, even if wage rises continue at their present rate. This is
because of the higher starting level in industrialized nations, which means
56 Major challenges

that the absolute rate of wage increases is already higher here than in
emerging markets. According to an EIU scenario (see Figure 3.6), the
absolute difference between hourly wages will actually grow in the
coming years. Moreover, the anticipated productivity increase in
emerging markets will be significantly higher than in the triad markets. As
a result, product cost advantages will shift even further in favour of the
emerging markets.

Average wage costs [b/hour]

37.3 37.0 36.6 37.1
Germany
33.2 34.0
32.9
30.0 29.6
29.1 29.2 29.0
EU-15
26.5
25.2 25.8 USA
24.3 27.6
22.7 22.5 22.4 25.9 26.7
24.3 25.0
22.8 23.5
21.1 22.0
19.5 20.3
18.4
17.0 16.9 X 11

X 28

1.8 2.1 2.4 Russia

0.6 0.7 0.8 0.9 1.0 1.1 1.4 China
India
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 3.6 Comparison of wage cost development in industrialized

nations and emerging markets
Sources: Economist Intelligence Unit (EIU), Roland Berger Strategy Consultants

Challenges for established OEMs and newcomers

It is not easy to keep exploiting the comparative growth and cost advan-
tages of emerging markets sustainably. Established OEMs and newcomers
alike will have to address a wide range of challenges. These are:

ᔡ a large number of first-time buyers and minimal brand loyalty;

ᔡ high levels of price sensitivity and diversity in regional markets;
ᔡ high fixed costs and operations that lack critical size;
ᔡ demand volatility, exchange rate fluctuations and trade barriers.
 The globalization challenge 57

High number of first time buyers and minimal brand loyalty

The vast majority of customers in emerging markets are first-time buyers,
and many of them have no experience with cars. The only exceptions are
first-time buyers making the transition from two-wheelers to cars. They
do, however, represent a relatively large segment of the market. In India,
for example, more than 5 million two-wheelers are sold each year. About
25 per cent of these customers plan to buy a car in the next few years,
which translates into a total market volume of more than 1 million cars. In
India, a total of 80 million people will have the financial wherewithal to
purchase an automobile in 2007.

1996 2007
Annual household income Million households Million households
[USD]

Very rich > 20,000 1) 1.2 5.2

Consumer class ~ 4,500 32.5 75.5

Emerging ~ 2,300 54 87.7

Aspirant ~ 980 44 20.2

Poor ~ 440 33 16.5

• In 2007, more than 80 million households will have adequate disposable income to afford a car

• The impact of increasing disposable income is evident in consumer goods markets

1) Based on purchasing power parity, this is the equivalent of US$100,000 per household

Figure 3.7 Demographic structure and disposable incomes in India

Sources: Economist Corporate Network, Roland Berger Strategy Consultants

Similar to East German car buyers after German reunification, first-time

buyers in emerging markets are indeed brand oriented, but not as brand
fixated as customers in established markets. Although disposable incomes
have increased, they are still limited, so people opt for the car that delivers
the best combination of low upkeep costs and modern design and features
for a price that falls under their personal limit. The car’s resale value plays
only a minor role in purchasing decisions at this time.
These buying patterns create equal selling opportunities even for brands
that do not play a leading role in the big automotive markets of today.
Buick’s success in China is a good example. This brand does not generate
much market share for GM in the United States but in China, where it has
58 Major challenges

Feature Ranking1) • The total lifecycle costs of the vehicle

are critical criteria in the decision-making
Driving comfort 1 process.
• A typical Indian buyer expects European
Maintenance 2 quality at Asian prices.
Total
After-sales service 3 lifecycle • Resale value plays a very minor role
cost given that cars remain with the first owner
Fuel consumption 4 for a long time. Nonetheless, the used
car market is beginning to grow.
Price 5
• Driving comfort is a must, given that
Equipment 6 long traffic delays are common and the
infrastructure is still inadequate.
Appearance 7

Other 8 • Only car makers with a strong presence

in the country emphasize vehicle
maintenance and after-sales service.
Resale value 9

1) Rediff.com survey, 2004; 8841 responses from 25 Indian cities

Figure 3.8 Factors influencing purchase decisions in the midsize

segment in India
Sources: Rediff, Roland Berger Strategy Consultants

been given a fresh, modern positioning and offers solid product/

performance ratios, it is a yardstick for the midsize-premium segment.

High levels of price sensitivity and diversity in regional

markets
Even though Mercedes-Benz, BMW and Audi are establishing assembly
and production sites in emerging markets, the majority of cars sold into
emerging markets go for less than €8,000. In India, for example, such cars
make up more than 60 per cent of the total market. Obviously, the
performance and features of these vehicles are not identical with those of
more expensive models that are also sold in the triad markets.
Nonetheless, the level of the established competitors has to be reached – at
least visually – especially in terms of design and comfort.
In the wake of a growing model portfolio and rising local production
capacities, price pressure has entered the Chinese market. Even in the
mid-range and higher price segments, the past 12 months have seen list
prices and transaction prices fall by more than 20 per cent in some cases.
The specific vehicle properties that drive customers’ decisions to buy a
car not only depend on individual buyer segments, they also vary consid-
erably between regional sales markets. In keeping with the old adage
‘China is more than China’, customers in the north-east place more
 The globalization challenge 59

Overview prices of selected A segment models

Price
[EUR]
Peugeot Kia Picanto
107 Hyundai Atos (8,700-10,800)
10,000 Toyota Aygo (8,600-10,400)
Citroën
C1 Fiat Panda VW Fox
(5,500- Daewoo Matiz
7,500 Maruti Zen (8,000-10,300)
Dacia Logan (7,200-7,400) 10,500)
Fiat Palio
(6,000-7,000) Tata Indica
(5,600-6,200)
5,000
Maruti 800
Geely HQ
Xiali (3,500-6,000)
2,500 Chery QQ

Eastern China India Brazil South

Europe Korea
Production country
Size of circle = global sales 2005
Note: prices in brackets indicate range

Figure 3.9 Volume car prices in key emerging markets

Sources: JD Power, Roland Berger Strategy Consultants

emphasis on vehicles and brands that are especially known for durability
and reliability, whereas people in the south and south-east tend to go for
international brands.

High fixed costs and operations that lack critical mass

Research and development, production, sale and service in the automotive
business remain capital-intensive activities. Even if production changes
over from fully automated assembly lines to more manual processes to
exploit the labour cost advantages of the emerging markets, hundreds of
millions of euros worth of investment will still have to be pumped in to
ensure that production remains competitive on cost and quality. To justify
such investments, annual production volumes of at least 100,000 or
ideally 200,000 vehicles per model or model family have to be churned
out. Given that not even China – the largest of the emerging markets with
about 4 million vehicles sold in 2005 and very strong competition – is able
to absorb such volumes, plants in emerging markets can be competitive
only if export strategies for these vehicles targeting neighbouring and
triad markets are developed simultaneously.
Substantial investments are also required in sales and service to ensure
vehicles are presented and maintained in a way compatible with the brand.
Even though such investments are usually not made by auto makers but by
independent car dealerships, they too require certain minimum volumes to
justify their investments. One of the biggest financial and operational
60 Major challenges

North-west – North – North-east –

underdeveloped region Beijing and vicinity old industrial region
• Traditional values, price sensitive, • Diversified values, emphasis on fuel • Traditional values, price sensitive
fuel consumption and consumption and maintenance costs • FAW production site, incl. FAW -
maintenance costs very important • Prefer German brands over US VW JV and FAW Mazda,
brands 6 plants
• Established brands with high • Prefer established brands with a
levels of trust in terms of reliability good reputation for reliability and
and durability preferred (eg VW durability (eg Audi A6)
Santana or Jetta)

South-west – East
mountain region • Open to Western cultures and
new technologies
• Traditional values, albeit easy
adaptation to new technologies • SAIC joint ventures with VW and
and car models due to GM in Shanghai
government development policies
South
• Price sensitive, high emphasis on
fuel efficiency and maintenance • Traditionally large percentage of
costs imported cars
• ChanganGroup, Changan • Open to foreign influences and
SUZUKI JV, ChanganFord JV cultures
manufacture in Chonqqing • Honda, Nissan, Toyota joint
ventures concentrated in
Guangzhou
Central China
• Prefer Japanese cars over
• Home of DongfengAuto and PSA American and European cars
and Nissan joint ventures (very strong aftersales market for
Japanese cars)

Figure 3.10 Regional customer preferences in China

Source: Roland Berger Strategy Consultants

5 3 165
6
8
19

123 20

-17 -2

OEM JV Direct R&D Compo- Over- Sales Taxes Depre- Ener- Chinese
wages nents heads ciation gy model

Cost advantages Cost disadvantages

of Chinese OEMs of Chinese OEMs

Figure 3.11 Cost disadvantages in China as against the global

benchmark (in CNY 000)
Sources: Expert interviews, Roland Berger Strategy Consultants

challenges in this context is ensuring the availability of service centres

and spare parts supplies across the huge geographical expanses of coun-
tries such as China and India.
While economic minimum volumes are fairly irrelevant in protected
markets given that prices and margins are well above global market levels,
the kinds of volume that need to be sold increase dramatically when such
markets are liberalized. This is currently very well demonstrated in China,
 The globalization challenge 61

where prices are falling significantly while vehicle sales and service stan-
dards are rising to allow companies to differentiate themselves from the
competition.

Demand volatility, exchange rate fluctuations and

trade barriers

Young, dynamic economies are always subject to special risks resulting

from virtually unforeseeable shifts in their financial system and political
situation. Drastic drops in demand as well as substantial changes in
currency exchange rates and government trade restrictions (import duties,
local content provisions) may follow such seismic shifts. They have a
grave impact on the profitability of investment decisions. In an increas-
ingly networked and globalized world, the domino effect cannot be ruled
out. The Asian crisis of 1998 and the subsequent devaluation of multiple
currencies, for example, resulted in as much as a 40 per cent drop in
demand in Brazil at the end of the 1990s.

Success strategies for established auto makers

To successfully develop the potential of emerging markets, established

OEMs will have to master a whole series of specific challenges. The first
of these is to gain a thorough understanding of local market conditions and
customer requirements. The second is to develop specific low-cost
competencies. Then they will need to integrate emerging market activities
into the operations of a global R&D, production and sourcing system.
Most importantly, they must safeguard intellectual property rights. All of
these aspects and more also need to be embedded in management struc-
tures and personnel development systems that have been modernized with
a view to the special challenges of globalization.

Understanding and meeting local market requirements

Up until a few years ago it was sufficient, and indeed very lucrative, to go
into emerging markets such as Brazil, China or South Africa and sell
vehicle models that were no longer competitive in the embattled triad
markets on the grounds of outdated design and technical features.
Volkswagen did this with great success for years with the Beetle in Brazil
and Mexico, and continues to do so today, for example with its City Golf,
a derivative of the Golf I, made and sold in South Africa. From a mere cost
62 Major challenges

and liquidity angle, this strategy sometimes makes economic sense given
that the production costs of older models are significantly lower because
the products are less complex, and they allow manufacturers to attain
market-specific objectives more easily. Naturally such strategies are also
less capital-intensive, because they use machines and tools that have
already been amortized.
In an era of liberalized markets, this type of approach increasingly
appears to be doomed to failure. In the premium segment, the trend was
evident even before this. Mercedes-Benz’s attempt in the mid-1990s to
continue production – in India – of the E Class type W124, manufactured
in core markets from 1985 through 1994 but no longer built in Europe,
failed miserably. After all, customers who were able to afford the high
price tag for this E Class wanted to drive around not in a discontinued
model, but in the very same one they had seen on their trips to Europe.
Overall, established car makers, particularly those in the volume
segment, are facing the challenge of having to technically ‘slim down’
products featuring complex engineering for emerging markets in order to
align their costs with local spending abilities. On the other hand, their
design and features must be such that local customers do not feel they are
driving an outdated model. In this context, adaptations to local customer
preferences are absolutely crucial. Part of the reason that Volkswagen lost
market share in China was because it simply ignored the preferences of its
Chinese customers. Appropriate strategies for this booming market would
have been to offer the Jetta instead of the Golf and the Fox instead of the
Polo.

Developing low-cost competencies

Volume segment manufacturers must develop specific low-cost compe-
tencies if they want to take a leading role in emerging markets in the
medium term. Those who do not have a competitive entry-level model in
the €5,000 to 8,000 price range will lose many first-time buyers to other
brands/OEMs. Moreover, this approach also means forsaking volume,
sales and margin potential to finance the necessary denser sales and
service networks. And those first-time buyers who can later afford to buy
in higher price segments will either upgrade within the same brand or
switch to premium brands.
But how does a company create such a low-cost/low-price entry-level
model if the mere manufacturing costs of common entry-level models
(excluding selling costs/overheads) in triad markets exceed €7,000 and
are often far higher than that? Cosmetic ‘de-contenting’, such as leaving
out airbags, xenon lamps or catalytic converters, is certainly not the
 The globalization challenge 63

answer. Our experience shows that established auto makers can deliver
such vehicles only if they take a radical approach:

ᔡ forgoing redundant corporate structures and processes that drive costs;

ᔡ focusing on the technically feasible aspects that customers are willing
to pay for;
ᔡ taking consistent advantage of cost benefits resulting from modular-
ization as well as developing, sourcing and manufacturing at low-
cost sites;
ᔡ assigning dedicated multifunctional teams that work largely independ-
ently of group structures;
ᔡ ensuring targeted integration of suppliers that also meet the four
requirements stipulated above.

With its Dacia Logan, Renault provides a perfect example of the practical
implementation of this approach. Although built on the same platform as
the Renault 19, the remainder of the vehicle was newly developed with a
strict focus on cost optimization. Some components from current series
models were used. Others were based on completely new approaches to
ensure all requirements were met. This stringent ‘design-to-cost’
approach resulted in a much higher percentage of manual labour being
used in production than is the norm in modern car plants. As a conse-
quence, chassis structures became less complex and had higher toler-
ances. Given that this was not at odds with customer requirements in this
market segment, the approach yielded substantial savings.

Global R&D, production and sourcing system

Serving emerging markets locally from pure CKD assembly plants is
frequently the first step to more intensive market penetration. As trade
barriers decline (through World Trade Organization (WTO) membership,
for instance) and demand volumes rise, the profitability of doing more of
the value creation in emerging markets increases accordingly. Yet given the
enormous capital intensity of certain value creation activities, such as
pressing and painting equipment, the approach of developing market after
market separately is still relatively uneconomical in many cases. To ensure
that such equipment is used to its full capacity, there are already many auto-
motive plants in Brazil, China, India and South Africa exporting virtually
complete vehicles or expensive aggregates, such as engines, transmissions
or axles, within the scope of a worldwide production system.
At this time, Hyundai is probably the most aggressive auto maker when
it comes to establishing production sites in emerging markets. The new
64 Major challenges

plants in China, Russia, India, the Czech Republic and Slovakia make a
substantial contribution to the growth of this automotive group. In Russia,
Hyundai is one of the fastest-growing manufacturers; in India the
company more than doubled its production volume from 2002 to 2004.
One-third of the Indian output (about 75,000 cars) is now being exported,
primarily to Africa, the United States and Latin America. Consequently,
India is not merely a production site for local demand; it is also being used
as a hub for other markets.
Under the catchphrase ‘global sourcing’, a lot of effort in recent years
has gone into taking advantage of supplier cost potential in emerging
markets. Initially, the focus was mostly on subsidiaries of established
suppliers. As suppliers increasingly consolidated and the automotive
industry grew in China and India, recent attempts have been directed
towards exploiting the cost savings potential of these new players in the
vendor market. A few of them – Bharat Forge among them – have been
highly successful in this.
As the number of available university graduates with a technical back-
ground declines and cost pressure in research and development increases,
emerging markets are beginning to play a more interesting role as loca-
tions for global R&D networks. Brazil has already evolved into a key
supplier of R&D services, for instance within the Volkswagen Group;
India is set to move centre stage for all established auto makers in the
years to come. The country will play an important role even for premium
OEMs such as DaimlerChrysler, which offshored their R&D activities to
Bangalore as early as 1997.

Safeguarding know-how
The more intrinsic networks with local R&D and production partners are,
the higher the risk of valuable know-how that has been developed over
many years being disclosed to third parties. Considering that many of the
new markets are engaged in a very long-term process of playing catch-up
and are very diverse, intensive knowledge transfer is often required to
develop production and development resources and new suppliers. On
the one hand, this transfer must be both planned and accepted to prevent
sometimes insurmountable hurdles from being erected in day-to-day
business operations. On the other hand, it has to be absolutely clear
whenever such transfers are made that there is a risk of critical know-how
being communicated to partners who still have to learn how to handle
and protect other people’s intellectual property. The lack of legal safe-
guards, and perhaps even the existence of protectionism, can sometimes
result in confidentiality and non-disclosure agreements becoming
 The globalization challenge 65

virtually worthless. The aim must be to find the right level of know-how
transfer to develop the business without weakening the company’s own
knowledge base.

‘Globalizing’ management structures and personnel

development
Management structures and personnel development systems will also
have to reflect the importance and challenges of successfully devel-
oping opportunities in emerging markets. Given the liberalization of
emerging markets, it is completely inadequate to approach these coun-
tries with a ‘second-rate’ team. Moreover, executives should not be
encouraged to rotate to new positions too quickly. Especially in Asian
cultures, long-term relationships are key to successfully negotiating
contracts with business partners and are even more important in imple-
menting them properly. Recruiting, personnel planning and personnel
development teams should increasingly integrate staff and executives
from the emerging markets. The value of emerging markets must be
reflected in corporate hierarchies by allocating management positions
accordingly. Responsibility for the operational business in emerging
markets such as China and India absolutely must be assigned at top
management level.

Success strategies for newcomers

Newcomers such as Chery, FAW, Geely, SAIC and Tata have taken up
advantageous positions in their respective home markets in recent years –
through joint ventures and increasingly also through autonomous efforts.
This development was and is being supported by local governments. As
markets continue to be liberalized, newcomers are, however, increasingly
being subjected to the tough competition of the global market. To survive
as independent companies through the long-term consolidation of the
automotive industry, these newcomers will have to master a series of
specific challenges. They will have to:

ᔡ develop independent brands;

ᔡ develop products fit for the global market and autonomous technology
competencies;
ᔡ implement export strategies.
66 Major challenges

Developing independent brands

Only a few Asian OEMs have successfully built up the kind of brand
awareness in Europe and North America that would allow customers to
develop emotional connections with them. Despite being active in Europe
for many years, Asian car makers regularly rank near the bottom of the list
when consumers are asked how much they like a certain brand. However,
this fact did not negatively affect the Asians’ overall success, because they
were able to win over customers with rational arguments. Nowadays,
Japanese OEMs and Hyundai stand for quality and good value for money.
The new competitors will first have to work hard to build up this kind of
image while simultaneously striving to create a differentiated brand
perception. Being recognized as a car maker with ‘reasonable prices and
OK quality’ is not enough on its own, not even in the emerging markets.
How important a brand can be is evident in the sudden sales boost experi-
enced by former Daewoo vehicles when they started being sold under the
Chevrolet brand. In any event, auto makers must understand that creating
true brand value is a process that can take years, even decades, in the auto-
motive industry.

Developing products fit for the global market and

autonomous technology competencies
There is no doubt about it – Indian, Chinese and Russian car makers do
not yet possess the technological competencies to allow them to compete
with European or Asian OEMs. Highly public failures such as the crash
test of the Chinese Landwind SUV and the low sales figures of Tata in
Great Britain underscore this fact. To be able to keep up in the increas-
ingly liberalized global competition as autonomous suppliers, the
newcomers will have to close these competency gaps. Buying up patents
and production facilities, as SAIC and Nanjing Motors did when they
legally acquired Rover’s competencies, is likely to remain the exception
rather than the rule.
Probably the most attractive way of closing competency gaps, in our
opinion, is to intensively integrate and utilize R&D service providers such
as AVL, EDAG, Karmann, Magna-Steyr, Pininfarina and others. The main
focus of the know-how transfer in these business transactions is on body
and overall vehicle competencies. Moreover, strategic partnerships with
large, technology-driven suppliers such as Bosch, Continental, Delphi or
SiemensVDO will be helpful in addressing electrical and safety issues and
in closing gaps in engine and chassis-related proficiency.
Comparing the breakneck speed with which the leading newcomers are
evolving with the historical development of Japanese and Korean OEMs,
 The globalization challenge 67

it is safe to assume that some of the new players will already have closed
all of the key competency gaps within the next 10 years.

Implementing export strategies

To be able to finance all of the investments necessary to develop vehicles
fit for the global markets and build competitive plants, newcomers from
the emerging markets will also have to develop export markets.
Obviously, they will not be able to export cars that are subject to legal
restrictions, such as licence manufacturing agreements. At this time, inde-
pendent suppliers are shipping only to export markets where the statutory
and customer requirements are relatively low. The sales volumes
generated in these markets will not suffice in the long term to escape the
industry’s consolidation pressure. The ambitious newcomers from
emerging markets will therefore be compelled to export to automotive
core markets as well.
Despite good long-term prospects for some of the newcomers, we shall
not see any momentous shifts in market share, given that the newcomers
will be confronted with much stricter safety, emissions and fuel
consumption standards and will first have to build up distribution and
service networks in these core markets.
A recent Roland Berger Strategy Consultants study reaffirms this
opinion. While more than 40 million people in the United States have
annual incomes of between US $15,000 and 50,000, which would make
them an ideal target group for cheap vehicles from China, cars in this
category have barely sold at all in recent years. Only Hyundai was able to
exceed the 100,000 vehicles mark, which it did with two models in the
same year. Against the backdrop of rising fuel prices and the fact that
vehicle upkeep costs have become more important as a factor in people’s
purchase decisions, our survey indicates that a new market for cheap cars
costing less than US $10,000 will develop in the United States. Chinese
OEMs such as Chery and Geely are well positioned to move into this
segment. However, they will have to sell their cars for at least US $7,500
in order to rake back the cost of adapting them to US statutory require-
ments and to cover additional distribution and marketing costs.
Given the lack of sales and service networks in the core automotive
markets, we consider the hurdles still to be high, albeit not insur-
mountable. Independent dealers and fast-fit chains are waiting for their
chance. Automotive News Europe ran the headline ‘Some German Opel
dealers will sell Chinese cars’ on 5 August 2005. Allegedly there are
already plans to utilize the Opel distribution network, currently suffering
from excess capacities, to sell new brands.
68 Major challenges

CONCLUSION

The globalization challenge is, is the automotive industry raising the

champions of tomorrow? The points made in this article show that the
answer to this question is multifaceted. In any event, the leading OEMs
and suppliers of today are indeed giving R&D assistance to new manufac-
turers from emerging markets. Some of these new manufacturers will
evolve into competitors to be reckoned with. On the supplier side, Bharat
Forge is already fit to play in the premier league.
Many of the new suppliers will, however, fall prey to continued
industry consolidation. Equally, OEMs from established core markets that
are currently considered leaders will become victims if they do not take
the necessary restructuring action in time, or if they fail to implement it
consistently enough. The current problems at Fiat, Ford and GM, as well
as at Delphi and other suppliers, underscore the dramatic negative conse-
quences of holding on to old sinecures for far too long.
Ultimately, the progress of automotive globalization will make cars
more affordable and better for us – the customers and drivers.
 69

The value chain challenge:

networks, the strategy
for success
Marcus Berret, Partner, Roland Berger Strategy Consultants

As a key sector of the global economy, the automotive industry is second

to none in driving the development of new product and process tech-
nologies. Ever since car makers and component suppliers began to build
up huge surplus capacity worldwide, it has also been one of the most
competitive industries. As a result, pressure to cut costs and improve
performance in the automotive value chain has been growing constantly
in recent years.
Auto makers and their component suppliers thus found themselves
forced to reinvent their value chain processes at regular intervals.
Attention initially focused on perfecting the art of assembly line
production in the 1970s, followed by a focus on ‘lean’ development and
production to improve efficiency in the 1980s. In the 1990s, value chains
became increasingly globalized as production plant and sourcing activ-
ities spread to countries with low labour costs.
Now, in the first decade of the 21st century, the stakes have been raised
further still. To enable continued growth and catering to ever more varie-
gated customer wishes, despite stagnating markets, manufacturers have
substantially broadened the range of models they have on offer. The
number of models marketed by European manufacturers has indeed more
than doubled in the space of just 10 years (see Figure 4.1). During the same
period, lead development times have been slashed by between 10 and 20
per cent – even as vehicles have become technologically more complex.
Cost pressure also increased as Asian vendors grew their market share
and made overcapacity – currently sufficient for around 20 million units –
70 Major challenges

Number of vehicle models marketed by Time from concept approval to roll-out

European manufacturers (in months)

238
213 40

163 162
150
138
30
125
88
100 75
75
50 20

75 75 75 76
50 50

1 998 2000 2002 2004 2006e 2008e 1998 2000 2002 2004 2006 2008

Standard models Derivatives ( eg soft-tops) Europe North America Japan

Figure 4.1 More model ranges but shorter development cycles

Source: Roland Berger Strategy Consultants

worse still. One fruit of this development is the less than satisfactory
earnings situation at numerous car companies, including Ford, General
Motors (GM), Fiat and DaimlerChrysler, not to mention many of their
component suppliers.
In our view, OEMs, component suppliers and development and
production service providers must therefore join forces to pull three key
levers that together can optimize the entire automotive value chain (see
Figure 4.2):

ᔡ Lever I: value chain breakdown (‘what?’). This lever optimizes the

part played by every link in the value chain (original equipment manu-
facturers (OEMs), component suppliers, development service
providers and production service providers).
ᔡ Lever II: footprint (‘where?’). This lever optimizes the physical and
geographical development and production networks operated by all
companies involved.
ᔡ Lever III: business model (‘how?’). This lever optimizes collaboration
between each link in the value chain, for example in the form of joint
ventures or strategic partnerships.
 The value chain challenge 71

Lever III:
Business model
Lever II:
Physical service provision
• Productivity can be raised
Lever I:
significantly only by
Value chain breakdown • Ongoing relocation of value
improving collaboration
links to countries with low
between
labour costs
• OEMs: Focus on develop- – OEMs and OEMs
• Challenges
ment/production activities – OEMs and component
– Choosing products and
that shape the brand suppliers
services that are suitable
• Component suppliers: for relocation – Component suppliers and
Positioning as integrators or component suppliers
– Choosing the right
cost-oriented component • Challenges:
location
vendors
• Existing plant in countries – Choosing a suitable form
• Development service of collaboration
with high labour costs can
providers: Project
survive , eg by becoming – Adjusting skill sets
management and
more flexible and reducing – Choosing the right
standardization services
personnel expenses partners
• Production service
provider: Services to handle – Sharing risks and
peaks and help OEMs enter opportunities fairly
new markets

Figure 4.2 Levers to make the value chain more efficient

Source: Roland Berger Strategy Consultants

LEVER I: VALUE CHAIN BREAKDOWN, A

STRONGER FOCUS ON CORE COMPETENCE

In recent years, vehicle manufacturers have consistently rolled back their

share of the total value chain. Whereas 70 per cent of value was added in-
house in the 1960s, this figure had dwindled to just 34 per cent or so by
2004. These days, having external suppliers deliver completely
preassembled modules and systems straight to the OEMs’ assembly lines
– and even having them fit these modules in the vehicle shell – has
become business as usual. While opening up considerably more business
potential for component suppliers, this trend also imposes far greater
responsibility on the same firms, demands greater skills and exposes them
to higher risks.
Beyond parts production, recent years have also seen OEMs outsource
the development and production of entire vehicles. Engineering service
providers such as EDAG and Pinifarina and production service providers
such as Karmann and Magna Steyr have benefited from this practice,
boosting their sales by nearly 15 per cent per year since the mid-1990s.
Notwithstanding these developments, the way roles have been split in
value chains to date is far from optimal. All too often, car makers are
inconsistent in the way they relocate activities, and hence also in the way
72 Major challenges

they scale back internal capacity. This leads to a situation where both
parties – the OEM and the component supplier – keep capacity available.
Consequently, at the latest by the time when they have to decide who does
what, the manufacturers often still tend to opt for in-house production to
avoid wasting internal capacity.
Conversely, OEMs have already transferred too much competence to
external suppliers in some areas, electronics being a good example. This
makes the former more heavily dependent on the latter than ever before,
especially with regard to the quality of the components and modules
supplied.
One subject of heated debate in the past few months has been why
German cars have become less reliable. The numbers are sobering.
According to a study by the ADAC (the German automobile association),
251,000 vehicle breakdowns were recorded in Germany in 2004, against
216,000 in 1999 (see Figure 4.3). Interestingly, the mileage clocked up
remained more or less constant in this period.

No. of vehicle breakdowns in Germany (000) No. of recalls in Germany

E/E share Electronic con-

[%] 52 56 59 tent as % of total 21.5 21.8 22.0
vehicle costs
251 144
242
231
127

94

148
125 135

2000 2002 2004 2000 2002 2004

Of which caused by electrical/electronic (E/E) components or systems

Figure 4.3 Breakdown and recall statistics, 1994–2004

Sources: ADAC, Roland Berger Strategy Consultants

The number of cases in which electronic problems are the cause of break-
downs has risen from 50 to nearly 60 per cent. However, this is not only
because of the generally greater importance of electronics in all kinds of
vehicle function, as can be seen from a direct comparison between
European makers and their Asian rivals, whose figures look substantially
better. According to the KBA, Germany’s Federal Motor Vehicle Office,
the number of recalls also more than quadrupled between 1994 and 2004.
 The value chain challenge 73

Over the past few years, numerous vehicle makers have farmed out all
aspects of the management of second- and third-tier suppliers to external
systems integrators. Ironically, they are now starting to complain about
losing direct contact with smaller component suppliers, a fact that is in
turn putting the brake on innovative dynamism.
It is therefore high time to address one crucial question. How will the
roles played by all parties to the development and production of automo-
biles evolve in future? A subset of this question is, what will happen to the
skill sets needed by each player?
Car makers must therefore ask themselves which skills they need to
keep in-house to what depth, and to what extent they want to rely even
more heavily on external partners in future. On the other side of the
equation, component suppliers and development/production service
providers must gain a clearer understanding of what business opportu-
nities the future holds, and what skill sets will be needed to exploit them.

Car makers: focused on core competences that shape

the brand

In the years ahead, car makers will be compelled to invest even more of
their scarce financial resources in design, development and sales/
marketing. They will also have to pump proportionally more money into
new growth markets, such as China, India, Russia and the Middle East.
Consequently, fewer internal resources will remain available for capital-
intensive production areas such as foundries and injection moulding plant.
In light of this situation, we expect car manufacturers’ in-house share of
the value chain to drop further to around 20 to 25 per cent of total devel-
opment and production costs by 2015.
Most OEMs today still take each make-or-buy decision in isolation.
They often lack any clear idea of what the overall value chain ought to
look like in future. It is nevertheless vital for them to systematically comb
through every activity they perform in-house. They must then clearly
define what they want to carry on doing internally in future and what
activities they want to farm out in the medium to long term. In addition,
this analysis must draw clear distinctions between different assemblies,
systems/modules and even individual components. It may even be
necessary to draw distinctions on the basis of regional markets.
We would therefore recommend breaking the analysis down into
three steps:
74 Major challenges

ᔡ Step 1: Define the ‘candidate’ blocks to be investigated. These blocks

can be combinations of systems, modules or components, or they can
be individual process steps (coachwork pressing, final assembly of the
dashboard, and so on).
ᔡ Step 2: Determine what influence each candidate block has on the
manufacturer’s brand promise (such as the joy of driving at BMW or
safety at Mercedes-Benz), and gauge the extent to which potential
external providers for each block are in fact available on the market
(see Figure 4.4).

Influence on
Yes brand image

Central locking system Cockpit

Occupant safety Chassis/

Communication/ drive electronics
entertainment
Lighting system

Braking system Steering Engine

Windscreen wipers management
Gearbox
Seats Suspension
Exhaust Engine
system Wheels and dampers
Drive shafts
and axles

Wheel suspension Front end

Back end

Hood/tailgate

Doors
No Fenders

High Low

Figure 4.4 Example of how an OEM might define its core competencies
Source: Roland Berger Strategy Consultants

ᔡ Step 3: For any block that is not of core significance to the brand, the
last step is to calculate in detail whether outsourcing would yield cost
benefits. At this stage, it is critical to consider the following items:
higher transportation and handling charges; the external suppliers’
anticipated profit margin; and, in particular, an estimate of those
overhead costs that will remain in-house in spite of outsourcing. In
practice, these are precisely the areas in which mistakes are often
made. One common error is to assume that overheads will be elimi-
nated entirely if activities are outsourced. This generally causes the
actual financial benefits of outsourcing to fall short of defined targets.
Another mistake is to assume that overhead costs will remain static
 The value chain challenge 75

despite outsourcing. This view is equally unrealistic and often causes

firms to keep activities in-house after all (see Figure 4.5).

-4%

13.9
Logistics 0.2
Payroll 0.5 1.5 13.3

SG&A 1.5
11.8
0.4 Supplier's margin
Factory 0.9
2.5
overheads 0.3
0.5
0.9

Materials 9.2 8.8

‘Make’ costs Supplier's Remaining overhead in ‘Buy’ costs

price the event of outsourcing

Figure 4.5 Sample cost comparison calculation for make-or-buy

decisions (in euros)
Source: Roland Berger Strategy Consultants

As well as comparing running costs, it is naturally also important to

take account of the one-off charges associated with outsourcing (such
as transferring machines, drawing up a social plan to accompany the
headcount reduction, and writing off plant that becomes surplus to
requirements).
Once future core competencies have been defined, the company must
then go on to identify the skill sets it will need and take steps to close any
existing gaps.

Component suppliers: focused on components or

integration

In recent years, the automotive component supply market has grown

consistently at around 3 to 4 per cent per year. Better still, this growth has
been profitable. The world’s 500 largest publicly traded component
suppliers have thus seen their return on capital employed (ROCE)
rebound sharply since 2002, following the slump that lasted from 1997
through 2001 (see Figure 4.7).
76 Major challenges

‘Black box’ In-house

outsourcing project

Cockpit
Interior
• Dashboard Actual Target
• Air-conditioning
• ...
Seats
Door upholstery
...
Suspension
Coachwork Chassis

Steering
Brakes
Coachwork
Windows • Inventory all resources/skills
available worldwide
Doors, tailgate
• Boost resources by outsourcing
Cylinder heads non-core activities
Engine

Air/fuel • Identify HR/resource

intake
requirements
Radiator • Identify existing gaps
Electronics

On-board electronics
Infotainment
Systems integration

Figure 4.6 Example of how an OEM might define its future skill sets
Source: Roland Berger Engineering Study

13.4

11.7 11.9 11.9

11.1 ROCE

9.5

8.2
ROA
7.1 7.1
6.7 6.8
7.3 5.6 EBIT
6.6 6.4 6.3
5.8
5.3

1999 2000 2001 2002 2003 200 4

Figure 4.7 Profitability of the world’s 500 largest publicly traded

automotive component suppliers
Sources: Bloomberg, Roland Berger Strategy Consultants
 The value chain challenge 77

As OEMs continue to farm out activities and areas of competence to

external suppliers, the market for automotive components will continue to
present attractive growth opportunities in the years ahead. The question is,
what strategies will enable individual component suppliers to exploit this
lucrative potential to the full?
To answer this question, Roland Berger Strategy Consultants have
combed the global component supply industry in search of particularly
successful and less successful companies. We then compared the
strategies they have pursued over the past five years. Our investigation
found that successful suppliers behaved differently from their less
successful competitors in five key business dimensions. These dimen-
sions are company size, product portfolio, customer portfolio, R&D
spending and the degree of vertical integration.

Sales Sales of Sales

1 Company size
< EUR 0.4 billion EUR 0.4 – 4 billion > EUR 4 billion

2 Product portfolio Focused Diversified

3 Customer portfolio Focused Diversified

Low Average High

4 R&D spending
(<2% of sales) (2–4% of sales) (>4% of sales)

5 Vertical integration Low Average High

Successful suppliers Less successful suppliers

Figure 4.8 Patterns of success in the automotive component supply

industry
Source: Roland Berger Strategy Consultants

Statistical evidence confirms a clear link between company size and

earnings power, for example – although the correlation is by no means
directly proportional, as business used to believe back in the days when
big was always beautiful. In fact, our analysis shows that, alongside the
heavyweights, small component suppliers too tend to be markedly more
profitable than their medium-sized rivals.
There are several reasons for this. Many small component suppliers
service highly profitable niche markets, for example, and are well
protected by the patent rights they own. Moreover, owing to their relatively
small sales revenue, these companies have not generally been targets for
acquisition by their customers. Many of the mid-sized companies we
examined are currently evolving from family-owned and/or family-run
businesses to large corporations. In this transitional phase, they often lack
78 Major challenges

Average ROCE,
1997–2003

10.0
9.4
8.8
7.8 7.3 7.2
7.1
6.4 6.6
4.8

0 - 50 - 100 - 250 - 500 - 750 - 1,000 - 4,000 - 7,000 - 10,000 -

Business clusters, by sales (US$ m)

Figure 4.9 Correlation between profitability and company size

Source: Roland Berger Strategy Consultants

the necessary structures and management resources, or they are simply

trying to service too many product groups at once.
A clear relationship can likewise be identified between profitability and
the focus of a company’s product or customer portfolio. Top performers
generate 86 per cent of sales with their one largest product group and 58
per cent of sales with their three largest customers, for instance. Suppliers
whose performance is substandard tend to have a much more diffuse
product and customer portfolio.
It will doubtless come as no surprise to discover that the top-performing
component suppliers are also those that invest above-average sums in
research and development. The same companies also outstrip the low
performers in terms of their degree of vertical integration. Apparently,
numerous campaigns to shrink the value chain have not (yet) positively
impacted the annual financial statements.
Many of the more successful small and mid-sized component suppliers
have a strong focus on gaining a perfect mastery of individual compo-
nents. The more these companies grow, however, the more important it
becomes for them to acquire the skills needed to integrate individual sub-
modules or components into complete systems or finished modules. Only
then can they meet OEMs’ demand for external partners that possess end-
to-end value chain competence (in design, simulation, production,
assembly, and in test bed, off-road and on-road testing) as well as compre-
hensive process management, subcontractor management and logistics
skills.
One copybook example of a company that has systematically acquired
these integration skills is Brose Fahrzeugteile GmbH & Co. KG, head-
 The value chain challenge 79

quartered in Coburg, Germany. Since its inception in 1919, Brose has

systematically and ambitiously transformed itself from a component
manufacturer into an integrator of modules and systems (see Figure 4.10).

Degree of Integrated
integration door modules

Door systems
with frames

Door modules

Electronic
window lifters

Manual window
lifters

1928 1986 1987 2002

Figure 4.10 Brose Fahrzeugteile – how a component manufacturer

became a module supplier
Source: Brose Fahrzeugteile GmbH & Co KG

Back in 1928, Brose made the first manual window lifters ever. Electric
lifters came in 1963, followed by electronically controlled devices in
1986. A year later, the first door module, consisting of a window lifter,
window pane, window guide and impact protection unit, was fitted in an
Audi 80 Coupé. Since then, things have moved fast. Today, a Brose door
module is made up of a wide range of add-on components, such as
speakers, locking systems, sealing elements and control elements for the
wing mirrors. To complement its window lifter and door module business,
the company gradually also moved into seat adjustment and locking
systems. The reward for this relentless and systematic accumulation of
competencies has been impressive indeed: Brose has averaged 13 per cent
annual growth for the past 50 years, expanding faster and more
sustainably than virtually any other automotive component supplier.
One key success factor at Brose has been a style of management
focused rigorously on the long term. Others have been optimal interplay
between mechanical, electrical and electronic components, an ability to
respond swiftly to changing market conditions and customer require-
ments, and a healthy mix of technology and cost leadership.
80 Major challenges

Engineering service providers: beginning to find

their focus

Engineering service providers are a very disparate group (see Figure

4.11). Over the past decade, this corner of the supply network has enjoyed
above-average growth rates, expanding on average at around 15 per cent
per annum since 1996.

Development process
Research/ Design/ Con- Com- Simu- Modelling Testing Inte- Produc- Plant Compo-
Modules predevelop- styling ceptual ponent lation/ / proto- gration/ tion construc- nent
ment phase design compu- typing project planning tion produc-
tation mgmt. tion

Electronics AVL List

Bertrandt Bertrandt AVL List EDAG ETAS Rücker ETAS EDAG
EDAG Ricardo Bertrandt ESG Ricardo ESG
Ricardo
Interior Bertrandt
EDAG
IVM
EDAG
MSX
Coachwork Rücker

Chassis
AVL List MSX Rücker MSX
IVM Ricardo Ricardo

Drive train
AVL List Ricardo AVL List Rücker
IVM Rücker Ricardo

Engine Ricardo
AVL List
Ricardo

Complete Bertrandt EDAG

vehicle EDAG Ricardo
EDAG
IVM
MSX International

Figure 4.11 Activities covered by engineering service providers

Source: Roland Berger Strategy Consultants

Dark clouds have however been looming on the horizon, at the latest since
the start of 2004. Demand for external engineering services has shifted into
reverse, for a number of reasons. One is that a number of OEM engineering
departments have moved over to a strict insourcing policy in order to
absorb excess in-house capacity. Demand is also being hit by car makers’
redoubled attempts to keep competence that is critical to their brands in-
house. Furthermore, one of the principal drivers of the outsourcing trend –
sharp growth in the variety of vehicle models – is likely to peak in the next
year or two. At the same time, OEMs are now making first-tier suppliers
responsible for entire systems and modules, in the hope that they will also
handle and finance the necessary engineering work.
Despite all these negative effects, the market for engineering services is
still likely to present lucrative business opportunities in the medium to long
term. This market segment will receive positive stimulus from the fact that
in-vehicle technology – especially in the field of electronics – is contin-
 The value chain challenge 81

ually becoming more complex. Auto makers’ cost-conscious efforts to

standardize or at least harmonize, certain technologies (such as software
engineering), modules and components across different vendors will
likewise fuel further demand for these services. This is precisely where
tremendous opportunities lie in store for engineering service providers.
The providers concerned will nevertheless only be able to tap this
potential if they carve out a keener profile for themselves. Back in the
heady years of rampant growth, many such firms tried to cover every
conceivable service, from predevelopment to plant construction – and that
in every single product group. This inevitably left them with a decidedly
fuzzy market position, preventing many of their business areas from
achieving critical mass. The pivotal challenge will therefore be to define
focal areas of future activity, and to bring both qualitative and quantitative
resource allocation into line with this new orientation. Our experience
indicates that many development service providers could raise their effi-
ciency by double-digit percentages if they were to optimize their capacity
management in particular. A further challenge in the years ahead will be to
adjust their network of locations in line with customer expectations.
Above all, this will involve building and ramping up capacity in low-
labour-cost regions such as China and India.

Full-service providers and dedicated production service

providers: services to unplug bottlenecks and catalyze
entry to new markets

A series of full-service providers for auto makers have emerged in the

recent past. Today, the likes of Karmann and Magna Steyr can not only
develop entire vehicles and get them production-ready: they also have the
capabilities to volume-produce vehicles, which they do with the BMW
X3, the Mercedes CLK and the Jeep Grand Cherokee. Alongside these
flexible market players, dedicated production service providers such as
Valmet (for the Porsche Boxster) have gained a foothold on the market.
For car companies, drawing on the services of such firms makes
eminent sense. Capacity bottlenecks can be unplugged. Small-series and
niche models can be rolled out efficiently at highly flexible plant, despite
low unit volumes. By no means least, the car makers themselves have to
tie up far less capital for development and production.
In this segment too, however, a few boom years have now given way to a
more sober mood. Large numbers of new niche models, such as VW’s soft-
top and the latest 6 Series BMW, have been or are still being manufactured
82 Major challenges

Valmet

Heuliez
Karmann
Magna Steyr
Bertone
Santana
Karmann Pininfarina

Styling/ Project Compo- Total Total Produc- Produc- Volume Volume

design manage- nent vehicle vehicle tion tion production model
ment develop- integration testing planning engineering plant assembly
ment

Bertone Bertone Heuliez Bertone Bertone Karmann Bertone

Karmann Karmann Karmann Heuliez Karmann Heuliez
Pininfarina Magna St. Magna St. Karmann Magna Steyr Karmann
Santana Pininfarina Pininfarina Pininfarina Pininfarina Magna St.
Santana Magna Steyr Santana Pininfarina
Valmet Santana Valmet Santana
Valmet Valmet

Figure 4.12 Overview of production service providers

Source: Roland Berger Strategy Consultants

in-house. New plants are springing up in the world’s growth markets, even
though existing capacity in the triad markets is not being rolled back.
Current global overcapacity – enough for some 20 million vehicle units – is
thus likely to remain acute until beyond 2010. Added to this is the fact that
OEMs themselves have in the meantime set up more flexible production
plants of their own. One direct consequence is that production service
providers saw an average of two to three percentage points shaved off their
profits between 2001 and 2003.
Here again, however, production service providers can continue to
operate in attractive areas in future. One opportunity is to assist OEMs as
they seek to penetrate new growth markets such as China, Russia, India
and Iran. The idea of having service providers that absorb peaks right
across the brand spectrum is also proving to be a viable option. In this
area, production service providers must nevertheless make their
production processes and plants more flexible than they are at present.

Section summary: attractive growth opportunities for

module and system suppliers – major challenges ahead
of engineering and production service providers

In future, OEMs will concentrate even more heavily on areas of compe-

tence that are critical to their brand image. Many component suppliers can
 The value chain challenge 83

therefore look forward to sustained and very attractive growth, especially

in the areas of drive and chassis products. All in all, we believe that
component suppliers will increase their share of the total value chain from
around 64 per cent today to about 73 per cent in 2015 (see Figure 4.13).

Share of total
value chain
1 849 bn [%] CAGR

1 750 bn 8 8 1 +1%
1670 bn 8 1 +1%
8
Production service providers
7 7
Engineering service providers

632 73 +4%

Component suppliers 428 518

OEMs 228 216 201 25 -1%

2004 2010 2015

Figure 4.13 Breakdown of the value chain in the global automotive

industry
Source: Roland Berger Strategy Consultants

The outlook is less rosy for development and production service

providers, however. Most of the areas in which they operate are closer to
OEMs’ own core competencies than is the case for the component
suppliers. Accordingly, these service providers will be hit harder by the
auto makers’ bias toward insourcing.

LEVER II: FOOTPRINT, GROWING PRESSURE

ON EXISTING LOCATIONS

The second lever to improve efficiency in the value chain is the opti-
mization of physical footprint. The central question here is, where can
what products and services be provided most efficiently?
In recent years, capital spending in the automotive industry has headed
east to the new growth regions of Asia and Eastern Europe at an aston-
ishing pace. Manufacturers of the calibre of Hyundai, Kia, PSA and VW
are currently erecting new assembly plants worth over €4 billion in
84 Major challenges

Eastern Europe alone. The established triad markets are being left behind
(see Figure 4.14).

14,950
Others
BMW
PSA
DC

Ford

Hyundai

GM

4,480
Toyota
DC 3,030
VW DC 2,430
Ford Others
Ford 1,800
PSA 1,290 1,180
GM VW KIA Others 850 600 600
GM GM
Hyundai DC Ford VW VW
China Canada Mexico Slovakia Korea Brazil USA Belgium Poland Portugal
1) Announcements made in 2003-2005 for the years 2004-2008

Figure 4.14 Capital spending announced by OEMs, by country

(in € million)
Sources: JD Power, Roland Berger Strategy Consultants, OEMs’ press releases

Although production jobs are the primary target, the writing is already
on the wall for development activities as well. Here too, new jobs will
be created only in Eastern Europe (+2,000), China (+4,500) and India
and the Pacific region (+4,000) in the next 10 years (see Figure 4.15).
In the coming years, car manufacturers will offshore the work of whole
development teams to countries with low labour costs. China is very
clearly the OEMs’ favourite destination, followed by Eastern Europe
and India. Simulation, machine tool construction, modelling and docu-
mentation are among the activities that will feel the impact most
keenly.
The same trend can be observed among automotive component
suppliers and engineering service providers. Not a week goes by without a
company announcing its intention to invest in Eastern Europe while
slashing capacity in Western Europe. Italy, the UK and Spain are leading
the way in axing local production capacity, whereas factories in France
and Germany are usually retained but downsized.
 The value chain challenge 85

-500 Western +2,000

Europe Eastern
North 93,500 +4,500
Europe
America 1,900 China +/-0
32,200 4,800

+/-0
Japan
43,600
India and the
Central and Asia/Pacific
South America region
3,200 10,500
-500 +4,000

Trend in full-time equivalents, 2002– 15

Figure 4.15 OEMs’ existing and planned development resources (in full-
time equivalents)
Sources: Roland Berger Strategy Consultants, interviews with auto makers, company
information

Establishing low-labour-cost locations – a matter of

survival

The widespread belief that the benefits afforded by Eastern Europe and
other locations with low labour costs will be eroded by substantial annual
wage increases over the next 5 to 10 years is wrong. True, annual wage
rises of as much as 10 or 15 per cent are no rare occurrence in many
Eastern European countries. Given the low level from which they are
starting out, however, substantial discrepancies will remain in absolute
terms (see Figure 4.16).
In spite of lower productivity in locations with low labour costs,
companies can thus still save up to 75 per cent of their personnel expenses
for a long time to come. And personnel expenses account for 25 to 30 per
cent of total production costs on average. It follows that, even allowing for
higher logistical and complexity costs and lower productivity, component
suppliers can still expect to reduce total costs by 10 to 15 per cent by
transferring production to Eastern Europe. In the hard-fought component
supply business, that can make the difference between staying alive and
going under (see Figure 4.17).
The trend towards building up capacity in countries with low labour
costs will thus continue in the years ahead. Indeed it will accelerate, as a
2004 study by Roland Berger Strategy Consultants discovered. Of the
respondent mid-sized industrial companies, 90 per cent said they planned
to transfer further links in their value chain abroad in the next five years.
86 Major challenges

2004 2009

+ 0.6

Germany 2 5 .3 Germany 2 5 .9

Czech Rep. 5 .0 Czech Rep. 6 .7

Hungary 4 .2 Hungary 5 .7

Poland 4 .1 Poland 5 .2

Slovakia 2 .9 Slovakia 3 .9

Latvia 2 .4 Latvia 3 .2

Turkey 1 .8 Turkey 2 .6

Romania 1 .8 Romania 2 .5

Ukraine 0 .8 Ukraine 1 .3

+ 0.5

Figure 4.16 Labour costs (including non-wage labour costs) for an

unskilled worker in Germany and Eastern Europe (€/hour)
Sources: EIU, CE research, LLP, Roland Berger Strategy Consultants

114

1 3 100 -12%
Other 35
-18
Logistics 2 38 +9%

Personnel 23 +4%
3
5
-79%

Materials 54 54 ±0%

Running costs Change in Change in Change in Running costs

at old location personnel logistics other at new location
(Germany) expenses costs1) costs2) (Romania)

1) Including the cost of capital inventories 2) Coordination, tax writeoffs, more scrap, etc.

Figure 4.17 Comparative view: average costs for a component supply

factory with annual sales of around €170 million (in € m)
Source: Roland Berger Strategy Consultants

To put that figure in context, only 69 per cent of these have relocated
value chain links to low-labour-cost countries in the past. Increasingly,
even highly complex technological components are being caught up in
this wave.
Often enough, component suppliers have no other choice. When one of
their OEM customers asks them to supply components direct to a low-cost
 The value chain challenge 87

plant, the only question is, do the volumes and prices justify investing on
the ground in China or Russia?
On the other hand, a lot more preparation and careful consideration is
needed when deciding to set up a site from which countries with high
labour costs can import parts manufactured at low cost. Three key issues
must be covered when preparing and planning to relocate production to
countries with low labour costs:

ᔡ Suitable products must be chosen.

ᔡ A suitable production location must be chosen.
ᔡ A detailed relocation plan must be drawn up.

Choosing suitable products

The issue of exactly what activities are to be relocated is the most
important question of all. A five-step approach to answering this question
has proven its value in the past (see Figure 4.18).

1 Point of 2 ‘Technological 3 ‘Number of 4 Definition of 5 Definition

departure complexity’ variants’ filter suitable of relocation
filter candidates scenarios

Implementation risk
Volume '09 Products

+
Product hierarchy
Scenario 3
Technological
complexity Scenario 2
Scenario 1
-
- +
No. of variants Technologies Payback period

Definition of product/
Products rejected: Products rejected: technologies that Scenario 3
• Product 1 • Product 3 would be suitable for Scenario 2
• Product 2 • Product 4 relocation
• Etc. • Etc. Scenario 1

Figure 4.18 Determining the scope of production to be relocated

Source: Roland Berger Strategy Consultants

The first step involves drawing up a clear, understandable hierarchy of the

entire product portfolio. A scoring model then enables products whose
technology is too complex to be eliminated, as they are not suitable for
relocation. The third step is to examine the number of variants of each of
the remaining products. Depending on the relative maturity of the short-
listed low-labour-cost locations, the results of this examination may vary.
88 Major challenges

Products manufactured in a wide range of variants (that is, relatively

labour-intensive products) might be ideal for one candidate location but
not at all suited to another.
Products that make it to step four are divided up into individual process
steps. The various combinations of products and production stages are
then analysed to determine both the financial impact of and the risks asso-
ciated with relocation. A series of plausible scenarios are then evaluated to
arrive at a final decision. When analysing the financial impact, it is
important to make sure that all relevant cost items are factored in,
including the cost of training new people on site, higher logistical costs,
the cost of producing new samples for OEMs, and the implicit cost of any
discounts granted to the auto makers.

Choosing a suitable production location

A whole raft of criteria must be considered when looking for a suitable
low-labour-cost location. Practical experience has nevertheless shown
that a small number of criteria carry the most weight (see Figure 4.19).

Weight- New EU member countries Non-EU countries

ing Can- Others
[%] didates

Criteria PL CZ H SLO SK LT LV EST BG RO HR SM MK BIH UA RUS TR

• Personnel 30
– Current wage costs 20 3 2 3 1 4 4 4 4 5 5 3 5 4 5 5 5 5
– Long-term wage trend 50 2 2 2 1 3 3 4 3 5 4 2 4 4 4 5 5 4
Costs

– Availability 30 5 5 5 2 5 2 2 2 3 4 2 1 1 1 2 4 3
• Logistics 30
– Distance 40 4 5 4 4 4 3 2 2 2 41) 4 3 2 3 2 1 1
– Reliability 60 5 5 5 5 5 4 4 4 2 3 4 2 2 2 1 1 1

• Economic and 7.5 4 4 4 5 4 4 4 4 3 3 3 1 1 1 2 3 2

Stability

financial stability
• Political and legal 10 5 5 5 5 5 5 5 5 3 3 3 1 1 1 1 1 1
stability
• Transparency 12.5 2 3 3 4 3 3 3 4 3 31) 2 1 1 2 1 1 2
Duties/

• Corp. income taxes 5 3 2 4 2 3 4 4 1 4 4 3 5 5 1 2 2 1

taxes

• Customs tariffs 5 5 5 5 5 5 5 5 5 4 4 3 3 3 3 3 3 3

Weighted score 100 3.8 3.9 3.9 3.5 4.1 3.6 3.6 3.4 3.2 3.5 2.9 2.4 2.2 2.3 2.3 2.4 2.2

Ranking 4 2 2 7 1 5 5 9 10 7 11 12 16 14 14 12 16

1Very disadvantageous 5 Very advantageous

Figure 4.19 Simplified scoring model for choosing a location (example,

Eastern Europe)
Source: Roland Berger Strategy Consultants

Current personnel expenses at the target location, and above all antici-
pated wage increases in the years ahead, are naturally two of the most
significant factors. Generally speaking, reliable information can only be
 The value chain challenge 89

gleaned through in-depth talks with industrial companies, job placement

and investment agencies, and/or public bodies in the countries concerned.
Component suppliers in particular should think about the kind of
employees they will need very early on, and then conduct research to
determine whether the regions they have in mind actually have a large
enough pool of labour with appropriate skills.
Logistical costs are the second core issue. It is vital to ensure that trans-
portation channels can be relied on absolutely, even in adverse weather
conditions. Otherwise, the buffers that have to be factored in would tie up
capital and quickly negate any savings made on labour costs, for example.
It is also important to make sure that the target location is easily accessible
to visitors (customers, suppliers and the company’s own management).
Proximity to a decent-sized airport is always expedient, for example. If a
reasonable solution is not found here, huge problems can occur during
start-up in particular if it is not possible to respond swiftly.
The selected country must also enjoy long-term economic, financial,
political and legal stability. Taxes and customs tariffs too should never be
left out of the equation. Depending on the product programme and the
value chain model, it may further be necessary to critically assess the
availability of suitably qualified upstream suppliers.
Once priorities have been set concerning the preferred target countries,
these countries must then be divided up and analysed on the basis of indi-
vidual economic regions (see Figure 4.20). A final location decision
should not be taken until the investigation has drilled down to a region of
no more than 200 or 300 square kilometres.

Economic regions in Romania Transportation corridors in Romania

km
0 50 100
Satu Mare Corridor IX
Corridor IV Kiev (UA)
Bistrita Iasi
Prague (CZ) Moscow (RUS)
Oradea
Cluj Budapest (H)
Tg. Mures IX
Arad IV IX
Sibiu
Timisoara
IV
Pitesti Brasov Galati
IV
Ploiesti
Gaesti Bucharest
Bucharest
Craiova
IV Corridor IV
Sofia (BG)
Industrial Injection Plating Assembly of Metal-
systems moulding processes white goods working

Figure 4.20 Definition of local regions and transportation corridors

(example: Romania)
Source: Roland Berger Strategy Consultants
90 Major challenges

Detailed relocation plan

Once the scope of activities to be transferred has been defined and a target
location selected, it is time to map out a detailed relocation plan. This plan
will feature a number of aspects:

ᔡ layout planning for the new plant (or extension);

ᔡ punctual orders for the necessary production equipment;
ᔡ punctual recruiting/appointment of the first level of management (in
particular the plant and HR managers);
ᔡ punctual build-up of inventories to ensure that shipment can continue
even during relocation;
ᔡ commencement of talks with the customer to prepare for initial
samples;
ᔡ preparation of communication with employees and suppliers;
ᔡ adjustment of overhead structures at the ‘home’ plant.

Section summary: solutions for locations in countries

with high labour costs

With few exceptions, growth in the next few years will take place in coun-
tries that have low labour costs. The cost benefits involved are quite
simply far too compelling. The situation is different, however, if a
company wants to transfer production lines from an existing high-wage
plant to a low-wage plant but has no other business to take up the slack at
the original site. In such cases, social plans and sundry costs associated
with plant closure can impose a crushing financial burden. It is not
unusual for these expenses to add up to three or four times the projected
annual savings. Experience shows that, when the cost of capital is factored
in, this can extend the payback period to around four to six years.
This is precisely where factories in countries with high labour costs
must seize their opportunity. Personnel expenses at home can be reduced
by as much as 15 per cent by lowering payroll costs, adding greater flexi-
bility, raising the working week from 35 to 38, 40 or 42 hours without
increasing wage costs, docking overtime rates and/or cancelling vacation
allowances and Christmas bonuses, for example. Since such moves add
just one or two years to the payback period, relocation then scarcely
makes economic sense. Numerous leading West European component
suppliers have already opted to go this way in recent months and years
(see Figure 4.21).
 The value chain challenge 91

Details of agreements/impact on employees

Company Year Plants affected Working week Wages/welfare benefits Employers' concessions

Bosch Stuttgart, Sebnitz 35 ’ 36-hour week Welfare benefits and bonuses No lay-offs through 2007;
waived plans for relocation to China
abandoned
Brose All German plants 35 ’ 38-hour week Under negotiation Not known
Continental Hanover-Stöcken Increase to a 40-hour – Not known
week
Continental Teves Gifhorn 35 ’ 40-hour week – Headcount reduction limited
to 200
Delphi Wuppertal 40 ’ 44-hour week – –
for white-collar empl.
EDAG Fulda More flexible – Cap imposed on headcount
working hours reduction
Edscha Remscheid Longer working – Avoidance of
week relocation
FAG Kugelfischer Eltmann More flexible 2% of welfare benefits No lay-offs through 2006;
overtime agreement waived home site saved
INA Lahr 35 ’ 40-hour week – –
Leoni Two German 35 ’ 38-hour week – –
plants
Schuler All German More flexible Agreed wage rise and bonuses –
plants working hours for 2005 waived; bonus
agreements more variable for
Würzburg subsequent years
Siemens VDO More flexible Agreed wage rises postponed; Guarantees for 1,400 jobs
working hours vacation allowance and through 2010
Christmas bonus reduced

Figure 4.21 Factory-specific agreements that have reduced personnel

expenses (examples)
Sources: Roland Berger Strategy Consultants, press releases

LEVER III: BUSINESS MODEL, MORE EXTENSIVE

NETWORKING WITHIN THE AUTOMOTIVE
VALUE CHAIN

The third lever to optimize the automotive value chain is improved collab-
oration between everyone involved.
Much work remains to be done in this area. Business relationships
between OEMs and their component suppliers, for instance, have deterio-
rated alarmingly in recent years (see Figure 4.22). Many suppliers today
complain of an unparalleled decline in the way they are treated. To take
just one example, retroactive demands for one-off payments for orders
that have already been completed land ever more frequently on the desks
of component suppliers. Anyone who refuses to ‘pay to play’ can wave
goodbye to follow-up orders. Since only profitable component suppliers
can continue to deliver required innovations and uphold the necessary
quality in the long run, this trend cannot be sustained for long.
The potential derived from optimizing the breakdown of the value chain
(lever I) and optimizing physical service provision (lever II) can only be
exploited to the full if all parties represented in the value work together
(lever III). The forms which such collaboration takes must experience
radical change (see Figure 4.23).
92 Major challenges

Criteria Change, 2004 versus 2002

DECREASE INCREASE

1. Price pressure +78

2. Quality demands +56

3. Willingness to recompense
-4
cost savings

4. Chances of earning
-46
an adequate ROI

5. Willingness to shoulder
-50
development costs

Base: Average of opinions on leading OEMs

Figure 4.22 Change in OEMs’ purchasing behaviour from the

perspective of their component suppliers (2004 versus 2002)
Source: Supplier Business.com

Today Tomorrow

1. Innovation • Solutions to problems mostly bilateral • Networked solutions to problems

• No special incentives to innovate • Incentives to innovate
• Isolated, company-specific improvements • Improvements across and between companies

2. Leadership • Company-specific value chain strategies • Integrated value chain strategies/unified and
and communi- • Focus on strong individual processes complementary competencies
cation • Communication emphasizes commitment • Integrated processes
• Hierarchic collaboration • Intensive communication emphasizes trust
• Full networking and integration of specialist
knowledge

3. Access • Local and/or company-specific standards • Collaborative target agreement and escalation
• Independent corporate planning and control processes based on uniform standards
• Independent resources and capital spending • Integrated corporate planning and control
• Loose collaboration • Shared resources and capital spending
• Close collaboration

4. Risk • Short-term profit maximization • Profit and risk sharing

• Simple contractual regulation of information • Contractual protection of intellectual property
exchange

Figure 4.23 Paradigm shifts in forms of collaboration

Source: Roland Berger Strategy Consultants

To simplify matters, distinctions can be drawn between six basic types of

collaboration within the automotive value chain (see Figure 4.24). The
section that follows outlines one successful example of each type and
summarizes the success factors for more intensive collaboration in the car
industry.
 The value chain challenge 93

1. 3. 5.

With cross- Hella Behr Plastic Japanese Toyota/PSA

Type of collaboration

share- Omnium keiretsus (TPCA)

holdings (HBPO) in Europe

2. 4. 6.

Without Siemens VDO/ Toyota and DaimlerChrysler,

cross-share- Magneti Marelli its component GM and BMW
holdings suppliers

Supplier/supplier Supplier/OEM OEM/OEM

Partners involved

Figure 4.24 Types of collaboration in the automatic industry

Source: Roland Berger Strategy Consultants

Joint ventures between component suppliers: the

example of HBPO (Hella Behr Plastic Omnium)

HBPO is an outstanding example of successful collaboration between

component suppliers that involves cross-shareholdings. What is now the
leading provider of front-end modules emerged in two steps between 1999
and 2004, as parts of three component suppliers – Behr, Hella and Plastic
Omnium Auto Exterior – came together. Today, these units stand together
as a single, legally independent corporation with a total of eight sites in
North America, Europe and Asia (see Figure 4.25).
In a very short time, HBPO became known throughout the industry as
‘the module company’. It has cultivated a pronounced customer orien-
tation and set itself the ambitious goal of becoming the clear global market
leader in front-end modules. By the end of 2004, HBPO had already
cornered 23 per cent of the global market.
HBPO is unquestionably a success story. Four factors have been instru-
mental in its astonishing rise:

ᔡ Attractive market segment: the market for front-end modules has

witnessed very positive development in recent years. Between now
and 2010, the global sales volume is expected to swell by as much as
25 per cent per annum.
94 Major challenges

Sales at HBPO (em) HBPO sites

Germany: Lippstadt and Meerane

Czech Republic: Mnichovo
CAGR +38% Slovakia: Lozorno
≈700 Spain: Vitoria-Gasteiz
Korea: Jillyang, Seosan, Ulsan, Hwasung
Mexico: Puebla
USA: Troy/Detroit

352

≈210
≈180
≈140
≈100
≈70

1999 2000 2001 2002 2003 2004 2006e

Figure 4.25 HBPO at a glance

Source: HBPO company information

ᔡ Complementary capabilities: the joint venture constitutes the ideal

combination of Hella’s lighting and electronics expertise with Behr’s
knowledge of radiators and air-conditioning and Plastic Omnium Auto
Exterior’s mastery of coachwork parts, bumpers and crash
management. All three companies rank among the most innovative
players in their respective product segments. Better still, all three also
contributed complementary customer portfolios to the joint venture.
ᔡ Flexibility: the new company is extremely flexible. It focuses rigor-
ously on customers and their needs and wants. The recent inclusion of
Plastic Omnium in the organization is one fruit of this strict customer
orientation.
ᔡ Cultural fit: the three joint venture partners all have comparable
corporate and management cultures. All three tend to focus corporate
policy on the long term, for instance. As a general rule, this kind of soft
factor is hugely important to the success of joint ventures.

Analysis of numerous other joint ventures confirms the validity of these

success factors.

Strategic alliances between component suppliers: the

example of Siemens VDO and Magneti Marelli

The strategic alliance between Siemens VDO and Magneti Marelli is

completely different from the example described above. In this case, two
 The value chain challenge 95

direct competitors decided at the end of 2004 to work together. This move
came about in response to Bosch’s dominance in diesel injection systems
(see Figure 4.26).

Shares of the global market for diesel

injection systems (2004) Key data on the collaborative venture

Magneti
• Announcement: October 2004
Marelli
Delphi • Planned production startup: 2007
3%
10%
• Object:
To jointly develop a new generation of diesel
Siemens injection systems for smaller and mid-sized
VDO 24%
engines

64% • Aim:
Robert For both partner companies to sharply
Bosch increase their market share

Figure 4.26 Aim of collaboration between Siemens VDO and Magneti

Marelli
Source: Company information

The two partners have made it their goal to jointly develop a new gener-
ation of diesel injection systems for smaller and mid-sized engines by
2007. Although they are direct competitors, collaboration yields benefits
for both companies:

ᔡ Complementary technologies: the new systems combine the magnetic

fuel injectors that Magneti Marelli developed with Fiat and fuel
injection technology from Siemens VDO. Magneti Marelli alone is
developing the electronic control unit.
ᔡ Protection of intellectual property: the relevant contracts put up very
high exit barriers for both parties. Effective protection is thus provided
for both parties’ intellectual property – usually the most critical issue
in this type of collaboration.

One key challenge in collaboration between Siemens VDO and Magneti

Marelli is that the two companies’ customer portfolios overlap to some
extent for the same product. Another issue is restricted access to the
resources of the individual partners.
96 Major challenges

Close collaboration involving cross-shareholdings

between OEMs and component suppliers: Japan’s
keiretsus

With the exception of a few relationships that grew up due to unique

corporate histories (such as those between Faurecia and PSA or Magneti
Marelli and Fiat), interlocking equity interests between OEMs and
component suppliers tend to be the exception on the European and
American markets. Not so in Japan, where closely interlocking interests
between auto makers and component suppliers – a construct known as
keiretsu – have been a key aspect of the automotive value chain for many
decades. Toyota offers a fine example. Its extensive network involves cross-
shareholdings and long-standing business relationships with and between
822 individual component suppliers. The four most important of these are
Denso, Aisin Seiki, Aisin AW und Toyota Industries (see Figure 4.27).

Denso

23.2% 2.0%

7.98% 9.1% Toyota Motor 0.1%

5.4% 29.5% 0.7% 22.2%

6.7%
Toyota Industries Aisin Seiki
2.0%
41.1% 50.9%

Aisin AW

Figure 4.27 Cross-shareholdings between Toyota and its four key

component suppliers
Source: Supplierbusiness.com

These companies often also get together to form joint ventures. Examples
include Advics (Sumitomo, Denso and Aisin Seiki), FTS (Toyoda Gosei
and Horie Metal) and Favess (Koyo Seiko, Toyoda Machine Works und
Denso). These companies are also helping Toyota build new plants –
witness the assistance provided by Denso, Aisin Seiki and Aisan Industries
in relation to the new Toyota/PSA plant in the Czech city of Kolín.
 The value chain challenge 97

Apart from interlocking capital structures, two other key factors shape
the keiretsus:

ᔡ Collaboration in a spirit of partnership: within a keiretsu, a culture of

trust and a willingness to learn from one another prevails. Toyota,
Honda and Nissan, for example, all help their component suppliers to
continually improve their performance by introducing and perfecting
efficient production systems. Component suppliers that willingly
accept such close collaboration generally have the assurance that they
will remain partners in the long term. The probability of follow-up
orders is therefore at or around 100 per cent.
ᔡ Close coordination of planning: the companies in a keiretsu coordinate
their planning very closely. This applies both to longer-term tech-
nology and investment planning and to shorter-term changes in
volume planning.

In the past, the only drawback in this system was the absence, or at best
only limited presence, of competition between the individual companies.
Aware of this, the OEMs have in recent years taken great pains to reor-
ganize traditional keiretsu structures (see Figure 4.28).

Up to 1985 1985– 1995 Since 1995

C Global M&As
B Nissan
Mazda MMC
MMC
OEM A Toyota Honda
Nissan

Sepa- Toyota
Tier 1 Consoli- ration Mazda
dation System
integrators
Tier 2 Technology
satellites
Process
Tier 3 satellites
Process
satellites
Basic • A keiretsu pyramid • Consolidation among suppliers • Transition from a pyramid to a
structure structure • Separation of suppliers at network structure
Nissan, Mazda, MMC • Different strategies pursued by
different OEMs

Drivers • Growing market • Stagnating market • Shorter technology cycles

• Quality improvements • Fierce competition for market • Scarce R&D resources
through collaboration in share • Cash flow management
the keiretsu • Cost reductions due to open
sourcing

Figure 4.28 Changes in keiretsu structures and the drivers of these

changes
Source: Roland Berger Strategy Consultants
98 Major challenges

Close collaboration between OEMs and component

suppliers without cross-shareholdings: the example of
Toyota

During its process of internationalization in recent years, Toyota has gone

a long way in opening up to non-Japanese component suppliers. In doing
so, it has succeeded in carrying the trusting collaboration that charac-
terizes the keiretsus over into its dealings with these new suppliers. This
fact is reflected in surveys that describe the extent to which component
suppliers are satisfied with OEMs: Toyota regularly comes top of the
league (see Figure 4.29).
Change since the last survey

0.2

0.1

0.0

-0.1

-0.2

-0.3

-0.4
Toyota Renault- BMW DCX VW GM PSA Ford
Nissan

Figure 4.29 Extent to which component suppliers are satisfied with their
OEM customers, 2004
Sources: Supplierbusiness.com

Toyota expects a lot of its component suppliers. Its quality standards

are unrivalled anywhere in the automotive industry. On costs, too, it is
no rare occurrence for Toyota’s buyers to inform their suppliers that
this or that part will simply have to cost 30 per cent less in the next
product generation.
Unlike other car makers, however, Toyota is convinced that these objec-
tives can only be realized through very close collaboration with
component suppliers. In other words, Toyota doesn’t just set goals: it also
helps its component suppliers to meet them.
Four key tools enable all this to happen:
 The value chain challenge 99

ᔡ Mutual understanding: Toyota takes the trouble to try to understand its

suppliers’ business almost as well as they do themselves. An extensive
controlling system also constantly monitors and analyses suppliers’
performance.
ᔡ Intensive training: Toyota has set up a group called SPM (Supplier
Production Management) in its purchasing department. This group
proactively helps component suppliers to fine-tune their production
systems (in a process known as kaizen).
ᔡ Permanent technical support: each component supplier has a fixed set
of Toyota engineers who are permanently assigned to it. The goal is to
rectify problems before they even occur. Should problems arise never-
theless – during a new product roll-out, for example – the support team
is beefed up immediately.
ᔡ Multilateral best practice sharing: Toyota organizes regular meetings
and conferences to promote the systematic sharing of best practices
between its component suppliers.

This kind of collaboration between the manufacturer and its component

suppliers has been instrumental in Toyota’s emergence as one of the most
successful car makers in the world.

Joint ventures between OEMs: the example of TPCA

(Toyota Peugeot Citroën Automobile)

Now that the ‘merger mania’ between automotive companies has

subsided, collaboration that is focused on individual projects – perhaps
engine construction or vehicle assembly – are coming back into vogue.
One very topical and therefore very good example is PSA and Toyota’s
collaboration on compact cars.
In 2002, Toyota and PSA decided to build a plant in Kolín, Czech
Republic, for the production of three models (the Peugeot 107, Toyota
Aygo and Citroën C1) built on the same platform. The factory is scaled to
cope with 300,000 units and went into production at the start of 2005.
Three key factors have had a formative influence on this project:

ᔡ Homogeneous objectives between the partners: Toyota and PSA want

to use the Kolín site to make small, modern, high-quality vehicles
featuring attractive technology, and to sell those for low prices on the
European market.
100 Major challenges

ᔡ Role-splitting in line with core competencies: in deference to its

thorough knowledge of the European component supply market and
its mature diesel technology, PSA is responsible for purchasing opera-
tions and diesel engines. For its part, Toyota is contributing the Toyota
Production System and is also in charge of gasoline engines.
ᔡ Clear and fair ground rules: each party has shouldered its share of the
development costs. By contrast, the money invested in the plant will
be charged to the three brands according to manufactured units.

It remains to be seen what this joint venture delivers in the long term.
Right now, however, expectations are very high indeed.

Collaboration between OEMs: the example of

DaimlerChrysler, GM and BMW

At the end of 2004, DaimlerChrysler and GM announced their intention to

press ahead with joint development of a ‘two-mode’ hybrid engine. BMW
joined the alliance in September 2005. It remains to be seen whether this
collaborative venture will be more successful than the Covisint electronic
procurement platform launched jointly by DaimlerChrysler, GM and Ford
in 1999. Back then, the entire automotive industry had high hopes for
Covisint. Owing to technical problems, management mistakes and
disunity among the participant car makers, the platform nevertheless
failed to deliver on its promise. In 2003, the founding companies retracted
their interest in the venture.
In the case of collaboration on hybrid engines, however, the outlook is
not bad at all. The project already meets several of the key criteria for
successful cooperation:

ᔡ Pressure to act and a win–win situation: the three manufacturers share

one major problem. As hybrid technology gains an ever more secure
foothold, they have fallen way behind their Japanese rivals, Toyota
and Honda. While vehicles such as the Toyota Prius advance from
sales record to sales record, GM, DaimlerChrysler and BMW do not
have a single engine that is ready for volume production. In an age of
spiralling fuel costs and ever stricter environmental legislation, that is
a dangerous place to be in. This collaborative venture will reduce
development costs for each of the three partners. Far more important,
however, is the time they expect to make up. DaimlerChrysler and GM
plan to fit the new technology in vehicles such as the Chevrolet Tahoe,
 The value chain challenge 101

the GMC Yukon and the Dodge Durango (on the North American
market) as early as 2007.
ᔡ Clear role-splitting: all parties are contributing their current state-of-
the-art research to the hybrid development project. The goal is the
mutual development of a modular total system. DaimlerChrysler will
lead the development of rear-wheel-drive hybrid systems for saloons,
while GM spearheads development for front-wheel-drive, four-wheel-
drive and off-road vehicles. Each company is then independently
responsible for integrating the hybrid system in its own model range.
ᔡ Clear contractual agreements: the relevant contracts set forth clear
rules governing the expertise contributed, such as Mercedes-Benz’s
and Chrysler’s 10 years of experience, and the knowledge and proto-
types contributed by GM.

Section summary: closer collaboration is needed

OEMs and component suppliers will be able to improve the efficiency of

the automotive value chain only if they work a lot more closely together.
Collaboration between component suppliers enables them to tap new
product markets and regional markets. Improved cooperation between
OEMs and component suppliers helps the latter to tailor their activities
even more precisely to the needs of their customers. This in turn helps
them prevent the build-up of idle capacity. On another plane, collabo-
ration between OEMs reduces the investment risk faced by all parties
concerned in a marketplace that is changing ever more rapidly.
Notwithstanding these successes, any number of less successful
examples likewise testify to the validity of a number of generally appli-
cable rules:

ᔡ Clear goals must be defined for collaborative projects.

ᔡ The corporate cultures involved must be compatible.
ᔡ Roles must be split unambiguously based on each party’s core
competencies.
ᔡ Opportunities and risks must be shared fairly.
ᔡ Rules governing the solution of conflicts must be spelt out clearly in
the contracts.

All these points require due attention when collaboration is still on the
drawing board, and they must be adequately reflected in the contracts that
are ultimately signed.
102 Major challenges

SUMMARY: ALL PARTIES INVOLVED IN THE

AUTOMOTIVE VALUE CHAIN FACE THREE KEY
CHALLENGES

In an age of ever more intensive cost pressure and fiercer competition, car
makers and their component suppliers must strive for excellence more
than ever before. If they fail to do so, they will not live to tell the tale.
As they go forward toward this goal, the three levers we have described
in detail – the breakdown of the value chain, physical footprint and the
business model – will all play a crucial role. This assertion is borne out by
our investigation of numerous successful and less successful companies in
the industry over the past few years.
Only those companies that define their core competencies in line with
what the market demands and optimize the cost of their location networks
will survive. Ultimately, however, the master key that opens the door to a
secure, lucrative future will be a commitment to closer, trusting,
consciously designed collaboration.
 103

The technology challenge:

progress or pitfall?
Silvio Schindler, Partner, Roland Berger Strategy Consultants

INTRODUCTION

Automotive companies in the established triad markets are confronted by

a tricky market situation. Sales have been stagnating for years. Legal
conditions and constraints have tightened, and customers are constantly
becoming both more demanding and more varied in their individual pref-
erences. The industry has responded to this growing demand for diversity
by creating a wide array of new models and vehicle segments. The
resulting information overkill – and the erosion of customer loyalty that
goes with it – have made it all the more crucial for car makers to clearly
differentiate themselves from their rivals, and to position their brands
astutely in respect of their targeted customer segments. While attractive
prices tend to be the main selling point for volume manufacturers, a
pitched battle for technology leadership and exclusive claims has broken
out among premium brands. In an attempt to differentiate themselves
against the competition, car makers have used advances in sophisticated
electronics in particular to repeatedly roll back the limits of what is tech-
nologically feasible. In consequence, high-tech content in premium
vehicles has experienced a quantum leap as manufacturers strive relent-
lessly for unique selling propositions.
Numerous manufacturers have nevertheless discovered that stuffing
vehicles full of technical innovations does not guarantee their market
success. Wherever customers have been unable to intuitively perceive
104 Major challenges

the real value added by the new technology, or when it did not line up
with customers’ brand expectations, sales have consistently fallen short
of projections. Some manufacturers have also learnt the hard way that
customers will only accept mature technologies. If technological inno-
vations are not really mature, they can do serious damage to a brand’s
image.
Premium car makers thus find themselves faced with a dilemma. On
the one hand, every new product launch compels them to come out with
innovative new technologies as evidence of their premium position,
and to position their brand successfully and differentiate it from the
competition. This situation is exacerbated by the fact that new tech-
nologies nowadays spread ever faster – what ranks as ‘premium’ today
can very quickly filter down to lower classes of cars and/or be adopted
by the competition. On the other hand, the need to master alternative
competing technologies is driving costs and complexity to a level that
will not be sustainable in the future.
To escape from the complexity and cost trap, car makers must restrict
themselves to key technologies. They must abandon the traditional
‘technology creates demand’ approach that is obsessed with realizing
whatever is technically feasible. They must instead turn to a ‘tech-
nology generates value’ approach that makes customers the focus of all
technological development. Leading manufacturers have understood
the opportunities that rigorous adherence to this approach affords in
terms of brand positioning, a keener brand profile and differentiation
relative to competitors. Successes and failures in applying this strategy
– in some cases at one and the same company – nevertheless highlight
the very fine line that separates dream from disaster. The challenge is,
therefore, to get customer orientation to permeate the entire organi-
zation, systematically and completely. In the future, the key success
factor for premium auto makers will be what we call ‘customer-
oriented technology management’.
 The technology challenge 105

THE STATUS QUO: TECHNOLOGY

DEVELOPMENT WITHOUT CUSTOMER FOCUS

Technology development in transition

Competitive pressure sparks a blaze of innovation

Car makers around the world are today facing a plethora of challenges that
vary considerably from region to region. In growth markets such as Asia,
OEMs still have every reason to be upbeat about the promising sales
outlook. The most important thing here is to pick the right market strategy,
choose the right local partner and build a commensurate sales network. By
contrast, the established triad markets – the United States, Europe and
Japan – present OEMs with far more daunting challenges. Conditions are
difficult, and markets have been stagnating for years. Legal constraints
have tightened up and customers are becoming ever more varied and
differentiated in their individual preferences.
A macroeconomic trend toward individualism and individualization is
indeed observable in society at large. This trend is sweeping all consumer
markets, triggering a veritable explosion of supply-side diversity. Seiko,
for example, today has over 3,000 watches in its programme. Philips
markets more than 800 different televisions. The number of magazines
on newsagents’ shelves has doubled in the past 10 years. And the average
supermarket today stocks well over 20,000 products, as against 4,000 at
the end of the 1950s.
The automotive industry too has felt the impact of this trend. Car
makers have substantially broadened their model ranges to satisfy
customer requirements in ever more narrowly defined target segments,
and to accommodate demand for more ‘individualized’ vehicles and
vehicle concepts. The result has been a flood of new models and new
vehicle segments. In the early 1980s, the vehicle segments were limited to
saloons, coupés, convertibles and estates. Today, customers also have
vans, minivans, multi-purpose vehicles (MPVs), sports utility vehicles
(SUVs) and a wide range of cross-over vehicles to choose from. And the
tide shows no sign of ebbing. A parallel development is that vehicle life-
cycles have shrunk by around three to four years over the past two
decades. Models used to feature in car manufacturers’ programmes for 9
to 10 years on average. Now, new models are brought to market every six
years.
106 Major challenges

To make matters even more difficult for manufacturers, introducing

new model series nowadays inevitably involves upgrading the array of
features fitted as standard. Customers in Europe quite simply expect
safety features such as airbags, ABS and ESP. Governments too are
placing ever more exacting demands on the ecological and safety aspects
of vehicles. In many cases, however, the extra cost of complying with
stricter emissions regulations or fitting new safety systems cannot be
passed on to the customer. Customers expect – and get – ‘more car for
their money’. Adjusted for inflation, a comparison of mid-range saloons
such as the Mercedes C180 between 1993 and 2001 shows that list prices
for standard models remained virtually static in this period, despite the
fact that ever more add-on features (such as ABS, ESP, airbags and immo-
bilizers) were fitted as standard (Figure 5.1).

CAGR 2.6%

CAGR 1.0%
22, 799
20,247 20,656
19,531

19, 763
18,921 19,002 18,780
18,151

1993 1995 1997 1999 2002

Adjusted for inflation Nominal price CAGR = compound annual growth rate

Figure 5.1 Price development of a standard Mercedes-Benz C class,

nominal and adjusted for inflation (ex-works list price in euros,
excluding value-added tax)
Sources: DaimlerChrysler AG, Federal Statistical Office, Roland Berger Strategy
Consultants

Somehow, car makers must therefore find a solution to the following

conundrum: while volumes per model line are decreasing and prices are
stagnating (at least for standard versions), they still have to satisfy greater
expectations of more comfort, safety and ‘extras’.
Manufacturers vary the focus of their response to this dilemma
depending on how their brands are positioned on the market – that is,
 The technology challenge 107

whether a brand belongs in the premium or the volume segment. Volume

brands whose primary differentiation criteria in the market are attractive
prices concentrate their efforts on cost efficiency and cost effectiveness.
Economies of scale (especially in purchasing, development and
production), operating efficiency and a global footprint are the key issues
for these firms. At the other end of the scale, premium car makers are
responding to competitive pressures in a different way. In recent years,
they have worked hard to position their brands precisely in specific target
customer segments, thereby carving out a keener brand profile. In an age
of information overkill, eroding customer loyalty and ever fiercer compe-
tition, it is supremely important to distinguish a brand from its rivals by
creating an unmistakable genetic code. Brands are a source of orientation
for customers. They charge what is essentially a technical product – a
means of getting you from A to B – with emotion. But brands also give
customers a chance to differentiate themselves from the competition, to
cultivate a certain lifestyle and express a certain attitude or mindset.
Customers place their trust in brands whose brand characteristics and
products best match their individual needs and wants. The basic rule is
this: the more sharply a brand profile is defined, the greater will be its
attraction and its ability to foster customer loyalty. In recent years,
premium manufacturers have ignited a sparkling display of innovative
technologies in an attempt to clearly delimit brand profiles and distinguish
themselves from their rivals. Technological progress – especially in the
field of electronics – has significantly improved the scope of high-tech
functions in premium vehicles. Competition between innovative tech-
nologies has, however, also worsened the dilemma described above by
once again sharply driving up the complexity and cost of R&D activities,
for example (Figure 5.2). To remain competitive in the future, manufac-
turers are doing everything they can to wriggle out of this tight place. The
challenge is to maintain the same level of customer loyalty and differenti-
ation while reducing complexity and lowering costs. They will only
succeed if they genuinely grasp what customers really want and need, and
if they are able to focus their development activities accordingly.

Today’s innovation is tomorrow’s standard

Technical innovation was always the preserve of premium manufac-
turers. It has traditionally been the lever that lifted them above their
competitors. Thanks to a series of ground-breaking new developments,
DaimlerChrysler in particular has earned a reputation as an innovation
leader and thus justified its position as a premium manufacturer.
Examples include monocoque body construction and passenger
108 Major challenges

CAGR 9.4% 246%

• Model offensives
• Shorter lifecycles
• Greater use of new technologies
• Stricter legal requirements (emissions
norms, safety regulations, consumption
regulations)
100%

1993 2000 2001 2002 2003

Figure 5.2 Development of R&D costs per vehicle (adjusted for

inflation) based on the example of a premium manufacturer
Sources: Roland Berger, DaimlerChrysler, Federal Statistics Office

protection systems in the 1960s, the introduction of ABS in the 1970s,

the launch of airbags in the 1980s, and ESP in the 1990s. The period of
time for which a given technical innovation gives a car maker a unique
selling proposition is diminishing constantly, however. It took the ABS
system around 20 years to achieve 40 per cent market penetration.
Today, it is fitted as standard in just about every vehicle sold in
Germany. Compare this trajectory with ESP, which was deployed for
the first time in 1994 but took only 10 years to realize equivalent
market penetration. This example illustrates how technological innova-
tions that are initially designed for premium vehicles are filtering down
ever more quickly into the volume segments. Technologies therefore
lose their differentiating characteristics ever faster. Premium brands are
particularly hard hit by this development, as it undermines their brand
attraction and eats away at customer loyalty. Volume manufacturers do
not face the same problem, because price is the issue on which they
mainly seek to set themselves apart. They do indeed benefit from the
spread of innovations since, subject to a certain time-lag, they realize
new technologies in high-volume production and achieve the corre-
sponding scale effects. Ultimately, this advantage is also passed back to
premium vehicles.
 The technology challenge 109

The right mix of emotion and innovation

To avoid becoming expendable in this situation, premium car makers
must work hard to influence the way their brand is perceived. They must
occupy a credible position and clearly demarcate themselves from
competitors. Also, their brand values must be coherent. If they want to be
seen as innovation leaders, premium manufacturers have no choice but to
repeatedly develop new technologies and get them to market as early as
possible – ahead of their rivals. Eager for fatter margins, almost every car
maker now wants to be regarded as a premium brand. Even manufacturers
such as Subaru, until now far better known for being ‘rugged and robust’,
are now claiming to be ‘premium’. It is not enough just to produce reliable
cars with the odd high-tech component here and there, however. Since the
start of the 1990s, the leading European premium brands (Audi, BMW,
Jaguar, Mercedes-Benz, Porsche, Saab and Volvo) have increased their
share of new vehicle registrations from around 20 to around 30 per cent.
Worldwide, German premium brands currently account for 40 per cent of
the total premium market. In the luxury segment, this share leaps to an
eyebrow-raising 80 per cent. So what is the secret of their success?
‘The key to success is to combine the right mix of emotion and substance
with consistent brand management,’ says Kay Segler, the man in charge of
the Mini brand (source: Automobilwoche). He ought to know, given that
the Mini ranks as a textbook example of successful brand positioning. The
people who revamped the Mini understood that Mini owners have a very
special relationship with their vehicles. This meant that developers had to
keep their hands off everything that was sacred to the original Mini design:
go-cart-like handling, a central position squarely behind the steering
wheel, and minimal overlap beyond the car wheels. What Mini customers
are less concerned about are the characteristics of the engine – in stark
contrast to BMW customers, for instance. The fact that BMW worked
together with volume manufacturers such as Chrysler and PSA to build the
Mini engine thus in no way jeopardized the vehicle’s success. Above and
beyond the technical blueprint, BMW took great pains to design everything
else in an authentic and brand-specific manner. From sales to service, from
marketing to communication, everything was specially tailored to meet the
unique needs of Mini customers and carry the famous ‘Mini feeling’ safely
over into the new generation. Even internal staff and external consultants
were selected based on an assessment of whether they fitted in with the
brand motto: ‘Are you Mini?’
Another example of successful brand positioning – or an even greater
challenge, a complete change of image – is the success story written by
Audi. Over the past 25 years, Audi has managed to shake off the staid
110 Major challenges

image inherited from DKW, its predecessor brand, and establish itself as
one of the leading premium manufacturers. When Audi introduced the
Quattro, the company rigorously translated its classic advertising slogan
‘Vorsprung durch Technik’ into a broad spectrum of innovations (such as
the Torsen differential gear) that all customers could experience for them-
selves. The legendary Quattro S1 rally car set new standards in the world
of motor sports and towered over its rivals for a long time. What more
vivid way to demonstrate the superior performance of this technical inno-
vation in terms of driving dynamics and driving safety to customers! At
the same time, this positioning injected the necessary dose of emotion.
Ultimately, it was customers’ acceptance of the technological design that
made the change of image a success. This feat was achieved by enabling
customers to ‘feel the difference’ (that is, the generated value) in what, for
them, were two vital areas of technology: driving dynamics and safety.
Crucially, the value that was generated aligned perfectly with the Audi
brand’s catchphrase, and therefore helped distinguish it very clearly from
its competitors.

Technology development without customer focus

High tech that doesn’t generate value for customers is

doomed to failure
Not all manufacturers’ attempts to position themselves have met with the
same success, however. Audi’s parent company, for example, is having
difficulty establishing ‘VW’ as a premium brand. Although VW’s Touareg
SUV has been a resounding success, its high-end flagship, the Phaeton, still
lacks momentum. When the Golf V hit the market, not even a fanfare of
technological innovations was able to make up for the absence of a premium
bonus. Sales did not really shift into gear until prices were knocked down
when the company gave away free air-conditioning systems.
The main reason for such sluggish acceleration was that customers did
not intuitively grasp how they would benefit from all the technological
advances, such as electromechanical steering and the elaborate four-link
rear axle. In Germany in particular, advertising that focused on the new
Golf’s performance on bends did not at all spell out what value was being
generated. Conversely, the press placed more emphasis on perceived
shortcomings in workmanship – such as the appearance of the interior,
which certainly does have an immediate and formative impact on brand
perception, especially in a brand aspiring to ‘premiumship’. As a result,
 The technology challenge 111

what was in fact a genuinely innovative car elicited less than enthusiastic
coverage in Autobild, a popular and influential German automotive publi-
cation: ‘[VW’s] love for details is waning’; ‘in terms of its look and feel,
it’s a step back, not a step forward’; and ‘development on the Golf V is
invisible to the eye’ (an allusion to the chassis and steering).
When it introduced the iDrive concept, BMW too discovered that
customers will only accept innovation if they believe it caters appropri-
ately to their needs. Acclaimed by its maker as a trail-blazing innovation
when the new 7 Series was rolled out in 2001, iDrive did not capture the
hearts of drivers, who found it too complicated. BMW’s basic idea had
been to tidy up the cockpit while offering more functions and creating
clear hierarchic structures in vehicle control. All secondary functions
(such as infotainment, navigation, telematics services and audio/video
offerings) were to be combined as a central functional block. BMW and its
cooperation partners managed to design a knob that drivers could press or
turn eight ways to control over 500 different functions. The technology
was breathtaking, but the first iDrive system was extremely complex and
proved too much for the company’s 7 Series customers. Even younger
people with a liking for technology took unusually long to learn to use the
system – and they are not normally the target group for top-of-the-range
saloons (which mostly consists of males aged 45 to 67). The niceties of the
clever new system were often hopelessly lost on this latter group, whose
affinity for information technology (IT) is known to decrease with age
(Figure 5.3).

Regular use
of a PC

40% Key customers for

premium vehicles

20%

0%

Age
20 30 40 50 60 70 80
(years)
Base: German population

Figure 5.3 IT affinity of key customers for premium vehicles

Sources: DIW, Roland Berger
112 Major challenges

Customers’ criticism was taken into account in later versions of iDrive.

When the next generation of the 5 Series was introduced, the system was
reworked and simplified extensively. Even so, the BMW system is still
regarded as more complex than comparable top-end command systems.
Of all the systems commonly installed in luxury saloons, the combined
interface model fitted in the Audi A8, for example, is the easiest for
customers to operate. Such an interface features a combination of buttons
that control specific functions directly and a knob that can be turned and
pressed to access multiple functions (Figure 5.4).
The command system in the new S class (W221) learnt from this object
lesson and focused squarely on the needs of customers. The high-tech
operating system is made up of one controller and two 8-inch screens,
each in 16:9 format. It governs a whole host of technical, convenience,
entertainment and navigation functions that would quickly overtax
conventional forms of user interaction (switches and buttons). On the
basis of extensive customer surveys, the system was designed to be very
user-friendly. The most important difference is that many functions can
now be operated in a number of different ways, either via the controller,
through direct selection buttons, or by pressing buttons on the steering
wheel. Initial tests by the press confirm that the system is indeed intuitive
and very easy to use.

Very good 6

5
4. 0
4 3.3
3.1
3 2.6

Poor 1
A8 Phaeton 5 Series 7 Series

Easy operation of the Good radio operation, Good navigation, Good navigation,
MMI, good navigation, air-conditioning command unit well command unit well
good radio operation controlled via hard positioned positioned
keys

No numeric keys Too many buttons, iDrive functionality iDrive functionality

display not optimally unclear, telephone unclear, telephone
positioned operated via iDrive operated via iDrive,
too many functions,
difficult navigation

Figure 5.4 Convenience of command systems in premium cars

Source: SirValUse Consulting (Germany)
 The technology challenge 113

The above examples show how tremendously important it is to focus tech-

nological development on what customers really want and need. If tech-
nology fails to anticipate customers’ expectations, or if customers fail to
perceive the value that an innovation generates, sales forecasts will be
missed. Knowing the needs of the target customer segments is therefore
becoming ever more crucial as a success factor in the development of new
technologies.

Only mature technologies are accepted

Advances in the field of electronics have helped engineers push back the
boundaries of what is technologically feasible again and again. Electronic
components lay the foundation for complex applications such as active
suspension, biometric recognition systems and radar-guided cruise
control systems. Compliance with laws on emissions or on passenger
safety, say, is no longer possible without the use of electronics. Fully 80
per cent of all innovations are already based on developments in elec-
tronics and software, and the forecast rate of growth for the next five years
is 75 to 100 per cent (relating to today’s value share in the entire vehicle of
about 20 per cent). More and more on-board systems, such as active and
passive safety systems, are becoming networked and are merging into
one. This trend, coupled with ever more functionality, is making in-
vehicle electronic systems hugely complex. And this in turn makes it
difficult to achieve the required degree of technological maturity before
innovations go to market.
A glance at breakdown statistics collated by ADAC, Germany’s auto-
mobile association, highlights the impact of this trend. Electronic failures
easily occupy pole position, with a share of approximately 60 per cent of
all breakdowns. If we examine manufacturers’ existing skill sets, a key
reason for this problem quickly becomes apparent. A Roland Berger study
of all leading OEMs reveals that, while electronics accounts for approxi-
mately 80 per cent of all innovations, electronic engineers account for
only 14 per cent of these companies’ engineering forces.
An added difficulty is that the complexity of the software development
process is often underestimated. Changes to functionality are often made
ad hoc, without systematic rigor. Nor has a satisfactory solution yet been
found to the problem that electronics and software innovation cycles are
far shorter than vehicle model cycles (Figure 5.5). This challenge is set to
become even stiffer. Future customers will, for instance, no longer settle
for using six-year-old on-board navigation systems or mobile phones (the
average period to the next model generation) when technology in both
areas has made significant strides in the meantime. Since OEMs
114 Major challenges

themselves do not have the engineering skills to develop these systems,

lifecycle synchronization will necessitate far closer collaboration and
networking with component and system suppliers.

Sales (units)
Approx. 6 years

Vehicle model cycle

Time (years)
Sales (units)

Hardware cycle

Software cycle

Time (years)

Figure 5.5 Comparative view of vehicle model cycles versus hardware

and software cycles
Source: Roland Berger

The innovators among the premium manufacturers in particular face a

kind of ‘Catch-22’ situation. They are under enormous pressure to satisfy
the huge expectations with regard to innovative technologies with every
new model launch. Yet they also have to minimize the risk that precisely
these innovations – 80 per cent of which, as we have seen, have to do with
electronics and software – may not be fully mature when they (literally)
hit the road. Immature technologies can naturally do immense financial
damage, with warranty claims and recalls quickly running up a bill into
the hundreds of millions. But they also do serious harm to customer satis-
faction (Figure 5.6). Mercedes-Benz knows this pitfall all too well.
Investment bank Goldman Sachs estimates that services performed under
warranty totalled around €2,400 for every Mercedes sold in 2004. Despite
the company’s enviable position as technology leader, these quality
problems leave it languishing in mid-table on customer satisfaction.
By contrast, ‘fast followers’ such as Toyota, Honda and Nissan tend to
use established technologies, have far less electronic content overall – and
have far fewer problems as a result. The price they pay is that they have
not yet been able to gain a foothold in the premium segment. Because of
 The technology challenge 115

the high quality and reliability of its vehicles, Toyota remains the
industry’s yardstick for customer satisfaction – a reflection of customers’
decreasing willingness to tolerate quality problems. The distance between
leading brands is eroding all the time. If innovations are found to be
immature at market launch, established market positions can shift dramat-
ically at short notice.

844

826

811
808

799
792

786
Average
across all
brands

T o y o ta M az d a Hon da B MW Au d i M er ced es -
B en z

Rated on a scale of 1-1000

Figure 5.6 Customer satisfaction index, Germany 2004 (selected brands)

Source: JD Power and Associates, Germany

Not all technologies become established

The purpose of technology roadmaps is to help decision makers in the
automobile industry recognize when what new technologies will be intro-
duced (Figure 5.7). However, current developments indicate that
advanced technologies whose benefits to the customer cannot readily be
explained have not lived up to their makers’ expectations.
What are known as ‘by-wire’ technologies present a classic example.
DaimlerChrysler recently withdrew electrohydraulic braking systems
from its assembly lines – along with 600 other electronic functions. Why?
Because the technologies involved are not sufficiently mature. The value
they add is difficult to communicate to customers and related system costs
are high. Such negative experience will also cause other by-wire tech-
nologies to slip down the priority list on development roadmaps, at least
temporarily.
Yet another advanced technology – the 42V vehicle power system – will
also be directly affected by this turn of events. The demotion of by-wire
116 Major challenges

Chassis Powertrain Engine Body Exterior Interior Electronics

2002
Hybrid engine Aluminum/
Smart airbags
magnesium
Otto-engine DI Metal foams Bus systems
Ceramic
brakes
2005 Particle filter Steel space Active lighting
Magnesium frame
gearbox Pedestrian Night vision
housing Composite protection
Active materials system 42V vehicle
chassis Variable power system
Radar-guided
interiors
cruise control Pre-crash
Electro- Variable system sensors
2010 mechanical Plastic
transmission
brakes body
Fuel cell
Steer-by- engine
wire

Wheel hub Hydrogen Driving on

2015 drive engine autopilot

Figure 5.7 Examples of technology roadmaps

Source: Automobil-Produktion (publication)

technologies eliminates one of the main justifications for such networks,

which will therefore suffer the same fate. Innovators in the industry have
long been promoting 42V technology in particular as the future trend in
automotive engineering. Back in the mid-1990s, car makers were
convinced that the in-vehicle need for electric power was set to rise
sharply, and that existing 14V power systems would simply no longer be
up to the task. The advantages of the new technology were obvious:
lighter and less bulky wiring, a more reliable, efficient power supply, and
the opportunity to fit vehicles with all kinds of new functions. The 42V
vehicle power system was to become the platform for innovative develop-
ments such as by-wire technologies, electric turbo chargers and person-
alized air-conditioning systems.
Despite a very positive echo when the markets were buoyant in and
around 2000, many components suppliers held back. They didn’t really
believe the system would make the breakthrough, and they were well
aware that they themselves would have to bear most of the up-front
investment in this expensive system. As early as 2000, Bosch for
example voiced concerns that forecasting institutes were being too opti-
mistic, contending that 42V would probably not be around before 2010.
The current status is that no economical solution can be found to
problems with the technology; that quality risks still exist; that core
applications that would have needed 42V technology are now off the
agenda; and that more efficient energy management has substantially
 The technology challenge 117

reduced vehicles’ need for power. It is therefore not unlikely that the 42V
power system will be put on ice for the time being – or will perhaps even
disappear from view altogether.
On a brighter note, development of other technologies whose benefits
customers clearly understand has been accelerated. The outcomes are
reaching the market earlier than expected. One example is the radar-
guided cruise control system. Originally expected after 2007, this tech-
nology is already available in top-end vehicles, and is even gradually
appearing in mid-range saloons, too.

TRANSITION: THE CUSTOMER AS THE FOCUS

OF TECHNOLOGY DEVELOPMENT

From ‘technology creates demand’ to ‘technology

generates value’

The examples discussed, and even a cursory analysis of the technology

landscape as it stands, prove a clear point: technological development is
still far from focused on the customer. It is hard to shake off the
impression that technology development to date has been based on the
theory that technology creates demand. Accordingly, industry players
have tried to develop whatever appeared technically feasible. Competitive
pressure and the trend toward individualization and differentiation have
doubtless also fuelled the individualization of in-vehicle functions and
technologies.
An examination of the broad diversity of technology that has resulted
indicates the vast spectrum covered – and gives an idea of the challenges
faced by OEMs. The latter are, for example, called upon to come to terms
with innovative engine technologies such as high-pressure common rail
diesel systems and hybrid technology; driver assistance systems such as
lane change assistants and adaptive cruise control, complete with radar
and video sensors; active body control systems such as active front
steering and predictive emergency braking; safety-enhancing systems
such as predictive safety systems and run-flat tyres; weight-reducing
materials such as steel space frame technologies, carbon fibres and
composite materials; biotechnology in the context of breathable fabrics
and lightweight insulating substances; and even bionics to reduce air
resistance and create self-cleaning surfaces.
118 Major challenges

Since many technologies also compete with each other, OEMs find
themselves confronted by almost overwhelming complexities and
spiralling costs. To steer safely around the complexity and cost trap, they
will in the future have to focus more narrowly on key technologies. In
coming to this realization, manufacturers are learning that the ‘technology
creates demand’ approach of the past will not get the job done. They have
understood that, to master the challenges of the future, they need an
approach that focuses technology development rigorously on the needs of
the target customers. Only then can they reduce internal complexities
while generating higher revenues by adding greater value for the
customer.
Customers are indeed willing to pay for perceptible add-on benefits.
Whereas buyers in Germany paid an average of around €9,500 for a new
car in 1983, this figure jumped to €15,200 by 2003. The purchase of
‘special extras’ accounts for some two-thirds of the difference (Figure 5.8).

3,700 15,200

65%

2,000

35% Share of
9,500 price rise
accounted for
Rise in price of by special
standard model extras

1983 2003

Figure 5.8 Trend in the average price of a new car in Germany (in
euros, adjusted for inflation)
Sources: DAT Report, Roland Berger

Many car makers are now visibly shifting to a new approach. The ‘tech-
nology generates value’ approach assesses innovations in terms of several
factors: the value they generate for customers, their degree of maturity and
their compatibility with a brand profile, the fit with the product posi-
tioning and with current trends in the different technology segments. The
task now facing decision makers in the industry is to investigate the
myriad potential new technologies ahead of them and identify those tech-
nologies and technology segments that target customers will accept and
pay for.
 The technology challenge 119

Ecology, safety and convenience as drivers of technology

In seeking to filter out those technologies that target customers will

accept, it is vital to identify the drivers of technology – those factors that
influence customers’ value systems. Daily reports that fossil energy
reserves are running out, the threats posed by crime and terrorism, and
consumers’ growing demand for comfort, availability and ease of use (in
other words, convenience) have altered our system of social values. In the
process, three core elements of a new value system have emerged: envi-
ronmental awareness, safety and convenience. These core elements of our
new value system are also having a substantial impact on the automotive
industry, in which they rank as the key drivers of technological devel-
opment. Perhaps even more importantly, they serve as the principal filters
in determining whether or not customers accept advances in technology.
In the past, most innovations centred around the driving experience
itself. Following the shift in values, however, it is only logical that three
major new segments of technology have sprung up around the more
elementary ‘driving’ segment. The three new segments are: ‘the envi-
ronment’, which is occupied by hot topics such as particulate filters, high-
pressure diesel technology and in particular hybrid engines; ‘safety’,
which focuses on such themes as active and passive safety systems, run-
flat tyres, adaptive cruise control and the kind of short-range radar sensors
that only recently went into volume production; and ‘convenience’,
involving elements such as automated air-conditioning, heated seats and
seat ventilation.
In light of this situation, it is no surprise to discover that the strong
growth rates which many pundits forecast for the ‘communication’ tech-
nology segment (focusing on functions such as DVD players, in-car PCs,
internet access, remote troubleshooting and telematics services) have so
far failed to materialize.

Successful technology development that focuses on the

customer

As we saw earlier, leading manufacturers have woken up to the fact that

the ‘technology creates demand’ strategy does not produce the desired
results. They have begun to realize that technology must instead generate
value. Indeed, a number of highly successful examples show how this
shift of mindset is even now being put into practice to good effect.
Analysis of these examples reveals essentially the same success factors in
each case:
120 Major challenges

ᔡ Recognize key trends, technology drivers and changes in customers’

value systems at an early stage.
ᔡ Identify key customer opinion leaders.
ᔡ Aim for leadership within the chosen technology segment.
ᔡ Manage the technology development process stringently with regard
to the selected segment.

The new S class from Mercedes-Benz is one example that, from a techno-
logical and strategic perspective, can be categorized as an attempt to
‘defend innovation leadership’. Each successive generation of this model
series has traditionally set a new milestone in innovative automotive engi-
neering. DaimlerChrysler’s image and future prosperity are closely tied
up with the market success of the S class. In its role as the brand’s techno-
logical standard bearer, the S class affects all of the company’s other
model series. DaimlerChrysler is therefore compelled to pump huge
amounts of money and effort into research and development work for
every new S class in order to deliver on its brand promise and uphold its
tradition as a pioneering innovator. The new S class indeed lives up to this
role once again and is shot through with all kinds of innovations: an
enhanced pre-safe system linked to ESP; radar-guided cruise control
system; a braking assistant; night vision equipment, complete with two
infrared headlamps and a reversing camera whose projected lines facil-
itate reverse parking; and a host of other smart new developments. This
might all sound very futuristic, perhaps even over the top in terms of high-
tech wizardry. DaimlerChrysler has, however, learned from the electrohy-
draulic brake episode. The lesson reads that high technology will not
successfully establish itself unless it clearly generates value in a way that
customers understand. On the contrary, it can make a huge dent in the
brand’s quality image if the technology concerned proves to be immature.
Accordingly, all the innovations in the new S class have been grouped
together in a package that very clearly generates value for the customer.
DaimlerChrysler calls this package its ‘vision of accident-free driving’.
‘We focus on innovations that yield significant benefits for the
customer,’ says Thomas Weber, the member of the board of management
in charge of research and technology at DaimlerChrysler. ‘In other words,
not everything that is technically feasible finds its way into our cars.’
Against this background, the new technologies fitted in the S class
perfectly match both Mercedes-Benz’s specific brand promise (which has
always been associated with advances in safety technology) and the
modern value system in which ‘safety’ is a core element. Press
commentary, such as that from the popular Autobild journal, confirms that
 The technology challenge 121

the developers have struck the right chord: ‘In the new S class, drivers
today have a firm grip on the technology of tomorrow.’
Renault’s example is especially impressive. It illustrates the vast
potential even for volume manufacturers to sharply boost their brand
image and carve out a more distinctive profile, provided they correctly
anticipate what customers expect of new technologies. Although Renault
has not been regarded as a technology leader in the past, top grades in the
Euro-NCAP crash test gave a sudden and significant lift to the company’s
brand image. This example, too, clearly underscores the success factors
for technology development in the automotive market:

ᔡ Recognize customer trends at an early stage. Renault was very quick to

spot the tremendous importance that customers attach to the issue of
safety – and the opportunities that a positive link between this theme
and the Renault brand would open up.
ᔡ Identify key customer opinion leaders. Unlike other car makers,
Renault committed to collaboration with Euro-NCAP from the
beginning, an astute move that paid handsome dividends. Excessively
complex and in some cases non-objective test criteria conspired with a
lack of lobbying muscle to prevent other manufacturers from standard-
izing their test procedures. Backed by strong support from the British
government, however, Euro-NCAP established itself as the leading
European and OEM-independent organization for passive safety. By
cleverly marketing its test results for passenger safety, and more
recently for pedestrian protection, Euro-NCAP reaped the benefits of
high-profile public attention and strong credibility. Equally cleverly,
Renault – whose results put it at the top of the table – succeeded in co-
opting this credibility for its own marketing ends.
ᔡ Aim for leadership within the chosen technology segment. Right from
the outset, Renault set itself the strategic goal of becoming the first
manufacturer to earn a five-star rating in the Euro-NCAP crash tests –
a goal it achieved in 2001 with the Renault Laguna. To realize this
ambition, the company embedded Euro-NCAP’s test procedures in its
product specifications and even made them a leading strategic
guideline across all levels of the enterprise. Following the same
rigorous logic, Euro-NCAP became a core component of Renault’s
marketing and communication strategy. Since then, all other car
makers have likewise started to feature positive Euro-NCAP test
results as a kind of ‘quality seal’ in their advertising campaigns. Even
so, test results show that some premium vehicles have been unable to
achieve five-star ratings. In one specific case, the vehicle in question
undoubtedly had a superior safety concept and actually outperformed
122 Major challenges

a number of the crash test criteria. The safety concept was not applied
consistently enough, though. Nor was it adapted early enough to meet
the specific criteria valid for Euro-NCAP tests. Below-par test results
were therefore inevitable. Strong brand positioning and a substantial
premium bonus will now be needed to plug the hole that has been torn
in customer opinion.
ᔡ Strictly manage technology development. Renault – not exactly a
byword for innovation leadership in the past – has consistently chan-
nelled the bulk of its sizeable development spend into the ‘safety’ tech-
nology segment. The company has consciously refrained from
spreading itself too thinly by also concentrating on other advanced
technologies. Interestingly, although safety had always been an
important issue to both customers and manufacturers, not all car
makers grasped the significance of the Euro-NCAP crash tests to the
same extent in the mid- to late 1990s. At the time, Euro-NCAP was
itself striving to be accepted by the automotive industry. The perma-
nently increasing importance of safety themes in customers’ value
systems thus generated a classic win–win situation for both parties. In
the end, Euro-NCAP attained a leading position as an independent
testing organization for passive safety, while Renault’s ‘lead role in
passive safety’ gave a lasting boost to the car maker’s brand image
(Figure 5.9).
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

 Renault Laguna Megane Modus

Highest crash Laguna Megane-
safety score Vel Satis CC
Espace
VW/Audi Touran Golf Passat
A6 Touareg
Mercedes C class E class A class
BMW X5 1 Series

 Renault Megane Megane Clio Scenic Kangoo

Espace Espace
Audi/VW Golf Lupo Polo Passat Polo A3
Beetle A4 A2 TT
Mercedes E class A class C class SLK Vaneo
M class

BMW 5 Series 3 Series Mini 5 Series 3 Series

Z4
 Renault Twingo
VW/Audi Polo Passat A6 Sharan
A3
Mercedes Smart Smart
 Renault Clio Laguna
VW/Audi A4
Mercedes C class
 BMW 3 Series
Lowest crash
safety score

Figure 5.9 Euro-NCAP test results (passive crash tests)

Sources: Euro-NCAP, 2005; ADAC
 The technology challenge 123

Yet another manufacturer that has understood the power of customer-

focused technology strategies is likely to give sleepless nights to the
incumbent technology leaders in the future. Toyota, already the front-
runner in terms of growth, quality and profitability, will now also gain
recognition as a technology leader. Toyota is therefore leveraging the
hybrid engine technology to take the lead in the ‘environment’ technology
segment. This core area is of crucial importance to customers. Zooming in
on hybrid engines as an area of core competence, Toyota is seeking to
cultivate an emotional image for the Lexus brand in particular.
Public discussion of climate change, record oil prices and particulate
emissions are just some of the issues that have sensitized consumers to
ecological matters, leading to calls for more environment-friendly cars.
Unlike Japan’s pioneers of hybrid technology, European manufacturers
have elected to rely on diesel engines. Any other research they do concen-
trates on fuel cell and hydrogen technologies, neither of which will be
ready for volume production before 2015 to 2020. To date, manufacturers
and experts have led a highly technical and often polemic debate about the
individual strengths and weaknesses of diesel, hybrid, natural gas and
other comparatively ‘green’ engine technologies. Customers have
perceived the heated debate as disconcerting – it has not exactly rein-
forced their desire for environment-friendly technologies. In the United
States, tighter emissions legislation and public subsidies have fostered a
trend toward hybrid vehicles that European makers quite simply over-
looked for far too long. More than 80,000 hybrid autos were sold in the
United States in 2004, over 50,000 of which were Prius models from
Toyota. Market researchers expect the global market volume to rocket to
over 900,000 hybrid vehicles by 2010 (Figure 5.10).
For the longest time, the automotive industry’s corporate HQs in
Europe and the United States insisted that two engines would be too
expensive and too heavy. That made them hesitate to join the fray and
actively address the hybrid issue. Meanwhile, Toyota had swiftly recog-
nized what customers wanted and pressed ahead with the development of
hybrid technology. It has since gained a several-year lead over the
incumbent technology leaders. When the hybrid engine was first intro-
duced in the Prius in 2000, the vehicle was derided for its stuffy design
and poor driving dynamics. However, by the time the Lexus RX400h was
unveiled, if not before, this attitude had changed completely. ‘Runs
smoothly, is great fun to drive and even appeases your environmental
conscience’, is how Autobild summed up its test drive experience – encap-
sulating to perfection what customers expect of hybrid vehicles.
Ever since Hollywood stars such as Cameron Diaz and Harrison Ford
rolled up to the Oscar awards ceremony in a hybrid Prius, and ever since a
124 Major challenges

0.1 0 0.1 0 0.3 0.1 0.7 0.4 1.2 1.4 1.3 2.7

941
836

451 449

233
178

68 70
31 11
0.9 1

2000 2002 2004 2006 2008 2010

Worldwide W. Europe Share of overall market, in %

Figure 5.10 Market forecast for hybrid vehicles (in thousands of units)
Sources: Automobil-Produktion (publication), Freedonia Group, Global Insight

Honda Insight Hybrid effectively shared top billing with John Travolta and
Uma Thurman in their movie Be Cool, it is obvious who Toyota has iden-
tified as ‘key customer opinion leaders’. The Japanese car maker also
manifestly has a clear strategic focus on leadership in this technology
segment, and stringently manages its technology development programme.
Toyota has, in other words, seized this opportunity with both hands.
Just when Europe’s incumbent premium brands such as Mercedes were
indulging in a spot of navel-gazing regarding quality and product port-
folio issues, Toyota launched an assault on the Old Continent with its
Lexus brand. Armed with a powerful arsenal – a more attractive,
European-style design, new technology (with hybrid technology posi-
tioned as core competence for the Lexus brand) and top rankings on
quality and service – the Lexus is gunning to narrow the gap on Europe’s
home-grown premium brands. Within the space of five years, all top-of-
the-range Lexus models are to be fitted with hybrid technology.
From bitter past experience with the Lexus brand in Europe, Toyota
knows full well that the climb to premium peaks will be a long and
arduous one. Its only chance is to beat the European premium car makers
in the arena of leading-edge technology. Accordingly, the group pumped
over €5.5 billion into new technologies in 2005. Hybrid technology is a
central tenet of Toyota’s overall strategy, which aims for market lead-
ership by 2010. And so far, the Japanese company has achieved every goal
it set itself. That is why the automotive world has to sit up and take notice.
Now that exciting, innovative cars are no longer necessarily ‘made in
 The technology challenge 125

Europe’, Toyota definitely has the potential to rearrange the existing

pecking order.
European and US car makers are making impressive efforts to catch up.
A series of new models have already been announced for the years ahead.
Ford has fitted a hybrid engine in the Escape and four more models will hit
the market within the next three years. General Motors (GM) and
DaimlerChrysler – neither of which could, until recently, be described as
ardent believers in hybrid engines – are working together to develop an
even more efficient technology which is due out in 2007. BMW is also in
on this collaborative venture. Audi is working flat out on a hybrid engine
for its new Q7 SUV, and even Porsche is considering the option of a
hybrid solution for its Cayenne SUV.
Hybrid technology is not the only field where the battle for customers is
heating up, however. European – and especially German – manufacturers,
keen to roll up the American market with diesel technology, are even now
preparing to launch stage two of their ‘diesel assault’. Still plagued by a
negative environmental image, diesel is as yet only a footnote to the US’s
automotive success story and accounts for just 3.2 per cent of the market.
But not for much longer, the Europeans hope. Over 40 per cent growth in
sales of diesel vehicles in the past six years has spurred them on, as did the
prospect of diesel fuel with significantly lower sulphur content, due out in
autumn 2005. Accordingly, vendors such as VW, Audi, BMW, Nissan,
Ford and – leading the charge – DaimlerChrysler are thinking hard about
how to increase market share with diesel cars.
The sophisticated exhaust gas treatment in DaimlerChrysler’s brand-
new ‘BlueTec’ technology reduces nitrogen oxide emissions by as much
as 80 per cent, bringing them well below even California’s ultra-strict
specifications. BlueTec technology depends on the availability of low-
sulphur diesel fuels. It also requires AdBlue, a urea solution, to be topped
up at regular service intervals. Yet despite these limitations, the tech-
nology now presents serious competition to hybrid engines on two counts:
fuel consumption and environment-friendly properties. DaimlerChrysler
has thus announced its intention to hit the US market with four new
models armed with BlueTec technology. The first will be the E320, whose
roll-out is timed to coincide with the launch of low-sulphur diesel. More
ammunition for the diesel assault could also come from GM, the number
one car company in the United States and the world. Combining tech-
nology derived from the GM-Fiat powertrain joint venture with
completely new developments, GM is planning a diesel offensive of its
own in 2008.
Optimistic market forecasts assume that diesel cars will raise their
market share to as much as 7.5 per cent – or 1.3 million vehicles – by
126 Major challenges

2012. It will therefore be exciting to see which of the two technologies,

hybrid or diesel, makes the running in the medium term. In the light of
pent-up customer demand for greener autos, both alternatives exhibit
plenty of upside potential.
All these examples emphasize the importance of rigorous technology
management that focuses on the real needs and wants of customers – a
strategy that will gain further ground in the future. The introduction of
Euro-NCAP crash tests first caused a stir in the ‘safety’ arena. Then
Toyota brought hybrid technology into the ring – and threw established
technology leaders back on the ropes. One thing thus becomes abun-
dantly clear: companies that swiftly and accurately interpret new trends
can significantly improve both their market positioning and their brand
image. Conversely, if trends are anticipated wrongly or too late, targeted
revenue potential can be squandered while complexity and costs go
through the roof. Any attempt to use high technology as a differentiator
without taking into account customer benefits is doomed to failure. This
is another lesson we can learn from the above examples, such as the
trajectory of the 42V vehicle power system. Current debate surrounding
environmental issues confirms the point: innovative engine technology
and environment-friendly fuels alone will not get cars out of the
showroom. Customers expect a coherent all-round package demon-
strating the vehicle’s driving dynamics, whether it is fun to drive, its
image, safety and environmental friendliness.
For car manufacturers, the key success factor in the future will be
‘customer-oriented technology management’. Manufacturers must ask
themselves whether their inherited approach to technology
management is up to the challenges that the future holds. Is the
customer genuinely the focus of attention on every level? The examples
we have seen clearly show that, even within one and the same company,
the line between success and failure, between dream results and disas-
trous performance, can be very fine indeed. This being the case, it is
fair to assume that, while car makers have in principle understood the
need to focus all technological development squarely on the customer,
they have not yet put this principle into practice systematically
throughout their entire organization.
 The technology challenge 127

OUTLOOK: THREE CORE ELEMENTS OF

CUSTOMER-ORIENTED TECHNOLOGY
MANAGEMENT

Many manufacturers will have to review the technology strategies they

have already approved, and possibly even rewrite them to focus them
more strongly on the customer. Strategy is not the only thing that needs to
be examined, however. Companies must also query whether their existing
organizational structure and processes are conducive to realizing the
stated focus of their technological development across all new vehicle
projects, levels and regions. The stated technological focus must be
applied stringently but it must also be adaptable to the specific require-
ments of different model series, for example. Nor is it enough for manu-
facturers to revector only their internal organization. They must also
reconfigure the changing structure of their supply network.
Car makers must not make the mistake of applying their technology
management strategy to actual technology development alone. To
successfully master the challenges of the future, companies must
introduce an integrated, customer-oriented system of technology
management that is made up of three key building blocks (Figure 5.11).

Technology/
product strategy
Customer Key trends
requirements
Customer-oriented
technology
management

Operational Network
design management

Figure 5.11 Key building blocks of customer-oriented technology

management
Source: Roland Berger

The technology or product strategy ensures agreement with overall

strategy and market positioning. It transforms trends and customer
requirements into vehicle attributes and technologies that shape the brand.
128 Major challenges

This strategy also defines the precise technologies and innovations that
can and should be used to differentiate a brand and product from rival
brands and products. The target value chain structure is then mapped out
on this basis. The secret of successful transformation is to focus devel-
opment rigorously on the value to the customer – and to verify this value
orientation for every detail and on every level.
The operational design phase aims to systematically implant or embed
a customer’s-eye view of the car maker’s development organization
across every level, division and vehicle project. Traditional, function-
oriented value chain structures must be reoriented to focus on the brand-
shaping vehicle attributes and customer needs. These structures must be
enabled to recognize and respond quickly to emerging trends. Change
must also come to the development process. In the past, the development
approval process was focused on individual components. Now, specifica-
tions of defined vehicle attributes must be added. Also, the development
organization must have the skills and resources it needs to rise to future
challenges and cope with the ever faster pace of innovation. Critical
knowledge must be available within the organization.
Network management will play a very prominent role in the future.
More and more links in the value chain will be outsourced to suppliers and
service providers. This will leave the manufacturers free to concentrate on
the brand-shaping elements of the value chain. But it is also a pragmatic
way for OEMs to maximize productivity and exploit cost advantages
despite their own limited resources and lack of expertise in innovative
technologies. In the future, however, this process will slow down
noticeably, and will not go as far as was expected until recently (Figure
5.12). The flood of new models has already passed its high-water mark.
With productivity gains now being eroded to some degree by higher coor-
dination overheads, manufacturers face considerable overcapacity and
strive to build up critical knowledge resources in their own organizations.
Even so, the shift in the value chain between manufacturers and
suppliers will still be significant. New business models will result that
establish car makers and their external suppliers as strategic partners
within tightly meshed networks. For the car makers, the main success
factors will be choosing the right partners and managing the resultant
network effectively as a virtual company. The individual partners will
operate different business models, have different levels of vertical inte-
gration, possess different competences and be responsible for different
areas. Ensuring that such a network focuses consistently on one and the
same customer-oriented strategy is a highly complex task. Efficient
network management will be crucial to keep auto makers competitive
while constantly adapting to current and anticipated market changes.
 The technology challenge 129

CAGR: +2.5% 66.7

CAGR: +4.6% 48.3 Suppliers

56% (including
+4.8% engineering
41% service providers)
28.3
+7.2%
30%

59% +0.5% 44% OEMs

70% +3.1%

1990 2002 2015

Figure 5.12 Trend in value chain structures (in € bn)

Sources: Interviews, Roland Berger Engineering Study

Customer-focused technology and product strategies

It will take a completely new strategic approach to enable automotive

firms to concentrate strictly on customer value. Traditionally, their devel-
opment organizations have been focused on technical components. As a
consequence, approaches designed to differentiate themselves from the
competition have enabled companies to design and market precisely these
components in innovative ways. The problem is that customers do not buy
technical components. They buy vehicle attributes such as driving
dynamics, performance, comfort and safety. To succeed in the future,
development must line up with customer perceptions and focus on
concrete vehicle attributes (Figure 5.13).
This focus on vehicle attributes is at the very core of the technology and
product strategy. All other aspects of the strategy build on this foundation.
Generally speaking, an integrated, customer-oriented technology and
product strategy will break down into four distinct levels (Figure 5.14):

1 Spot changes in customer requirements at an early stage

In the future, it will be vitally important to monitor changes in customers’
requirements and keep a close watch on emerging core trends. Most car
makers know the needs of their target customers and have positioned their
brands and products accordingly. Any such positioning is by nature static,
however. It works fine as long as no fundamental changes occur, for
example in the value system of the customers, and hence in customers’
perceived requirements.
130 Major challenges

Past/present Future
Component-oriented Attribute-oriented

• Air-conditioning system • Comfort, ease of use

• Heated rearview mirrors • Overall vehicle design
• Four-cylinder engine • Environmental friendliness
• ABS • Value retention
• 5-gear automatic Differentiation • Driving dynamics/handling
transmission
• Safety
• Aluminum radiator hood
• Engine performance
• etc.
• Interior design
• Infotainment

Figure 5.13 Focus of development – shifting from a component

orientation to a focus on vehicle attributes
Source: Roland Berger Engineering Study

Spot changes in
customer requirements
at an early stage

Focus vehicle/brand
• New core trends
attributes on the
• Factors that
customer
influence trends
Focus new
technologies on added
Identification of value aimed at specific
vehicle attributes that target groups
shape the brand

New technologies
that generate value Adjust value chain
for target customers structures

Concentrate on value
chain elements that
shape the brand

Figure 5.14 Steps in technology and product strategy development

Source: Roland Berger

When new trends begin to impact the market, change comes about.
Established market players nevertheless often lack the systematic
‘sensors’ that would allow them to detect such shifts early on. That is why
many of them often respond very late. Manufacturers who are intent on
transforming their image generally adopt a much more aggressive stance.
As soon as a new blip on their radar screens signals a change in customer
 The technology challenge 131

requirements, they seize the opportunity and rigorously focus their tech-
nology strategy on this trend – witness the examples of Euro-NCAP and
hybrid engines.
All car makers essentially face the same challenge: to wade through the
flood of short-lived trends and filter out those ones that will have a lasting
impact. This requires transparency and a systematic approach.
Transparency is needed in respect of macroeconomic trends that
suddenly begin to drive technology and so affect the activities of the
market. But manufacturers also need a clear overview of opinion leaders,
such as newly emerging technology institutes (like Euro-NCAP) and
market research institutes (like JD Power, whose analyses of customer
satisfaction are gaining more and more importance). Transparency is
equally essential with regard to the media, such as journals whose
regional influence is growing (Auto Motor Sport is a good example in
Europe), and concerning multipliers, such as the Oscar awards scenario
in the case of Toyota’s hybrid vehicle.
A systematic approach is necessary to wean firms off the kind of ad hoc,
‘gut feeling’ models that have been prevalent in the past. Car makers must
instead learn to regularly track familiar and new drivers and trends. In
many cases, organizational deficiencies are one of the reasons that infor-
mation that could have a critical influence on key decisions never makes it
from Marketing to Development – or that the latter often rejects any such
input. Again, the reason for these deficiencies is mostly that customer
orientation has not been implanted in technology management at a
strategic and organizational level, or that customer orientation has not yet
become the sole focus of the development process across all levels and all
relevant divisions. The fact that one and the same manufacturer can
deliver both glowing successes and abject failures of technology
management substantiates this hypothesis: the ability to realize a
customer-oriented technology management strategy is obviously there. It
just isn’t everywhere – yet.

2 Transform customer demand into brand-shaping vehicle

attributes
Once a car maker knows what its customers need and want and has posi-
tioned its brand values in line with this data, the requirements placed on
the product – the vehicle – can be defined in a systematic ‘cascade’
process. The first step is to nail down exactly what customers expect of the
brand, what vehicle attributes will shape the brand in accordance with
defined brand values, and what will set the brand apart from its
competitors. To this end, vehicle attributes must be grouped into logical
132 Major challenges

clusters and then analysed and prioritized to determine their relative

importance to the brand profile and their emotional or rational nature
(Figure 5.15). This exercise must be conducted on the basis of a clearly
defined target group for each model series.

Emotional Comfort,
ease of use

Driving
dynamics Interior
Engine
Info- perf.
tainment Design
Value
orientation
Safety

Environmental
friendliness Value
retention

Rational
Low Importance for brand differentiation High
(minimum standard
for premium vehicles)

Figure 5.15 Positioning of vehicle attributes

Source: Roland Berger

The next step is to transform brand values into sets of vehicle attributes.
The attributes themselves must be such that they can be experienced by the
customers, generate value for them and clearly differentiate the vehicle
from other vehicles. Once all vehicle attributes have been defined, it is time
to decide which technologies and innovations are best suited to realizing
them. The technologies selected must be clearly assigned to the corre-
sponding vehicle systems. Based on these defined guidelines and their
intended mode of functioning, the final step is to translate the requirements
placed on these systems into the language of development: that is, into
technical specifications. This is the crux of the whole process: the
conversion of customers’ wishes into technical specifications. After all, not
every abstract customer perception can be mapped one-to-one onto a
detailed technical description and measured in terms of physical units.
A concrete example helps illustrate this four-step process (Figure 5.16).
The figure shows how a premium manufacturer converts the brand value
of ‘sportiness’ into a vehicle attribute that drivers can experience, namely
‘excellent handling through superior traction in all weathers’. Translated
into the language of development, this attribute is realized in part through
‘optimal load distribution and superb grip’. The innovative technology
 The technology challenge 133

‘electrohydraulic suspension control’ is selected to achieve this objective.

Once this technology has been pinpointed, it is then possible to draw up
the specifications for the ‘suspension and damping’ systems.

Customer requirements

Brand values
Sportiness

Vehicle attributes reflected in Excellent handling

in all weathers

achieved by Electrohydraulic
Technologies suspension control

integrated in Suspension/damping systems

Systems

Figure 5.16 Translating what customers want into product specifications

Source: Roland Berger

The extent to which marketing requirements are translated smoothly and

coherently into the language of development varies considerably from
manufacturer to manufacturer. Glitches in the process lead to situations
where vehicle attributes do not turn out the way they were intended. In
such cases, they may then fail to satisfy customer expectations.

3 Systematically generate customer-focused innovations

As we have consistently argued in this chapter, new technologies and
innovations will be well received by the market only if they fit the relevant
brand image and line up with customer requirements. They must also
sharpen the contours of the brand profile and distinguish it from rival
brands. These fundamental principles dictate a number of consequences if
a company systematically wants to generate innovations that will meet
with customer acceptance. One consequence is that a selective approach
to innovation is imperative. Not every new technology will fit a car
maker’s brand profile. It should also be obvious that technology strategies
134 Major challenges

must also vary as a function of manufacturers’ differing brand values. If

technology strategies are too similar, the differentiation potential dimin-
ishes. This erodes customer loyalty, causing pressure to be exerted via the
lever of price. Another consequence is that innovations and technologies
must be developed with a strong focus on customer requirements,
customer value and customer acceptance. The third aspect in the process
of generating innovation is the manufacturer’s own view. In order to be
profitable, car makers must be able to persuade customers to pay a
premium that covers the considerable expense incurred in developing an
incessant stream of new innovations. Taken together, these three aspects –
the brand fit, the benefit to the customer and the benefit to the maker – are
the core filters to determine whether or not particular innovations align
with a given brand.
Appropriate innovations can, of course, only be generated systemati-
cally if a systematic process is in place. This process consists essentially
of three steps in which innovations are pooled, evaluated and selected
(Figure 5.17). The innovation pool, a repository for all of a company’s
innovative ideas, receives input from three sources. First, it serves as a
store of all existing innovative ideas. Second, it is fed by the systematic
analysis of factors such as core trends, drivers, opinion leaders,
competitors and changes in customer requirements, as well as by the
resultant identification of future innovation deficits. Third, input is
derived from technology roadmaps, which indicate when what technology
will probably hit the market. As we saw earlier, these roadmaps them-
selves require upstream filters to detect changes in customers’ value
systems. They must never be the product of an obsession with technology
for technology’s sake.
To filter suitable potential technology projects out of the innovation
pool, the brand fit, the value to the customer and benefits to the maker
are evaluated in the second step. The third step is to prioritize the attrac-
tiveness and technological positioning of the candidate projects iden-
tified in step two. At this stage, potential projects are either rejected or
selected and cleared for development. This systematic approach
ensures that the new technologies and innovations selected for imple-
mentation will indeed generate value in a way that customers can
understand and are willing to pay for. Also, this process will ensure that
each selected development contributes to the sharpening of the brand
profile. The internal impact in terms of technical optimization, cost,
quality and internal processes, for example, is also rendered transparent
at this point.
 The technology challenge 135

Create/conceive innovation Evaluate innovative ideas Select innovations

+ +

Innovation pool
- -
Slow follower Innovator Slow follower Innovator
Technology position Technology position

Sources: Filter:
• Existing innovative ideas • Does it fit the brand?
• Conclusions drawn from • Does it benefit the customer?
innovation gaps
• Does it benefit the manufacturer?
• Comparison with roadmaps

Figure 5.17 Customer-focused innovation process

Source: Roland Berger

4 Align the value chain with the technology strategy

Once initiated, the customer-oriented technology and product strategy
must be applied consistently across the entire value chain. It is the OEM’s
responsibility to ensure that customers will perceive the brand-shaping
and differentiating vehicle attributes in line with the brand promise. For
this reason, it is important to identify those elements of the value chain
that have an impact on shaping and differentiating the brand, and those
that do not. The former are part of the car maker’s core competence and
should therefore be kept in-house. Activities that make little or no contri-
bution to the distinctive brand perception are generally ideal candidates
for outsourcing to suppliers. In the latter cases, the car companies can
benefit from more efficient processes, focused product portfolios, lower
complexity and structural cost benefits often enjoyed by external
specialists. Essentially, every system and every component must be
examined to determine the extent to which it influences the characteristics
of the brand. This exercise results in the manufacturer’s target value chain
structure (Figure 5.18).
During implementation of this strategy, two processes run in opposite
directions at the same time. On the one hand, the car maker outsources
large chunks of the value chain – those elements that do not influence the
brand perception – to suppliers. On the other hand, core competencies and
critical expertise are insourced. This trend is born of many car makers’
painful experience that external suppliers often dominate areas of
expertise that are crucial to those attributes that make a brand so
136 Major challenges

• Brand Interior Chassis Body Engine E/E

characteristics
• Customer benefit
• Differentiation

Attributes

Quality

Environm. friendliness

Safety
Projected impact of individual systems
Engine performance on brand characteristics

Driving dynamics

Interior design

Ease of use

Impact on brand character.: Strong Avg. Weak Irrelevant

Figure 5.18 Impact of vehicle components on brand characteristics

(example)
Source: Roland Berger Engineering Study

distinctive. Today, the brand-shaping attributes of products and tech-

nologies in the various systems and components are often generated by
electronics and software. Chassis control systems, powertrain and motor
management systems are just three examples, and the knowledge behind
these systems and components often lies with outside suppliers.
Moreover, since little progress has been made in standardizing hardware
and software platforms, such suppliers are far from interchangeable. This
situation highlights how important it is to brand image for manufacturers
and suppliers to collaborate closely in tightly woven networks.

Forms of operational design

Once core competencies have been defined and the value chain structure
has been designed to match, the next challenge is to ensure that the
company’s technology and product strategy can generate the expected
benefits in practice. To make sure that vehicle attributes defined on the
basis of customer requirements and brand values will realize in models as
expected, car makers have begun to give their development activities a
functionality focus. Depending on their individual philosophy or the
degree to which they apply this strategy, manufacturers adopt a number of
 The technology challenge 137

different approaches to operational design. There are, however, three

organizational forms that are most common (Figure 5.19).

Traditional component-oriented Reduced-complexity Transformed development

development organization organization organization

Chassis Interior Vehicle Chassis Interior Vehicle Driving Passive Comfort Vehicle
Body project Body project dynamics safety project

Attribute
x1 Attribute Attribute
Attribute x1 x
x2
Attribute
x2
Attribute Attribute
x3 y

Line functions supply Functional teams supply Vehicle attributes are created in
components; vehicle attributes modules; vehicle attributes are the lines; vehicle project
are created in the vehicle project created in the vehicle project integrates vehicle attributes

Line responsibility Project responsibility

Figure 5.19 Different organizational approaches to integrating vehicle

attributes
Source: Roland Berger Engineering Study

1 Component-oriented development organizations drive

complexity
Vehicle attributes that customers actually perceive – such as ‘sportiness’– are
produced not by just one component, but by the smooth interplay of several
components. In a traditional development organization, which is component-
oriented, each line function supplies isolated components as its contribution
to the vehicle project. The project team then has to try to put all the systems
and components together in a way that produces the desired vehicle
attributes. Given the multitude of systems (especially electronic systems)
that have to dovetail perfectly in today’s vehicles, delaying integration until
this late stage often causes problems and makes projects unmanageably
complex. Since each individual project is unique and therefore has its own
learning curve, it becomes difficult to realize the brand-shaping vehicle
attributes consistently across all product lines. It is not unusual for different
projects to end up reinventing already defined attributes.

2 Functional teams reduce complexity

Although this model seeks to sharply reduce the complexity of a vehicle
project, it is still based on the traditional ‘geometric’ development
138 Major challenges

organization. Line functions team up to build functional subteams that hand

over finished modules or submodules to the vehicle project. Subteams are
responsible for bringing the components contained in modules in line with
desired vehicle attributes. The approval of the functional attributes of the
module is also placed in their hands. The attribute ‘excellent handling’, for
example, could mean that the electronics unit gets together with the power-
train unit to test and fine-tune the interplay between ESP sensors and the
motor management system. The finished module is then handed over to the
vehicle project, which integrates it with the other modules. Though this
model certainly does reduce the effort within the vehicle project itself, inter-
faces remain a problem and complexity remains high. The main benefit is
that it can often be applied within the confines of traditional organizational
forms, in effect giving employees a ‘soft’ introduction to new ways of
working and new challenges. The residual threat remains, however, that
failure to coordinate up-front on the integration of individual modules in
higher-level systems may cause the intended vehicle attributes to be missed.

3 Function-oriented development organizations guarantee

customer focus
The more important it becomes to carve out a distinctive brand profile –
and hence to focus rigorously on customer requirements, brand values and
vehicle attributes – the more carefully companies must think about how to
transform their development organization into a function-oriented
structure (Figure 5.20). It follows that premium manufacturers in
particular must tackle this approach head on.
Wherever a function-oriented development organization exists, all
aspects of the integration needed to create specific vehicle attributes can
be performed within the line and then handed over to the vehicle project as
a ready-made system. The driving dynamics unit, for example, might
develop and integrate everything needed to deliver the attribute ‘excellent
handling’ from start to finish. This approach makes vehicle projects
markedly less complex, while ensuring that every unit that develops a new
vehicle model builds on a common understanding of customer require-
ments, brand values and vehicle attributes. At the same time, the use of
this approach on different vehicle projects over time helps the company
accumulate a wealth of experience – all of which enables the technology
in question to permanently improve and mature.
Development processes must, of course, be adapted at the same time as
the development organization. These processes should be focused on the
vehicle attributes from the earliest phases of development, and must then
retain this focus from beginning to end (Figure 5.21).
 The technology challenge 139

Example 1 Chassis Driving dynamics

Axles Acceleration and braking

Brakes Handling
Suspension Vibration

Original focus Brand value-oriented

Example 2
Interior Interior design and comfort

Seats Driver and passenger

Doors ergonomics
Cockpit Infotainment
Haptic/visual appeal

Figure 5.20 Focusing the development organization on brand-shaping

vehicle attributes
Source: Roland Berger

Component-specific approval process,

Focus on the specification of vehicle complemented by approval of vehicle
attributes instead of component attributes attributes

Vehicle
Vehicle integration
specification/design

Specification of
Systems integration
vehicle attributes

Module design Module testing

Component design Component testing

Module realization

Focus on components Focus on vehicle attributes

Figure 5.21 Focusing the development process on vehicle attributes

Source: Roland Berger
140 Major challenges

At present, the development approval process is usually still carried out at

the level of specific components. To achieve the desired focus, however,
approvals must also be granted for complete vehicle attributes. These
attributes must be clearly defined in advance. And that is no easy task,
bearing in mind that customers’ perceptions must be translated into the
language of development on such a detailed level that they ultimately
deliver precisely the desired attributes – and leave no room for subjective
interpretation.
Yet another challenge stems from the fact that vehicle attributes should
not merely embody a car maker’s general brand values in the same way
across all product lines. They must also reinforce the individual ‘person-
ality’ of each and every product line. This requirement is usually accom-
modated by setting up a core strategy unit in the development department.
In close collaboration with marketing, this unit prescribes the technology
and product strategy and determines exactly which innovations fit the
brand in general, and which fit the individual product lines in particular. It
also defines the brand-shaping and differentiating vehicle attributes, so
that core competencies can be staked out and the value chain strategy
drawn up for the development process. To strengthen the unique identity
of the individual product lines, today’s rather case-by-case project organi-
zations should be transformed into more formal units within the devel-
opment organization. If a company goes a step further and merges related
product lines in a sensible way into such units, it also becomes easier to
harmonize vehicle architectures and to introduce modularization and stan-
dardization strategies.
BMW is regarded as a pioneer in designing brand-shaping value chain
strategies, and in focusing its development organization on vehicle
attributes. BMW assesses the importance to the brand of every module in
every vehicle. It then focuses its value chain strategy accordingly. The
way in which development is organized has likewise experienced far-
reaching changes. Having singled out the ‘interior’ as a brand-shaping
vehicle attribute that is crucial to the BMW brand, the company extricated
this unit from its body unit and further transformed its chassis unit into a
new driving dynamics unit.

Networking closely with external partners

Changes in the supply network can be linked to three main drivers that
affect the network concurrently but in different directions.
 The technology challenge 141

1 Value chain elements that do not contribute to brand

characteristics are increasingly being outsourced
One obvious driver is manufacturers’ stated aim of concentrating on the
brand-shaping and differentiating elements of the value chain. This is their
core competence. As a consequence, elements that do not contribute to the
brand characteristics are increasingly outsourced to suppliers. Indeed,
entire modules or systems encompassing extensive content all the way
along the value chain are being farmed out, involving for example
purchasing, production, assembly, logistics and integration tasks. As a
result, various forms of collaboration are emerging depending on the indi-
vidual module or system, and depending on the individual scope of
responsibility assumed by the supplier.

2 Brand-shaping value chain elements demand fair

partnerships
The second driver is rooted in many manufacturers’ belated realization
that they have little or no core expertise in-house to cope with electronic
and software functions and the integration of them. In theory, car makers
can quickly find a solution in the discipline known as ‘insourcing’. In
practice, however, the road to effective insourcing is a long and difficult
one. Suppliers are naturally reluctant to hand over their module or system-
specific expertise, precisely the expertise that has often given them a
dominant role in innovation and in creating the brand characteristics.
Close networking on both sides offers a way out of this dilemma.
OEMs depend on suppliers to realize defined brand characteristics, for
instance by programming brand-specific attributes into the motor
management system. Conversely, suppliers are obliged to align their
modules and systems with the brand-specific vehicle attributes dictated by
the OEM. They must therefore engage in fine-tuning and any number of
minor coordination loops involving other systems in order to produce
brand-compliant vehicle attributes. Both parties are thus forced to open up
to each other. OEMs must disclose their brand and differentiation
strategies and information on targeted vehicle attributes to their suppliers.
The latter must in turn contribute their intellectual capital – that is, their
technological and innovation competence. It is thus vital for both sides to
commit to a fair, trusting partnership that offers a long-term strategic
perspective.
The third driver derives from the fact that vehicle model lifecycles are
‘out of synch’ with electronic and software development cycles, as we saw
earlier (Figure 5.5). Electronic components and software are developed at
such a fast pace that certain modules and systems – such as navigation
142 Major challenges

systems, telephones and entertainment systems – will need to be upgraded

within a vehicle model lifecycle, and integrated in existing vehicle
systems without disrupting functionality. OEMs lack some of the compe-
tencies needed to handle this challenge and would therefore be unable to
cope. Again, therefore, they have little choice but to network closely with
suppliers, nurturing long-term partnerships in order to ensure that
upgrades and updates go ahead smoothly.

3 Competences and competitive capabilities demand

tight networking
Since it makes sense for the owner of the know-how to also play the role
of process leader, suppliers have to shoulder extra integration work, for
which they too must build up expertise. To meet this challenge, Bosch, for
example, launched Bosch Engineering as a subsidiary company. Bosch
used to supply ready-made control systems and associated software for
engines, transmissions and braking systems as separate modules. Now,
Bosch Engineering pools the expertise needed to integrate these systems,
and sells this service to OEMs. The Bosch subsidiary brings together the
engine, brake and transmission controllers and hands them over as a self-
contained system to the customer.
The need for access to innovative skills and the need to remain
competitive compel OEMs to compete with each other to find the best
partners. It is therefore necessary for OEMs to cement the long-term
loyalty of top-flight suppliers. Depending on the precise value chain
links that have been assumed by the supplier and their importance in
shaping the car makers’ brands, a variety of business models emerge as
a result. ‘Little OEMs’ handle everything from the development to the
production of derivative products. System suppliers develop extensive
functionality groups in the context of long-term partnerships, while
independently managing second and third-tier suppliers. Spin-offs
ensure that value chain elements that are not critical to the character-
istics of the brand remain competitive in the long run. Direct equity
investments safeguard access to the skills and capacity needed for
strategically important components. Joint ventures develop new tech-
nologies, and OEMs serve as incubators to foster innovation in collabo-
ration with small, thinly financed firms. All of this points to a future in
which business relationships will become more variegated and more
important than ever for car makers (Figure 5.22).
 The technology challenge 143

Inte- Coop-
gration eration
partners partners

Tier 1
OEM Tier 2
Small
Tier 3
technology
firms

Partners
System in other
partners industries

Figure 5.22 Networking all kinds of business relationships

Source: Roland Berger

From hierarchies to genuine partnerships in tightly meshed

networks
Traditional functional and hierarchic structures can no longer cope with
these many and varied challenges. Collaboration must now take on new
forms that focus on customer requirements and brand values. Ultimately,
this will lead to efficient partnerships that operate in tightly meshed
networks. Something akin to virtual companies will emerge that
contribute specific modules and/or systems to sharpen the brand profile or
raise competitiveness (Figure 5.23).
The opportunities afforded by such networks can only be realized if
network management is institutionalized, however. Network managers
need to synchronize the various business models. All the parties involved
should share the same understanding of customer requirements, brand
characteristics and defined vehicle attributes. Legacy structures inherited
by OEMs and their network partners alike must systematically be trans-
formed to accommodate the new forms of collaboration we have
discussed. Network partners must bring their organizations into line with
their defined focus on vehicle attributes. Their workflows and procedures
must be synchronized to create stable, reliable development processes that
release functionalities rather than just components. Network managers
must define a set of systematic criteria by which to select suitable partners
144 Major challenges

and permanently monitor the network configuration. Collaboration in an

atmosphere of trust demands partnership agreements on issues such as
intellectual capital and exclusivity arrangements, but also on matters such
as how potential conflicts between the partners are to be resolved. In the
long run, partners will only remain in the network if they possess strategic
core competencies or improve competitiveness.

Functional hierarchy Stronger project focus Network

OEM OEM

OEM

PAST PRESENT

Figure 5.23 From heirarchies to networks

Source: Roland Berger

SUMMARY

The technology challenge: does it constitute progress, or is it a pitfall? The

conditions and constraints surrounding technological development have
changed. Whereas innovation proceeded at a comparatively modest pace
until the early 1990s, technological advances – especially in the field of
electronics – have since triggered dramatic acceleration. This trend,
coupled with the fact that new technologies now spread ever more quickly
to other brands and lower classes of car, is making it hard for car manufac-
turers to differentiate themselves from their competitors. Even premium
brands are becoming more interchangeable. The pressure to innovate, the
competition that exists between alternative technologies and the crushing
burden of R&D expenditure are threatening to catch premium manufac-
turers in a cost and complexity trap.
The way to avoid this trap is to focus on those technologies that are
critical – that is, those technologies that distinguish a manufacturer from
its competitors, sharpen its brand profile and, no less important, bring in
more revenues. Premium car makers must abandon their ‘technology
 The technology challenge 145

creates demand’ mantra in favour of a development rationale based on the

understanding that ‘technology generates value’. They must know what
their customers want and need, and quickly identify trends that will alter
customers’ system of values. At the same time, they must keep a watchful
eye on the importance and development of opinion leaders. Together with
the need for technology to match the brand profile, all of these factors will
be crucial to car makers’ future success.
Some manufacturers have already spotted the potential inherent in tech-
nology strategies that focus on the customer. By achieving top grades in the
Euro-NCAP crash tests, Renault, for instance, moved up to a leading position
in passive safety. Toyota’s current drive to establish hybrid technology as an
innovative core competence of the Lexus brand is another example.
Evidently, the process of rethinking is well under way. Many car makers
are nevertheless still adopting a piecemeal approach: technological devel-
opment is not focusing on the needs and wants of target customers across the
board. If they are to master the challenges that lie ahead, manufacturers will
need to apply a customer-oriented technology strategy that centres around
three core elements. First, the technology and product strategy must establish
benefits to the customer as the focal point of all technological development,
defining those technologies that are to differentiate a brand and product from
rival brands and products. Second, a suitable operational design must foster
this mentality and ensure that a customers’-eye view is implemented across
all levels, divisions and vehicle projects. To this end, traditional development
organizations and processes must be transformed into functionality-oriented
structures. The third key element is network management. Role splitting
between OEMs and suppliers along the value chain is creating a need for new
forms of collaboration. All kinds of different business models will in the
future coexist within tightly woven networks, and cooperation will take
place in what amounts to a virtual company. Efficient network management
will safeguard access to the knowledge and capacity held by key partners. It
will ensure that customer-oriented technology strategies are implemented
uniformly across all external partners in the network. It will also enable
network partners to closely integrate their activities, and will continually
adapt the overall structure to current and future changes in the market.
Advances in technology are a decisive factor in giving premium vehicles a
distinctive brand profile. This has been true in the past and it will be true also
in the future. It is therefore imperative for car makers to focus strictly on the
requirements of their target customers. Only then can they escape the cost
and complexity trap and successfully position their brands. The more accu-
rately a manufacturer anticipates customer requirements and responds to
these in its product and technology offerings, the more leverage it will gain to
exploit strategic opportunities.
146

The market challenge: who

will gain strategic control?
Jürgen Reers, Partner, Roland Berger Strategy Consultants

CHALLENGES IN AUTOMOTIVE SALES

‘Premium segment now also hit by price-cutting war.’ ‘Car makers’ long
struggle with stagnant sales in core markets.’ ‘Margins nowhere near
adequate at many companies.’ These are the kind of depressing head-
lines that are currently being seen in the media. For all market players –
manufacturers, component suppliers and dealers – today’s automotive
industry is becoming an ever more challenging arena. And for all of
them, what is already hard-fought competition is set to become even
tougher.
The industry’s key markets are stagnating. Growth can be achieved only
by either broadening the product or service portfolio, or expanding into
emerging markets. At the same time, worldwide overcapacity and the
ambitious entries by newcomers from the Far East are making compe-
tition fiercer than ever.

Changed behaviour? Change the way you think!

In this climate of flat demand and ruthless competition, customers’ expec-

tations and behaviour too have changed significantly. For many buyers,
cars have long since graduated from being just a way to get from A to B
and are increasingly becoming an expression of a lifestyle. The traditional
forecast models that used to segment target groups by income, social
 The market challenge 147

background and age alone are no longer sufficient to accurately predict

how people will behave. For instance a growing section of the affluent
population like to understate their prosperity. So buyers in this segment
opt for small, modern autos in place of the traditional high-end sedans and
saloon cars. In doing so, they are making a statement about their post-
materialist lifestyle. To take another example, new value systems often
breed hybrid consumption patterns. The same buyer might head for the
luxury segment when satisfying special requirements while consciously
looking for rock-bottom price offerings in other categories.
Smart shopping appears unstoppable – and will heat up market compe-
tition further still. In consumer goods, the trend is already well estab-
lished. Customers have a detailed knowledge of where they can get the
best price for products and services. They also have a perceived need to
settle for nothing less. This combination has nourished the dominance of
discount formats in food and consumer electronics retail. Even stores that
sell luxury items are now having to accommodate this development. As a
result, 30 to 50 per cent markdowns are bringing luxury fashion wear into
the same price bracket as no-name products.
The same harsh wind is also blowing in the face of car dealers. In the
past, would-be buyers would stroll down to the nearest dealer to ask for an
offer for the brand of their choice. Today, an array of channels allows them
to find out for themselves about the products and prices available from a
variety of vendors. In Germany, 56 per cent of car buyers now use the
internet to gather information on possible configurations and prices, before
weighing up and taking their decision (source: TNS Emnid/Autoscout 24).
They then leverage information about incentives and discounts to haggle
over prices with the dealer. The attractiveness of the brand and the product
is still important, but decisions to buy autos is now increasingly being
linked to price (see Figure 6.1).
In the automotive industry, intensified competition and price pressure
have driven a fast rate of innovation that has affected both product port-
folios and core values.

Manufacturers’ response: a varied approach to products

and costs

On the product front, car manufacturers have responded by extending their

model ranges. Mercedes-Benz and BMW typify auto makers’ efforts to
move into new segments. The former’s A class and the latter’s 1 Series
have given both companies a foothold in the less profitable compact class.
Conversely, Volkswagen has added the Touareg and the Phaeton to the top
148 Major challenges

53
Certain brand/ 64 62
certain model

47
Certain 38
36
price ceiling

Figure 6.1 Key criterion in decisions to buy autos in Germany, 2000–04

(per cent)
Source: Roland Berger Market Research survey conducted in Germany

end of its traditional portfolio. The growing trend for vendors to set them-
selves apart by developing innovative niche vehicles is constantly
spawning new subsegments. Twenty years or so ago, model segments were
clearly defined. Recent years have seen an explosion in niche segments,
however. Cross-over models that combine elements of different segments
have been introduced and have shaken up inherited product categories.
Innovative roof models, for instance, have blended elements of the coupé,
the convertible and the saloon car. Fresh models combine features of sports
utility vehicles (SUVs) and large saloon cars, adding the comfort of the
luxury segment and using sleek roof lines to give a sports car-like flair
reminiscent of a coupé. Current concept cars even cross coupés and
convertibles with SUVs.
Mercedes-Benz is an excellent case study illustrating the entire trend
toward the expansion of model ranges. Having produced just seven model
series in 1980, the company was rolling out 20 by the end of 2005 (see
Figure 6.2).
While spreading the range of models on offer, manufacturers have also
shortened vehicle lifecycles. Volkswagen’s first Golf had a rated lifecycle
of nine years. With the Golf IV, that figure diminished to six years.
On the cost side, moves to optimize development, sourcing and production
processes have yielded substantial gains in efficiency. Extensive standardi-
zation based on a common platform, and identical parts strategies, have
enabled firms to tap vast potential all along the value chain (see Figure 6.3).
 The market challenge 149

No. of model series

7 8 8 9 14 20
Passenger cars
E class
E class T model
To 1997: E class coupé CLK
S class
To 1981: SLC 1981–1996: S class coupé CL
SL
G class
1982–1993: 190 C class
1991–1997: E class convertible CLK convertible
C class T model
SLK
1996–2003: V class Viano
A class
M class
C class sports coupé
Vaneo
CLS
SLR
B class
R class
1980 1985 1990 1995 2000 2005

Figure 6.2 Expansion of model series at Mercedes-Benz, 1980–2005

Sources: Roland Berger Strategy Consultants, Global Insight, DaimlerChrysler website

Close collaboration between auto makers and their suppliers, with both
sides acting as partners, has delivered huge successes in this area. The
early involvement of component suppliers in the product development
process and the spread of networking thanks to open CAx data models can

Monetary effects

R&D • 5–20% of R&D costs for

platform/model-based
vehicle development

Purchasing • 5–10% of material costs through

scale effects with identical parts

Production • 5–10% of per-vehicle production

costs

Figure 6.3 How standardized technology can boost efficiency

Source: Roland Berger Strategy Consultants
150 Major challenges

save both time and money. Platform strategies and the outsourcing of the
development and production of entire systems to first-tier suppliers enable
economies of scale to be realized across corporate brands and even across
multiple manufacturers. In a similar strategy, heavily integrated
production processes (where suppliers deliver parts just in time or just in
sequence) reduce complexity and speed up assembly on the line.

Competitive pressure remains severe

However, as all car makers focused their efforts on product and cost
aspects, cost advantages and unique selling propositions cancelled each
other out over time. In addition, the expansion of product ranges has
made product development, manufacturing and marketing more
complex in many cases. Consequently, the automotive market found
itself in an even more difficult situation.
The volume segment, in particular, is likely to face similar problems.
By 2010, this segment will see its share of the total market decline to
around 70 per cent, from nearly 80 per cent in 1980 (see Figure 6.4). The
consumer goods market has already experienced this trend. In Germany,
the volume segment has lost considerable market share to the premium
and discount segments over the past five years. A market share of 65 per
cent in 1999 has now shrunk to just 54 per cent (source: GfK).

Premium
segment 11 15 17

Volume 79 72 68
segment

Value
segment 11 13 15

1990 2002 2010

Figure 6.4 Trend in segments in Western Europe, 1990 versus 2010

(percentage shares of new car sales)
Source: Roland Berger Strategy Consultants
 The market challenge 151

In the automotive industry, the battle for the growing premium segment is
intensifying. For some considerable time, manufacturers have been
conceding sizeable discounts on premium models in order to gain or
defend market share. In the German market, for example, price reductions
of 10 per cent, 15 per cent and more are commonplace in this segment.
At the bottom end of the price range, low-cost offerings are facing
even more intense competition. One pioneer in focusing on cost effi-
ciency and minimal features and fittings has been Renault/Nissan, the
company that developed the Dacia Logan. Volkswagen’s announcement
that it intends to pursue a similar market strategy clearly shows that
other players cannot escape from this pressure. Volkswagen is looking to
the 3-K, whose production costs should come to about €3,000, to
improve its competitive position in emerging markets in particular.
Further low-cost Asian vehicles will also penetrate the market. The
Koreans and Chinese are expanding aggressively. Indian makers also
are working on vehicle strategies that would take production costs down
below €2,000.

Harsher competition outside the new car market

New vehicles are not the only source of earnings that is coming under
pressure in the automotive business. New market players, new delivery
channels and the deregulation of automotive sales are adding to compe-
tition throughout the vehicle lifecycle.
Non-captive financial service providers and regular commercial banks
are increasing the competition to finance auto purchases. Manufacturers’
banks have already lost some ground, even in Germany where growth
prospects for vehicle financing are decidedly positive, and where the
market share of loans and leasing-based financing is expected to rise from
70 to 76 per cent by 2010. In 2004, 38 per cent of all new cars sold were
financed by loans or leasing arrangements with the car makers’ banks,
compared with 40 per cent two years earlier.
In vehicle insurance, the deregulation of contractual provisions and
wider tariff spreads have led to a sharp drop in premiums. According to
information from GDV, the German Insurance Association, the average
car insurance premium stood at €475 in 1995. Adjusted for inflation, this
figure had already slipped to €375 by 2003, a decline of 21 per cent.
In vehicle maintenance too, the elimination of quantitative selection
pursuant to the new Block Exemption Regulation has fuelled stiffer compe-
tition. Moreover, professional sourcing logistics and service models are
transforming non-captive repair shops into ever more serious competitors.
152 Major challenges

As the technological complexity of vehicles increases, both authorized

dealers and non-captive repair shops are having to invest heavily in diag-
nostics tools, technical support and ongoing employee training.
In the replacement parts business, non-captive wholesalers are gaining
new significance now that the Block Exemption Regulation has loosened
conditions surrounding the sale of original parts. Expectations that the
Design Protection Regulation will be eased throughout Europe are also
strengthening the position of this channel. At the same time, the pan-
European consolidation of parts wholesalers is only adding to the pressure
to provide competitive services (in terms of the breadth of offerings,
punctual and accurate delivery and professional logistics) while still
offering attractive discount rates.
In the used car market, new information and delivery channels are
creating more transparency, which makes it more difficult for dealers to
realize attractive prices. In addition, the internet makes it easier for private
individuals to trade directly.
New providers with aggressive pricing policies are likewise fuelling
greater competition in other areas, such as car rental and other service
segments.

Sales activities: an additional key to success

In light of all these challenges, it is increasingly important to pay more

attention to sales as well as to costs and product offerings. Here, there is
room for improvement on both the dealers’ and the manufacturers’ sides.
Much of the existing sales system remains rigid and multi-tiered.
Relationships between car makers and dealers have remained largely
unchanged for a long time. Accordingly, there is plenty of potential for
optimization.
Returns on investment in the car selling business are below the norm,
trailing behind all other links in the automotive value chain. Whereas car
makers’ banks earned an average return on equity (ROE) of 16 per cent
from financial services in 2004, the car makers themselves posted an ROE
of 12 per cent. Even large component suppliers managed an average of 10
per cent, far more than the 4 per cent averaged by German dealers
(sources: Autohaus, Bloomberg, Roland Berger’s own analysis).
The return on sales in the automobile trade has been in constant decline
since the 1970s. The average return on sales netted by authorized dealers
in Germany is now down to about 1 per cent. Nearly 30 per cent of dealers
post losses (see Figure 6.5). Nevertheless, Roland Berger Strategy
Consultants’ project experience shows that greater professionalism and
 The market challenge 153

structural improvements can add at least one or two percentage points to

dealers’ operating profits (relative to sales).

Percentage of
dealers [%]
40 37

30

20 18 17

11
8
10 7
2 Profits
0 [earnings before
tax, in %]
<-2 -2 to -1 to 0 to 1 to 2 to >3
-1 0 +1 2 3

Figure 6.5 Distribution of dealers’ profits based on the example of

Germany, 2004 (percentage of dealers in each bracket)
Source: Autohaus

Significant potential also remains to be tapped within manufacturers’ own

sales activities. Numerous projects performed by Roland Berger Strategy
Consultants have improved per-vehicle earnings by €300 to €500. These
gains can be achieved primarily by boosting administrative efficiency on
the wholesale level, and by providing better support to authorized dealers
in order to optimize market penetration.
The sections that follow analyse key levers to tap these potential
improvements in sales activities. To begin with, we shall examine the
principal success factors in systematically identifying and addressing
customers’ needs. The next step is to find ways to break down the
barriers inherent in the traditional sales system. Once we have
discussed the issue of who gains strategic control of the sales channel, the
final section looks ahead to future trends and developments in sales.
154 Major challenges

UNDERSTANDING THE CUSTOMER: A KEY

SUCCESS FACTOR

As customer behaviour changes and competition intensifies, under-

standing customers and the structure of their needs becomes an ever more
vital ingredient in business success.
In this context, companies must accurately define their target groups,
the value propositions linked to their brands and the positioning of those
brands. Only then can they consistently focus their product and service
offerings to the specific needs of their target groups throughout the entire
sales trajectory, right down to the point of sale.
The following key success factors can be identified:

ᔡ detailed knowledge of customers’ needs;

ᔡ exact definition of the target group;
ᔡ clear definition of the brand’s value proposition and positioning;
ᔡ sharp focus on the value proposition of, and target group for, product
and service offerings;
ᔡ consistent implementation at all stages in the selling process;
ᔡ professional communication with customers throughout, down to the
point of sale in the car showroom.

Traditional forecasting models are out;

value-based strategies are in

With all these success factors identified, one major challenge is to opera-
tionalize customers’ needs and the brand’s value proposition. Since tradi-
tional customer segmentation is breaking up and customer behaviour is
becoming more difficult to predict, a value-based strategy is now
required. Conventional models that forecast consumer behaviour solely
on the basis of social background and income no longer give accurate
guidance.
That is why Roland Berger Strategy Consultants developed ‘RB
Profiler’, a tool that models the structure of needs and values in a clear,
understandable way. Using 19 key values, it is possible to segment
customers on the basis of their preferences and aversions, but also based
on their perception of brand positioning (see Figure 6.6).
The Mini is a good example of the benefits of this kind of value-based
strategy. A clear notion of the specific target group to which this car would
 The market challenge 155

appeal was critical to its market success. Accordingly, both brand and
product had to be positioned very precisely.

Products need to address

emotional
emotional aspects
E- E E+
Passion Thrill&Fun
Fair
Vitality
Nature Classic Carefree
Tranquil Calming New&Cool
Purism
Less consumption More consumption
Service 24/7
‘Less is more’ Protech ‘The more the better’
Smart Quality
Shopping Personal
Efficiency
Proven
Total Cost
Customized
R- R R+ Customer segmentation/
Products need to comply brand positioning based
Rational on value clusters
with rational criteria

Figure 6.6 Key values in the RB Profiler model

Source: Roland Berger Strategy Consultants

Based on such a clear-cut definition, manufacturers can collaborate with

dealers to set the direction of their product and service strategy. This
approach ensures that customers’ needs are addressed consistently at all
levels including to the point of sale, a strategy designed to attract and
retain potential buyers (see Figure 6.7).
For premium manufacturers, for example, it is important to create an
exclusive setting that lines up perfectly with the brand values the company
wishes to communicate. This includes elegant rooms in which customers
can talk privately with well-trained staff. It involves high-class presenta-
tions of seat covers and wood panelling, evocative of a quality tailor
cutting a suit to measure. It means presenting maintenance work in an
atmosphere reminiscent of hand-made production, caring for vehicles in
specially designed car wash systems, and so on. Similarly, car dealers that
sell low-cost (‘value’) automobiles can powerfully underscore their
profile as price leaders precisely by crafting a rigorously purist ambiance
that eliminates gimmicks and peripheral elements. Another crucial aspect
is that the behaviour and communication of the entire sales and service
team must fully match the image presented at the point of sale.
156 Major challenges

3 Assessment of whether
value propositions are
consistent with personal
values up to the point of sale

Expectations Name, symbol

Personal Brand
Preferences Marketing mix
Behaviour value system positioning Brand users

2 Perception of value propositions by the 1 Projection – brand positioning

consumer

4 Purchase decision

Figure 6.7 Value assessment and consistent brand positioning

Source: Roland Berger Strategy Consultants

End-to-end CRM systems: an important success factor

Another important tool to help translate an understanding of customer

needs into new business or more loyal customers is a powerful customer
relationship management (CRM) system. Careful customer targeting that
consistently ‘fulfills customer needs’ can open up vast reserves of acqui-
sition and cross-selling potential throughout the customer and vehicle life-
cycle. Especially in the automotive industry, customer loyalty is rated as
one of the most vital success factors.
From the vendor’s point of view, the main functions of CRM programmes
are to facilitate long-term customer loyalty across multi-year purchase
cycles, and to reinforce the brand image.
Customer loyalty programmes are becoming increasingly widespread
in the automotive industry. Bonus programmes, customer cards and
customer clubs are frequently used as elements of CRM strategies.
Compared with other sectors such as airlines, hotels, service stations and
department stores, however, the use of these programmes is still at a rela-
tively early stage.
Alongside these programmes, car makers have already invested
substantial amounts of money in CRM systems and customer care
centres, yet the results have so far failed to live up to expectations. One
main reason for this failure is that neither information nor processes
flow seamlessly between manufacturers and dealers. The rigid struc-
 The market challenge 157

tures of today’s sales systems still prevent market players from truly
understanding their customers, identifying them systematically,
winning their custom and retaining it in the long term. These limitations
must be recognized and overcome.

OVERCOMING THE LIMITATIONS OF

TODAY’S SALES SYSTEMS

Existing sales systems still contain glaring structural deficits and effec-
tively prevent manufacturers and dealers from tapping the full market
potential. The core problem is the rigid, multi-tiered sales structure that
involves manufacturers, wholesalers, dealers and in some cases
subsidiary dealers or service companies. This structure makes it difficult
for delivery, service and information processes to flow smoothly from end
to end. Improvements can be made on all three levels: the manufacturers’
level, the wholesale level and the dealers’ level.

Potential for improvement on all levels of the existing

sales system

Many auto makers still focus too narrowly on production and model port-
folios. Rather than rigorously aligning everything they do with customer
needs and current demand, they run expensive special offer campaigns to
encourage the market to soak up overcapacity. Offers launched in the
context of employee discount campaigns on the US market in the summer
of 2005 provide a graphic illustration. In early summer 2005, GM rolled
out an extremely aggressive programme in the United States, offering
every potential car buyer the chance to buy a broad selection of the model
range at GM-internal rates. Rivals were forced to respond in kind. When
GM’s sales leapt 47 per cent in June, Ford and Chrysler followed suit in
early July and also made their internal-rate discounts available to all
customers. These two vendors also saw their July sales surge by 25 per
cent. It is, however, extremely questionable whether people were actually
buying more rather than just buying earlier. Promotions of this kind often
adversely impact brand image. Perhaps worse still, customers’ higher
expectations with regard to realizable discounts can erode the profitability
of current and future models for a long time to come.
158 Major challenges

Although many auto makers have integrated the wholesale level in the
larger markets, the traditional principle of ‘one country, one company’
remains generally valid. Hub models, in which geographically and socio-
culturally related countries merge to form a single organization, are still
few and far between in the car industry. Many smaller markets are still
served by importers, who tend to use either the same elaborate processes
and systems as are operated in larger markets, or very rudimentary solu-
tions. Cost disadvantages result, and managing these systems is difficult
because of substandard support functions. Cross-border synergies and
opportunities to run a more professional operation are often squandered.
Like the manufacturers’ level and the wholesale level, the dealers’ level
too still exhibits structural deficits. Especially in Europe, countless efforts
to restructure networks have left the market as fragmented as ever, as is
shown by a comparison with the United States (see Figure 6.8). Failure to
reach critical mass thus prevents companies from pursuing professional
marketing strategies and reaping economies of scale.

1 3 .7

No. of dealers 2 .3
per 1,000 km2

1 1 .7
7 .5
No. of dealers per
100,000 inhabitants

760

371
New car sales
per dealer

Western USA
Europe

Figure 6.8 Structure of dealer networks in Western Europe and the

United States, 2003
Sources: Roland Berger Strategy Consultants; HWB; Automotive News, Ipeadata; IBGE;
Fenabrave
 The market challenge 159

Unsatisfactory earnings often inhibit necessary investments both in

point-of-sale presentations that do justice to the brand and in technical
infrastructure. Many dealers thus find themselves trapped in a vicious
circle. All manufacturers’ margin systems naturally include fixed margins
and volume bonuses, but they also include significant spreads for
compliance with defined quantitative and qualitative standards. Standards
to ensure that a company supports the brand image are one example. Other
criteria include the availability of demonstrators, specifications for sales
workplaces, participation in dealer benchmarking exercises, the size and
nature of showroom space, and attendance on mandatory training courses.
Depending on the particular car maker, authorized dealers can increase
their margins by up to seven percentage points by meeting these stan-
dards. However, if meagre earnings prevent them from investing what can
be substantial sums of money, they forfeit a significant share of their
margin. Earnings deteriorate further, leaving even less room for
investment. This negative feedback system leads to further inadequacies.
The bottom line is that the sales systems often in place today need to
become much more effective and much more efficient – despite the fact
that car makers and dealers alike have already done a lot to overcome the
limitations of these systems.

Limited success for optimization programmes to date

Manufacturers have indeed pumped huge sums into sales and dealer-
ships. First and foremost, they have set up their own outlets to reinforce
brand identity. They have restructured sales networks to improve dealer
quality, and they have integrated wholesale activities in order to improve
market access.
Auto makers invest hundreds of millions in their own outlets and brand
experiences to give a lift to the presence of their brand in metropolitan
areas. According to press reports, BMW, for instance, is spending some
€100 million on BMW World, the new delivery centre at its headquarters
in Munich. Meanwhile, DaimlerChrysler is spending €250 million on new
premises in Stuttgart which feature an adjacent automobile museum.
Practically all car companies have been restructuring their sales
networks for years. In 2000, 53,000 main dealers ran a total of 106,000
sales outlets in Western Europe. By 2004, the numbers had shrunk to
43,000 dealers (a decline of almost 20 per cent) and 74,000 outlets (a
decline of 30 per cent; source: HWB). Such adjustments cost manufac-
turers a great deal of money, most of which goes on taking back vehicles
and parts, and especially in Germany, on compensating now-redundant
160 Major challenges

dealers (pursuant to Section 89b of the German Civil Code (HGB)). In

addition, where network adjustment involves recruiting new, more profes-
sional dealers, the car makers also have to pay investment support and
increase their marketing budgets to launch the new dealerships. A Roland
Berger project illustrates just how much investment is needed: in one
European market, a car maker spent over €150 million to cut 20 per cent
of its 600 sites, while enrolling new dealers to enable the leaner network to
increase its market share.
In the wake of the Block Exemption Regulation, manufacturers have
also invested in integrating independent importers to maximize their
access to core European markets. These firms have spent considerable
sums to buy outright or acquire a majority interest in previously inde-
pendent importers.
These realignment programmes call for substantial resources, but still
usually happen within the boundaries of traditional sales systems.
Genuine innovations – strategies that break the rules, that optimize sales
from top to bottom by reshuffling roles and improving the integration of
dealers, wholesalers/importers and auto makers – have so far been the
very rare exception. Brand values are not communicated and transformed
consistently all along the line to the point of sale. In many cases, products
and services simply do not harmonize. Nor is it unusual for poorly coordi-
nated strategies to cultivate contradictory perceptions among customers.
Actions taken by different sales partners do not complement each other,
but actually tend to cancel each other out – or even have a negative impact.
If companies spend huge sums on spectacular showrooms but then
populate these with ill-qualified sales and service staff at the point of
sale, customers perceive this dissonance and begin to see where
processes are not really working. A brand claim loses its credibility the
moment the salesperson fails to embody the brand values or inadequately
explains the products and services. The same thing happens when
Customer Service misses a fault because it uses obsolete diagnostic
systems, or when repair shop customers have to wait for replacement
parts that are out of stock.
Ultimately, even the redeployment of resources in sales has not yielded
the improvements that are still possible. Inefficient processes and struc-
tures hinder smooth collaboration between partners at different points in
the sales trajectory. Yet considerably more potential could be tapped if the
sales system was remodelled from the ground up. The question is, how
should the various market players go about driving the change process?
There are inevitably conflicts of interest between auto companies, whole-
salers/importers and dealers. The crucial issue will therefore be who gains
strategic control as the ‘sales power play’ unfolds.
 The market challenge 161

POWER PLAY IN SALES: WHO WILL GAIN

CONTROL?

Manufacturers have traditionally exercised significant control over sales

in the automotive industry. Although the majority of sales partner organi-
zations were independent, the Block Exemption Regulation laid the foun-
dations for this control for a protracted period. For a long time, the large
number of small partners in the market prevented dealers from becoming
a strong counterweight, and thus from taking control of the delivery
channel. Now, however, deregulation and increasing concentration among
dealers is rewriting the rules.
Sales operations must therefore ask themselves a number of key ques-
tions about the future:

ᔡ Can dealers gain control of the delivery channel?

ᔡ What steps will car makers take to defend or even improve their
position?
ᔡ Will new players gain a foothold in automotive sales in future?

Dealer power

The process of concentration among dealerships raises the question

whether car dealers are poised to gain more power and follow a similar
path to the one already travelled by, for example, the consumer goods
industry. Concentration in the German food retail industry, for example,
has been extreme in recent decades. The five largest food chains have
increased their share of total sales nearly threefold, to almost 70 per cent,
over the past 25 years. By comparison, concentration in the automotive
retail industry is very much weaker, in all European markets. While the
UK’s top five car dealer groups can at least boast a 14 per cent market
share, the corresponding figure is 6 per cent in France and 4 per cent in
Spain. In Germany, the five largest dealer chains account for a mere 3 per
cent of the total new vehicle market.
Concentration will nevertheless continue in this industry. Indeed, it is
likely to accelerate to enable companies to realize economies of scale. At
present, the car-selling industry is consolidating in two directions:
towards internationalization and towards multi-brand sales.
Large dealer groups are enlarging their footprint by acquiring
companies at home and abroad. Some, like the Weller Group in Germany,
162 Major challenges

are focusing on national and regional purchases. Pan-European and even

global acquisitions are becoming increasingly widespread, however.
Pendragon, a retail group of British origin, has bought on a massive
scale in its home market, and has also been acquiring dealerships in
Germany and the United States since 1990. By the end of 2004, the
company had acquired 12 US and 10 German operations on top of its 244
UK-based dealers.
Porsche’s Austrian holding company has been pursuing a similar inter-
nationalization strategy, and today operates in 15 European countries.
When Eastern Europe opened up, the Porsche holding company became a
wholesaler (importer) in Hungary, Slovakia, Slovenia, Croatia, Romania,
Serbia-Montenegro, Bulgaria, and more recently in Albania and
Macedonia. In these countries, as in the Czech Republic, Germany and
Italy, the Porsche holding company also runs sales outlets exclusively for
brands belonging to the VW Group. Its involvement in Western Europe
dates back to wholesale activities with niche brands that began in France
in the mid-1970s. The move into retail sales came when an equity stake in
France’s PGA was acquired in 1999. This was followed by acquisition of
an interest in the Nefkens Group in 2001 and the purchase of CICA, a
French company, a year later. One PGA subsidiary also runs an operation
in Poland. The story does not end there, however. In mid-2005, the
company also entered the Chinese market, where it is now selling vehicles
in a pilot project.
This kind of strategy can yield scale advantages in all parts of the
business. In the new vehicle segment, higher sales strengthen the
company’s demand position in relation to auto makers. Bundling inven-
tories and centralizing vehicle preparation harbour huge potential for new
cars and demonstrators, and even more so for used cars. These practices
also make it possible to standardize the valuation and pricing of used cars.
After-sales operations can leverage higher volume target agreements and
realize substantial potential by centralizing capacity for coachwork and
paintwork repairs, as well as for parts logistics. Indirect savings can also
be achieved by bundling corporate functions such as management,
accounting and human resources.
Alongside regional expansion, a discernible trend toward multi-brand
sales is being driven by customers and dealers alike. A study by Roland
Berger Market Research found that 69 per cent of auto buyers prefer to be
able to compare different brands under one roof. Dealers are equally
enthusiastic about multi-brand sales: 47 per cent of single-brand dealers
intend to add at least one more brand to their portfolio. A further 24 per
cent are still undecided, but are considering a similar course of action.
 The market challenge 163

Multi-brand strategies can enable dealers to exploit a wide range of

synergies. In the new car business, broader market coverage and a more
balanced spread of end-customer risk are the key market-side advantages.
The option of offering and managing mixed fleets is a further source of
potential in relation to small and mid-sized corporate customers. Bundling
used car business across a number of brands likewise lets dealers offer a
wider choice and opens substantial potential to improve inventory
management. Earnings can be further optimized by bundling demand for
identical parts across brands, and by making better use of repair shop
capacity. Finally, overheads can be lowered by organizing management,
accounting and other administrative tasks across brands too.
Larger multi-brand groups are generally able to translate economies of
scale into higher earnings, as can be seen from comparisons of large,
publicly traded mega-retailers with the average of retailers in the UK.
Multi-brand groups do not restrict their business models solely to tradi-
tional retail sales, however. The example of the Dutch-based Kroymans
Group is indicative of their innovative expansion strategies. This auto dealer
group now has a presence in 27 European countries, in which it sells 17
brands. Kroymans’ focus is on GM and Ford. Its total new car sales volume
came to 60,000 units in 2005. Besides expanding its array of retail outlets, the
company is also making inroads into the financial services sector. It has set up
its own leasing companies in Belgium, the Netherlands and Luxembourg, and
is currently launching internet-based leasing service providers in Germany.
Furthermore, the Dutch group is now the sole European wholesale
distributor for GM’s Cadillac, Corvette and Hummer brands. In return, GM
is injecting some US $25 million into Kroymans to help fund its planned
growth. This is the first time that an auto maker has outsourced its entire
European sales operation for a given brand – and the result is a classic
win–win situation. Kroymans now has the chance to expand further and add
to its market muscle. For its part, GM now has a powerful partner with a
professional market image, but can also reduce its management costs and
contain its financial risks. Not content to commit only to GM, Kroymans is
also collaborating with Alfa Romeo, and secured the distribution rights for
this brand too in the Netherlands in mid-2005.
As we have seen, the process of concentration will continue in the car
selling business in the years ahead. Even taking a medium-term horizon of
5 to 10 years, however, car dealers will not attain the strength that their
peers in the consumer goods industry have achieved. There are several
reasons for this. The investment bill will be very high indeed. Multi-brand
sales runs the risk of diverting rather than growing business. In addition,
the product, service and process levels will all become more complex. For
164 Major challenges

concentration to progress to the stage we have seen in consumer goods

retail, each of the five largest German dealer groups would, for example,
have to increase its new car sales from 20,000 or so today to an annual
average of 400,000. Growth by a factor of 20 does not appear realistic.

The auto makers strike back

The car makers are also doing their utmost to consolidate their strategic
competitive position in sales. Almost all manufacturers have already
taken steps to launch their own outlets. Premium providers in particular,
but also French volume producers have applied themselves to making this
strategy work. Their primary objectives are to gain more control over end
customers at the point of sale and to improve the way they present their
brands. Especially in the larger cities, exorbitant land and rental charges
often prevent non-captive dealers from running a profitable business.
However, not all manufacturers will successfully build up the core
competencies they would need in the retail discipline. High start-up costs
and heavy capital tie-up will probably cause the number of car makers’
own outlets to stagnate or dwindle (see Figure 6.9).

1,620 1,500–1,700

1,360
1,280

2002 2003 2004 2010

Figure 6.9 Trend in the number of car makers’ own outlets, 2002–10 in
Western Europe (number of sites)
Sources: Roland Berger Strategy Consultants, HWB

Auto companies are trying to use CRM activities (building call centres,
for example, and establishing customer clubs and cards) to strengthen
their direct contact with end customers. They are pursuing exactly the
 The market challenge 165

same goal in expanding their range of financial services to include credit

cards, savings deposits, investment funds, savings plans for new vehicles,
and even non-vehicle insurance. Volkswagen is going so far that it wants
to become its customers’ main bank. In keeping with this objective, it is
marketing the entire spectrum of banking products, from current accounts
to mortgages. BMW also recently announced its intention to systemati-
cally expand its portfolio of financial services.
At the same time, seizing the opportunity afforded in Europe by the new
Block Exemption Regulation, car makers are seeking to gain greater
control over sales by setting high standards for dealers.

New players in the market

In the past, new players have repeatedly emerged in the car sales
business. The pioneers have mostly been consumer goods retail chains
such as EDEKA, KarstadtQuelle and Tchibo in Germany, and Tesco in
the UK. However, no dealers from outside the car industry have yet made
a lasting success of such ventures. The examples we have seen suggest
that customers are not enamoured by such providers and sales formats.
Most of these players are unable to foster sufficient trust in their after-
sales support capabilities in the event of warranty claims, or of goodwill
claims when warranty expires. This is because most of these formats
revolve around brokering models or pure sales promotions. Limited sales
success and the one-off nature of the campaigns held by EDEKA and
Tchibo, for example, paint a clear picture. Mastering the vast complex-
ities of this business – ensuring that car sales, maintenance, replacement
parts services, other services, and the return and marketing of used cars
work smoothly together – demands a huge investment. Accordingly,
players from outside the industry tend to shy away. Low margins,
sizeable investments, heavy capital tie-up and the cyclical nature of the
automotive business should be enough to keep new rivals from the door
in future.
To summarize, we can expect that both dealers and auto makers will
step up their efforts to tap new veins of value potential in the sales
process. New competitors from outside the industry will remain a
peripheral phenomenon.
166 Major challenges

Partnership promises greater success than running

battles to control sales

When pondering whether dealers or manufacturers will come out of this

power play on top, it is worth thinking back to the key success factors with
which we started out. Understanding what customers need and translating
brand values into unmistakable products and services are fundamental core
competencies for car makers, but they are equally vital to successful sales.
Applying such product and service competence consistently throughout
the sales chain demands an uncompromising commitment to customer,
sales and service orientation – all of which are the traditional strengths of
dealers. If the complementary competencies of dealers and auto makers
can be interlocked smoothly, considerable value can be added as a result.
This development is likely to be accelerated if car makers concentrate on
their core competencies while dealers expand and become increasingly
professional at what they do. In other words, there are compelling argu-
ments to abandon the rivalry model and instead build the relationship
between manufacturers and dealers on partnership and collaboration.
Toyota’s activities on the German market illustrate this approach. In
Germany, Toyota has a two-tiered sales network in which 140 main
dealers operate 290 out of a total of 630 sales centres nationwide. The
network also includes 70 dedicated service centres (figures valid at year-
end 2005). The car company focuses on large, professional dealerships
with which it works together as a partner. In 2004, for example, Toyota
invested in a large-scale dealer coaching programme involving external
support. Conducted for the 120 biggest dealers, this project applied a
specially developed action list with the aim of improving dealers’
performance.
The principle of having only one dealer in one city lines up with the
strategy of minimizing intrabrand competition. In large metropolitan
areas, Toyota’s stated aim is to increase collaboration with large dealers
and dealer groups.
Going a step further, Toyota also worked with the dealers’ association to
draw up a fair play charter in order to involve its B dealers to a greater
extent. The charter makes recommendations on collaboration between A
and B dealers. It covers such themes as passing on discounts, splitting the
cost of marketing activities and agreeing volume targets. Both parties’
behaviour is monitored in an ongoing evaluation process.
These and other elements are helping Toyota to translate its strategy
into visible market success. In recent years, the company has continually
enlarged its market share, which grew from 2.4 per cent in 1996 to 3.9 per
cent in 2004. Since JD Power first published its CSI study in 2002, the
 The market challenge 167

Japanese brand has consistently topped the customer satisfaction table. In

2005, Toyota models won the top slot in five of seven segments. Among
dealers too, Toyota is the most popular brand in the large imported brands
category and ranks fourth among all manufacturers (source:
MarkenMonitor study, 2005).
Looking ahead to what the future holds for automotive sales, the key
question is, what concrete implications can and must be drawn from the
need for a stronger focus on partnership?

THE FUTURE FOR AUTO SALES: FROM

SEPARATE TIERS TO INTEGRATED NETWORK

Critical examination of the sales system as it stands leads us to the

following conclusion: rigid, multi-tiered structures and the charged
atmosphere of conflict between car makers and dealers are two of the
main causes of inefficiencies. Examples such as Toyota’s professional
collaboration with its dealers and the partnership that exists between
Kroymans and GM lend considerable credibility to the claim that part-
nership can make both sides more effective and more efficient.
To return to our point of departure, it is useful to enquire whether, and to
what extent, the insights gained from revectored manufacturer–supplier rela-
tionships can also be transposed onto sales dealerships. Interestingly, there
are a number of obvious parallels between the manufacturer–component
supplier interface and the manufacturer–dealer interface.
At both of these value chain interfaces, the large number of external
partners is one important driver of complexity. Today, the average auto
maker has something like 650 direct suppliers – down by almost half from
1,200 in the early 1990s. In the same period, manufacturers have likewise
almost halved the number of interfaces to individual dealers. The absolute
figure, however, is still significantly higher. In 2004, every brand still had
an average of 1,300 main dealers throughout Europe. For the leading
brands, this figure rises to just under 2,000 (source: HWB).
Heavy demands are placed on logistical processes at both interfaces. At
the interface to component suppliers, the complete value chain has to be
coordinated, from raw materials supplier through first-tier supplier to
production by the manufacturer. Innovation, quality and cost targets and
deadlines likewise have to be reconciled. At the interface to dealers, the
main challenge derives from the multiplicity of new car, used car and
parts/accessories processes. Owing to the large number of parts, storage,
168 Major challenges

transportation and order processing in relation to vehicles and replacement

parts are just as error-prone as the production process itself. Deficiencies in
the logistical chain can thus have a devastating impact at either interface.
One missing part can bring production of an entire vehicle to a standstill.
Similarly, one replacement part that is out of stock can leave a defective car
standing in the repair shop for an unacceptable period.
Innovation and technological advances present major challenges on
both sides. Electronics is not only revolutionizing the component supply
industry, its impact is also being experienced in after-sales service. In-
vehicle electronic content is increasing all the time. According to a study
by Roland Berger, electronic content accounted for 12 per cent of the
value of a vehicle in 1995 and will rise to 32 per cent by 2015. This means
that both manufacturers and suppliers must develop and expand their
software expertise in this field. Their development processes must
dovetail more exactly, and standardization must be advanced in order to
overcome quality problems in the electronics sector. In after-sales, dealers
must invest substantial amounts in modern diagnostic systems and in the
expertise of their service staff, if electronic defects are to be remedied
quickly and reliably. This investment is balanced out by additional sales
potential, however, as standardized system architectures allow the latest
electronic innovations to be installed in plug-and-play mode by dealers
themselves during the vehicle lifecycle.
Both suppliers and dealers have an important part to play in communi-
cating and fostering customers’ perception of brand values. Suppliers
contribute modules whose attributes are instrumental in shaping brand
perception. They must therefore develop an in-depth understanding of
how to translate abstract brand values into concrete products. Dealers are
crucial to the way products and services are perceived at the point of sale.
They thus play a pivotal role in ensuring that brand values are communi-
cated consistently across all channels.

Applying lessons learnt in collaboration with suppliers

to collaboration with dealers

It therefore makes sense to look at how manufacturers’ relationships with

the supply industry have been improved and successfully realigned, and to
consider how the same might be done in relation to dealers. Larger, more
professional dealerships could in future increasingly assume the role of
systems integrators on behalf of manufacturers. Such first-tier dealers
would shoulder development and management tasks for an entire
 The market challenge 169

economic area, and integrate smaller downstream sales and service

centres (tiers 2 and 3).
A wide range of functions could be entrusted to dealers in this way.
Physical distribution (parts shipments, vehicle stocks), aspects of dealer
support (training, business management advice), a variety of control func-
tions (enforcement/monitoring of standards) and the coordination of
regional marketing efforts are all possible candidates. Such arrangements
would ease the burden on car makers by reducing the number of interfaces
to direct partners. Quality could be improved by collaborating more
closely with system partners. This structure should also yield tangible cost
benefits. Since systems integrators in the dealer network could handle
various functions from a position of closer proximity to the market, auto
makers could reduce their own capital tie-up. This would allow them to
concentrate on developing innovative sales and service strategies,
improving the communication of brand values at the point of sale, and
raising the quality of sales and service. To optimize the management and
care of larger and increasingly international dealerships, the sales organi-
zation too should be reviewed. An international key account organization
to serve dealer groups could effectively complement – or even replace –
the heavily decentralized field service organizations that exist today.

From static multi-tiered model to dynamic network

Closer collaboration with a smaller number of better-quality partners is

one way forward. Another is to dissolve rigid sales tiers and transform
them into more flexible networks. In strategic sales regions, this would
permit dealers to assume a more prominent role, while systems integrators
could play a greater part in providing comprehensive geographic
coverage.
At the wholesale level, the one-dimensional tradition of having one
sales company per country can be overcome by centralizing functions or
distributing them across regional hubs. Only those functions that
genuinely constitute local unique selling points (USPs) would have to be
based on site in the relevant countries or regions. Many industries already
think along these lines. Leading players in the consumer goods industry
have revectored their European wholesale stratum into multi-country
hubs scattered across three to seven regions. These hubs mostly centralize
administrative tasks such as finance, control and IT, alongside key
account management, marketing strategy, business development, sales
support and logistics. By contrast, decentralized organizations are set up
for front-line activities such as sales operations and operational marketing
170 Major challenges

activities. Sufficient proximity to the market and superior process quality

are the key drivers for such models, which must also optimize cost effi-
ciency. Introducing this kind of hub model can cut overhead costs by up to
40 per cent.
The model is not yet widely represented in the automotive industry, yet
the first tentative beginnings are already discernible. One leading German
car maker began building a hub in northern Europe in 2004 and soon plans
to apply the same model to an Eastern European region. A Japanese OEM
implemented the model as far back as 1999 and now has three regional
hub organizations that run its European wholesale operations. A number
of crucial criteria must be borne in mind when forming such clusters or
hubs. Homogeneous customer preferences, regional proximity, cultural
and/or language barriers, the level of local economic development, market
size and competitive position must all be taken into account. Intelligently
designed hub strategies will have similar effects to those in other indus-
tries. Process quality will improve on the wholesale level. Internal
knowledge will grow as expertise is bundled across multiple countries.
Wholesale costs will be cut, and dealers will enjoy a better quality of
support.

Outlook

So who will gain control in this new constellation of partnerships and

networks? When competitive conflict gives way to constructive collabo-
ration, control is no longer the focal issue. The result is a win–win situ-
ation. Like the process that the component supply industry has already
experienced, it will take at least a decade before new business models take
shape that adequately accommodate new requirements and share out
benefits and burdens in an equitable manner. As the spider at the centre of
the web, manufacturers have the chance to actively guide processes on the
sales side too. However, if they fail to take action in the areas we have
discussed, powerful dealer groups will take matters into their own hands
and rewrite the rules of the game. In sales, as in other disciplines, size and
market power merely create potential. Lasting success demands entrepre-
neurial creativity and fast execution, by either the car maker or the dealer.
 171

The sales and after-sales

challenge: capturing value
along the car lifecycle
Max Blanchet, Partner, and Jacques Rade, Principal,
Roland Berger Strategy Consultants

In the automotive industry, the car is not the only automotive activity
that generates revenues. Various activities related to the vehicle along its
lifecycle, such as vehicle financing, maintenance and repair, used car
buy-back and reselling activities, wholesale spare parts, as well as
services, provide quite substantial revenues.
These activities do in fact generate higher profits than manufacturing
vehicles. It is no secret that vehicle manufacturers, or original
equipment manufacturers (OEMs), make almost 50 per cent of their
profits from the spare parts business. A study, which could perhaps
sound too simplistic, estimated the price of a car built from spare parts
at roughly four times its new price. These additional sources of profit
are of utmost importance for OEMs because they are linked to the pool
of cars in use and not to new car sales, which are always subject to
cycles or dependent on the success of new models. The cars in use
provide greater financial stability, which is especially appreciated by
the financial community and rating agencies. In a similar fashion,
financial services are also highly profitable, driven more and more by
the used car business and less by the sale of new cars.
172 Major challenges

THE AUTOMOTIVE VALUE CHAIN

DURING THE CAR LIFECYCLE

The average return on capital (ROCE) employed in automotive-related

activities throughout the lifecycle of a vehicle is 6 per cent, which is rather
low compared with other industries manufacturing similar high-tech
products. This is especially true when we consider that activities not
related to new car sales contribute more strongly to the ROCE.

40 41
30

10
28 Maintenance/spare parts

1 16 1 Operation
12
5
13 Insurance/financing

-5 -6 -5 Used cars

-4 1 2 +/-0 New cars

3 16 3 6 8
2) 6 per cent ROCE
Others Banks/ Distri- OEM Suppliers
insurers bution 1) in total

1) Including importers/distributors 2) Including subsidiaries

Figure 7.1 Return on capital employed per vehicle in Europe (per cent)
Source: Roland Berger Strategy Consultants

Profitability is somewhat unbalanced across activities and among

players (Figure 7.1). The ROCE is high in all financing activities, in
service and repair, and has been growing more recently in the used car
business. These activities contribute strongly to the profitability of the
overall market, and help compensate for the considerable capital
required for developing new car models. Parts suppliers of products
with high replacement volumes such as makers of wipers, tyres, filters
and radiators benefit from this situation. This is not always true of
original equipment suppliers (OES) that manufacture seats, roofs or
dashboards, for instance.
In our analysis, the closer the activity is to the end-user, the higher the
profitability. As a general trend, players that want to capture more value in
 The sales and after-sales challenge 173

the market are pursuing strategies aiming at involves moving closer to the
final customers and strengthening ties with them.
For decades, this business model has operated in the European auto-
motive market. As a result, the playing field has progressively reached a
sort of equilibrium, with entrenched beliefs such as:

ᔡ ‘Original parts are found in the OES channel, non-original parts in the
independent aftermarket (IAM) channel.’
ᔡ ‘Parts prices are set up by OEMs and are the indisputable reference in
the market.’
ᔡ ‘Recent vehicles are repaired in the OES channel, old vehicles in the
IAM channel.’
ᔡ ‘Used cars are cars with more than 30,000 kilometres on the clock.’
ᔡ ‘Dealers are 100 per cent dependent on OEMs.’

When compared with other consumer goods sectors such as luxury goods
and food, it becomes apparent how unique this situation is to the auto-
motive market. Automotive sales and after-sales activities have historically
been organized and managed using an ‘offer-push’ approach rather than
‘customer-pull’, because the customer’s primary need is not driven by an
emotional demand but rather by a necessity, namely to repair, maintain or
get rid of a used car. In addition, the automotive product is unquestionably
the most complex object sold in a mass production system.

A MARKET IN FLUX: MULTIPLE FACTORS

ACCELERATE CHANGE

Profound changes have altered the contours of the market over the past five
to eight years. In this changing environment, new rules have been intro-
duced. While the new block exemption regulation (BER) has grabbed
everyone’s attention, partly because of the media spotlight on it, the actual
impact of the BER has been rather limited. It is only one factor in a long list
of issues changing the rules of the game. Other important factors include:

ᔡ Product technology and diversity: the increase in advanced tech-

nology, for example electronics, electromechanical systems and
systems integration, together with the large diversity of models and
brands, creates far greater complexity when it comes to managing
after-sales activities.
174 Major challenges

ᔡ Car market evolution: the growing and ageing pool of cars that has
emerged because of longer car lifecycles, third family cars and high
adoption rates is changing the picture. For instance, the number of cars
over 10 years old in Germany is growing at 3 per cent annually, and the
number of seven to nine-year-old cars is growing at an annual 4 per
cent in France and 10 per cent in Spain.
ᔡ Evolution of customer needs: customers’ expectations regarding
service quality, reliability and relationships are growing, largely
encouraged by the experiences customers have gained with other
services (banks, consumer goods and so on).
ᔡ Changes in consumer behaviour: the increase in professional vehicles
(for example company cars and long-term rental), combined with the
much wider and professional used car offer, is changing consumer
behaviour.
ᔡ Regulatory changes: the BER is altering the automotive landscape
especially for spare parts, but so too is Eurodesign, which threatens
design-proprietary parts.
ᔡ ‘Specialized prescriber groups’: the growing influence of insurance
companies and associations such as Thatcham, and rating institutes
like Euro NCAP and JD Power, also affects the market.
ᔡ Europeanization: the creation of the EU-25 raises questions about how
to address the additional countries with the leanest distribution costs,
how to avoid grey markets, and so on.
ᔡ Channel consolidation: large dealer groups (especially in the UK and
France) are garnering a huge market share; consolidated IAM whole-
salers, large affiliated and networked repairers and large fleet
management companies now command clout.
ᔡ New entrants: retail store chains have been viewed as potential new
entrants, but entry barriers are too high. The real new entrants are
banks and financial institutions, leasing and fleet management
companies. These players are keen to acquire a share of this attractive
market.

In this chapter, the OES channel stands for the brand distribution channels
of OEMs. This includes for instance OEMs’ affiliates, dealers and agents.
The IAM channel stands for the independent after-market, which includes
wholesalers, fast-fitters, repairers and body-shop networks.
 The sales and after-sales challenge 175

THREATS AND OPPORTUNITIES INCREASE

FOR MARKET PLAYERS

In this changing environment, all automotive players face risks relating to

their current business model, but opportunities also abound. The risks
faced by OEMs include losing a sizeable chunk of their spare parts
business to distribution partners, and having financial services revenues
fall into the hands of non-automotive players, especially in the used cars
business. Technology is one area where opportunities exist for OEMs to
capture and retain customers.
IAM wholesalers and repairers are in danger of missing the techno-
logical turning. For these players, opportunities exist in capturing the
growth within the old car market, and by sourcing parts in low-cost coun-
tries. Fast fitters also face the difficulty of adapting their fast-fit business
model to keep pace with the leaps and bounds taking place in technology,
and to sidestep competition from OEMs.
The opportunities for large dealer groups stem from sourcing parts
outside the OES channel, and acquiring new customers in the IAM channel.
Suppliers are confronted with threats arising from low-cost and non-OE
suppliers, which offload so-called ‘adaptable’ products. They also face the
risk of being locked out by OEMs and losing market access as a result of
channel consolidation.
When insurers become more greatly involved in the spare parts
business, profitability comes under threat, as insurers are looking to
reduce the end-user part price.
Market players will have to adapt and redefine their business strategies
as well as reshape their organization if they are to master these challenges.
Should suppliers move downward in the distribution chain? Should large
dealer groups step more expansively into the IAM wholesale business?
Should insurers enter the wholesale parts business? Should fleet
management companies increase their role in the repair and service
business? These are just some of the most pressing questions market
players have to consider.
Battles are being fought between various market players in the auto-
motive sector to capture value along the vehicle lifecycle. The
remainder of this chapter aims to show which players are likely to
capture value and which are likely to lose out. The most important
question concerns the captive (for example, OEM-owned) versus non-
captive business model (for example, independent players), which is
omnipresent along the value chain. All activities ranging from used cars
and parts to general and financial services are sources of value from the
176 Major challenges

OEMs’ captive solution, but also from alternative solutions provided by

independent players.
Before we plot the key trends dominating the European market, the
different activities related to vehicles such as fleet management, the
used car business, repair and service, spare parts and financial services
will be investigated.

DEMAND EVOLVES: PROFOUND SHIFTS

REDEFINE THE MARKET RULES

New cars: from product to mobility

Fleets: a growing intermediary between OEMs and the

final customer
The professional car segment, the so-called fleet market, has developed
significantly in Europe. The segment saw an average annual growth rate
of 2.7 per cent between 1997 and 2001, and is likely to continue to grow at
3.2 per cent each year through 2007 (Figure 7.2).

Fleet market penetration Fleet market development in Western Europe

CAGR CAGR
65
+2.7% +3.2%
57
60
48
48 19.3
36 36 16.0 16.5
40 14.4 14.8 15.1 15.4
30 30

Germany UK France Italy Spain 1997 1998 1999 2000 2001 2002 2007e

= 2001 = 2007 estimate CAGR = compound annual growth rate

Figure 7.2 Fleet market penetration and development in Europe

(per cent)
Source: Roland Berger Strategy Consultants
 The sales and after-sales challenge 177

This development is powered by various factors including tax-related

incentives. Vehicles increasingly form part of employees’ salaries,
company cars are being used more and more as an instrument to motivate
employees, costs of mobility are rising, and customer attitudes towards
leasing are changing.
The fleet segment is driven by traditional rental companies (short-term
duration rental, or STD), administrative bodies and private companies,
but also by long-term rental fleets (long-term duration contracts, or LTD).
New car sales can be split among different channels – direct sales,
branches and dealers – and among various customer types – private, demo
cars, STDs such as Hertz and Avis, companies’ own fleets and leasers for
LTD. The demo car segment, which consists of all vehicles purchased by
OEMs for showrooms and dealers’ services, accounts for a sizeable share
of registrations (Figure 7.3).

OEM direct sales (31.1) 9.0 2

3.5
Branches and dealers 14.2
(24.2) 6.5

26.5

Dealers and agents (40.8) 31.5

6.4 2.9

Parallel imports (3.8)

Private individuals (58.5) STD (11) LTD (6.4)
Demo Companies &
cars organizations
(14.9) (9.1)

Figure 7.3 Car registration mapping in France (per cent)

Sources: Roland Berger Strategy Consultants, registration data 2003

This means that the share of professional customers among car buyers is
expanding, creating a new type of intermediary between end users and car
makers. The bargaining power of these intermediaries is intensifying.
Professional customers are using their new-found clout to negotiate addi-
tional specifications and lower prices.
178 Major challenges

Full mobility service solutions tailored to specific needs

Compared with the private sector, the demands of fleet customers are
becoming more specific, particularly when it comes to services expected,
fleet management and maintenance.
This development is particularly true in the fast-growing LTD segment.
The penetration of LTD rental among fleet customers is growing at
between 8 and 10 per cent annually, with growth rates especially strong in
the small and mid-sized fleet segment (Figure 7.4). LTD contracts often
contain more services than their STD equivalents. Maintenance services
are included in 90 per cent of long-term rental contracts, and tyre services
are to be found in 80 per cent, for instance.

Key accounts
65
(>100 vehicles) 20

Small and mid-size

companies 30
(5–100 vehicles) 30 LTD annual
growth =
8-10%
Private dealers
(<5 vehicles) 50 7

LTD penetration: 20

x% Penetration rate of LTD within each fleet segment in percent

Figure 7.4 Penetration of LTD within each fleet segment (per cent)
Source: Roland Berger Strategy Consultants

End-customers want greater freedom and mobility. Fleet management

companies increasingly tend to demand à la carte services from OEMs
and dealers to be able to meet customers’ expectations and to stand out
from the competition. These services include maintenance, insurance,
flow management (buying, delivery, reselling) and fleet management.
Leasing and fleet management companies are hunting out OEMs that can
support them in their strategic development. They expect support, for
example, in optimizing their geographical coverage, managing their spare
parts and service contracts, and outsourcing technical support.
 The sales and after-sales challenge 179

The ‘user chooser’ business model

Fleet management companies are also becoming more and more

demanding when it comes to selecting the vehicles they want. In the UK,
34 per cent of fleets – the so-called ‘user choosers’ – give their customers
total freedom when it comes to choice of vehicle. They do not keep to the
standard practice of proposing a panel selection.
The ‘user chooser’ business model is radically changing the fleet
business and transforming the relationship between fleet management
companies and OEMs. Fleet management companies are no longer
signing contracts with one or two OEMs with whom they have preferred
conditions, but are behaving more like private customers, with much
greater bargaining power.
In our opinion, fleet management companies will become a large
customer segment, capturing a significant share of value along the auto-
motive lifecycle. Fleet management companies are in a strong position to
gain better services and more sophisticated offers from OEMs.
Fleet management companies are contributing to the development of
new car sales, especially for expensive vehicles. Some high-range models
are almost 100 per cent purchased by fleet management companies and no
longer by private customers.

Used cars: a lever to regulate overcapacities

The ‘nearly new car’ system

A used car is by definition a car resold after a certain period of time or a
certain mileage. Recent-model used cars are becoming increasingly
important. Sales of used cars less than one year old have been growing at
6.2 per cent annually since 1998. This is almost twice as fast as the used
car market as a whole, which at 3.9 per cent annually is already growing
much faster than the new car market.
This trend is partly explained by the growing number of fleet
management companies that resell recent vehicles, but a common practice
called ‘zero mileage vehicles’ or ‘nearly new cars’ is also responsible for
this development. Nearly new cars are registered by the dealers them-
selves and sold as used cars. This helps boost the dealers’ official market
share, and it enables them to sell new cars at a used car price, which is at
20 per cent discount, without making an apparent discount on new car
prices. OEMs have encouraged this practice by giving STD fleets special
180 Major challenges

deals. STD fleets are given incentives such as margins of 1 to 2 per cent to
purchase vehicles for a period of six months, after which the vehicle is
bought back by the OEM and resold as a used car.
A common practice among dealers and car makers is to purchase vehicles
for showroom purposes and internal use, before reselling the vehicles with
very limited mileage to customers. This is also pushing up the number of
sales in the recent used car segment. These vehicles accounted for 11 per
cent of new car registrations in Europe in 1999, and 15 per cent in 2003.
This practice is especially prevalent in Germany, where ‘zero mileage
vehicles’ have at times accounted for 25 to 30 per cent of new car registra-
tions. This is facilitated by specific regulations that allow vehicles to be
registered for an interim period of time, such as six months.
These ‘flow regulation’ levers have been used widely by many OEMs to
boost their market share, which is measured by the number of car registra-
tions. OEMs also use this mechanism to regulate the structural problem
endemic in the European market, namely the overcapacity of new cars.

Professionalism increases in used car management

The used car business was once dominated by the private-to-private
segment, helped along by various intermediaries such as specialized
newspapers and the internet. In recent years, professional players have
taken over this business activity. The OEMs and dealers especially under-
stand that buying back old cars is necessary in order to sell new cars to
customers. On average, 60 per cent of used cars are bought back from
private customers and 40 per cent from fleet management companies or
from OEMs (zero mileage). The share of the private-to-private segment is
expected to decrease from 56 per cent in 1999 to 44 per cent in 2007,
while OEMs’ own subsidiaries and licensed dealers are likely to have
captured 38 per cent of the market by this time (Figure 7.5).
The profitability of the used car business has risen significantly for
distributors, and it is now making a real financial contribution to the
overall profit and loss statements of distribution groups. What is also
noticeable is the fast-growing share of used car brokers (+8.5 per cent
annually) who buy used cars from dealers and/or agents and resell them to
private customers.

‘Nearly new cars’ create a vicious circle

The professional management of the used car business – especially the
‘nearly new car’ practice – represents a risk for the overall industry. In
short, it creates a vicious circle. The emergence of nearly new cars in the
market with a discount of 20 per cent on the new car price creates unfair
 The sales and after-sales challenge 181

CAGR
+2.1%1)
4,896 5,782
Others 6 -0.2%1) 5

Brokers/dealers 8 +8.5%1) 13
Subsidiaries 5
+8.3%1)
8

Licensed dealers/agents 25
+4.5%1)
30

Private sellers 56 -0.9%1)

44

1999 2007e
1) Based on underlying absolute figures

Figure 7.5 Breakdown of used car sales by distribution channel (per cent)
Sources: Observatoire de l’Automobile, CCFA, Roland Berger Strategy Consultants

competition for ‘real recent used cars’, which are also discounted by 20 to
25 per cent on new cars but have a mileage of 15,000 to 30,000 kilo-
metres. This pulls down prices along the lifecycle and lowers the buy-
back value. Since buy-back values are negotiated up-front by OEMs when
selling to fleet management companies (that is, at the beginning of the
period), this price reduction creates a depreciation trap for OEMs.
Several OEMs have been hamstrung by this vicious circle. To avoid
falling into this trap, OEMs have to secure and control this activity better
than before. OEMs especially have to control the way used cars flow into
the market. They must leverage their Europe-wide network against
regional and local distributors to create scale effect and synergies in the
management of used car flows across Europe. A two-pronged approach is
required: they should provide better service to customers while taking into
account the used car price gap that exists across countries – for instance, a
used Clio has a higher market price in Germany than in France. Renault,
for instance, has managed to implement a European used car database to
quickly check used car availability across different European countries.
Players active in the used car segment are capturing value. New cars are
losing out as a result. The value captured by used cars is shared among
182 Major challenges

more players than ever before. Dealers, agents, fleet management

companies and brokers all take their share.

Repair and service: technology threat for the pool of six-

to-nine-year-old cars

Customers demand greater reliability and better satisfaction

Customers have grown accustomed to increasing service quality, from
booking flights to purchasing goods at a retail store, calling a telecoms
operator or buying a service from a bank. Service quality can be expressed
in manifold ways, including immediate availability, rapid response to
requests, limited waiting time, special allowance for delays, high
customer attention and fidelity tools. It has become a weapon in the
arsenal of tools companies use to differentiate themselves from
competitors. Service quality has become firmly embedded in the commu-
nication strategies of companies in various sectors. This can be witnessed
by their clear commitments: a rail transportation company guarantees
‘reimbursement after a one hour delay’; an appliance hard discounter
commits itself by stating that ‘we pay the price difference if you find it
cheaper elsewhere’; and fast-food outlets guarantee a ‘waiting time under
10 minutes’.
Improving customer experience is the underlying concept behind all
these marketing campaigns. Every contact with the company must be an
enjoyable experience for the customer. His or her satisfaction is what
counts. Many companies, including state-owned enterprises and even
government bodies, have sought out ways to improve customer expe-
rience for the services they provide.
Despite efforts made in the automotive distribution sector, service
quality is still lacking compared with other industries, and customers’
experiences could be improved. The nature of car distribution makes it
difficult to monitor and improve interfaces with the customer: this is one
reason that car distribution trails other sectors.
Customers’ experiences with car distributors are rather complex, ranging
from buying a new car to having it maintained and repaired. And the
encounters are quite emotional. The buzz of repairing a car might be over-
shadowed by anxiety, and customers are never in a good mood when they
have to leave their car at the repair shop. Additionally, the frequency of
interactions with the customer is rather low. Customers do not go to their
dealer every week. Furthermore, the fragmentation of distribution, which
 The sales and after-sales challenge 183

comprises OEM-owned dealers, contract dealers and agents, makes it

difficult to implement the sort of standardized service quality procedures
that have become standard at airlines and banks, for example.
However, customer experience is essential in improving the perceived
value of the OEM’s brand. Customers’ purchasing intentions grow expo-
nentially with the perceived value of the brand, meaning that a marginal
increase in perceived value significantly increases the purchasing intent
(Figure 7.6).

Purchasing
intention index
100
90
80
70
+ 23 pts
60
50
40
30
+ 1 pt
20
10
0
1 2 3 4 5 6 7 8 9 10
OEM brand perceived value index

Figure 7.6 Customers’ purchasing intentions in relation to the perceived

value of the brand
Sources: Renault, Roland Berger Strategy Consultants

Once the product, the brand image and the costs are in line with customer
needs, the quality of service received at the dealer or garage outlet
strongly influences how the customer perceives the value of the OEM. It
weighs in at around 40 per cent for customers who have already purchased
a vehicle of the particular brand (Figure 7.7).
How can players in the automotive sector improve customers’ expe-
rience? They must make the customer feel welcome, answer the phone
quickly, inform the customer about what has been done to the car, give
advice. They must ensure, for example, that the person who has checked
out the vehicle after a repair is briefed and informed by the person who
checked the car in. This enables consistent feedback about how the service
has or has not met the client’s expectations.
184 Major challenges

Perceived value

Value Customer
drivers Product Image Cost
experience

Weight-
ing of
drivers New
90 10
customer

Existing
60 40
customer

Figure 7.7 Importance of customer experience in OEM perceived brand

value (weighting of drivers in percentages)
Sources: Renault, Roland Berger Strategy Consultants

What customers expect from repairers in terms of quality of service has

increased in past years. Reliability and trust is the number one issue for
customers. The importance of reliability has jumped considerably over the
past decade, and it is now even more important than price (Figure 7.8).

Customers' repairer expectations Reliability versus price index development

(per cent) (per cent)

CAGR
Reliability and +7.9%
65
trust
Price 41 65
61
55 57
Warm welcome 29
45 46 48 47 46
29 44 44 43
Proximity 41
37
Advice 25

Lead time 24

No waiting 21
No appointments
12 1991- 1994- 1997- 1999 2000 2001 2002
necessary
1993 1996 1998

Reliability/trust Price

Figure 7.8 Importance of repairers’ reliability and prices for customers

Source: Roland Berger Strategy Consultants
 The sales and after-sales challenge 185

This means that repair and maintenance players need to display greater
professionalism if they are to capture and retain customers. Against this
backdrop, it is likely that the OES channel and large branded repair
networks will succeed, clawing market share away from independent
outlets. The success of the fast-fitters can be attributed to their excellent
service quality, standard procedures and codes of conduct – including dress
code, clear commitments – ‘no appointments’ and quick service delivery.

The car market: the focus turns to the six-to-nine-year-old

segment
The car repair and service expenditures profile is shifting along the car
lifecycle. Expenditures on services including labour and spare parts are
decreasing (Figure 7.9). More importantly, expenditures are shifting
toward older vehicles. In the past, the maximum expenditure was spent
on three-to-eight-year-old vehicles. Now, it is spent on six-to-nine-year-
old vehicles.

Car service expenditure is decreasing and the maximum expenditure

has shifted to six- to-nine-year-old vehicles

Total service expenditure

e16.7 bn 1997
e15.7 bn 2003

5.4
8.1
0.9
2.3

0 1 2 3 4 5 6 7 8 9 10 11 Vehicle age

Figure 7.9 Car service expenditures by vehicle age in France in 1997

and 2003 (in € billion, excluding tyres and lubricants)
Source: Roland Berger Strategy Consultants

Several factors explain this trend. These include the increase in mean time
between maintenance services or oil filter changes (even for older cars);
the longer lifecycle stemming from anti-rust metal protection; fewer acci-
dents owing to government action and also because of increased safety
equipment such as antilock braking systems (ABS); fewer broken
186 Major challenges

parts due to optimized vehicle architecture, more resistant parts such as

plastic lights instead of glass, and more robust shock absorbers.
This trend is creating ground for battle between the OES and IAM
channels. The OES channel is traditionally very active with recent cars –
that is with cars less than five years old, and new cars under warranty –
and enjoys high end-user loyalty. The shift of revenues to older cars
directly impacts the OES channel as it increases the likelihood of
revenues being diverted into another channel. The IAM channel, which
generally addresses older cars, welcomes this trend, viewing it as an
opportunity to invest in facilities to repair more recent cars (up to 10
years old).

Car technology: a threat or an opportunity?

The growing share of technology in vehicles is creating barriers that could
shake up the market. The penetration of technology in the car pool has
jumped considerably in the recent past (Figure 7.10).

Penetration rate
by age group
89 91 Catalytic converter
86 87
80 89 Airbag
85
72 ABS
75 64
68 Air-conditioning
53 60
60
40 51
37
31
29 34

11 20
9

10 years 7– 9 years 5– 6 3 –4 2 years 1 year Vehicle age

and over years years

Figure 7.10 Technology penetration in the car pool in Europe, 2003

(per cent)
Sources: CCFA, Marketline, Roland Berger Strategy Consultants

With the rise of technology in cars, especially electronic hardware and

software, much better skills are required these days to perform a car diag-
nosis. Although the BER forces OEMs to supply their repairers with
appropriate diagnosis tools, a barrier is created because the tools are
 The sales and after-sales challenge 187

extremely OEM-specific and expensive. This prevents IAM repairers

from gaining relevant experience.
The improvement of car technology directly impacts fast-fitters, who
are now experiencing a reduction of their addressable market size, and
have no possibility of completing more complex repairs.
The market for service and repairs is turning into a battlefield. New
threats are emerging for all players from increasingly professional service
quality expectations, shifts in car age, and from technology. But these
threats also create opportunities for players capable of adapting their
business model.

Spare parts: from a replacement to a retail approach

Captive spare parts are no longer immune from competition

Repairers and body shops are an important customer segment for IAM
wholesalers, which supply them with ‘competitive’ parts. They are also
important for OEMs via the OES channel. OEMs supply repairers and
body shops with ‘captive’ parts and OEM-proprietary parts for the body
and chassis. They also supply them with ‘competitive’ parts that they
purchase from the tier 1 supplier panel and later resell under their own
brand name and packaging.
Parts are replaced for three basic reasons: after accidents or crashes,
when they fail to work or are damaged, and because of wear and tear.
Accidents and crashes mostly concern body parts such as bumpers, side
panels and front panels. Four to five parts are broken in 60 per cent of
car accidents. Radiators, scratched bumpers, air-conditioning, wind-
screen and lighting are the parts that require replacing because of failure
or damage. And finally tyres, oil filters, brake pads and shoes, as well as
exhausts, are often replaced because of wear. Technical improvements
mean that these wear-and-tear parts need to be replaced less frequently
than in the past. Tyres, however, are an exception. Most drivers believe
that tyres have to be changed every 40,000 kilometres, but tyres that
need replacing after 15,000 kilometres’ wear are becoming increasingly
common: the new Laguna is just one example among many. Improved
braking distance and vehicle stability has seen tyre size and adherence
increase (from 14-inches to 17–18-inches). This pushes up the costs of
tyres and increases wear and tear. Tyre makers benefit from this devel-
opment, as do other players such as fast-fitters, which are jumping at
188 Major challenges

this potentially life-saving opportunity. The wear-driven spare parts

market is already highly competitive, with a specific distribution
channel comprising fast-fitters, tyre specialists and the like, and will not
be described in this chapter.
The accident-driven spare parts market has been largely immune from
competition because it mostly comprises captive spare parts (eg OEM
proprietary), which are replaced at the body shop. An examination of the
spare parts volume purchased by body shops to repair cars after an accident
shows that OEM captive parts represent around 77 per cent of total volume.
This means that 23 per cent of parts could potentially be purchased in the
IAM channel. This ratio is very likely to change in the coming years with the
introduction of the Eurodesign regulation, since this allows other suppliers to
develop captive parts without manufacturer agreement. Eurodesign already
operates in some countries including Spain and the UK, but not yet in France
or Germany. The introduction of Eurodesign could potentially reduce the
share of captive parts from 77 to 25 per cent in the long term (Figure 7.11).
This development would change the battlefield in favour of supply repairers
and body shops by potentially allowing them to supply significantly more
parts from the IAM channel or from low-cost countries.

Non-captive parts:
• Lighting 23 23
• Condenser
• Radiator 75 per cent of
• etc. spare parts
could potentially
be substituted
Captive parts: 52 after Eurodesign
• Body parts
77
• Chassis
• Specific parts

25

Before Eurodesign After Eurodesign

evolution evolution

Addressable market for equivalent part/OE quality

Figure 7.11 Impact of Eurodesign on accident spare parts (per cent)

Sources: Insurer databases, Roland Berger Strategy Consultants

Eurodesign covers OEMs’ proprietary parts. It also encompasses all parts

with proprietary design that may have been developed by tier 1 suppliers
 The sales and after-sales challenge 189

such as lighting, rear lamps and seats. Low-cost suppliers are emerging as
a threat. Spare parts that already fall outside of Eurodesign, such as radi-
ators, filters and spark plugs, are also being threatened by low-cost
suppliers. Non-OE suppliers have captured a 40 per cent market share of
the IAM channel with these sorts of parts.
The degree of impact low-cost suppliers have in various countries
depends on whether or not Eurodesign is applied. The penetration rate of
low-cost adaptable parts suppliers is most striking with old vehicles because
the end-user is extremely cost-sensitive. The owner will likely not resell the
vehicle and often receives no insurance reimbursement. That is why end-
users try to have repairs done at minimum cost. When it comes to the older
vehicle segment, end-users search for the cheapest solutions themselves,
even down to spending time at the scrap yard to find a reused part.
Reused parts are also capturing a sizeable market share. In some coun-
tries, including France and Germany, Eurodesign prohibits adaptable
products, and the reused segment is much more developed as a result.
Reused parts account for almost 20 per cent of the lighting IAM in France,
for example. Once adaptable products are allowed to be sold, however, the
low-cost adaptable category grows very fast. This has been the case in
Spain, Italy and Eastern Europe. Players such as the Taiwanese headlamp
manufacturer TYC have already captured a strong market share in Spain
and Italy, and particularly in Eastern Europe.

Spare parts wholesaling: competition heats up for repairers

and body shops
If we break down the cost of repairing a car, we see that spare parts
account for more than 40 per cent and labour costs make up more than 50
per cent (Figure 7.12).
When it comes to the level of service and quality of supply, body shops
are becoming increasingly sophisticated. With the implementation of
large-scale facilities (for example body shop factory concepts) that are
capable of repairing 200 cars each week compared with the average-sized
body shop that manages to repair 20 cars a week, it is clear that body shops
are becoming better organized and more professional. One of the most
effective ways to improve the profitability of body shops is to reduce the
time a car spends on the premises during a repair. The immobilization
time directly increases the cost of repair and reduces the vehicle slot
turnover. Missing parts or parts that do not exactly fit the car and need to
be adjusted are the most frequent reasons for increased immobilization
time. A large diversity of parts need repairing after an accident (Figure
7.13). Even though only six parts on average are wrecked in an accident,
190 Major challenges

Typical cost of repair

Labour 52

Paint 6

Spare parts 42

Figure 7.12 Breakdown of typical repair costs (per cent)

Sources: Rechange Automobile, Roland Berger Strategy Consultants

the 10 parts that most frequently need replacing represent only 22 per cent
of the total crash parts volume.

Ranking of the parts most frequently Top 10 crash parts

damaged (volume per cent) (volume per cent)

Headlamp 4.3
50 parts cover only 60%
39 of crash parts volume Rear end 3.2
Front tank 3.0

8 Radiator grill 2.6

18
Front rims 2.4
Licence plate 2.1
13 22
Bonnet 2.0
Front bumper 2.0
Front door 1.9
Total Other 51st– 21st 11th Top
90th – – 10 Radiator grill fitting 1.9
50th 20th

Figure 7.13 Parts most frequently damaged in accidents

Source: Roland Berger Strategy Consultants (analysis based on database of 166,000
accidents)

As soon as body shops and/or repairers become more professional, their

needs from parts suppliers – OES, OEM dealers, wholesalers – rank as
follows: first, efficient tools to identify the correct part number; second,
 The sales and after-sales challenge 191

relevant technical support and documentation; third, availability of the

original part and/or a part that fits perfectly; fourth, the commercial
rebate. Interestingly, the rebate criterion is becoming less and less
important, because the price difference is largely cancelled out by the
additional work-hours required if the part does not fit.
Body shops are stepping up their efforts to purchase the exact set of
accident parts for a given model, under the ‘accident part offer’ idea.
Multi-make wholesalers are unable to implement this offer because of the
huge complexity involved in cataloguing, logistics, IT and so on, and the
difficulty of covering the entire spectrum of parts: the likelihood of having
all parts damaged by accidents in stock or in catalogue for a given model
exponentially diminishes with the number of parts involved. The only
players that can supply such accident part offers are the OEMs. This gives
them a significant competitive advantage.
While it is much more convenient for body shops to bundle the
supply of all the parts they need to the OES channel, the IAM channel
actually offers more aggressive discounts, provided its referencing
system is reliable and user-friendly, allowing correct parts to be easily
identified.
A battle is being waged between the IAM and the OES channels for
orders from body shops and repairers. The intensity of this battle differs
between countries. In France and the UK, most body shops bundle their
spare parts in the OES channel because OES dealers are strong and can
offer discounts similar to those given in the IAM channel. Additionally,
they have significantly improved the efficiency of referencing and/or
ordering tools. These days, the body shop finds the parts it needs simply
by entering the vehicle plate number.
In Germany, most body shops do not bundle their orders. Instead, they
purchase competitive parts in the IAM channel from players such as
Temot and ATR because they offer more aggressive discounts (15 per cent
or more), and provide efficient referencing tools as well as technical
support. In Spain, the situation is balanced. Neither of the channels has yet
won against the other.
The spare parts wholesale activity will also be subject to major changes
in the future, driven by the introduction of adaptable and low-cost
suppliers, and by a more open market. Some OEMs are intensifying their
efforts to win a share of the spare parts wholesale market. Renault, for
instance, has implemented a huge dedicated sales force of around 500
people to sell spare parts, which should improve its chances when
competing with traditional IAM wholesalers. Some IAM wholesalers,
such as Temot and ATR, have also made significant progress by offering
repairers efficient referencing tools and technical support.
192 Major challenges

The financial services challenge

A highly attractive segment coveted by non-automotive

players
Slowly but surely, Europeans are increasingly using credit to finance
purchases. Credit use is highest in the UK and Germany and lowest in
southern European countries, thus reflecting typical consumer habits in
Europe (Figure 7.14).

Development of outstanding credit in five European countries CAGR

(e billion) (per cent)

1993- 2000-
2000 2004
300

UK 9.3 11.7
250
Germany 3.3 1.4

200

150
France 7.6 3.9
100
Spain 8.3 5.0
50 Italy 11.2 11.7

0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 7.14 Outstanding credit in five European countries

Sources: Observateur Cetelem, Roland Berger Strategy Consultants

The automotive credit market is attractive to financial institutions because

it provides them with a lever to penetrate consumer segments with high
potential including youth, family (more than one car), rural areas or small
cities, and income potential. Given its attractiveness, it is understandable
that many players are interested in securing a share of this market. These
players can be grouped into two segments: captive financial institutions
and non-captive financial institutions. Captive financial institutions
consist of OEMs’ own financial services providers, operating under either
private labels or the OEM brand. Private labels are generally financial
services providers that were previously independent and have since been
bought by an OEM. Non-captive financial institutions are either inde-
pendent financial institutions or the leasing subsidiaries of commercial
banks (Figure 7.15).
 The sales and after-sales challenge 193

Captives Non-captives

Automotive banks White labels Independent Commercial banks

financiers

Volkswagen Financial Europcar Fleet Sixt Deutsche Bank

Services AG Services EBV
FFS Bank Leasing
Daimler Chrysler Premium Financial Versicherung Dresdner Bank
Bank Services
GE Capital Bank VR Leasing
BMW Financial Alphabet
Services ALD Automotive
Toyota Financial Sparkasse
Services Santander Consumer
GMAC Financial CC-Bank
Services
Renault Bank
Ford Financial
LeasePlan1)
Services

1) LeasePlan is considered to be ‘non-captive’ in this chapter

Figure 7.15 Categorization of automotive financial service providers

Source: Roland Berger Strategy Consultants

Although the financial services business is not a core activity for car
makers it is highly profitable. Since captive financial institutions have
access to the customer at the point of sale they have developed rapidly.
Finance and insurance activities generally have higher ROCE than car
sales. As well as providing higher profitability, these activities also
provide more stable profits and sales when the core car business is
languishing. Financial services activities also help car makers in the war
for customers and in bolstering customer loyalty. Customer retention is
boosted through effective customer relationship management or by influ-
encing repurchase behaviour, by providing customers with financial
offers that enable them to make a purchase sooner. New customer acqui-
sition arising from complementary financial services cross-over is an
additional advantage.
If we look at the overall expenditure related to a car throughout its life-
cycle, financial services account for 24 per cent, with straight financing
accounting for 9 per cent of this (including leasing) and insurance
accounting for 15 per cent. OEMs increasingly rely on their financial
subsidiaries to contribute to profit. As well as being able to boost sales and
earn extra profit, financial subsidiaries also help OEMs stabilize their
profits in times of crisis.
194 Major challenges

Automotive trends are changing the credit battlefield

Two trends in the automotive sector strongly influence how automotive
credit is purchased. First, the growing share of fleets and the rental business
model drive the share of automotive credit not purchased at the dealer point
of sale. Thus it does not necessarily fall into the hands of captive financial
services providers. Second, the growing share of the used car segment
creates a new attractive segment for financial services, since more and
more used cars are being purchased with credit (Figure 7.16).

Penetration rate of car credit in 2003 Major automotive credit players in France

(Used and new cars purchased by Players Penetra- Trend Example

private customers, per cent) tion rate

Banks 40-48% • Crédit Agricole

point of sale

• BNP Paribas
Outside the

No credit 25 32.5 • Deutsche Bank

35
• Santander
Specia- 5-7% • Cetelem
Credit lized credit • Sofinco
purchased institutions • Cofidis
39
outside
Captives 10% • VW Bank
point of sale 49.5 • Credipar, Diac
point of sale

53 • Fiat Crédit, Ford

At the

Crédit
Credit
purchased 36 Specia- 7% • Cofica CU
at the lized credit • Sofinco/Viaxel
point of sale institutions • CGI
12 18 • GE Money Bank
New car (25) Used car (75)

Figure 7.16 Major automotive credit players in France and the

penetration rate of car credit
Sources: Observatoire de l’Automobile, Crédiscope, Roland Berger Strategy Consultants

Each player’s strategy differs according to whether the credit is purchased

at the point of sale or outside the point of sale. The ‘outside point of sale’
segment is increasingly dominated by non-captive financial institutions
such as banks that are directly contracted by fleet management companies
and intermediaries, whereas the ‘point of sale’ segment is largely domi-
nated by the captive and specialized credit institutions of OEMs. Without
the presence of OEMs’ in-house fleet management companies, non-
captive financial institutions would completely command the fleet
management market (Figure 7.17).
The attractiveness of the fleet management segment means that players
are pursuing various strategies in an attempt to garner market share.
Captives are focusing on fleet management and full-service leasing solu-
tions, establishing additional ‘white label brands’ to serve multi-brand
 The sales and after-sales challenge 195

Company Country Size of fleet (000 vehicles) Owned by

Leaseplan Corporation NL 6501) Volkswagen AG, 50%;

Olayan Group, 25%;
Mubadala, 25%
PHH Arval F 600 BNP Paribas
ALD International D/F 545 Société Générale
Volkswagen/Europcar D 315 Volkswagen AG
Athlon/Fleet Synergy NL 310 N/A
DaimlerChrysler Services D 310 DaimlerChrysler
Overlease F 278 RCI Bank
GE Fleet Services US 220 General Electric
Masterlease UK 170 General Motors
ING Car Lease D 155 ING

1) Europe only, 1.1 million worldwide

Figure 7.17 Leading European providers of fleet management services

Sources: Fleet Europe, Datamonitor, Roland Berger Strategy Consultants

customers, and offering complementary bank services such as that offered

by Volkswagen Financial Services. Independent non-captives, usually
active in large fleets, are progressively extending their offers to small
fleets and even private customers with new concepts such as ‘leasing
under a different name’ (Figure 7.18). Non-captive commercial banks are
setting up or acquiring leasing subsidiaries to extend their financial
services portfolio. ALD is a good example in this respect. Non-captive
commercial banks are also approaching dealers more aggressively with
more attractive financing offers, and sometimes even approaching private
customers. Sixt immediately springs to mind in this context.
Automotive credit is a tantalizing segment. Used car credit is the
growth driver compensating for stagnation in new car sales. Traditional
captive financial services providers are being challenged by non-captive
financial institutions that take advantage not only of the ‘outside point of
sale’ segment, such as fleet management companies and large dealers, but
also of used car intermediaries.
196 Major challenges

Size of customers' fleet (no. of vehicles)

Private Commercial Fleet

customers customers customers
<5 Small fleet: Large fleet:
5–20 > 20
Products

Fleet management
Full-service leasing
Leasing
Maintenance subsidiaries
Insurance Independent
Operating leasing Captives non-captives

Residual value leasing

Loan financing Commercial
banks
Complementary
banking services

Figure 7.18 Strategies taken by leading financial services providers

Sources: Fleet Europe, Datamonitor, Roland Berger Strategy Consultants

THREATS AND OPPORTUNITIES CREATE NEW

CHALLENGES

Dealer groups: the relationship challenge

Dealer groups have consolidated in recent years. They have become

increasingly important players, with dominant positions in certain regions
and areas within the national landscape. In the UK, large dealer groups
such as Dixon, Arnold Clark and Reg Vardy have been established for
some time. These players sometimes have a local market share of more
than 50 per cent within their customer areas (Figure 7.19).
In France, for example, the top 100 distribution groups account for 46
per cent of the market and are particularly well developed. Although
Germany has a few large players, dealer groups there are still highly frag-
mented. French dealer groups have grown mainly by acquiring multiple
franchises. Between 1999 and 2002, the share of the French market
controlled by the top 100 distributors grew faster than the total market (a
compound annual growth rate (CAGR) of 4.8 per cent versus 0.3 per cent)
(Figure 7.20).
 The sales and after-sales challenge 197

France Germany Spain

PGA 1,901 MAHAG1) 801 Quadis 800

Domingo
Schuller 580 AVAG 2) 760 231
Alonso

Bernard 566 Schultz 600 Rossello 217

Zodo 555 Weller 452 Huertas 198

Guedet 539 Dello 350 Itra 177

Total EUR 4.2 bn EUR 3.0 bn EUR 1.6 bn

sales

Total Approx. 17,400 Approx. 23,500 Approx. 8,300

dealer
outlets

1) 2002 figures 2) Including international activities

Figure 7.19 Top five automotive dealer groups, 2003 (sales in € million,
total dealer outlets with service contracts)
Source: Roland Berger Strategy Consultants

Top 100 automotive distribution groups grow faster Sales breakdown of new car
than the market (number of new cars sold in France: registrations in France in 2003
Index 100 in 1999) (per cent, excluding fleets)

CAGR
1999–2002 OEM subsidiaries
123
35
and branches
115 Top 100 4.8%
110
4.5 pts
107
100 101 Total market 0.3% Top 100 automotive
101 40
distribution groups
102
100 99
97 Rest of the
market -1.0% Other concessions
and agents 20
Unofficial imports 5
1999 2000 2001 2002

Figure 7.20 Growth and market shares of the top 100 automotive
distribution groups
Sources: Résoscopie supplement 2001–2002–2003, Roland Berger Strategy Consultants

Dealer groups are generally positioned with the following characteristics.

They often have a multi-mono-make portfolio, meaning they have
separate contracts with several OEMs; they display a strong concentration
in one geographic area; they leverage local scale effects; they boast a
198 Major challenges

strong relationship with end-customers; and they have the financial power
to invest in other related businesses such as rental and mobility services.
Dealer groups are currently heavily reliant on OEMs, especially with
regard to spare parts, which they purchase from the OEMs’ parts and
accessories (P&A) department. However, given their size and potential
bargaining power, dealer groups are becoming attractive targets for spare
parts suppliers or even IAM wholesalers from whom they could poten-
tially get better rebates. In the medium term, we believe that dealer groups
will source many parts directly from suppliers instead of buying from
OEMs. Recent acquisitions of IAM wholesalers by dealer groups support
this. It is a clever tactical move that allows dealer groups to have a foot in
the IAM market while avoiding breaking the sacred rules with OEMs.

Historical situation Likely development

Strong silos between OEM Switch between channels at the

channels and IAM automotive distribution group level

OEM IAM OEM IAM

Manufacturers

Inventory/
product range
47/50 40 40 47/50 40 40
Automotive
distribution groups
70/75 80 62 70/75 80 62
Repairers

Original parts Equivalent Original parts Original parts

parts Equivalent parts

Figure 7.21 Automotive distribution groups are closing the OEM and
IAM channel silo (figures represent the average discount rate)
Source: Roland Berger Strategy Consultants

The structure of the market is likely to change significantly in the coming

years, especially because of the shift made by automotive distribution
groups (Figure 7.21). The figures above represent the average discount
rate. Today, quite a large silo exists between the IAM and OES channels
because of so-called OE parts. These parts were once in the domain of the
OES channel. Following BER, an OE part can be sold in any channel. The
implication is that the IAM and OES channels will become more porous
and develop into a more traditional supplier–distributor model.
 The sales and after-sales challenge 199

Aside from P&A, the sheer size of dealer groups will also enable them to
better leverage their strong multi-make regional position. They have the size
to optimize the used car process across different car makes and to develop
services with greater outreach, for instance loans, leasing and renting, as
well as to develop relationships with customers at the local level.
The challenge for dealer groups is to master the transformation from a
multi-make dealers’ network into a regional integrated player. This chal-
lenge is multifaceted and requires well thought out actions. Dealer groups
need to improve customer relationships throughout the lifecycle. This
involves making better use of their multi-make portfolio to provide
customers with appropriate mobility solutions. Dealer groups are also
widening their services offer by launching new services such as car rental
and financial services. Repair and service activities are improved by devel-
oping the multi-make body shop factory concept and developing parts
sourcing directly from suppliers, for instance. Under the revised BER,
dealer groups are theoretically allowed to source parts directly from the
equipment and/or parts supplier. By skipping over one rebate level, they
could get better price rebates. Such action is best suited for older cars less
than 10 years of age because these vehicles appear less frequently on the
radar screens of OEMs. Dealer groups also face the challenge of devel-
oping the wholesale parts business. Their size enables them to provide
competitive wholesale offers to repairers with similar high-performance
logistics and services levels to those offered by large IAM wholesalers.
Of course, these challenges will not be surmounted without OEMs. The
relationship between dealer groups and OEMs will become increasingly
critical. The impressive size of both players creates a mutual dependency.
The challenge is to develop a win–win situation with OEMs, while
progressively increasing the level of independence.

IAM repairer and wholesalers: the technology challenge

At repair level: consolidation toward affiliated networks

IAM repairers will face significant challenges in the future. They will
have to cope with increasingly sophisticated vehicle technology, and get
better at diagnosing problems, as well as serve more demanding
customers. IAM repairers will have to improve their skills and change
their repair practices in the light of these factors.
IAM repairers’ affiliation with networks is growing. IAM repairers are
taking this step to benefit from greater training support and access to tools,
200 Major challenges

which enables them to tackle more sophisticated car technology. The

number of affiliated repairers has grown constantly in past years, much to
the detriment of independent repairers (Figure 7.22).

France Germany Spain

9.2% Annual growth 18.6% Annual growth 2.5% Annual growth

1,110 Top 5,340 3,326BYG

3,246
90 Carrosserie 210 191
650 Carat
4,503 216 230
150 Acoat Gecorusa
852 selected 600 800 Temot
512 586 Cecauto
52
235 Five star 680
200 1,140 Coparts
818 819 GAU
1,140
280 Axial
300 1,350 Centro
1,088
AD 1,490 1,500 AD Parts
355
300 Carrosserie 1,400 ATR
995

2001 2004 2003 2004 2003 2004

Figure 7.22 Number of repair and/or body shops affiliated to a network

in France, Germany and Spain
Source: Roland Berger Strategy Consultants

Large affiliated repairer and body shop networks have emerged which
specialize in different areas: these include body shop repairers (mainly
sharing painting and body expertise), insurer networks, and parts
wholesaler networks. By joining forces, these networks could better
leverage their size. This would mean that they could share diagnostic
abilities and better develop partnerships to complete the multi-brand
offer. Branded networks would also help further improve the customer
experience, but the most critical issue for repairers is changing their
repair habits. The way to identify the root cause of a problem with a
vehicle is changing. The empirical approach to repairing cars –
deducing the cause of a breakdown from a set of symptoms – will soon
no longer be applicable. With all the various electronic systems built
into vehicles, the same symptoms can have many different root causes.
New methodologies, for example root cause analysis and AMDEC, will
have to be acquired by the repairer to properly diagnose vehicle
problems. Repairers today are hardly trained to deal with this new
environment.
 The sales and after-sales challenge 201

At wholesale level: consolidation toward large

buying groups
IAM wholesalers are consolidating into large-scale purchasing associa-
tions, with strong technical support and a large network of in-house or
affiliated wholesalers and repairers. Independent wholesalers and
repairers are the losers in this development, since they are unable to
compete against the consolidated groups with their better price condi-
tions, modern technical support and order flows.
Large IAM wholesalers are now present in three major countries, and
have significant clout in the market (Figure 7.23). In Germany, networks
such as Carat, ATR and Temot (which includes MAHAG) are extremely
powerful and high-performance players. Large IAM wholesalers are
diversifying into more service activities, taking advantage of the decline
of independent players.

France Germany Spain

576 500 402

1,500 AD 1,200 Carat 380 AD Parts
(195) (151) (28)
GAU 260
1,200 ATR 200 (4) 368
242 Espana (28)
670 3G
(140)
Centro
7001) Coparts 87 (17) 259 52 (11)
Holding
250
400 Starexcel
(153) 390
6201) Temot 128 (4) 1502) Cecauto
(304)

130 Cecauto 7 (tbc) 155

5601) Centro 115 (16) 132 Serca
(70)

Total Approx. 2,000 (N/A) Approx. 1,100 (300) Approx. 3,000 (N/A)
number
of outlets

Sales Outlets
Note: a minority of wholesale outlets belong to more than one cooperation

Figure 7.23 Top wholesale cooperative groups in France, Germany and

Spain, 2004 (sales in € million, and number of outlets)
Sources: Company websites, specialized press, Roland Berger Strategy Consultants

The large IAM wholesaler Auto Distribution, for instance, covers all
levels in France, from purchasing associations to end-customers. Its activ-
ities encompass a parts purchasing association with sales of around
€1,044 million and over 700,000 parts numbers, a network of distributors
with around 200 companies and 680 points of sales, seven specialist
202 Major challenges

service and repair networks and an internet portal with databases

(products and services) and information regarding prices and supplies
available online.
IAM wholesalers face a handful of key challenges. Leveraging their
clout across Europe will become an important factor. These corporations
are driven too much on a national level, even when international coordi-
nation exists. This is because of the ownership structure, which is often
not consolidated or frequently structured in the form of associations. To
compete with the large dealer groups and OEMs which are increasingly
capturing market share and channelling it into body shops, IAM whole-
salers would be wise to improve their technical support, parts referencing
and coverage, and to deliver excellence in logistics. Technical support
must also be efficient. This will mean implementing in-house and
centralized testing and diagnostic skills, and offering online tools. Getting
a grip of expanding sourcing capabilities to low-cost countries with OE-
quality products is also important. By taking a retail approach to product
collection, they could also broaden their product offering. This could
mean going beyond OE products.
Fast-fitters are a specific subsegment of IAM players. Their business
model in the long term appears risky for the following reasons. First, they
face strong competition from incumbent players – that is from OEMs and
dealers – who propose similar services bundled with car maintenance.
Renault Minute is a pertinent example here. The market is also shrinking
because of the decrease in failure parts that need replacing such as
exhausts and filters. Fast-fitters are also neither equipped to tackle the
technology challenge nor able to diversify into other areas. One short-
term opportunity they are all grabbing is the tyre aftermarket, which in
contrast to other fast-fit parts is growing.
To maintain their position, fast-fitters will have to expand geographi-
cally, requiring strong financial backing. Developing alliances or partner-
ships with potential prescribers such as fleet management companies or
insurers would also be helpful. In view of the growing competition, fast-
fitters must be vigilant in providing excellent service quality.

Insurers: the influential challenge

The influence and role of insurers in the automotive aftermarket is

growing. Aside from the end-user, insurers are the only market player with
a strong interest in lowering the price of spare parts. The influence
insurers have on the price of parts starts well before the vehicle is
launched on the market. The Allianz Danner test, for instance, carries
 The sales and after-sales challenge 203

particular authority for OEMs. It consists of a low-speed crash test and a

measure of the cost of the basket of spare parts needed to repair the
vehicle. This famous test is used by all insurers, and forms the basis for
defining insurance fees for any given car model.
Nearly all insurance companies have adopted the Danner test as the
basis for claims, and it greatly influences the product development
strategies taken by OEMs. There are valid reasons for this. End-users who
have access to the test results, which are available in most automotive
newspapers and magazines, are becoming increasingly sensitive to total
costs, especially in Germany where repair costs are much higher than in
other European countries. Furthermore, it is essential to have good scores
in order to be referenced by fleet customers, as fleet customers represent a
significant share of the market volume for OEMs.
As a consequence, most OEMs are improving their products at the
vehicle development stage to reduce the number of broken parts that end
up in the basket. Repair costs have dropped significantly in recent years
because of technical improvements. For the same test conditions, the cost
to repair an Audi 80 produced in 1978 was €5,200. In contrast, an Audi A4
produced in 2001 cost €3,900 to repair taking inflation into account.
Beyond technical improvements, the pricing strategy of OEMs
regarding spare parts is also influenced by insurance test results. OEMs
currently optimize the price of spare parts to meet the ‘Danner basket’ by
lowering the price of certain parts found in the basket and increasing the
price of others. Spare parts pricing is a complex mechanism, the logic of
which is very difficult for external observers to understand. The pricing of
spare parts is not only influenced by the results of insurers’ tests, but also
by various other criteria. OEMs are the only players that have managed to
master this game.
The criteria for pricing parts include vehicle range. Even if a part is
exactly the same across models, which is often the case due to the
platform strategy followed by many OEMs, prices of parts are not iden-
tical and can show substantial differences, for instance between a VW and
an Audi. The country’s competitive environment is also a criterion. Here
several factors need to be taken into consideration, such as the presence of
low costs, the existence of Eurodesign, and the weight of IAM whole-
salers. Whether or not parts are captive is another consideration. Trade-
offs are made on purpose, as the example of Renault shows. Renault
recently modified its prices by pushing through higher rebates on compet-
itive parts and lower rebates on body parts. As a result, the price of spare
parts can become fairly disconnected from industrial costs.
Taking this into consideration, it is understandable that insurance
companies want to increase their level of control over the price of spare
204 Major challenges

parts. Three basic strategies or models are being developed by insurance

companies: ‘sell’, ‘select’ and ‘buy’.

ᔡ The ‘sell’ strategy consists of focusing volumes to selected body shops

and negotiating prices with the wholesalers. This approach requires
large-scale communication to body shops as well as incentives,
including pick up, delivery and replacement cars. It provides reach to
around 60 per cent of customers.
ᔡ The ‘select’ strategy consists of referencing a reduced number of body
shop partners by developing multiple partnerships with body shop
networks. This implies a new distribution of roles between body
shops, the insurance company and the expert.
ᔡ The ‘buy’ strategy goes even further and consists of creating a
purchasing structure to negotiate contracts with spare parts suppliers.
Some cost reductions are shared with body shops.

‘Sell’ and ‘select’ approaches are a prerequisite for the ‘buy’ strategy. The
UK is the country that is the most advanced in the latter practice. In
France, the ‘sell’ and ‘select’ models are developing quite fast. Taking on
this approach requires insurers to steer clients towards a selected network
of body shops to achieve volume commitments made with the body shop
network. Volumes stemming from guidance given by insurers can be
significant for body shops, and can represent up to 35 to 40 per cent of
their activity. As shown in the example of France, the level of guidance
from insurers has increased markedly in recent years (Figure 7.24).
The influence of insurers varies significantly across countries in
Europe. It is the most influential in the UK, and is becoming progressively
more so in France. But the situation is very different in Germany, where
the insured customer has the freedom to choose between a direct cash
payment and vehicle repair. The customer is also free to select the location
where the repair work should be conducted. Repair and body shops
always make use of one-time agreements with insurers to regulate
payment flows. This explains why the level of guidance of insurers to
customers is much lower in Germany than it is in France (10 per cent
versus 40 to 60 per cent).
Insurers can play an even more important role, as the example of the UK
shows. UK insurers have achieved a 75 per cent guidance rate and are
increasingly becoming purchasers. This has a substantial impact on labour
rates and on the cost of parts. For example, Direct Line and Norwich Union
covered 50 per cent of the private market in 2003 and achieved huge
guidance rates: 85 per cent for Direct Line and 65 per cent for Norwich
Union. Moreover, some OE-equivalent or adaptable parts are also referenced
 The sales and after-sales challenge 205

Weight of insurers Change in guidance rate

(per cent) (per cent)1)

e 5.8 billion

• Mutuals, no brokers, eg Macif

50 60–70 70–80
• Insurance company branches

• General insurance agents (36%)

• Brokers (4%)
70–80
• Bank insurance, eg CA, 40 10–30
Crédit Mutuel
• Direct sales, eg direct
assurance (AXA) 7
3 0–20 20–40
Repair costs 2003 2008
in 2003

1) The guidance rate measures how many clients go to the garage or body shop recommended by the insurer after
an accident

Figure 7.24 Insurance guidance rate development in France – insurers’

guidance level likely to exceed 70 per cent by 2008
Sources: DRI 2002, Sidexa, Roland Berger Strategy Consultants

by approval bodies such as Thatcham, and are prescribed to repair a car. In

France, insurers only prescribe OE parts because the expert becomes liable if
a problem occurs as a result of replacement by a non-OE part.

Parts suppliers: the market access challenge

Parts suppliers basically sell products using the OEMs’ network and under
the OEMs’ brand or via the IAM channel with a private brand such as
Hella, Valeo or Bosch. Although BER has theoretically made it more
favourable for suppliers to sell more OE products in the IAM channel, this
has not translated into practice. Parts suppliers are increasingly being
squeezed on several fronts. They face substantial and growing price
pressure from the OEM channel. In the IAM channel, they are confronted
with larger buying groups, progressively looking for alternative products.
Regulation trends also do not make life easier for parts suppliers. Non-OE
parts are gradually being allowed to be sourced from low-cost countries.
The growing OES channel and the subsequent shrinkage of the IAM
channel in several markets increases pressure on parts suppliers, as it
reduces market access for suppliers’ private brands. Price pressure from
insurers is also a considerable factor.
206 Major challenges

Parts suppliers would most likely benefit from taking a more proactive
strategy toward the market. This could include marketing at the repair and
wholesale levels, introducing a pricing and brand positioning that enables
differentiation according to the level of competition for individual parts,
addressing large dealer groups, and exploring all potential growth oppor-
tunities, including accessories, niches and other countries.
Market changes offer parts suppliers new ways to capture value
(Figure 7.25).

OES IAM

OEM parts
Suppliers (makers)
Equipment suppliers Other suppliers

Central parts & accessories Super Purchasing

Logistics
Makers' subsidiaries wholesalers associations

Wholesalers Multi-make groups Wholesalers

OES
Others/
Customers Agents Repairers
fast fit

Current spare parts flows Future spare parts flows

Figure 7.25 Potential changes in spare parts flows

Source: Roland Berger Strategy Consultants

Captive and non-captive financial institutions

Captive and non-captive financial institutions have very different market

positions. At the point of sale, captive financial institutions have a
dominant position, with clear competitive advantages achieved by lever-
aging integrated offers such as buying back a used car, selling a new car,
financing the vehicle and providing services. This allows OEMs to make
trade-offs between the level of credit granted, the rate applied, the used car
buy-back price and the rebate on the new car. Credit provided by captive
financial institutions at a 0 per cent rate is commonplace. The reason is
simple: the OEM has already negotiated a cheaper buy-back price for the
used car.
 The sales and after-sales challenge 207

Captive financial institutions have to tackle a number of issues. Their

lack of financial expertise would suggest that improving scoring capabil-
ities should be a priority. Developing the used car financial services model
as well as offering additional financial services for customers, such as retail
banking services, would help them improve their standing. This last
strategy is especially favoured by German OEMs, which excel in this area.
The next subsegment of the chapter is dedicated to exploring this model.

Captive banks: the German exception

Volkswagen, DaimlerChrysler and BMW are the only OEMs to offer
retail banking services in their domestic market. Although OEMs’
financing activities are maturing, retail banking follows a steady and
regular growth pattern. The bank deposits of VW Financial Services have
increased by 26 per cent each year since 1998, amounting to €8.7 billion
(Figure 7.26). VW Financial Services is among the top 10 Visa card
providers, one of the leading direct banks and the eighth largest insurance
company in Germany. The bank deposits of BMW Bank have also
developed significantly since 1998 (at around 31 per cent annual growth)
and totalled around €3.8 billion in 2003. Bank deposits at
DaimlerChrysler Bank, which was created in 2002, grew from €0.8 billion
to €3.1 billion between 2003 and 2004.

Sales in financial services Operating margin in financial services

(e billion) (per cent)
1)
CAGR: 10% 10.4 10.8
8.7 9.5 2)
8.2 10.6
6.0 6.5 7.8 8.2
6.5
3.5 3.0 2.5

1998 1999 2000 2001 2002 2003 2004 1998 1999 2000 2001 2002 2003 2004

Penetration rate of automotive credit/leasing

(per cent) Bank deposit (e million)

CAGR: 26% 8.7

36 36 6.7
27 27 31 31 5.5
26 4.5
2.8 3.5
2.2

1998 1999 2000 2001 2002 2003 2004 1998 1999 2000 2001 2002 2003 2004

1) Published data not consistent with previous years because of changes in underlying accounting – number shown
has been extrapolated based on 2003 figures
2) Based on new accounting

Figure 7.26 Development of Volkswagen Financial Services

Sources: VW financial reports, broker reports, press
208 Major challenges

These banks provide a complete product and service portfolio. VW

Financial Services sells a large product range including accounts, credit,
loans, insurance policies and leasing. The range of products on offer at
DaimlerChrysler Bank and BMW Bank is less broad, but covers all of
the customers’ basic needs. Such retail banking activity has been
developed by leveraging partnerships with specialized suppliers. VW,
for instance, has signed dozens of contracts with companies including
Neue Leben, HDI, Allianz and SEB Invest for insurance and investment
products. VW and BMW have also signed agreements with some of the
very same companies.
The development of OEMs’ retail banking activities has been progressive
and is set to continue across Europe. VW Financial Services, created in 1990,
has progressively broadened its scope in Germany by introducing private
accounts and investment management services. VW wants to expand these
activities by winning non-VW brand customers, and intends to extend its
financial product range to other European countries. DaimlerChrysler Bank,
which has expanded the scope of its specialized financial services and cites
cementing customer relationships as its primary objective, is now planning
to extend its activities to other countries. The same expansion objectives also
apply to BMW when it comes to direct banking.
Is this model unique to Germany? Given the enormous success of this
activity, could other OEMs apply the model? Is retail banking a growth
opportunity, and does it support OEMs in further developing their brand
and position? Surely it does, but we also believe that certain character-
istics specific to the German banking sector have contributed to the
success experienced by German OEMs.
First of all, the banking sector in Germany is highly fragmented,
comprising large private banks including Deutsche Bank and Dresdner
Bank, as well as many local banks and savings banks. The current players
are often relatively weak. Second, automotive distributors already have a
strong advisory role. The OES channel, for instance, is the most
developed for insurance products. Third, the awareness of OEMs’ brands
in Germany is extremely high. Strong value is attached when a customer
has a BMW credit card in his pocket because it reveals that he or she owns
a BMW vehicle. A fourth factor is the banking habits of German
customers, who tend to hold accounts at more than just one bank. This is
not the case in many other countries including France. A fifth factor is the
specific weight of funds compared with a National Savings Bank
passbook, and the specific usage of checking accounts (Girokonto).
Those characteristics are very specific to Germany and do not neces-
sarily exist in the UK, France or Spain. We believe that OEMs in other
European countries would have difficulties employing this sort of model.
 The sales and after-sales challenge 209

Non-captives: the challenge of capturing market share in

new growth areas
For non-captives, the major opportunity resides in capturing market share
in new growth areas such as the fleet segment and the used car segment. A
number of challenges also exist, however. Non-captives would likely
improve their situation if they leveraged cross-selling potential with the
existing product portfolio and defined target sales channels in line with
future developments in automotive retailing (multi-brand dealers, large
dealer groups, large fleet management companies and so on). Forming
partnerships with the captive financial services providers of importers or
manufacturers in unexplored markets, and expanding regionally in
currently immature automotive financing markets such as CEE, may help
non-captives capture market share.

OEMs: the captive business model challenge

OEMs are obviously the only players to master all business models
described above: new car sales, used car buy-back and resale, car repair
and maintenance, spare parts wholesale, and financial services. OEMs are
also the first player encountered by the final customer, and while loyalty to
the dealer network may differ from one country to another, it is generally
high. According to the analysis below, customer loyalty does not depend
solely on the age of the vehicle, it also depends on where the customer has
purchased the car and whether it is a new or a used car. For a used car
purchased at the dealer, the loyalty to the dealer is still high even if the car
is already old. This curve is extremely important for OEMs, and is a key
indicator to monitor the retention of their customer base (Figure 7.27).

89

66
51
40 New cars + used cars bought
in the OEM's network
40
24
17 Used cars bought elsewhere
12

1 year 4 years 7 years 10 years Car age

Figure 7.27 Customer loyalty to dealers for service (per cent)

Source: Roland Berger Strategy Consultants
210 Major challenges

OEMs face threats on many fronts. Eurodesign and the impact of BER,
consolidation of dealer groups and IAM wholesalers, the increasing pene-
tration of adaptable parts, the growing influence of insurers, and the
number of ageing cars in use are just a few of the threats. But OEMs have
the upper hand when it comes to technology; they also own original parts
and specifications, are able to monitor the used car buy-back process, and
have firm control over financial credit.
All the same, the key success factor for OEMs is to develop an even
more integrated business model, leveraging their ‘bundling’ compet-
itive advantage across several dimensions. The first step could be to
leverage trade-offs between new and used cars by further monitoring
car flows and the buy-back process through maximizing their European
scale. In a second step, the trade-offs between captive and competitive
spare parts wholesale could be optimized by further expanding
wholesale activities, better controlling spare parts flows, and by opti-
mizing pricing and logistics. A third step could involve improving
repair and service control. This could be achieved by further consoli-
dating their own repairer and body shop networks, and by maintaining
competitive advantage and entry barriers in diagnosis capability.
Further development of the customer experience and service quality
could also be achieved at this stage. In a fourth step, OEMs could try to
develop captive financial services beyond new cars at the point of sale
through leveraging bundled offers and proposing creative solutions to
the customer to beat the competition. A fifth step could involve devel-
oping strategies to retain the final customer in the OES channel, by
bundling warranty extensions, mobility services, roadside assistance
and other services.
Facing those challenges will also require adapting the distribution
organization. This must be done at several levels. Many sales and
marketing processes could be managed on an even more European
basis, especially with respect to used and new car pricing and
marketing. An increased level of integration will be required to better
control the distribution, implying the reduction of independent national
sales companies, or to develop more entrenched alliances and to
increase the weight of affiliates. Distribution costs can be further opti-
mized by adapting the traditional country organization into leaner
structures, especially to cope with small countries within the newly
formed EU-25. In this context, leaner structures could mean clustering
business into regions with shared activities at the regional level. Many
activities, from call centres to HR payroll processes, can also be
outsourced.
 The sales and after-sales challenge 211

CONCLUSION: WHICH PLAYERS WILL

MANAGE TO CAPTURE VALUE ALONG
THE CAR LIFECYCLE?

The automotive sales and after-sales landscape will continue to evolve

over the next few years. Market players will have to adapt their business
models to survive in this new environment. New threats will develop, but
automotive market participants will also gain opportunities to capture
additional value throughout the car lifecycle.
Despite the strong acceleration over the past five to eight years, the pace
of evolution in this sector is rather slow. This is a result of industry frag-
mentation, the evolution of the car market (a model lifecycle is between
10 and 15 years!), and the regulation spread. Another factor contributing
to the slow pace of evolution is specific to Europe. No single market in
Europe is completely identical to another owing to different regulatory
environments, different car market profiles, different types of players and
different customers’ habits.
Projecting the winners and losers that will emerge in 10 to 15 years time is
difficult given the complexity of the different markets and drivers.
Irrespective of the market, one key strategic issue is how the relationship
between captive and non-captive players will pan out. Despite the difficulty of
projecting winners and losers in the near future, we have sketched out three
potential scenarios for 2015 to 2025 to illustrate how the sector could develop.
Although the sketched scenarios are perhaps a little exaggerated, they
are based on our trend analysis. We have also taken into account the
contrasting situation that already exists between European countries today,
for example between the UK and Germany, and Spain or Italy and France.

Let’s assume we are in 2020.

The ‘fully captive’ scenario

Given the new technologies that have been introduced over the past 10 to
20 years such as X-by-wire or multiplexing, cars have become so complex
and repairs so specific that it is near-impossible to have them repaired
anywhere else but at the OEM. Car maintenance these days has more to do
with providing updates for the different software inside the car than with
changing tyres. As a consequence, multi-brand repairers have either
vanished or are restricted to repairing very old vehicles. Only OEMs have
the ability to maintain and repair new cars.
212 Major challenges

Remote maintenance tools and assistance warnings that oblige the

customer to bring the vehicle back to where it was purchased also directly
bind the vehicle and the place of purchase. A similar situation exists in the
used car market. Used car customers are offered such attractive financial
services and insurance conditions as well as other services that they
become tied to the place of purchase. The IAM has shrunk because cars
cannot be repaired there, suppliers – unable to sell many parts in this
market – are firmly locked in by OEMs, and easy-to-fit parts such as some
spark plugs, wipers and tyres are sold by retail store chains. OEMs are
vertically integrated, with subsidiaries in most critical geographical areas.
They have developed fleet management services, either internally or via
partnerships, to offer LTD solutions to private companies.

The ‘fully non-captive’ scenario

Cars have become too expensive to purchase, too expensive to repair, too
polluting, and not safe enough, according to the European Commission.
Various major independent players and ‘specialized prescriber groups’ are
increasingly defining the rules of the market owing to their influence on
customer choice. Customers are more frequently choosing vehicles based
on ratings from specialized agencies and institutions. These favour certain
criteria such as fuel consumption, safety, quality, ergonomics, contri-
bution to sustainable development, buy-back value, total maintenance
cost, and body shape selection flexibility. These specialized agencies have
even developed their own official label.
The sales channel is driven by various non-captive and independent
players such as banks, financial institutions, insurance firms and fleet
management companies, all of which offer their customers bundled solu-
tions. For instance favourable credit is offered for real estate investments,
which is bundled with the LTD rental of a fully-serviced family car, and a
full insurance package covering both vehicle and house is thrown into the
deal as well. The package also enables customers to change their car
model throughout the year, when it suits their needs. The customer can
drive, for instance, a monospace vehicle over the weekend, a 4-wheel
drive on vacation, and a coupe for work. The customer can choose not
only between different types of vehicle but also between different brands.
These independent players have partnered with selected, referenced
fleet management companies with whom they have negotiated specific
rates for new and used cars. Repair and maintenance is fully managed by
the independent company, which provides such services as roadside assis-
tance, pick up, and repair at referenced repairers. The end-user does not
 The sales and after-sales challenge 213

know what parts have been replaced in the car because everything is
covered in the contract. OE parts, matching quality parts, adaptable or
reused parts are not visible to the end-user. Customers simply purchase a
completely tailored contract providing full mobility service.

The ‘retail’ scenario

Distribution is controlled by powerful automotive distribution groups that

not only sell cars but also provide all related services, including financial
services, leasing and LTD. These players were once dependent on OEMs,
but their size and multi-make contracts have granted them greater inde-
pendence over the past years. Automotive distribution groups are also
deeply involved in wholesale and repair activities, made possible through
their own pan-European structure. Some have even developed a global
structure. This situation arose following mergers between large multi-make
dealer groups and previous IAM wholesalers and repair networks. It was
also spurred along by organic growth in emerging countries such as China
and India, and by alliances with distributors in the United States and Japan.
The distinction that once existed between the captive OES channel and
the non-captive IAM channel is no longer in place. Automotive distri-
bution groups are capturing customers and are in charge of defining
sourcing policy for new cars, used cars, spare parts and financial services
providers. They are starting to impose product and service specifications
(car range, options and specific equipment) and are even selling cars and
services under their own brand. Spare parts are sourced from an
assortment of offers from their global footprint based on the best cost and
rebates. Distribution groups also offer their customers innovative solu-
tions such as multi-brand showrooms, one month’s car trial, and bundled
services. The market is divided between producers, OEMs, suppliers and
distributors in a retail logic set-up.

Striking the balance

The future will likely contain elements of all three scenarios. Germany is
the European country that already most closely fits the captive scenario,
while the non-captive scenario can best be seen in the UK, and the retail
scenario is best demonstrated in France. The balance that is struck
between the players will be the determining factor in any scenario that
develops. That balance will not be easy to find, since the bargaining
power of many players is almost equal and a mutual dependency
214 Major challenges

connects them. The equilibrium reached in each European market will

depend on various factors.
One important factor is the country and market structure within any
particular country. What will be critical in this context is the level of
concentration among the different players, whether it is the OEM’s home
market, how integrated the banking and insurance system is, and how
developed the OEM’s brand equity is.
A second important factor is the maturity of the market. Whether the
market is emerging or is already mature is a key question in this context.
The maturity of the market also takes into account such factors as the
transformation of the pool of cars and changing consumer habits.
Customer groups are also a factor that will affect the relationship
between the players. Here a balance needs to be reached between the
premium versus the volume segment, family versus youth, and even urban
versus rural. The specific strategy taken by individual players, including
brand and international development, will also be a critical factor.
The winners of this battle for value will likely be the players with the
most financial power, the closest relationships with customers, and
those that can best bundle opportunities. Independently financed players
with only one business activity, brand and geographic area will lose this
battle. To a large degree, the winners in terms of capturing value along
the automotive lifecycle are already visible. It is easy to imagine an
automotive landscape composed of four types of players: OEMs, large
distribution groups, financial and insurance groups, and large profes-
sional customer groups.
Yet the mutual dependency between these players will become too
strong to allow any one player to dominate the others along the value
chain, as we depicted in each of the three scenarios. This powerful mutual
dependency between the players with strong bargaining power will create
the need for alliances or partnership structures. Based on predefined
strategies, these partnership structures will be developed to address a
specific market or customer segment.
In the premium car segment in emerging countries, for instance, a
strategy that could be taken by an OEM would be to maximize vertical
integration (as depicted in the captive scenario) but to simultaneously
develop alliances with large fleet groups and financial companies. A
volume OEM not operating in its home market could favour a strategy that
involves partnering with key distribution groups and the development of a
differentiated offer to compete with incumbent players (as we sketched
out in the retail scenario).
The objective pursued will always be the same: to offer increasingly
broad but tailored mobility solutions to the end-customer at lower and
 The sales and after-sales challenge 215

lower total cost. The automotive distribution value chain in Europe is far
from optimum. Significant improvements can be made. Like other industry
experts, we believe that 30 per cent of distribution costs could be elimi-
nated or replaced by providing more added value to the final customer.
216

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Part II

Case studies
218

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 219

Partnership as a model
for success
Franz Fehrenbach, Chairman, Robert Bosch GmbH

This chapter considers cooperation between automobile manufacturers

and their suppliers.

INTRODUCTORY REMARKS

In the course of many decades, German and European automobile manu-

facturers and their suppliers have worked hard to achieve their leading
position in the world. A key factor in this success is the tradition of close
cooperation, which has proven its worth and is just as valuable today as it
has always been. This partnership was and is the prerequisite for the state-
of-the-art technology with which the German car industry has made a
name for itself across the globe. However, manufacturers and suppliers
must now come to grips with profound changes of various kinds.
One of the main drivers behind these changes is the shifting of weights
in the global automotive market. Asia continues to gain momentum as the
world’s most dynamic growth region. On the one hand, the emerging
markets of Asia present enormous sales opportunities; on the other, inter-
national competition is becoming increasingly stiff. New contenders are
coming of age in China and in India. Their goal is to establish themselves
as major players, not only domestically, but also in international markets.
In addition, new market segments are developing: in the emerging
markets of Asia and Eastern Europe, the demand for economy cars is
220 Case studies

growing. Despite their low price, these vehicles must comply with key
consumption and emission standards, since the need to conserve resources
and protect the climate is also growing, and this on a global scale. Such
cars are also attracting the interest of buyers in established markets. If it
wants to participate in global growth, then it is especially the German
automobile industry, with its strong focus on advanced technology, that
must find appropriate responses to these changes.
The sharp upswing in the price of oil poses a further challenge, and has
rekindled the debate about future drive systems. If the automobile is to
remain the favoured means of transportation, the car industry must find a
suitable response to this debate. Moreover, with more and more cars on
the road worldwide and with an increasing density of traffic, heightened
demands will also be placed on safety.
At the same time, the automotive sector is marked by growing
complexity. One reason for this is the growing diversity of models;
another is the industry’s increasing international spread. Among other
things, this is leading to a change in the way automotive partners co-
operate. Suppliers are assuming more and more tasks in development and
production, tasks involving entire vehicle systems.
These numerous changes raise some important questions. Is the idea of
partnership viable under these new conditions? What form will coopera-
tion between automobile manufacturers and suppliers take in the future?
What factors will be most important for successful cooperation between
partners down the line?

THE EXAMPLE OF ESP: THE STORY OF A

SUCCESSFUL PARTNERSHIP

When considering how partnerships can function successfully in the auto-

motive industry and what factors come into play, one example that readily
springs to mind is the development of ESP. Technologically, ESP was
based on ABS, also developed as a joint effort between today’s
DaimlerChrysler AG and the Bosch Group. When it came to further devel-
oping the ABS system, the two companies initially took separate paths.
The challenge they shared was to stabilize the vehicle against lateral
forces; stabilizing it in a longitudinal direction was no longer enough. A
Bosch engineer came up with the idea of a lateral slip control utilizing two
lateral-acceleration sensors. At the same time, Bosch was in the process of
developing a more economical single-channel ABS, which in the end
 Partnership as a model for success 221

proved not to be viable. The need for an additional sensor, a yaw-rate

sensor, became apparent. Consequently, a decision was reached to
develop a vehicle dynamics control system based on high-quality four-
way hydraulics. In winter trials, engineers from Bosch and
DaimlerChrysler demonstrated their differing solutions to each other. All
involved agreed to cooperate even more closely in the future, and to use
the concept developed by Bosch as the basis for continuing the project.
This marked the start of a joint project. Both sides established project
organizations, each comprising nine teams of experts in the relevant disci-
plines: sensor technology, hydraulics, control unit engineering, controller
and software application, measuring and test engineering, simulation, as
well as purchasing and sales. The advantage of this mirror-image
approach was that each of the specialists could contact his or her counter-
part at the other company directly, without resorting to time-consuming
official channels. In software development, where especially close co-
operation was required, a core team of experts from both companies was
assembled and assigned its own project facilities. This organizational
structure alone meant that development took a good year less than origi-
nally planned. As a result, ESP was ready for its market launch as early as
the mid-1990s.

Many obstacles along the way

The path to ESP was strewn with numerous technological challenges,

notably in the area of software. For example, testing revealed that the
initial prototypes were unable to distinguish between cornering on a
steeply banked surface and spinning out on ice, since both situations
involve only minimal lateral acceleration forces. Consequently, algo-
rithms had to be developed to identify both the traction properties of the
road surface and the banking angle of the vehicle. Such detailed work
requires not only intensive communication with the customer, but also a
willingness by both parties to carry out projects with uncompromising
commitment. It also requires the ability to endure setbacks.
One key task was to adapt the yaw-rate sensor, the heart of the ESP
system, to the requirements of the automobile. This kind of sensor was
developed for space travel. In a rocket, such a sensor must function under
extreme conditions, though here it is generally designed for one flight
only. In an automotive application, on the other hand, it is expected to
remain intact throughout the entire service life of the vehicle. But the task
was not only one of developing the sensor itself. If the system was to
achieve success in all segments of the market, then a solution had to be
222 Case studies

found that was suitable for large-scale series production and thus cost-
effective. And today, a sensor that once required a bulky housing is
contained in a micromechanical chip no larger than a fingernail. It is also
now available for a hundredth of its original cost.

What can be learnt from the example of ESP

ESP has been a success story for years now. The legendary ‘elk test’ trig-
gered a major surge in demand. At the time, Bosch managed to ramp up
large-scale series production of ESP for the Mercedes A class within just a
few weeks. This would have been impossible without the teamwork and
coordinated project work with the manufacturer that had become routine
during the development phase.
By the end of 2005, Bosch had delivered more than 15 million systems.
Almost three-quarters of new cars currently sold in Germany are
equipped with ESP; the total figure for Western Europe is 40 per cent. All
manufacturers here support initiatives like the EU e-Safety programme,
which aims to halve the number of road deaths by 2010. This requires
that an increasing percentage of cars and trucks be equipped with ESP.
This percentage will also grow in the United States, as independent
studies have confirmed that the significant safety benefits of ESP apply
equally to American road traffic.
This example of the joint development of ESP touches on virtually all
the factors that make for successful cooperation and partnership between
car makers and suppliers. These include:

ᔡ the independence and responsibility of both parties;

ᔡ the common goal of technological leadership;
ᔡ cost-effective structures and processes;
ᔡ international cooperation;
ᔡ a shared long-term perspective.
 Partnership as a model for success 223

FACTORS IN PARTNERSHIP

The first factor in partnership: independence and

responsibility

In the automotive industry, a key international sector, major successes

have many sources. One of the main reasons for the technological lead-
ership of the German and European automotive industry is undoubtedly
the close cooperation of car manufacturers with independent suppliers
acting on their own responsibility. Close cooperation is characterized by
common goals: both partners work to achieve overriding common
objectives to their mutual benefit. Manufacturers and suppliers see
themselves in many respects as being in the same boat, but especially
when it comes to ensuring that the automobile remains appealing to
consumers on a long-term basis, while at the same time remaining
geared to changing demands on environmental compatibility, safety and
economy.
Entrepreneurial independence and responsibility means that each party
involved is responsible for its own business success, and therefore retains
the authority to decide whether or not to enter into contractual relation-
ships. The other side of the coin is, of course, loyalty to the terms of a
contract, which leads to a complex web of economic interdependencies.
In this regard, business always involves a system of dependencies.
However, this system must be designed for the benefit of all concerned. A
one-sided advantage is generally possible for the short term only, and even
then it poses a threat to the long-term success of the parties involved,
including the supposed ‘winner’.
The independence that allows companies to enter into contractual rela-
tionships brings with it all the fundamental advantages of the division of
labour. Each partner company specializes in its strengths, concentrating its
competence on the further development of those areas in which its special-
ization holds particular advantages. And since both sides must also
compete in the marketplace, both feel the pressure to drive innovation and
efficiency with great creativity, as well as to adapt flexibly and consistently
to changing requirements. Based on this proven division of labour, the
ideas and developments of suppliers contribute significantly to techno-
logical progress throughout the entire sector. At the same time, they must
make every effort to produce systems and components as cost-effectively
as possible. And in cooperation with manufacturers, they must ensure that
the various systems in a vehicle are perfectly compatible with each other.
224 Case studies

Inequality of power
The independence of suppliers results in tangible benefits for all
concerned, yet working relationships often suffer when there is a disparity
in power between the partners. The fact is that concentration has sharply
increased in the industry. Automobile manufacturers have grown into
worldwide conglomerates that consistently utilize their strong positions,
especially when it comes to purchasing. In principle, what serves to check
this increase in manufacturers’ market power is the proportion of value
added contributed to the automobile by suppliers in general, which has
now grown to between 60 and 70 per cent. To counter this, manufacturers
pursue a strategy of breaking down systems into components, to enable
them to purchase interchangeable parts at lower prices.
Purchasing prices are not all that is under pressure today. There is a
growing trend towards transferring a greater share of quality risks and the
associated guarantee costs to suppliers, often in full awareness of the risk
of adversely affecting their capacity for innovation. Especially for small
and medium-size suppliers, an individual order can be critical to the
survival of the entire company. For this reason, they are extremely limited
in their freedom to say ‘no’, and often agree to accept risks that carry with
them a potential threat to their very existence. Appealing here to the
manufacturer’s sense of fairness may be an honest approach, but in light
of today’s gruelling competition on all sides, it holds little promise of
success. The consequences are only logical: shake-out and increasing
concentration also in the supplier camp.

Competence and a broad footing support independence

Having the strength to maintain an independent position means that a
supplier must have a strong and reliable capacity for innovation, quality
and cost-effectiveness. Also of key importance is the ability to draw on a
broad portfolio of customers and products, as well as to utilize a global
presence. Ever since Bosch was founded, it has been working systemati-
cally to fulfil these requirements. The company has gone even further by
entering into markets beyond the area of automotive technology, with
good business success.
Bosch has achieved presentable results with this strategic orientation:
sustainable, positive growth over the course of many decades, coupled
with a stable financial position. This in turn puts Bosch in a position to
make major up-front investments in new technologies, while offering its
customers long-term, stable cooperation that is successful for both sides.
Our observation is that this approach of achieving and consistently
defending a position of independence is in the best interests of the entire
 Partnership as a model for success 225

automotive industry, an observation which is clearly borne out by the

many negative examples of other companies that had for a long time
pursued a different approach. This is especially apparent today in North
America, where domestic manufacturers and suppliers alike are strug-
gling with major economic problems. In the cultural contexts of Japan and
South Korea, there has long been a tradition of close ties between manu-
facturers and suppliers, even to the point of cross-investments and
holdings. Such a relationship affords the supplier comparatively little
decisional autonomy. For the most part, responsibility for technological
development here is also in the hands of the manufacturer, with suppliers
taking on a largely in-house role.
But here too the situation is beginning to change, as the automotive
industry can no longer take part in the global market on the basis of export
activities alone. The impetus to change is coming from both sides: from
manufacturers, who cannot simply take their suppliers with them when
expanding into other regions, and from suppliers, who either seek co-
operation with leading international systems suppliers with specific
know-how or wish to establish a worldwide customer base themselves.
Generally speaking, Bosch has already achieved what these companies
are working towards: independence based on competence and a broad
international footprint.

The second factor in partnership: the common goal of

technological leadership

The purpose of a partnership is to bring each party’s specific skills and

capacities to bear on common challenges and goals. If the European and
German automotive industry is to prevail in global competition, manufac-
turers and suppliers alike will have to master three main tasks: to maintain
technological leadership by means of innovation, continue to improve
quality standards, and offer products at competitive prices.
Especially over the past 10 years, a wide range of innovations have
played a crucial role in the success of the European and German auto-
motive sector. These advances have helped boost vehicles’ performance
dramatically, in terms of fuel consumption and emissions as well as in
terms of safety, comfort, and driver support.
Bosch has also participated in this positive development, even though
expanded activities outside Europe have accounted for a major portion of
the substantial sales growth recorded in its automotive technology business
sector, a growth in sales from 10.5 billion euros in 1995 to some 26 billion
euros in 2005. The greatest contribution Bosch has made to the innovation
226 Case studies

drive over the past 10 years is to be found in the development of ABS and
ESP, in direct-injection systems for diesel and gasoline engines, and in navi-
gation and driver assistance systems. To achieve this, the Bosch Group has
continuously increased its research and development expenditures in its
automotive technology sector over the same period. Today, these expendi-
tures represent more than 9 per cent of sales in this sector, considerably
above the industry average.

Suppliers assume more and more responsibilities

Such exceptionally high research and development expenditures of Bosch
and other automotive suppliers clearly reflect the fact that suppliers are
taking on a growing share of vehicle development tasks. The trend among
car makers is to concentrate more on overall vehicle architecture, specific
model features and design, as well as on assembly, marketing and service,
in order to prevail in today’s globally merging markets.
In this context, suppliers are playing an ever more important role in
driving innovations, becoming more active in the development and
production of systems and special components. In the end, this is also
absolutely necessary to ensure that innovations remain economically
viable. Provided suppliers are independent and work with different
customers, they can stay in a position to manufacture in the large
production runs required to amortize their high R&D costs. Ultimately, it
was this ability that allowed Bosch to carry out such developments as ESP
and high-pressure diesel injection.

Forward-looking cooperation: AUTOSAR

Future developments in automotive technology will be driven by elec-

tronics even more than has been the case up to now. The share of elec-
tronics in vehicles will thus continue to rise in the years to come. Yet
electronics, alongside the greater diversity of models and variants, today’s
significantly shorter model cycles, and the enormous range of sub-
systems used, is a major driver of complexity and cost. Generating viable
solutions for the future under these circumstances places exceptionally
high demands on partnerships between manufacturers and suppliers.
In 2003 Bosch was one of the founding members of the industry
alliance AUTOSAR, together with other German suppliers and manufac-
turers. This acronym stands for ‘Automotive Open Systems Architecture’,
and accordingly the partnership is dedicated to developing a concept for a
common, standardized electrics/electronics architecture. The concept is to
 Partnership as a model for success 227

be introduced to the market as a way of replacing a number of conven-

tional company-specific solutions. Nearly all major manufacturers and
suppliers worldwide have now joined the initiative. AUTOSAR is thus not
only an example of how partnership allows growing systems complexity
to be brought financially under control to the benefit of all involved; it
also takes account of the increasing levels of global interdependence. The
initiative gives each partner the freedom to differentiate in order to secure
a competitive advantage. At the same time, it will be possible to develop
uniform basic software functions which have no immediate bearing on
competitive position.

The common goal of quality

Along with reducing the development costs of electronic systems, a key
objective of AUTOSAR is to master the complexity of such systems,
which results from the proliferation of control units in the car. Many cars
today have as many as 70 control units. For the future, it is planned that
a network of some 20 control units will regulate all vehicle functions.
This complexity is by no means arbitrary, but for the most part the
logical consequence of current demands with respect to emissions and
fuel consumption, as well as safety and comfort. However, malfunctions
as a result of complexity have given rise to a new quality debate among
customers. Breakdown statistics in recent years have shown that quality
leadership no longer resides with German premium car makes. On
occasion, manufacturers and suppliers have even publicly blamed one
another for quality deficits. Such a debate is damaging to the entire
industry, regardless of where responsibility for the shortcomings may
lie. The situation has now improved considerably, and statistics reflect
initial positive trends. And German cars are regaining lost ground in
quality rankings.
An important milestone was reached on 22 June 2005: the agreement
‘Quality, the Foundation for Joint Success’ between manufacturers and
suppliers on the managing board of the German Association of the
Automotive Industry (VDA), an agreement which also regulates commu-
nications. The focus of this agreement is on partnerships between manu-
facturers and suppliers, not only in terms of external communications, but
also in terms of sharing knowledge and taking rapid, coordinated action
when the necessity arises.
Partnership is built on trust and transparency. Trust means that critical
and difficult issues as well as outright bad news are discussed openly and
without delay. Problems are solved by working together. This applies to
all corporate levels, internal as well as external. As a systems supplier,
228 Case studies

Bosch must act as both transmitter and receiver of such information in

communications with its customers and suppliers.
Transparency means that each partner must be aware of the other
partner’s current projects, what modifications are planned, and how the
products will later be deployed, even if a system or component is to be
deployed in a model not originally planned. However, should this benefit
a product, partnership also means adopting quality tools that have been
used successfully by a partner. For instance, Bosch has adopted a number
of quality tools from Toyota.
In the future, Bosch will review its own processes and those of its
suppliers more intensively than ever before for ways of optimizing
quality. As tier 1 automotive suppliers become fewer in number, we have
a greater responsibility for tracking the high-quality demands of car
makers throughout the entire supply chain. In doing so, it will be essential
for us to extend the spirit of partnership to include every supply level.

Innovative products for new market segments

The German automobile industry has experienced most of its international
success over the last 10 years with premium vehicles. In many areas,
German suppliers have stood for high-tech systems and products. In the
10 years to come, however, the most significant growth can be expected
with cars selling for under 10,000 euros net, or even less than 7,000 euros
net in some cases. And this applies not only to emerging markets in Asia,
but to Eastern Europe as well. New responses are called for.
These markets are demanding low-cost vehicles that can still meet
minimum standards with respect to fuel consumption, emissions and
safety. For example, for the meantime the Euro 3 emissions standard for
diesel engines applies to Beijing and Shanghai. Only with modern elec-
tronic injection systems is compliance with this standard possible. At the
same time, new local manufacturers are maturing in emerging markets
such as India and China. These new contenders have set their sights on
precisely this target group, and are also looking to succeed worldwide
with such cars. But it is not only German suppliers who need to answer the
all-important question, whether they are able to deliver the right products
in order to do business with these new manufacturers. It would help if both
German manufacturers and suppliers were to work together on techno-
logical solutions to exploit these market opportunities.

Shared market interests

One example of shared market interests, which more than anything
brought Bosch and manufacturers closer together, resulted from the debate
 Partnership as a model for success 229

on particulate matter in 2005. In Germany, the controversy was focused

almost exclusively on diesel engines. With its undisputed benefits for fuel
consumption and climate protection, diesel technology has significantly
strengthened the competitive position of the European and German auto-
motive industry in recent years. Germany has profited considerably as a
business and industry location. In 2005, roughly half of all new passenger
vehicles sold in Europe were equipped with diesel engines.
A heated debate threatened to end this success story, particularly in
Germany, after a strict EU directive on particulate matter came into effect
in early 2005. It remains undisputed that diesel emissions from local
passenger vehicle traffic constitute as little as 3 per cent of particulate-
matter pollution in our cities. Yet the German public perceived diesel
engines as the sole culprit, even though the image of diesel-powered cars
as sluggish polluters should be a thing of the past. Diesel engines have
become not only more fuel-efficient and agile, but also significantly
cleaner: internal engine improvements alone have reduced particulate
emissions by a good 90 per cent since 1990.
The Euro 5 standard, planned for 2010, foresees particulate emission
levels close to zero for new cars. In addition, early replacement of older
vehicles would further reduce these emissions by almost 20 per cent in
five years, and this applies to all diesel-powered passenger cars on the
road. Not least thanks to a persistent information campaign by the auto-
motive industry, more objectivity was brought to the debate. This is also
necessary if the diesel is to exploit its potential beyond Europe.
The ‘globalization of diesel’ is in the interest of the entire European
automotive industry. It has a technological advantage in this area which it
should utilize on a global scale. Diesel acceptance in North America is
crucial, and accomplishing this will require a joint marketing strategy for
the European automotive industry. Bosch has already made a large-scale
commitment, with measures including ‘Diesel Days’ and a test-drive fleet.
Initial success can be seen: approximately two out of every three drivers in
the United States plan to at least consider a diesel when buying a new car.
Were its proportion of diesel-powered light utility vehicles at the
European level today, the United States would be largely independent of
oil imports.
In 2005, the US Congress agreed on measures to promote fuel-efficient
vehicles. Fortunately, this applies to diesel-powered cars as well as hybrid
models. The addition of the particle filter further improves the chances for
‘dieselization’ on the other side of the Atlantic. Bosch is also working on
control concepts and metering systems aimed at reducing nitrous oxides
to comply with US07 limits in all states. Development projects involving
American and European manufacturers are in progress.
230 Case studies

A further challenge for the European automotive industry is the simulta-

neous development of hybrid solutions. Hybrid drive concepts are mainly
suitable for stop-and-go traffic, and thus offer most of their benefits in
urban areas. Accordingly, the market share of hybrid passenger cars and
light utility vehicles in Japan could reach 10 per cent by 2015. More
modest changes are predicted in the American market, despite notable
initial successes scored mainly by Toyota. The United States is a nation of
long distances, heavy cars and powerful engines. This situation cries out
for partnerships between manufacturers and suppliers, partnerships that
will allow them to shoulder the costs of developing this technology
together. Bosch is working intensively on various hybrid concepts, and
has established a ‘Competence Centre for Hybrid Systems’ dedicated to
this purpose.

The third factor in partnership: cost-effective structures

and processes

Structures and processes in the automotive sector must reflect the

changing demands of the market. Along with technological leadership,
this is a fundamental prerequisite for the future joint success of manufac-
turers and suppliers. As already mentioned, an ever larger proportion of
value added is being shifted from manufacturers to suppliers. The asso-
ciated changes in the division of labour necessitate further structural
adjustments in the cooperation between manufacturers and suppliers, as
do abbreviated product lifecycles and expanding product variant ranges.
Moreover, the growing number of production sites maintained by manu-
facturers and suppliers at locations all around the world results in
heightened demands on all business processes.
These challenges cannot be mastered by individual companies alone, nor
can they be mastered through individual measures. The entire value added
chain, beginning with the product-creation process, must be looked at.
Here, more than at any other stage, close cooperation in the spirit of part-
nership is required. In a very early phase of product development, engi-
neers must begin to work in a close-knit network. This is the only way to
avoid unfortunate product design constellations that result in unnecessary
additional costs or even quality risks for the manufacturer or supplier.
It is not only in development, however, that customer and supplier must
closely coordinate their processes at an early stage. A logistics concept
must be defined almost equally early on. The same goes for a quality and
inspection concept for the supplier’s products. The goal must always be to
optimize the competitive position of both partners by avoiding the waste
 Partnership as a model for success 231

of resources in any form, while at the same time developing reliable

manufacturing methods that allow inspection processes to be minimized
at the end of the assembly line. This applies to the entire supply chain.

Geographical proximity remains important

The proximity of manufacturers and suppliers is becoming increasingly
important for the application stage. While new communications tech-
nology renders face-to-face meetings unnecessary in some cases during
the design and development phase, it is essential that engineers and tech-
nicians are able to practically get behind the wheel together during appli-
cation. In order to provide this hands-on service to customers in as many
countries as possible, Bosch is significantly expanding the number of its
application centres worldwide.
Once a component or system has gone into production, fast and
effective communications between supplier and manufacturer become a
top priority. Both parties must be in a position to take rapid and decisive
action in the event of a critical situation, be it a supply bottleneck or a
quality-related incident. This was illustrated by the example of diesel
pumps in early 2005: during production, ongoing endurance tests
conducted by Bosch indicated that a number of pumps failed to perform
for the length of the defined service life. Bosch swiftly relayed this
unpleasant and unwelcome finding to the automobile manufacturers
affected, and it was possible to halt delivery of vehicles with potentially
defective pumps to buyers. Furthermore, in cooperation with the manu-
facturers’ materials specialists, expert teams from Bosch were able to
isolate and evaluate the defect, and reach a decision together with their
partners on measures to correct it. The incident gave rise to a new
discussion on partnership in quality issues at the VDA, with fruitful
results. As mentioned above, the entire VDA managing board signed the
accord ‘Quality, the Foundation for Joint Success’.

Balancing innovation and cost leadership

Throughout the value added chain, each company in our sector is reliant
on the cost-effectiveness of its partners. First and foremost, however,
each is of course responsible for optimizing the cost-effectiveness of its
own operations.
As the world’s largest automotive supplier, Bosch faces the twofold
challenge of maintaining its leadership in technological development while
at the same time offering its products at competitive prices. Which of these
challenges outweighs the other depends on the maturity and age of a given
product. Bosch will continue to introduce pioneering developments such as
232 Case studies

ABS, ESP and high-pressure diesel injection in order to set itself apart from
the price competition. Yet it has become increasingly difficult to retain a
technological edge for any length of time, with the result that innovations
must now face stiff cost competition soon after they are launched. At that
point, if not earlier, it becomes crucial to optimize processes for cost-effec-
tiveness and to consider alternative production sites. For this reason, some
50 per cent of our R&D expenditures today are dedicated to product and
process innovations whose purpose is to reduce costs. At the same time, a
worldwide production network that includes low-cost sites in emerging
markets must be established at an early stage, even for high-tech products.
In the case of the highly innovative common-rail diesel-injection system,
nearly two-thirds of its value added is already created outside Germany. In
this way, Bosch not only meets the demand of producing locally within its
markets, but also reduces total manufacturing costs.
To realize the maximum earnings potential in a given area of business,
it is essential to recognize at an early stage the point at which the competi-
tive advantage of technological differentiation is superseded by price.
Business in systems is typically displaced by business in components as a
technology matures. Today, classic gasoline-injection technology is rarely
delivered as a complete system. However, it is considerably more difficult
to achieve technological differentiation with individual components, such
as injection valves or fuel pumps, than with complete systems. In this
case, the focus is on keeping costs as low as possible, and thus on
optimum processes.

Process optimization is called for

This demands a new, and above all self-critical, approach to processes.
Whether they involve development, purchasing, production or sales,
many processes on all levels of the value added chain are often still too
complex and thus too costly. In order to exploit the potential of greater
efficiencies, it is necessary to part with a number of traditional yet often
superfluous procedures. For example, in some cases Bosch had taken
complexity a step too far in automating its production. The Bosch
Production System, designed after a Japanese model, represents at least a
partial return to more straightforward processes and procedures.

A mix of high-cost and low-cost countries

Bosch, like other companies, must exploit the value-added potential of the
world’s low-cost regions in order to stay competitive. However, its prin-
ciples remain unchanged: for Bosch, there is more to intelligent locational
planning than cost management. Now, more than ever, skilled leveraging
 Partnership as a model for success 233

of an international development and production network is the key to

success. Each region of the triad requires a mix of locations, those offering
special cost advantages as well as those that benefit from proximity to
major customers or research centres. And it is still the case today that
Bosch plants in Germany have enormous strengths when it comes to new
product launches, not least thanks to their experience in handling complex
systems. On the other hand, their competitive position must be ensured by
integrating low-cost locations into the network.
The number of Bosch associates working in automotive technology in
Germany has risen to more than 65,000 over the past 10 years. However,
the automotive workforce outside Germany has doubled during the same
period, growing to more than 90,000. For the future, the question that
arises for us is how these jobs can be retained at today’s locations. And this
applies not only to Germany, but also to the rest of the world. It is impos-
sible to bring about wage parity between industrialized and emerging
countries. In essence, what we are after is an intelligent weighting of all
locational factors in order to create a balance between locations with
advantages in terms of know-how or of political and social stability on the
one hand, and locations in emerging countries with especially pronounced
cost advantages on the other. Such weighting cannot be a one-off action,
but must be continuously adapted in step with global changes.

The fourth factor in partnership: international presence

A further factor is becoming increasingly important for the success of the

industry, as well as in cooperation between car makers and their suppliers:
their international spread. The German automotive sector is now a global
business. This is especially true of Bosch. Some 75 per cent of our sales in
automotive technology are generated outside Germany, including non-
German production. Europe, with roughly two-thirds of sales, still
accounts for the lion’s share. Yet the two other regions in the triad, the
Americas and Asia Pacific, continue to grow in importance. In 2005, the
Bosch Group had around 110 production sites in 34 countries in auto-
motive technology alone.

Internationalization began early at Bosch

Bosch is an international company by tradition. As early as 1898, the
company’s founder Robert Bosch established his first sales office outside
Germany in London, just 12 years after his ‘Workshop for Precision
Mechanics and Electrical Engineering’ opened for business in Stuttgart. In
234 Case studies

1913, the last year of peace before the First World War, Bosch generated
nearly 90 per cent of its sales abroad. The key product in this early inter-
nationalization was the magneto ignition device. It made Bosch an auto-
motive supplier and established the company’s global presence, even at
that early stage. Following each of the world wars, however, Bosch had to
go though the difficult process of becoming re-established in international
markets. It was especially difficult to regain a foothold in the aftermath of
the Second World War, as by then the markets were firmly in the hands of
competitors. Moreover, unlike at the beginning of the 20th century, Bosch
was not in a position to offer a product with the same unique appeal as the
high-voltage magneto ignition device.
Like other suppliers, Bosch carried out its new internationalization
initiative in three steps. The company began by supplying original
replacement parts for exported German cars, including Volkswagen and
Mercedes, in the United States. The second phase began after German car
makers had established plants in countries such as Brazil, Argentina,
Mexico and Australia, as early as the 1950s and 1960s. To supply them,
Bosch built its own local production facilities, an especially important
move, as high import duties coupled with local content regulations would
have rendered delivery from German plants impossible. These facilities
continue to exist today, although now following the liberalization of
markets their main advantage is that they allow Bosch to be close to the
customer and to utilize generally lower wage costs. In a third phase, Bosch
succeeded in winning over non-German car makers as original equipment
customers. In the 1990s, important milestones in internationalization
included the acquisition of the brake business of the American manufac-
turer AlliedSignal and the assumption of industrial leadership at the
Japanese supplier Zexel.

Shifting growth regions

German manufacturers and suppliers must learn to accept that global-
ization of the automotive industry will continue. Most importantly, the
strongest growth will occur in Asia and Eastern Europe in coming years. If
German car makers and German suppliers wish to participate in this
growth, they must make an even greater commitment to international-
ization. This holds in equal measure for the Bosch Group. In the long
term, we aim to increase the proportion of our automotive technology
sales in the Americas and Asia from the present level of approximately 36
per cent to roughly 50 per cent. It is worth mentioning that international-
ization is by no means a one-way street. This is evident in the moves of
Japanese and Korean manufacturers to establish plants in the United
 Partnership as a model for success 235

States and Europe, as well as in the redoubled efforts of American and

Asian suppliers to expand their presence in the European market.

Global responses to local requirements

International presence is thus a key factor in partnership between manu-
facturers and suppliers. It is not just for cost reasons that Bosch has
established an international development and manufacturing network
for its core products. More importantly, a successful supplier must act at
least as globally as its customers. This also means being able to develop
local solutions for specific needs in each country. For VW and GM in
Brazil, for example, Bosch has produced a fuel-injection system that
functions with sugar cane ethanol in addition to gasoline. Such new
ideas can only be anticipated and carried through on the basis of a strong
local presence.
However, local solutions alone are not enough. The first ‘global ABS’,
which was introduced to the market in the mid-1990s, represented a mile-
stone for Bosch. It was shaped by the needs of Japanese car makers with
plants in Asia as well as in Europe, which wanted to be supplied with the
same system at all locations, yet with as much local content as possible. In
other words, the system had to be manufactured regionally or at least on
the same continent. A global ABS was the only solution that would allow
this to be achieved in combination with high production volumes. Only in
this way was it possible to minimize initial costs for development and
process technology.
Yet this did not necessarily mean that special customer wishes would be
neglected. Indeed, standardized key technologies provided the basis for
modifications. This approach even shortened release procedures. Once an
automobile manufacturer had approved an ABS component at one
production facility, there was no need to carry out another time-
consuming analysis on the other side of the globe. If this was to work,
there had to be identical manufacturing processes and machine tools at all
sites involved, in Germany, the United States and Japan just as in Australia
and South Korea. This coordination encouraged greater flexibility.
Despite local content requirements, case to case capacity bottlenecks
could be compensated for with deliveries from other plants. The
worldwide manufacturing network was backed up by a worldwide devel-
opment network. Accordingly, the design of the hydraulic modulator for
the global ABS emerged from a competition held within the company.
American, German and Japanese engineers participated, and the design
chosen to be manufactured included ideas from all sides. The process led
to a sustained intensification of cooperation on a global scale.
236 Case studies

Bosch has a broad international footprint

Today, Bosch operates more than 50 engineering and application centres
around the world. One out of three R&D associates works outside
Germany. Of these associates, some 2,000 are located in the Americas,
and roughly a further 2,000 in Asia. In Japan alone, Bosch employs nearly
1,000 automotive engineers. Development capacities have been concen-
trated there for good reason: automobile production may be growing only
modestly within Japan itself, yet as far as technical concepts for interna-
tional business are concerned, Japanese manufacturers continue to reach
important decisions in Japan.
The capacity to adapt locally to the individual needs of each manufac-
turer is therefore critically important if automotive suppliers are to be
successful globally. Accordingly, it was no coincidence that in 2004
Bosch decided to establish a new engineering centre with 2,000 engineers
in Abstatt, near Heilbronn in south-west Germany. A supplier wishing to
present itself and its know-how to the world side by side with German
manufacturers must be near the car makers’ development centres. At the
same time, Bosch set up further engineering centres in the Chinese cities
of Suzhou and Wuxi. Again, our software development centre in
Bangalore, India, provides valuable support for all our automotive tech-
nology divisions. For example, the Bosch subsidiary Blaupunkt also
utilizes the know-how of Indian software specialists in the development
of its navigation systems.

The fifth factor in partnership: a long-term perspective

The increasingly complex and international structures of the global auto-

motive industry are not the only factors influencing cooperation between
manufacturers and suppliers. Not only the hard, but also the ostensibly
soft factors play a role. Along with independence, these include a long-
term perspective.
In these hectic times of quarterly reporting, dictated by the finance
markets, there is no denying that the ownership structure of Bosch, with a
charitable foundation as its principal shareholder, makes it easier to take
such a long-term perspective. Bosch is in a position to commit itself to
major up-front investments over the long term without having to justify
the short-term financial consequences to the outside world. Especially for
fundamental innovations, perseverance is an asset.
The example of ESP demonstrates the extent to which the development
of electronic systems can become an obstacle course. Again and again, the
 Partnership as a model for success 237

path to success in innovation is fraught with difficulty, and can also be

long and hard. Even the development of ABS was certainly on the brink of
failure more than once. During the first winter trial of ABS in 1972, nearly
one in three control units broke down under gruelling conditions. The
electronic systems were prone to failure because they were made up of
over a thousand analogue components. When today’s DaimlerChrysler
AG and Bosch introduced ABS to the market in the Mercedes S class in
the summer of 1978, this marked the first application of a digital LSI
circuit in a series-produced car: the breakthrough that put electronics on
the road.

The need for stamina and perseverance

Nor was the current diesel boom a matter of course. It began in 1989 with
the Audi 100 TDI, the first passenger car with electronically controlled
direct injection. Bosch had worked tenaciously for 15 years to get this
technology up and running. No less demanding was the development of
the common-rail system to the point of maturity for series production in
the mid-1990s. For example, the nozzle needle play in the injectors had to
be manufactured to a level of accuracy measured in fractions of
micrometres, and initial yields of the pilot series were not even half of
what was expected. It was not easy to maintain faith in success in this
phase of development and preparation for series production.
Innovation drives alone are not enough to bring about innovations, nor
do they mean that good ideas will prevail in the global marketplace.
Stamina is called for, especially in the face of setbacks. The German auto-
motive industry’s strong international position is also the result of long-
term thought and action. In other words, technological advances are also
rooted in culture. The ability to be spurred on by setbacks along the way
and to defiantly face down temporary failures is the basis of the great
innovative strength that has characterized the German automotive
industry in recent years.
238 Case studies

PARTNERSHIP IN THE CONTEXT OF GLOBAL

CHANGE

What does the future hold? How will the coming changes affect future
cooperation? Will today’s factors remain significant?
The automotive sector stands a good chance of maintaining its position
as one of the world’s key industries also over the next 10 years. The undi-
minished desire for individual mobility, which is no less strong in today’s
developing countries and emerging markets than it is in wealthy industri-
alized nations, speaks in favour of this optimism. Mobility forms the basis
of modern society and also of a flourishing economy. As a flexible means
of transportation, the automobile plays a decisive role in this mobility.
At the same time, the automotive industry undeniably faces major
changes. One of the biggest challenges is the shift in the focal points of
global growth. By 2015, Asia will overtake both Europe and North
America to become by far the world’s highest-volume car manufacturing
region. And this is more than a purely regional development: it will also
bring with it structural changes in the automotive markets. What is more,
tough competition awaits established manufacturers, whether in Europe,
North America or Japan, from new players in today’s emerging countries.
The same can be expected for suppliers. This development is already
taking shape in China and India, further intensifying global competition in
the automotive sector among manufacturers as well as suppliers. In this
context, innovative products and processes will remain key factors, as
these alone can generate true progress in the industry.
Pressure of competition, increasing demands on innovative strength
and international presence, as well as the greater share of value added
assumed by suppliers (resulting in ever higher amounts of capital
employed): all these factors will lead to higher levels of concentration
among automotive suppliers. This prospect is not without its problems.
After all, amid growing concentration among manufacturers over the past
decade, it was the suppliers who provided much of the necessary flexi-
bility, and thus generated crucial impetus for the further development of
the automotive industry as one of the world’s most innovative sectors.
Considering this development, it will be even more important for the
individual supplier to hone an unmistakable and individual profile in the
future. Those who succeed in adapting to the process of change, systemat-
ically enhancing their innovative strength and international presence, will
be rewarded by considerable market opportunities.
How will this influence cooperation between manufacturers and
suppliers? The global market entry of new manufacturers and suppliers
 Partnership as a model for success 239

from developing and emerging countries will reshuffle the cards: that
much is certain. The question is, however, whether the rules of the game in
international cooperation will also be redefined.

Joint responses to future challenges

If the individual mobility that only the automobile can provide is to

continue growing on a worldwide scale, solutions to fundamental future
challenges are required. As was touched on at the beginning of this chapter,
these include the necessity to further reduce consumption and develop
alternative drive concepts, especially in light of finite oil reserves. Equal
importance must be attached to heightened demands on vehicle emissions
derived from increasingly strict legal regulations in all countries, intended
to counter global climate change. Furthermore, rising traffic density will
not only lead to even greater demands on vehicle safety; it will also neces-
sitate improvements in traffic guidance. And the fact that populations are
ageing means there will be more demand for additional comfort and driver
assistance, not only in today’s industrialized nations.
Finding responses to these fundamental future challenges calls for
considerable research and development expenditures involving the entire
industry. This calls for a concerted effort on the part of manufacturers and
suppliers. It requires not only bilateral partnerships between individual
companies, but also cooperation on a global scale. AUTOSAR is a good
example of what such a partnership might look like.
It is precisely here that significant future opportunities for the German
and European automotive industry lie, provided it can make its devel-
opment cooperation model viable for the 21st century. Its successes are
based on networks of close ties which have grown over a long period.
These represent a decisive competitive advantage, as business relation-
ships of this calibre are virtually impossible to establish artificially and on
a short-term basis. Alongside manufacturers and suppliers, these
‘clusters’ include an outstanding toolmaking and mechanical engineering
industry, a highly developed training system, as well as reputed colleges
of applied sciences, universities and research institutes. In addition,
awareness of the need to reduce consumption and protect the climate is
already strongly pronounced in Germany and the rest of Europe. For ideal
test markets, the industry needs to look no further than its own backyard.
However, the essential prerequisite for mastering these major chal-
lenges for the future of the automotive industry is cooperation built on
shared long-term perspectives, trust and partnership. This by no means
excludes intense competition between manufacturers and among
240 Case studies

suppliers. On the contrary: healthy competition is the only guarantee of

processes that are cost-effective over the long term. Consistently working
to establish and fine-tune such processes is the responsibility of each indi-
vidual company, for manufacturers and suppliers alike. However, shared
objectives and fair rules are also a must. Each party involved must be able
to profit from such joint efforts in proportion to its contribution, allowing
it to continue investing in the future and in its innovative capacity.
Anything else would endanger the long-term competitiveness of manu-
facturers and suppliers, indeed of the automotive industry as a whole.

Trust as a basis

Such relationships, as well as trust, will only survive if all those involved
feel they have been treated fairly and openly. Only then will partners agree
to join forces in long-term, capital-intensive (and risk-oriented) inno-
vation projects. It is on projects such as these that the future viability of
the entire automotive industry depends.
In light of the increasingly interdependent nature of the global auto-
motive industry, it is important to establish such a culture of trust on a
worldwide scale. That means agreeing on shared values or basic prin-
ciples. In some cases it also means returning to neglected or forgotten
approaches. Once established, the advantage of such shared principles is
that, despite cultural differences, they obviate the need for rigid rules.
From a business standpoint, they reduce risks, lower costs, and create the
basis for long-term relationships. To achieve this, it is essential that all
those involved recognize the fact that close cooperation based on part-
nership offers both manufacturers and suppliers decisive advantages in
confronting the common challenges they face, and thus a solid basis for
successfully taking the automotive industry into the future.
 241

Brand differentiation on
the basis of platform and
module strategies
Dr Bernd Pischetrieder, Chairman, Volkswagen AG

FRAGMENTATION

The global automobile market has been undergoing an intensive process

of change for some time now, with the borderlines between national
markets becoming increasingly blurred and the tempo of information
gathering pace at a tremendous rate. Technical developments are increas-
ingly speeding up, and at the same time the competitive environment in
the automobile markets is becoming progressively tougher.
The growing fragmentation of the markets has become one of the
biggest challenges facing the automobile industry. Recent analyses show
that in 1987, customers discerned nine different vehicle segments, the
perceived dimensions of this segmentation being in particular driving
pleasure, prestige, usefulness and versatility as well as price. By 1997
this number had already risen from 9 to 26 different vehicle segments,
while this year our customers are perceiving no less than 40 (Figure 9.1).
From the automobile manufacturers’ point of view this means that each
vehicle project requires the production of an ever decreasing number of
units. On the other hand, however, our aim has to be to offer each
customer precisely the car that reflects his or her own individual tastes
and lifestyle.
The continuing market fragmentation is reinforcing the already existing
trend in which the number of models and model families on offer will
242 Case studies

Figure 9.1 Fragmentation of the markets

grow further in the future. Moreover, the rising degree of competitive

pressure will make for a reduction in the number of car producers as well.
The upshot of this general situation is an increasingly declining number of
manufacturers producing a significantly broader diversity of models
while building fewer units per model (see Figure 9.2). The decisive chal-
lenge here lies in also being able to carry out each project successfully in
economic terms, and secure the company’s success in the long term.

Figure 9.2 High competitive pressure caused by a continously diminishing

number of manufacturers while the spectrum of models on offer grows
 Brand differentiation 243

In many sectors the products are increasingly becoming more homoge-

neous. Technical innovations are only decisive in the decision to purchase
up to a point, and only to a limited extent are they suitable for setting a
product apart from those of competitors. An empirical survey examined the
relevance of brands in different industry sectors. The analysis of the results
showed that their importance varies significantly (see Figure 9.3). For
example, brand names are of little significance for energy providers but
occupy a very high level of importance where automobile manufacturers
are concerned. In this automobiles are comparable to other luxury goods
such as expensive watches. This means that from the point of view of our
customers – automobile buyers – the car represents a special opportunity to
set off their own individual personality in an individual manner. The choice
of brand is thus also linked with a certain attitude to life, or set of values.

5.0
. 5 = high brand
.. relevance*

Luxury goods 3.8

Automobiles 3.8
Food / beverages 3.6
...

Telecommunications 3.3
Transport and logistics 3.2
...

Energy providers 2.5

...
1 = no brand
1.0 relevance*

Brands have a high degree of relevance in the automobile industry

*Empirically calculated on a scale from 1–5

Figure 9.3 Relevance of brands in different industrial sectors

Sources: McKinsey/MCM, 2002

Seen against this background, the importance becomes particularly clear

of the various brands and the multi-brand strategy as an integral whole,
together with the associated processes. Having established this, we now
move on the individual backgrounds and the essential steps and process
phases of the multi-brand strategy.
In step one the brands are lastingly positioned in the customers’
perception. The next step involves the definition of a brand core for each
brand and the logical derivation of the brand values. The third step
involves determining brand-typical product and design characteristics for
244 Case studies

each individual brand. Brand-typical segments and body styles are then
selected in the fourth phase. The strategy for each individual brand then
has to be put into long-term practice at the operational level by way of an
optimal marketing mix (Figure 9.4).

Positioning of the brands in customer segments

Definition of brand core, derivation of brand values

Definition of brand-typical product and design characteristics

Definition of brand-typical segments and body styles

A successful strategy is rounded off with the operative

implementation in all areas of the marketing mix

Figure 9.4 Multi-brand strategy process

Now we have looked at these aspects, it is necessary to take a look at a few

of the strategy’s fundamental approaches. The process of brand posi-
tioning requires effective account to be taken of both current and future
demographic trends. In the past, the society in which we live was largely
middle class, but this middle class will become smaller in the future, and
this too has consequences for the strategic orientation of a large number of
brands. This trend is already becoming very apparent.
Demographic trends could in the future have an even greater impact on
the growth rates achieved by various automobile producers, and brand
positioning orientated accordingly is already in evidence today. Producers
that, for example, positioned their brands in Western Europe as base
brands or premium brands showed the highest growth rates between 1994
and 2003. This goes hand in hand with an orientation as cost or quality
leader. However, it should be emphasized that even against the back-
ground of this insight, unambiguous positioning of each and every brand
is nevertheless an absolute necessity and makes sense.
A further fundamental element of brand differentiation comes in the
form of brand values derived from the rather abstract brand cores. The
 Brand differentiation 245

brand values are intended to firm up the brand cores and provide effective
and lasting expression of explicit brand associations. All activities relating
to a brand have to be consistent with these brand values. Similarly, the
defined mission is orientated to the brand image and has to be authentic. A
failure of the substance of products to live up to the claims made for them,
and thus also failure to satisfy the customers’ wishes and requirements in
terms of the brand, means that the brand lacks ‘grounding’ and comes over
on the whole as lacking credibility. These insights apply to a far greater
degree in the automotive industry than in many other sectors. In addition,
manufacturers with several brands are faced particularly with the
necessity to clearly demarcate their brands and models in the product
segments, in order to avoid any overlapping of product ranges and thus
any risk of cannibalization (see Figure 9.5).

2003:1994 Markt +19%

Porsche +203%
Audi +74%
Mercedes +71%
Quality leaders
Qualitätsführer BMW +31% Premiummarken
Premium brands
VW +17%
Renault +15%
Opel -12%
Ford -12%
‘Stuck in the middle’
Fiat -22%
Seat +28%
Peugeot +30%
Citroen +49%
Cost leaders
Kostenführer Toyota +110% Base brands
Hyundai +191%
Skoda +319%
Kia + 440%

Figure 9.5 ‘Companies without unambiguous positioning lose!’

Comparison of growth rates 1994–2003 in Western Europe
Source: Newreg 2004, comparison of growth rates 1994–2003 Western Europe, units
without vans

The basis of achieving this lies in a clear definition of the brand-typical

segments and the unambiguous allocation of the bodywork designs.
Recent years have seen an increasingly sharp downward trend where
customers’ brand loyalty is concerned, with new offers constantly and to a
growing extent encouraging them to abandon their accustomed brand in
favour of a new one. However, in some cases it is possible to retain them
as customers of the company by way of a broad product spectrum and a
choice of several brands.
246 Case studies

It should nevertheless be pointed out that it is not nearly enough to

simply have an extensive portfolio of brands. Of far more crucial
importance is taking long-term account of essential components when
implementing the multi-brand strategy. Two decisive aspects are a
global orientation for the brand product policy, aimed at blanket
coverage of the markets, and at the same the creation of a largely
overlap-free product range. A further essential factor to this end is an
unambiguously clear positioning of the brands through the creation of
brand personalities with emotional consistency, and effective imple-
mentation and deployment of the brand images. In addition, ensuring
long-term consistency and high-level credibility of the brand experi-
ences is a priority, starting with the product itself and going right
through to the marketing process (see Figure 9.6).

Global orientation of product policy

Unambiguous positioning / Differentiation of

the brands

Consistency and credibility of the

brand experiences

Figure 9.6 Success factors of a multi-brand strategy

Accordingly, offering a multiplicity of products and bundling brands within

the company framework are possible responses to the growing fragmen-
tation of markets. On the other hand, the platform strategy as part of the
multi-brand strategy is aimed at enabling ongoing expansion of the growing
range of models and series on a sound economic basis, and at the same time
offering a higher level of quality at competitive prices. The platform
strategy involves using identical components – which the customer neither
sees nor perceives – in several vehicle models and even in whole model
families produced by various Group brands. What the platform does not
include are the individual product variants, which incorporate components
that the customer does see or perceive.
The platform strategy has a number of advantages from our point of
view. For example the use of platform components in various models and
 Brand differentiation 247

series reduces vehicle development times, and this in turn enables a

swifter response to changing market requirements. The creation of iden-
tical parts in high unit quantities has cut the costs of developing and manu-
facturing individual models, as well as entire series and model families.
This has also opened up the possibilities of better development of niche
potential by way of enhanced product diversity, and at the same time of
responding to the growing degree of market fragmentation. The platform
strategy has also enabled expansion of the individual brands’ product
ranges, and we have enhanced the quality of our products by simplifying
and standardizing the manufacturing processes.
It remains to be emphasized that it is hardly possible to introduce an
extensive new-model campaign and include various brands, at a high
tempo and based on a relatively moderate input of resources, without
using identical platforms for several models or model families and series
(see Figure 9.7).

Reduced development times

Reduced development and manufacturing costs

Expanded product range

Simplified production processes

Figure 9.7 Advantages of a platform strategy

The platform strategy does however harbour risks as well, and these are
not to be underestimated. Alongside the synergy effects, it is necessary to
keep an eye on and take account of the erosion effects in terms of brand
policy. It is essential to ensure that the attractiveness and keen positioning
of individual products and entire brands are not watered down as result of
employing the platform strategy. It is safe to say that the greatest temp-
tation, and the one that carries the most risk, lies in the possibility of
continuously developing similar variants on one single platform and posi-
tioning them in similar or identical market segments.
The platform strategy’s variant-driven cost reduction effect leads to the
risk of an ever growing number of variants being offered on a common
248 Case studies

platform and ‘thrown’ onto the market. These products then compete
with each other in similar or the same market segments, resulting in a
cannibalization of the products within the company’s brands. This effect
can also be described as ‘segment saturation’. Besides the effects on
product and brand strength, the decisive risk generated by a development
of this nature lies in the possible impact on earning power. An uncoordi-
nated multiplicity of increasingly similar products generally leads to
rising costs and a downward revenue trend. Negative cost effects in
particular result from the inevitably arising type-specific development,
production, marketing and distribution costs.
A further critical aspect lies in the cost spread, and the difficulty of
asserting a clearly defined price hierarchy when there are platform-similar
products in a segment. The possible effects of product positioning that is
platform-driven and no longer market-driven should therefore on no
account be left out of consideration (see Figure 9.8).

The attractiveness and positioning of individual products might

become watered down

Similar product variants can be developed and positioned

in similar market segments

Platform-driven diversity of variants and

‘segment saturation’ can negatively
impact earning power

No longer possible to assert

price hierarchies

Figure 9.8 Risks entailed in a platform strategy

On the contrary, the positioning of new products should have been closely
checked in the definition phase. At this point any and all chances and risks
should be analysed and evaluated in detail. When taking each relevant
decision it is therefore essential to balance the advantages of the platform
strategy with the values of the brand in question, and to evaluate them. As
a matter of general policy, all product-related decisions should be
analysed meticulously and taken on a purposeful and selective basis,
taking account of the chances and risks involved.
Besides the possible weak points to which attention has been drawn,
there is a further fundamental deficit to be drawn into the discussion. The
 Brand differentiation 249

platform strategy in its known form is too strongly orientated to segments

and vehicle categories, since it is there that the focus is on the devel-
opment of similar models. Development on a cross-segment and cross-
vehicle-category basis is hardly possible with the platform strategy alone.
For this reason, among others, combining the platform strategy with the
module strategy appears to be a line of action that makes real sense.
Under the module strategy, components and sub-assemblies are no
longer developed just for one particular model or platform. Instead,
modules are generated on a cross-platform basis for use in various model
types. For example, an axle is developed that provides for various track
widths and wheel sizes, and can therefore be used for a number of
different models rather than one specific type or series.
If it is systematically applied and implemented, this strategy can enable
faster production of greater differentiations and new variants. This makes for
new flexibility, which better allows the use of new products in a segment to be
extended, and thus, from the company’s viewpoint, enables economic objec-
tives to be brought into an acceptable accord with those on the marketing
front. This is the basis for economic and thus entrepreneurial success.
Combining the platform and module strategies makes for considerable
advantages in the long term. The platforms comprise modules which it
turn come from the module building blocks, and a situation should be
created in which various modules can also be used in different series. The
use of some modules is bound to be restricted to one single series or model
family in the future as well, and this applies especially in cases where
these modules are of a specific nature.
Ongoing checks need to be carried out for whether an existing module
might possibly be used in a further series or model family, perhaps by
differentiating it, reducing its complexity or upgrading it. Constant
checking on all modules enables the existing platforms to be kept at a
permanently and consistently high technical standard, and simultaneously
ensures an even better realization of economic priorities.
A further advantage of the module strategy is that it facilitates the iden-
tification of synergy potential in the module’s development phase, and
hence leads to a reduction in existing complexities. Against this back-
ground, the basic objectives behind the module strategy can be defined as
securing more rapid and flexible market orientation, continuous cost
reduction, a smoothing of investment and expenditure, as well as an easier
and more cost-effective derivation of an expanded number of niche
models. Further possibilities accorded by the module strategy lie in the
saving of time between vehicle project kick-off and market launch – in
other words the ‘time to market’ – as well as a significantly optimized
useful life in terms of technologies. Another fundamental objective to be
250 Case studies

underlined is the achievement of enhanced quality, and all in all a solid

competitive edge (see Figure 9.9).

Components and sub-assemblies can be used on a cross-platform

basis in significantly higher unit quantities

Differentiations and new variants can be produced

faster with the aid of modules

Platforms can be permanently and rapidly

updated by way of new modules

Figure 9.9 Advantages of a modular strategy

A broad portfolio of brands offers companies the unique opportunity to

offer a diversified and comprehensive product range and to successfully
and lastingly establish their profile in the market. Multi-brand strategies,
brand images and an individual marketing concept are decisive elements,
and at the same time they form a basic prerequisite for successful oper-
ation and consistent development of a broad product portfolio.
The platform strategy is a crucial prerequisite for enabling the speedy
and effective implementation of a new-model campaign while meeting
the relevant economic requirements. The module strategy constitutes
the logical and intelligent advancement of the platform strategy, above
all offering vertical development possibilities from the technical point
of view. It affords the platform strategy an evolutionary stage and
enhances its overall efficiency. All in all, these building blocks offer the
company the opportunity to continue to develop its range of products
on an ongoing and selective basis, and to respond to the increasingly
more specific customer demands and wishes and market conditions
even more rapidly than before.
 Brand differentiation 251

Product differentiation
Platform strategy
Brand portfolio

The Company’s comprehensive

and goal-orientated product portfolio

Multi-brand strategy
Individual marketing Module strategy
Brand images

Figure 9.10 Summary

252

10

New impetus for General

Motors in Europe
Carl-Peter Forster, President, General Motors Europe, Europe GM

Eighty world premieres and millions of visitors eager to see Europe’s

latest highlights: the 61st International Motor Show (IAA) in 2005 offered
manufacturers a large and spectacular stage on which to showcase their
new models and forward-looking solutions. And that was not the only
reason for optimism: ahead of the IAA, a significant rise in new passenger
car registrations was recorded in Germany and elsewhere in Europe. After
five difficult years, there is light at the end of the tunnel, reaffirming belief
in a turn for the better.
This positive development is for the most part owed to new models and
buying incentives. German automakers – and especially Opel – have
performed better than average in this area, with Opel’s success based on a
major model initiative. New cars including the retractable roof Astra
TwinTop, the new Antara off-roader and the Opel GT (to be launched in
spring 2007), to name just a few models, demonstrate the brand’s potential
in important market niches. Opel has also raised the bar even higher in
terms of versatility, innovation and emotion with its most important new
edition in 2006, the completely newly developed fourth-generation Corsa.
Other GM brands are also tailoring their new version to European
customers. With the BLS, the luxury brand Cadillac launched a distinc-
tively styled sedan developed specifically for Europe, where it is also
produced in Trollhättan, Sweden. Saab is also making waves with its 9–3
SportCombi and completely restyled 9–5 range.
However, the positive mood among European automakers is not as
strong in all areas. While much of the long-standing resignation has all but
disappeared, intense price wars and fierce competition are forcing the
automobile industry to constantly take action. So, despite the strong
 General Motors in Europe 253

upturn in West European markets in 2005, most automakers feel obliged

to consider closing down plants and cutting their workforce. At the same
time, increasing market segmentation demands constant innovation to
meet changing customer needs and preferences. Automotive corporations
are well aware that the fledgling recovery in sales figures alone is not
enough to help them survive the cut-throat price war and intensified inter-
national competition.
For this reason, we at General Motors (GM) Europe are concentrating
our efforts on optimizing the competitive strength of Europe as a
production location, and on setting the stage for more growth. To accom-
plish this, we must further develop the increases in efficiency we have
achieved thus far.
GM has made tremendous progress in its European operations with its
efficiency optimization programme. The region is now considered a
model for restructuring the company’s US business units. However, even
GM Europe has a lot of work ahead of it.

WORLD-CLASS CARS WITH OUR QUALITY

AND PRODUCT INITIATIVE

Our initiative to augment our product development and improve quality

gives us the best chances possible to succeed in the face of tough compe-
tition. In one comparison test after another, vehicles like the Vectra, Astra
and Meriva continue to take home trophies. And with the new Zafira, the
best-seller enters its second generation. According to a recent study
conducted by the highly respected institute JD Power & Associates, GM
has a decisive lead on all competitors in the United States when it comes
to building test-winners in the category ‘Most dependable’. The company
also took the top spot worldwide in initial quality, with five test-winners in
18 vehicle segments.
In Europe, the quality turnaround is also progressing at a similar pace,
which is especially well demonstrated by the impressive figures of our
core brand Opel. Since the JD Power institute began conducting its studies
in 2002, Opel has shown the strongest improvement of all German high-
volume car manufacturers in the Customer Satisfaction Index (CSI). The
Signum achieved the greatest single success: in each of the four categories
Quality/reliability, Appeal, Dealerships/service centres and Running
costs, the spacious and versatile vehicle was awarded the highest scores of
any European car model. With regard to customer satisfaction, we at GM
254 Case studies

can confidently say that we are in the passing lane. And the Opel brand is
in the driver’s seat: in comparison with competitors’ products, its new cars
boast the lowest operating costs of all. These are the findings of a
comparison test carried out by the German Automobile Club (ADAC).
Europe’s largest automobile club is not alone in giving our Opel brand
top marks. Two of the most reputed research institutes in the automobile
industry, the Automotive Research Center at the University of Bamberg
(FAW) and the Institute for Automotive Research at the University of
Applied Sciences Nürtingen (IFA), examined the satisfaction of car
dealers: outstanding scores confirmed Opel’s upward quality trend.

COMPLETE SATISFACTION AMONG

CUSTOMERS AND CAR DEALERS

Proof of the quality advances in Europe can also be found in reliable, key
internal figures. For example, Opel succeeded in reducing the number of
guarantee claims by 65 per cent between 1999 and 2004. The costs of
guarantee claims and services carried out on a goodwill basis dropped by
20 per cent within the same period. A new awareness for defect
prevention, involving our entire workforce throughout the GM organi-
zation, made these results possible. The time required by our employees to
completely rectify a problem is now just a quarter of what it was as
recently as the mid-1990s.
GM plants are masters of product launch management. Our European
production facilities are extremely well equipped to manufacture new
models. This too is the result of a comparison study that examined car
manufacturers and automotive suppliers, published jointly by the
University of St Gallen and the Aachen University of Technology
(RWTH). One of the main consequences of this expertise is that the risk of
costly and – for the customer – inconvenient recall measures is mini-
mized. While the vast majority of new-model production launches by
European car makers in recent years failed to achieve their goals, Opel
and two suppliers, along with one other manufacturer, represent the
commendable exception. Praised for its quality by customers and the trade
press, the new Astra is a prime example of a successful launch.
Opel appoints a support team for each new-vehicle production launch.
This interdisciplinary group of experts supports the plants and assumes
responsibility for the development, implementation and continuous opti-
mization of manufacturing processes. Depending on the complexity of the
 General Motors in Europe 255

project, the team becomes active as early as 30 months prior to the

production launch, to begin setting the stage for trouble-free processes.
The conclusion of the reputed chair of production engineering at the
RWTH and director of the Fraunhofer Institute for Production Technology
in Aachen, Prof Dr Günther Schuh was, ‘Successful production-launch
management can eliminate recall measures.’

SPECIALISTS AND INTERNATIONAL

KNOWLEDGE-SHARING

Not only the support teams are responsible for this success. All employees
in every European plant are integrated into the implementation of uniform
manufacturing processes, a key aspect of GM’s holistic quality
philosophy. Along with staff involvement, four other principles apply:
standardization, quality from the very beginning, short processing times
and continuous improvement. Every employee has an obligation to pull
the Andon cord, whenever he or she encounters a problem that cannot be
solved within the defined cycle time. This sends a signal to the group
foreman, who provides immediate support. In addition, clearly defined
‘quality gates’ must be passed successfully during the production process.
An integral component of this process is an exchange of information on
the international level between GM plants. The Rüsselsheim Opel factory
pioneered the implementation of a standardized water test, which every
single vehicle must undergo. After the car has spent two minutes in a
water tank, quality controllers check for leakages with special electronic
moisture sensors. This test procedure proved so effective that it will now
become standard at GM plants worldwide. Knowledge-sharing functions
in both directions: the European GM facilities have adopted a squeak and
rattle test from their American counterparts. Each vehicle must move
through a standardized test track during final inspection by specialists,
who detect and eliminate bothersome noises.
At GM it is not always the high-tech systems that advance quality:
small details often make a big difference. One of the day-to-day problems
at car manufacturing plants all over the world is that workers accidentally
damage the paintwork with their tools during final assembly. Employees
at the Opel plant in Rüsselsheim have developed protective plastic sleeves
for the tips of electric screwdrivers. This idea too, however unspectacular,
has an excellent chance of becoming standard practice at GM on a
worldwide scale.
256 Case studies

The key to sustainable quality improvement at GM is not just to treat

symptoms, but rather to thoroughly analyse and get to the root of the
problem. At all European GM plants, this is the responsibility of a task
force consisting of around 275 engineers and technicians, the ‘Red X
Team’. This task force makes a significant contribution to the acceler-
ation of problem-solving processes. The experts work in close cooper-
ation with the Current Engineering department. The automotive
engineers and designers no longer consider their task completed the
moment a new model goes into production. For each model line, a core
team of engineers assumes responsibility for continuously optimizing
‘its’ model. The European GM production facilities maintain a staff of
more than 4,000 in Quality Promotion & Assurance in the
manufacturing process.

MOTIVATED EMPLOYEES PLAY A DECISIVE

ROLE IN SUCCESS

In 2005, 20 Opel teams were nominated for the GM Chairman’s Honors

Award for their creativity and teamwork. The projects selected by GM are
model examples of corporate culture, which show the way to a future of
even more intensive global cooperation. Each of the teams has already
delivered outstanding performance in its area – and the nomination alone
is recognition of their excellent work. At GM Europe, team spirit elevates
business to new heights. The creative ideas of employees boost efficiency
and lead to better products.
Due to the increasingly important role suppliers play in car manufac-
turing, supplier quality is more and more in the spotlight. The funda-
mental prerequisite for top-quality components from suppliers is close
cooperation between suppliers and General Motors. A prime example is
the precisely defined process that establishes the stage at which GM can
make final design modifications to a new model, and how even marginally
involved suppliers are to be informed.
GM Europe gives its suppliers extensive support in maintaining quality
standards. A team of more than 100 specialized engineers is charged with
the sole responsibility of solving any problems that arise with partners at
their source. And they perform this task with remarkable success: the
quota of substandard parts from suppliers has dropped by 80 per cent in
recent years.
 General Motors in Europe 257

EXPERIENCE AND FEEL THE QUALITY

When it comes to quality, monitoring is especially indispensable, no

matter how good the ideas and stable the processes are. At GM, pan-
European ‘quality controllers’ ensure consistently high standards by
appearing unannounced at the individual plants and looking over the
quality auditors’ shoulders.
To regard quality as limited to manufacturing quality would be far too
narrow. We at GM Europe are well aware that our products can only
achieve true excellence in all aspects of quality if customers are also thor-
oughly convinced by the perceived quality and overall image of our cars.
Quality must be something the customer can feel and experience. For
this reason, we have appointed more than 40 specialists at the
International Technical Development Center (ITDC) in Rüsselsheim to
represent customers. Their job is not to judge new developments primarily
from an engineer’s point of view, but rather to systematically represent the
preferences and interests of the customer during the development stage.
This cross-functional team, which covers a broad scope of expertise
including market research, design and product development, is supported
by an internal team of assistants. Eight hundred GM employees in
Rüsselsheim act as a representative focus group. For example, when the
engineers design a new folding mechanism for rear seats or a new child’s
seat fixture, they know within a few hours whether their solutions are
really as practical as they had thought.
There is a great deal more to quality than producing defect-free cars. At
GM, we have learnt that positive results can only be achieved with the
involvement of all employees at all times. The fact that we do not accept
faulty results – regardless of where they occur – is an integral part of our
corporate culture.

THE CUSTOMER BUYS BEAUTY –

DESIGN EXPERTISE

The look and feel of quality is not the only crucial factor in the decision to
buy a car. The design of the vehicle is also a key component, because the
customer buys beauty first. And design is a central element in GM’s
product philosophy.
In keeping with this exceptional emphasis, GM opened a new European
Design Center in Rüsselsheim, in the spring of 2006. Along with
258 Case studies

ongoing styling updates of models currently in production, the design of

future models (advanced design) will take place there. The direct
connection between forward-looking development and product planning
as well as brand management teams will allow better utilization of
synergies. This will also strengthen ties to the ITDC in Rüsselsheim.
The European Design Center is integrated in the Group’s global design
organization. All around the world, the multinational GM design team
operates at 11 networked facilities. Thanks to virtual reality technology,
all studios are able to work on all products. The new European Design
Center is an important addition to this international collaboration. It is also
helpful in securing the worldwide design leadership of GM.
The decision to locate the Design Center in Rüsselsheim also secures
jobs in Germany, and at the same time reflects the confidence GM has in
the performance of the Opel organization. The GM engineers and
designers in Rüsselsheim will play a key role in the worldwide GM
network in coming years. In its capacity as development location for the
compact and mid-size classes, Rüsselsheim will deliver the technical
basis for a major proportion of the GM range throughout the Group. Our
Rüsselsheim employees are more than up to the task: the Opel Vectra has
clearly proven that they are among the best in their profession. And when
it comes to flexibility, hardly another automobile production facility in the
world can compare with the state-of-the-art plant in Rüsselsheim. With
the four- and five-door Vectra sedan, Vectra station wagon and Signum,
GM is currently building four body variants on a single production line –
and doing so in outstanding quality. In the future, we will further increase
this flexibility and continue to expand the potential of the plant.
One reason for these ambitious plans is that Rüsselsheim has been
chosen to build a number of future vehicle architectures beginning in 2008.
Selected Opel and Saab models based on a shared architecture will be
produced at this location. A comprehensive analysis of numerous factors,
including capacity, required investment, wage costs, plant efficiency, flex-
ibility, logistics and models of working hours, as well as currency
exchange considerations, led to the decision. The Rüsselsheim and
Trollhättan plants both presented convincing studies. In the end, however,
Rüsselsheim demonstrated slight advantages, and was more cost-effective
than Trollhättan measured over the entire production period.
At the same time, we at GM Europe also have great confidence in our
competitive production location in Sweden, as well as in the Saab brand,
whose core products will remain the models 9–3 and 9–5. And we stand
by Trollhättan, where we will open a Saab Brand Center. A strong
expression of the Saab brand character, it will be home to a design team
mainly responsible for Saab-specific styling. In terms of design, Saab
 General Motors in Europe 259

looks back on an exceptionally rich history. This must be preserved and

developed further, to ensure that future Saabs maintain this DNA, accen-
tuating the elements the individualist brand Saab continues to stand for
after almost 60 years of swimming against the mainstream: sporty driving
characteristics, convincing functional attributes and vehicle safety.
A core team of engineers and marketing specialists will work in close
cooperation with the designers at the Saab Brand Center. This team is to
shape, further develop and cultivate the Saab-specific elements on all
levels – from conceptualizing future products to uniform communications
on a global scale. The main task of the Saab Brand Center will be to
answer a single question: what makes Saab so special? The Saab qualities
should be reflected in design, development, marketing, communications
and many other areas.
In Trollhättan GM is also opening a new Science Office that will expand
our advanced technical work portfolio in the areas of vehicle safety, emis-
sions and advanced manufacturing. The new Science Office will establish
centres of expertise in Sweden and coordinate all GM activities and
projects related to research and development. In Sweden, GM profits from
an extensive network of partners, including the Royal Institute of
Technology (KTH) in Stockholm and Chalmers University in Göteborg,
as well as research institutes and suppliers throughout the country. This is
the result of the extraordinarily successful work of Saab in fostering coop-
eration.
The Science Office represents a natural evolution of existing collabo-
rative partnerships. The Swedish government is affording GM an
outstanding opportunity to further expand its global network of partners.

PORTFOLIO POSITIONING

Opel and Vauxhall, Saab, Chevrolet and Cadillac – as the world’s largest
car manufacturer, we must position each of these brands unambiguously
in order to precisely address the needs of a broad market spectrum. This
does not mean reinventing our brand, but rather sharpening its profile in
the context of our multi-brand strategy. Cadillac is our luxury brand in
the high-end segment, while Saab is our classic, distinctive premium
brand; Opel and Vauxhall represent the innovative, high-quality core
brands of our volume business, and Chevrolet offers significant growth
potential as the foundation brand in volume business. With each model
General Motors introduces to the market, the positioning becomes more
sharply defined.
260 Case studies

The success of the new Zafira and Astra clearly shows that the brand
definition focusing on dynamics, versatility and quality is extremely well
received. Further models, like an SUV, will afford Opel an even broader
base. In the case of Saab, GM initiated an important product portfolio
expansion this year with the 9–3 SportCombi; additional models will
follow. And Chevrolet puts GM in an excellent position to react to current
market trends with models like the economical entry-level Matiz.
An automobile manufacturer operating on a global scale requires a
broad market base in Europe. This is not something we can afford to take
for granted: GM must detect trends and adapt the model portfolio accord-
ingly. Even highly successful models like the Opel Vectra, Europe’s best-
selling mid-size class sedan, must be updated continuously. Customers
expect innovation – in terms of both technical features and interior
comfort – in these models too.
Our decision to market the vehicles produced by GM’s Korean business
unit Daewoo specifically for sale in Europe as Chevrolets has proven
correct. This is confirmed by our sales figures: in the first half of 2005,
GM Europe sold around 117,000 Chevrolets throughout Europe, 25 per
cent more than in the same period of the previous year. The objective is an
annual sales volume of 200,000 cars. Chevrolets are entry-level GM
models, in Europe and worldwide. The brand is positioned below Opel,
yet it offers not only outstanding value for money, but also – perhaps most
importantly – quality, cost-effectiveness, appealing design and a long
service life. GM remains extremely active in this segment, with competi-
tively priced entry-level models that look back on years of market success,
such as the Matiz.
A global corporation must also be strong in the premium sector.
Customers looking for a luxury automobile with an individual character
can find the answer in the Cadillac BLS. Built in Trollhättan, Sweden, the
BLS offers high-quality equipment at an attractive price. This is also the
first Cadillac with a diesel engine, and the first to be developed especially
for the European market. GM Europe sees a pan-European annual sales
potential of up to 10,000 units for the BLS. From a business standpoint,
these are substantial figures. With dynamic cars, a state-of-the-art engine
range and innovative, distinctive design, the Cadillac brand has enhanced
its luxury image with forward-looking technology.
 General Motors in Europe 261

A DRIVING FORCE FOR THE FUTURE

Innovations first become relevant to the market when they generate

consumer interest and satisfy specific customer needs. This applies
equally to propulsion technology.
In the context of fuel prices soaring to record heights, economic alter-
native propulsion concepts have become the centre of attention. The
average fuel consumption of passenger cars in Europe has dropped by
almost 15 per cent since 1998. The development in oil prices shows the
importance of investing in energy efficiency and renewable energy
sources. For this reason, we continue to expand our range of low-
consumption and environmentally compatible engines. Our research and
development in the area of propulsion is focused on hydrogen fuel cell
technology as a long-term solution, along with hybrid technology in the
short to mid-term. At the same time, we remain concentrated on devel-
oping the future-oriented classic internal combustion engine – in terms of
efficiency, consumption and emissions. In this context, the development
of an advanced diesel engine technology is a focal point of our efforts.
GM will cooperate with Bosch and Stanford University in the United
States to further optimize the HCCI engine, which burns a highly
compressed fuel-air mixture without ignition. This technology will be
significantly more efficient than today’s engines. In addition, we will
develop a hybrid engine in cooperation with BMW and DaimlerChrysler.
GM has set the ambitious goal of equipping its next generation of full-size
off-road vehicles with hybrid propulsion systems, which consume 25 per
cent less fuel, beginning in 2007.
Along with the selective activation of electrical or internal combustion
propulsion depending on the situation, further technologies such as
cylinder deactivation will be used. At the IAA in Frankfurt, GM presented
the GMC brand’s SUV concept vehicle Graphyte. Thanks to its bimodal
full-hybrid system, this automobile already achieves the stated objective
for efficient consumption. Knowledge gained from the Graphyte will also
benefit other GM brands. The premium marque Saab has introduced the
first flexible-fuel vehicle (FFH) to the market. It can be operated on
bioethanol or on pure gasoline in every imaginable constellation. The
model BioPower, offered as a sedan or SportCombi, is based on the 2.0-t
version of the 9–5. The BioPower variant generates an output of 132
kW/180 hp. In line with the Saab philosophy, a single unique vehicle
unites various advantages: environmental compatibility and sporty
performance. The BioPower engine was developed by Swedish engineers
in collaboration with GM-Powertrain experts in Brazil. This location was
262 Case studies

no coincidence: Brazil uses pure ethanol from sugar cane to produce its
most widespread fuel, E100.
With the world premiere of the new Zafira 1.6 CNG (compressed natural
gas) at the IAA in Frankfurt, Opel presented the new generation of
Germany’s best-selling natural gas vehicle. As the market leader in natural
gas propulsion, Opel has made these vehicles popular – one in three natural
gas vehicles sold is an Opel Zafira. Outstanding results in crash tests have
done a great deal to help dispel fears and prejudices concerning natural gas
cars. The Zafira 1.6 CNG boasts superb economic efficiency.
Taking average fuel consumption of approximately 5.3 kg of natural gas
per 100 km and the current price of around €0.78 per kilo of natural gas,
fuel costs can be reduced by approximately 30 per cent compared with
diesel variants, or even around 50 per cent compared to gasoline models.
Taxes and insurance ratings are on the same level as those of its 1.6 litre
gasoline counterpart. The Zafira CNG with an output of 71 kW/97 hp also
offers distinct advantages in terms of environmental compatibility: this
type of propulsion generates 80 per cent less nitrogen oxide than a diesel
and around 25 per cent lower CO2 emissions than a gasoline engine
(diesel: minus 10 per cent). In addition, the emissions are free from soot
particles, ensuring that the Zafira CNG is not affected by potential driving
bans in large cities.

SMART USE OF ELECTRONICS

Electronics and software are the major driving forces behind today’s tech-
nological innovations. The amount of software in vehicle control units
doubles every two to three years, and we expect around 90 per cent of
future advances in passenger cars to be based on electronic engineering.
Currently, electrical and electronic components account for approxi-
mately 22 per cent of the manufacturing costs of a passenger car. In 2010,
this figure will probably reach 35 per cent. As the technologies and elec-
tronic innovations continue to grow in number and scope, car makers must
exercise great discretion in selecting which ones to implement. Every
manufacturer should question whether the available innovations are also
marketable. In this regard, GM Europe pursues a very clear strategy,
focusing solely on new features that are purposeful and practical. In
concrete terms, this can be summed up in three points: new technologies
and innovations must make a substantial contribution to customer satis-
faction; their cost–benefit ratio must be favourable; and the balance
between technological progress, costs, quality and customer benefits must
 General Motors in Europe 263

be the focus. New developments should not be dictated by what is techni-

cally feasible. Ultimately, our job as manufacturers is to deliver a
cost–benefit ratio in healthy balance. This is why GM Europe sees further
potential primarily in the area of active and passive safety.
Engineers at the GM European Development Center are currently devel-
oping a driver assistance system with innovative sensor technology for series
production. The objective of this system is to further support the driver and
increase safety and comfort in road traffic. An integral part of the GM
philosophy is to make useful innovations affordable for as many drivers as
possible. This trend-setting driver assistance system with adaptive distance
and speed control automatically maintains a constant safety zone to the
vehicle ahead in all driving situations, from stop-and-go traffic to high-speed
highway driving. Integrated in an Opel Vectra GTS, this technology is ideal
for everyday use. It employs road data, along with specially developed
enhanced power steering, to stay on track – in other words, the vehicle steers
automatically to correct deviations from the centre of the lane.
GM develops new technologies within the framework of the global GM
Group, which are then made available to each of our brands. This applies
to everything from future drive systems to advances in vehicle electronics.
Drivers in Europe have always associated new propulsion concepts such
as fuel cells or natural gas with the Opel brand. These technologies must
be affordable to yield real benefits, which is only possible in combination
with high-volume production.

GROWTH ABOVE INDUSTRY TRENDS

Maintaining a position as a key player in the automotive industry means

initiating new technological trends and delivering technology to a broad
consumer base at the right time. GM Europe is dedicated to fulfilling this
task, now and in the future. Of course this requires extensive investment,
but we are convinced that the benefits more than justify the costs and
efforts. A prime example is the Opel brand’s rapid rise in quality rankings
– an unbeatable sales argument at the retail level. GM also offers
customers a winning range of state-of-the-art engines. The Group’s
advances in diesel units and the particulate filter set standards. Our
increase in market share clearly shows that quality pays off: in the first
half of 2005, GM sold more than 1,063,000 cars in Europe, an increase of
more than 23,000 cars or 2.3 per cent over the same period of the previous
year. GM’s share of the generally stagnating European market grew from
9.5 to 9.7 per cent.
264 Case studies

Particularly in their home markets, the GM volume brands Opel and

Vauxhall developed positively, in both cases outstripping the general
market trend. Chevrolet continued its strong growth in Europe in the first
half of 2005. Saab sales varied in Europe during this period. Sales in the
United Kingdom increased by 41 per cent, reaching an all-time high of
nearly 14,000 cars. Although Saab also achieved substantial growth in a
number of its smaller markets, including Ireland (up 12 per cent), and
Germany (up 5 per cent), this was offset by decreasing sales in other
regions. The GM premium brands Cadillac, Corvette and Hummer made
good progress in their respective niche markets in 2005. Corvette sales
were three times as high as the previous year, while sales of Cadillac in
Europe doubled. Hummer sales remained stable at just under 200 units.
The new Hummer 3 is now being launched in Europe.

OVERCOMING A WEAK ECONOMY

Auto makers around the world face enormous pressure. Over the past five
years, car registrations in Europe have been declining. All Western
European plants must be examined critically, as structural problems in
many countries are surprisingly similar. GM sees five major challenges
facing the automotive industry: stagnating demand, overcapacity and inad-
equate productivity in manufacturing, growing competition, falling prices,
and the offensive by countries with low labour costs, particularly China.
Considering the developments in the market in recent years, no company
in the industry can afford to lose any time. The negative developments
demand quick and resolute action. Since the beginning of 2005, GM has
been implementing extensive restructuring measures, with the objective of
achieving a cost reduction of at least €500 million by the end of 2006. In
order to accomplish this, the company has reduced its workforce by 12,000
employees throughout Europe. At the same time, the GM brands will
continue their product and quality initiative. In this context, the Group places
central importance on safeguarding all of its competitive facilities in Europe.
Design and engineering are further focal points of the restructuring
programme. GM made great strides with the decision to locate the
European Design Center and the development of future vehicle architec-
tures in Rüsselsheim. Duplicated operations will be eliminated, thanks to
the alignment of engineering activities in Sweden, the United Kingdom
and Germany. At the same time, these synergies will strengthen each of
our brands. For instance, Saab was simply not large enough to develop its
own engineering capacity, which is necessary to build up a large premium
 General Motors in Europe 265

segment portfolio. For this reason, GM is fully integrating the

International Technical Development Center in Rüsselsheim and Saab’s
Technical Development Center in Trollhättan into the Group’s worldwide
engineering organization.
This creates additional economies of scale for GM, and frees up resources
by developing global components and vehicle architectures for a number of
brands. The strategy also supports the development of new niche models
like SUVs and roadsters. In addition, it yields customer benefits: GM can
offer more new models, variants and technologies in shorter periods of time.
A successful turnaround starts with high quality and attractive products. In
this regard, GM has clearly taken charge of the situation.
Everyone involved in the restructuring programme at General Motors
knows that it is not possible without painful cuts, yet the goal of imple-
menting the plan without dismissals or plant closures has been achieved.

NEW MARKET CHALLENGES

The economic situation is not expected to improve substantially in the imme-

diate future. In addition, demand in different car segments has fundamentally
changed, and completely new segments have been created in response to
evolving customer preferences. The market in Western and Central Europe is
changing fundamentally. The mid-size segment has decreased dramatically
since 1999, from a share of 17.2 to 13.1 per cent of the total market. The
compact class has met a similar fate, losing over six percentage points of its
market share during this period. At the same time, new segments and niche
markets have been established. A good example of this is the development of
the monocab or van segment, where Opel/Vauxhall already enjoys great
success with the Zafira in the compact van class and Meriva in the minivan
segment. GM Europe will continue to build on these successes. The clear
trend toward new segments and niche models will continue in the future. In
this respect, one of our most important strategic and competitive advantages
is the ability to detect and cover new niche markets.
Despite the current challenges, we are by no means bemoaning devel-
opments in recent years, simply objectively analysing evolving customer
preferences toward more dynamics, versatility, flexibility and comfort.
GM has successfully responded to this change with a number of models.
The most recent examples are successful niche models like the Opel
Speedster and Tigra TwinTop. The Astra TwinTop will continue this
success. The restructuring measures of GM Europe make allowances for
this segmentation, as they pave the way for more innovations. We are
266 Case studies

developing future-oriented cars and niche models with new concepts for
flexibility and versatility. GM is planning a total of 45 attractive new
models and variants in the next five years. The reorganization of GM
Europe is a key component in creating ideal conditions for its brands to
realize this model initiative. At the same time, the Group is significantly
improving the effectiveness of its investments.

ONE COMPANY

The key to success for our European business lies in thinking and acting as
one single company. GM has traditionally been a multi-brand organi-
zation, comprised of largely independent brands that were managed sepa-
rately. There are advantages to this approach, such as the benefit of strong
regional brands that adapt to and meet specific regional market needs.
However, we cannot overlook the disadvantages. These include the fact
that the considerable potential GM offers by virtue of its sheer size was
not realized sufficiently. The opportunities presented by the joint vehicle
architectures, components and processes throughout the Group were
exploited on a limited basis only.
Yet the concept of a global car, at times favoured by other car makers, is
no recipe for success either. In fact this approach has never worked, nor
will it work in the future. For this reason, GM pursues a strategy of balance.
We strive to achieve a perfect equilibrium between centralized
management and coordination on the one hand, and decentralized respon-
sibility for local market needs on the other. In other words, GM is aiming
for the best of both worlds – autonomous brand responsibility hand in hand
with strategic management from a single source. This is of crucial impor-
tance for the future success of the GM Group, GM Europe and each of the
Group brands.
GM will continue to develop and build cars for national and regional
markets, supporting brand identities in becoming recognizable and
tangible to customers. At the same time, shared development processes,
development of new technologies, vehicle architectures and components
will be further exploited. But the basic principle remains: GM cars are
adapted to the regional markets.
In this context, GM enjoys a decisive advantage due to its size, provided
this size is leveraged efficiently. All of the resources that a global player
like GM has must be utilized, while redundant processes and duplicated
developments within General Motors Europe and the Group as a whole
must be eliminated.
 General Motors in Europe 267

All Group brands and divisions in Europe will be steered on a uniform

course in the same direction, under the umbrella of GM Europe. GM is
following the clear objective of further cultivating its brands. To this end,
GM determines the positioning of each brand in its market.
The strength of a multi-brand organization like GM Europe is not only
of key importance in terms of leveraging size advantages: the proportions
and performance output of a company are also decisive in mastering the
increasingly rapid developments in technology. Here, the automotive
industry as a whole faces enormous challenges.
As the world’s largest automobile manufacturer, GM is in a position to
capitalize on the benefits of its size in this area as well. Complex and cost-
intensive research, development and engineering efforts can be carried out
a single time, yet the benefits are reaped by all Group brands. Business
risks are minimized, as the expenditures for innovations can be shared by
a number of brands. Moreover, the strategic innovation management of
GM looks at new technologies critically. The decisive factor is always
whether or not an innovation delivers tangible benefits to the customer.
Ultimately, the key question is, is the customer willing to pay for this
added value? This makes early and close cooperation between marketing
and development crucial, in order to successfully transform market needs
and preferences into concrete technological developments.
Of course we consider all available technologies in vehicle devel-
opment. They are integrated in the technology portfolio, but only if and
when a sensible balance between progress, costs, quality and real
customer value can be achieved. Although new technologies can play an
important role for the customer, this is not necessarily the case. The best
example of smart handling of technological innovations is the chassis of
the new Opel/Vauxhall Astra. GM used an enhanced McPherson strut
front suspension and a specially adapted torsion-beam rear axle in the
Astra, utilizing proven, top-quality solutions. The Group also offers the
optional IDSPlus chassis (interactive driving system) with electronic
continuous damping control (CDC) and networking of all driving
dynamics systems in an integrated chassis control (ICC) system.
This technology ensures balance between driving dynamics and
comfort with increased active safety on an even higher level. The
networking of ABS, CDC and ESPPlus is an innovation not only in the
compact class, but in the entire automotive industry. This is precisely the
type of innovation customers are willing to pay for.
The focus of a company of the size and standing of GM must not be only
on the short and mid-term cycles of technological progress. That is why the
Group is already actively working on long-term perspectives of individual
automotive mobility. For example, the company has thus far invested US $1
268 Case studies

billion in the development of fuel cell vehicles. The result of this investment
is the HydroGen3, a close-to-production prototype based on the Opel
Zafira, which has already proven itself in everyday use. The HydroGen3 has
successfully passed another endurance test, emerging as victor among fuel
cell cars at the first ‘Rallye Monte Carlo Fuel Cell and Hybrids’.
GM’s European and global resources are a decisive factor in bringing
fuel cell technology to volume production maturity. All GM brands will
benefit from this, but no one brand alone could carry the burden of devel-
oping and introducing to market such a groundbreaking technology.

DESIGN TREND-SETTER EUROPE

Just as a new, highly efficient production system was decisive for the reor-
ganization of GM plants in the United States, Europe is the role model for
design of passenger cars. We have fundamentally changed our philosophy,
and boring draft designs or superfluous ornaments do not stand a chance at
GM Europe. A major purchasing factor is the emotional currency of a car
design. Accordingly, GM Europe has introduced a new design language
and new vehicle formats, leading the way into a stylistically new future.
The new models must reflect the character, history and cultural back-
ground of the brands and successfully carry on their line of ancestry. It has
always been the objective of GM Europe to build cars for individualists
wishing to express their passion for cars outwardly. A perfect example of
this is the legendary Opel GT. The Rüsselsheim car maker has always
understood how to interpret the French coupé – cut-off – in a car with
sporty lines and a flowing rear form. Opel coupés were crosses between
low-cost volume production technology and powerful engines. A
successful line of predecessors testifies to this, from Commodore A, B and
C to Monza and Calibra. This successful tradition of sporty and affordable
cars will be continued with the OPC (Opel Performance Center) models.
The high-performance variants of the Astra, Vectra and Zafira are more
powerful, faster and more dynamic. Further OPC models will follow.
With exciting niche models like the Tigra and Astra TwinTop, the GM
brand Opel is putting more focus on emotional appeal and dynamics.
Our premium brand Saab is also very successful with cars that evoke
emotion. The 9–3 Cabrio and 9–3 SportCombi meet the individual tastes
of customers in a special way. The latest JD Power Institute study
confirms that Saab brand cars have markedly improved in reliability,
quality and cost-efficiency.
 General Motors in Europe 269

WELL EQUIPPED FOR A SUCCESSFUL FUTURE

Decisive factors in mastering the challenges the European automotive

industry faces will be competitive strength and a heightened focus on
growth. Key measures include increased work flexibility, a reform of the
social security system and renouncing any further increases in the cost of
mobility. Those who act in a timely and consistent fashion have the best
chance of retaining a healthy work environment. Auto makers have to find
new ways of adapting to the changing global competitive situation, such
as diversifying product portfolios. The speed of innovation is very fast,
particularly in the electronics area. New technologies such as fuel cell
propulsion must be developed to market maturity. This all has to happen at
the same time, under constantly mounting cost and competitive pressure,
and this pressure has not even reached its peak in Western Europe. The
market is almost saturated and substantial growth is not in sight. The
result of stagnation and shrinking markets is massive overcapacity, as is
the case in Germany. Experts calculate that the average utilization of auto-
mobile plants in Europe is currently less than 80 per cent, while the break-
even point is at around 85 per cent. At the same time, some manufacturers
have announced they will increase their production capacity in Europe,
which will introduce an additional 1 million units to the market.
Analysts predict a crisis along the lines of that in North America. In
order to keep plants operating at full capacity, more and more cars are
offered with rebates. This increases price pressure and reduces prof-
itability. And the long-term picture does not look any prettier: competitors
from China and India are entering the European market. The latest IAA in
Frankfurt gave us a small taste of where this will lead.
Initial exports to Europe and the United States have focused attention
on cheap cars from China. These manufacturers, which presented them-
selves for the first time at the IAA in Frankfurt, have a long, rocky road
ahead of them. So say Chinese experts, pointing to problems with quality
and customer service. But their sights are firmly set on Europe.
GM Europe is ready for increasing competition in the coming years. The
restructuring plan has put the brands and business processes on the right
course. We have now positioned ourselves to meet our goals of a competitive
employment environment in ultra-productive sites coupled with strong, prof-
itable brands. We continue to look far ahead with confidence, and our model
initiative is a visible expression of this future-oriented approach.
270

11

How electronics is
changing the automotive
industry: from component
suppliers to system
partners
Peter Bauer, Member of the Management Board, Infineon
Technologies AG

THE EVOLUTION FROM COMPLEX

MECHANICAL TO COMPLEX
ELECTRONIC SYSTEMS

Since transistors were first fitted in cars in the 1970s, vehicles have
advanced from being complex, predominantly mechanical systems to
complex and increasingly electronic systems. Simple electrical systems
were initially used to supply power to lighting and powertrain compo-
nents. Today, however, very few mechanical functions are not influenced
or improved by electronics. A plethora of new functions have also been
added: we need only think of ABS, stability control, airbags, air-
conditioning, rain sensors, distance warning systems, navigation systems,
on-board troubleshooting, driver assistance and telematics services. A
whole raft of power, safety, convenience and infotainment applications
would be unthinkable without electronics (see Figure 12.1).
 How electronics is changing the automotive industry 271

n Advanced MMI
Networking n ALC
n Navigation n AFS
n Electro-
system n Night vision
n CD changer n TLC mechanical
n Electronic valves
transmission n Bus systems n ACC stop & go
n Tyre pressure
control n ACC: active n Force feedback sensors
cruise control pedal
n 42 volt system
n Airbag n Lane changing
n Impact
n DSC: dynamic warning
protection
n Electronic n Electronic stability controls n Int. energy
injection climate control management n Steer-by-wire
n Adaptive
n ASC: anti-slip n Local hazard
transmission n Brake-by-wire
control warning
n Electronic control n CO2 reduction
ignition n ABS: anti-lock n Roll stabilization n Throttle-by-wire
n Telematics
n Check braking n Xenon light n Black box
n Online services
control system n RDS/TMG n Bluetooth
n Integrated
n Telephone n Emergency n Multimedia
n Speed security systems
n Seat heating calling systems
control n Fuel cells
n Servotronics n Wireless
n Central control n LH2
n Electronic connectivity
locking n Auto-dimming n Individualization
suspension
n etc. mirror n Software
control

1970 1980 1990 2000 2010 …

8080 80286 80386 Pentium ® Pentium III

4004 8086 68000 80486 Pentium II Pentium IV

Figure 11.1 Development in automotive electronics, 1970 to 2010

Despite all this progress, the pervasiveness of automotive electronics is

still in its fairly early stages. The potential for electronic innovation in
convenience applications is nowhere near exhausted. And safety systems
in particular – including driver assistance systems – are expected to post
the strongest growth in the years ahead. Roland Berger estimates that,
over the next 10 years, the electrical and electronic content of vehicles
will increase from a good 22 per cent in 2005 to around 32 per cent in
2015 (see Figure 12.2).

Average 1,338 2,430 2,561 3,341 3,756

electrical/electronic
share
per vehicle (E)

+6.4% +3.6%
electrical/electronic
compound
annual growth rate share 31.9%
28.8%
(%) Total E/E share
22.4%
21.5%
12.0% 20.9% 22.4% Electronic systems
13.5% 16.1% and electronic control
9.2% 7.9% 9.5% units
6.3%
Electrical systems
1995 2000 2005 2010 2015

Figure 11.2 Steadily increasing electronic content in vehicles

Sources: Strategy Analytics, Roland Berger analysis
272 Case studies

In future, scarcely any innovations in automotive engineering will not be

based on electronics. For those component suppliers that specialize in this
discipline, that is good news indeed. Semiconductor firms, for example,
are benefiting from automotive electronics’ voracious appetite for the
whole spectrum of semiconductor products, ranging from sensors, micro-
controllers and power semiconductors through memory products to chips
for wireless communication. Between now and 2010, in-car semicon-
ductor content is projected to leap by some 50 per cent.

The automotive industry – caught in the productivity vice

At the same time, rampant growth in the ‘electronification’ of automobiles

is also confronting the supply industry and car makers alike with many and
varied challenges. Technological advances (and the danger of falling
behind) place the automotive industry under tremendous pressure to
innovate. Statutory requirements relating to safety and environmental
protection are having the same effect. So too are customers’ demands for
ever greater functionality. However, since consumers are generally
unwilling to pay more for new technology, inflation-adjusted prices will
stagnate in just about every vehicle class. Car manufacturers therefore have
no choice but to consistently raise their productivity (see Figure 12.3).
The requirement for more innovation at lower cost, coupled with
demands for top quality and absolute reliability, means that the pressure to
become more productive is not restricted to car makers alone, however.
Upstream links in the value chain are feeling the full force of this trend.
Quality standards of the kind one would normally only expect in aero-
space or military contexts, but at prices reminiscent of the entertainment
industry: that neatly sums up what auto makers today expect of the supply
industry. Under cost pressure themselves, auto companies are demanding
that their suppliers cut prices by between 3 and 10 per cent per year. What
some manufacturers evidently do not realize, however, is that there are
limits to the ability to optimize the cost of existing systems or reap savings
from economies of scale. They fail to grasp that the component supply
industry alone will not be able to continue financing innovation in the long
run. As a rule, first-tier suppliers tend to pass on this cost pressure to their
own subcontractors. Semiconductor firms, for example, must therefore
ask themselves to what extent they can make a contribution to innovation
and quality in a market that is dominated by car makers and first-tier
suppliers (see Figure 12.4).
This challenge can only be mastered by a paradigm shift in the auto-
motive value chain. This paradigm shift is linked to a specific realization:
 How electronics is changing the automotive industry 273

Must-have technology
Legal requirements/safety
(eg ABS, airbag, seatbelts,
Market ESP)
penetration
in %
100
Nice-to-have technology
90
Comfort (eg air-
80 conditioning, power
70 windows, central locking)
Development direction

60 40 sample technologies
examined using a 35-year
50
timeframe
40
Niche technology
30
Individual thrills (eg memory
20 function, trunk extender,
10 seats with massage function)

0
0 5 10 15 20 25 30 35 40 45
Years
1st product 2nd product
lifecycle lifecycle

Figure 11.3 The pace of innovation introductions

Source: McKinsey/PTW-HAWK survey 2003

Figure 11.4 The automotive industry is taking heat from all sides
Sources: McKinsey/PTW-HAWK survey 2003, Infineon
274 Case studies

it is not the number of extra features and fittings that will determine a
company’s lasting success. It is more important to develop appropriate
business and profit models that shape the underlying cost structures, and
also to establish a suitable position in the value chain. Finance is therefore
the biggest issue facing the automotive industry. Given the growing
complexity of automotive electronics, how can a constant stream of inno-
vation be churned out reliably and affordably? And who is to bear the cost
of this innovation?

The need to get a handle on growing complexity

The growing complexity of vehicle platforms is a subject intimately

linked to the fast pace of innovation – and another subject with which car
makers and suppliers must concern themselves as they examine financing
issues. Loosely interconnected electronic control units (ECUs) have
dominated this segment of the industry hitherto. Future innovation,
however, will depend on deeply integrated and closely networked
systems. As many as 80 electronic systems and components still coexist
independently in today’s cars. Forecasts nevertheless indicate that, by
2010, they will all be networked and will interact to a considerable extent
(Figure 12.5).
This advanced level of networking is a fundamental precondition if
new, cross-system functions – mostly to enhance safety – are to be imple-
mented, and if synergies are to be tapped in order to reduce costs.
However, precisely this development gives rise to complex functional
interdependencies between the various electronic components. For auto
makers, it is imperative to master these interdependencies. Why? Simply
because every extra sub-system and every extra electronic control unit
increases the statistical probability that different sub-systems could
interfere with each other – and that the whole system could then fail.
There are all kinds of ways in which companies are trying to get a
handle on this growing complexity and to square the circle that demands
ever more functionality at ever lower cost. One method to which both the
supply industry and the auto makers are giving their backing is to establish
standards. Breaking down all in-car electronic systems into structured
domains is another approach. Manufacturers such as BMW and suppliers
such as Bosch are treading this path. The outsourcing of larger assemblies
to a single supplier is likewise under discussion. However, although both
suppliers and car makers are energetically exploring so many different
avenues, the search for the ultimate solution will probably not be over for
some considerable time, for a variety of reasons.
 How electronics is changing the automotive industry 275

Dimmable
exterior mirrors
Automatic
climate
control
Engine
management

Tyre protection

Figure 11.5 Individual applications are developing into complex networks

Sources: Mercer/Hypo Vereinsbank

Competence in electronics – a critical factor of

competition

Rapid innovation and the spiralling complexity of in-car electronics are

also increasing the potential for technical risks that, at worst, could lead to
breakdowns, system failures and recall campaigns. Any of these possibil-
ities would prove very expensive. It is therefore important to get a handle
on the risks too, as on the technology itself. Problems can arise, for
example, when car makers include innovative electronic developments in
mass-produced models before the innovations are fully mature.
Accumulating electronics expertise would be one way for auto companies
to minimize these risks. Indeed, auto makers that see themselves as inno-
vators have no choice but to build up competence in electronics in-house.

THE CONVERGENCE OF TWO VERY DIFFERENT

INDUSTRIES

Historically, most car manufacturers have obviously leaned more towards

mechanical skills. Unlike their traditional core competences – vehicle
design, body construction and engine development – electronics expertise
was for a long time the exclusive preserve of specialized electronic
component suppliers. Since those days, most car makers have realized
that they cannot get by without a command of electronics, and have taken
276 Case studies

steps to acquire skills in this field. One reason is that they do not want to
fall behind their competitors. Another is to avoid becoming completely
dependent on outside suppliers. Premium manufacturers in particular are
spearheading this trend. For them, electronics is now clearly recognized
as a core competence.
The trend is also reflected in the practice of launching subsidiaries (such
as BMW Car IT, Audi Electronics Venture and the Porsche Engineering
Group), in the establishing of competence centres (such as the Audi
Electronics Center, which opened in mid-2005), in moves to ramp up in-
house development departments, and in the introduction of specific elec-
tronics strategies. Auto makers are also recruiting more and more
electronics engineers and IT experts.
It is, as we have seen, important for car makers to deepen their
knowledge of electronics, but not only because of the technical risks
mentioned above. Unless these companies fully understand what auto-
motive electronics really involves, how will they ever be able to optimize
the way they assign tasks to outside suppliers? How will they be able to
judge and coordinate these efforts? The same principle applies to the
commercial appraisal of suppliers’ performance. Unless they acquire a
suitably detailed technical understanding, car makers will be unable to
reliably compare the components and services of different suppliers. By
no means least, they will not be able to optimize the in-car integration of
complete electronic systems unless they have the skills they need to do so.
As more and more electronic content finds its way into cars, the need
for an in-depth knowledge of software will also grow in the next few years
as this becomes a focal point in the value chain. Software lays the foun-
dation for all kinds of new in-vehicle functions, over and above deeper
integration and greater flexibility. For example, software can allow new
applications to be built into a car during its lifecycle.
Car makers clearly see this as a new source of revenues. Consequently,
they will increasingly use software as a unique selling proposition. Here
again, however, specific knowledge is needed in order to find new
business models with which to tap software’s potential to the full. An
example from the mobile communication industry illustrates just how
important this factor is. Some mobile phone makers have tried to buy in
entire platforms and outsource software expertise in the volume segment.
However, their attempts have showed that market success is closely linked
to a mastery of the technologies involved. In this industry, the successful
players are those that have kept and cultivated in-depth, application-
oriented software engineering competence in-house.
For many auto makers, software is a relatively new field. Especially in
the area of software maintenance and updates, many questions remain
 How electronics is changing the automotive industry 277

Market volume
5 270 billion

+ 400%

5100 bn

Market volume
5125 billion + 70%
5 25 bn

5 170 bn

5100 bn

2000 2010

Hardware Software

Figure 11.6 The market volume of automotive electronics is going up

Sources: Mercer/Hypo Vereinsbank

open and can only be resolved in close collaboration with suppliers.

Software expertise will play an ever more important role in the specializa-
tions that emerge within the automotive value chain in future. As software
accounts for an increasing share of automotive electronics, this will also
change the processes involved. The automotive industry is therefore
called on to learn lessons from the IT industry.

Electronics suppliers are growing in importance

Although they are building up their own electronics expertise, car makers
do not seem desperately interested in expanding into the relevant supply
links in the value chain. They rather seem to want to secure a position as
‘informed customers’. A study by Mercer Management Consulting, for
example, found that suppliers added 84 per cent of automotive electronic
value and car makers only 16 per cent in 2002 – and that this ratio will not
change significantly in the years ahead. In light of pressure to raise produc-
tivity and cut costs, not every car maker will readily have the resources to
invest in ramping up electronic content in vehicles. Accordingly, many
links in the chain will remain in the hands of outside suppliers.
If only because of widely varying innovation cycles and the problems to
which this leads, suppliers will in fact assume an even more prominent
role. As electronic content increases, electronic control components will
278 Case studies

rank as standard replacement parts. Auto makers will therefore have to

ensure a steady supply of electronic components throughout the entire
product lifecycle. This is problematic, however, because development and
product lifecycles in the automotive and semiconductor industries are way
out of sync. Whereas development lead times in semiconductors range
from 9 to 24 months, it takes the auto industry three to five years to
develop a new vehicle model. This model will then normally be manufac-
tured for around seven years and used for a further 15 years or so after
production stops (Figure 12.7). Obviously, then, car makers will depend
heavily on their electronics suppliers to ensure that replacement part
provisioning continues to run smoothly.

Lifespan of
15 years

Development 3 months
Lifespan 6 months
Consumer

Semiconductor

Development, Lifespan of
9 months 3–5 years

Figure 11.7 Various technology cycles

There is no easy way to bridge the gap between the pace of innovation in
the automotive industry and that in the semiconductor industry. If car
makers were to adapt to the dizzying speed of semiconductor devel-
opment, in-car electronics would have to be redesigned every time a new
semiconductor component came onto the market – even after production
of a model had been discontinued. On the other hand, stockpiling elec-
tronic components for 20 years or so is extremely difficult and expensive,
not only because of the sensitive nature of such components. Storage
options are also hampered by the facts that only rough estimates of actual
demand are possible – and that no one wants to bear the added risk (and
associated cost) of maintaining such huge inventories.
 How electronics is changing the automotive industry 279

ZVEI, the German electrical engineering and electronics industry asso-

ciation, has set up a workgroup to examine the ‘long-term provisioning of
electronic replacement parts for the automotive industry’. Car makers,
suppliers and chip manufacturers (including Infineon) are collaborating in
this group to formulate suitable models. Standardizing the components
used and committing to the retro-development of components whose
stocks are exhausted would be one possible option. In light of the huge
costs involved, however, this possibility is of limited practical value. By
improving storage capabilities, it would at least narrow the provisioning
gap. The cost would nevertheless remain exorbitant.
The early exchange of information throughout the entire process chain
could also solve some of the provisioning problems. This might even work
when changes are made to semiconductor products while a vehicle model
is still being produced. Clear communication and greater transparency
would nevertheless be needed to ensure long-term provisioning and guar-
antee quality levels. Only then can the full potential of innovation in elec-
tronics be exploited and applied in the auto industry. Auto makers will
depend on strategic partnerships with semiconductor manufacturers,
which in turn must clearly commit to ensuring the long-term availability of
the technologies needed by automotive electronics. In this context, car
companies must nevertheless remember two important things. One is that
maintaining ageing technologies necessarily incurs additional costs. The
other is that long-term provisioning can only be guaranteed by semicon-
ductor firms for which automotive electronics is part of their core business.

THE CHALLENGE OF SYSTEMS INTEGRATION

Automotive electronics is a fertile breeding ground for innovation. It is

spawning a rich diversity of systems, modules, components, operating
systems and software from a variety of manufacturers. Added to this
variety are ever more complex development structures, multi-layer
software models and increasingly extensive bus protocols. All of this
pushes up the cost of integrating both hardware and software in vehicles.
The relevant players in the automotive value chain must therefore ask
themselves how systems integration can be simplified despite this
growing complexity, and how they can at the same time ensure that func-
tionality and quality are maximized.
We have already touched on one way to reduce complexity and thereby
simplify systems integration, namely a model (operated by manufacturers
such as BMW) that carves systems integration up into structured domains.
280 Case studies

This model groups individual functions that exhibit similar requirements

together with the related control units to form larger domains. Within
these domains, central control units integrate a number of functions (as
well as actors and sensors) that possess their own built-in intelligence. The
separate domains can then be networked using proven bus systems such as
CAN and LIN, or using new, deterministic systems (such as Flexray) that
are currently being crafted by industry committees. To ensure that the
whole construct works smoothly, the principles of this domain archi-
tecture must be reflected in the way systems are partitioned.
Many pundits see open, standardized solutions as the high road to
seamless communication between the individual systems and control units.
They also believe that this approach will simplify the task of networking
systems from different suppliers. Consequently, numerous initiatives such
as HIS (a manufacturers’ software initiative) and development partnerships
such as AUTOSAR (Automotive Open System Architecture) are striving
to standardize software interfaces and software modules (Figure 12.8).
AUTOSAR aims to develop an open standard for in-vehicle electronic
architectures, and thereby to make it easier to reuse (and interchange)
software modules across different types and classes of automobile.
A single, standard platform that defines the fundamental software archi-
tecture and basic functionality would slash costs in two ways. It would not
only shorten development times, it would also vastly simplify the process
of integrating new functions. When individual components needed to be
replaced, it would no longer be necessary to redesign the entire system
every time. Instead, the modules or add-on components concerned could
simply be plugged into the appropriate software interfaces. This would
sharply increase the proportion of fully tested and proven modules, which
in turn would reduce system costs and improve quality in the long run.

Does standardization raise a barrier to competition?

Standardization is definitely one feasible way to master the complexities

of automotive electronics and systems integration. Even so, it will still
probably be some time before a uniform standard is in fact applied. This is
only partly because standardization is a very protracted and laborious
process. (It can take years to advance from verification to formal ratifi-
cation.) Another reason is quite simply that the various market players
attach different degrees of importance to this issue.
Cursory examination might lead us to the conclusion that the car makers
are the only players who would benefit, because fiercer competition
between suppliers would give them more flexibility to pick and choose
 How electronics is changing the automotive industry 281

SW SW SW
component 1 component 2 component n
………..
AUTOSAR AUTOSAR AUTOSAR
interface interface interface

QuickTime™ and a

AUTOSAR RTE
decompressor
are needed to see this picture.

Basis software
■ Transport levels for various different communication technologies
(eg CAN, LIN, etc)
■ Network management
■ System services (diagnose logging, etc)
■ NVRAM management
■ etc.

Microcontroller abstraction

ECU hardware

Figure 11.8 AUTOSAR standardization initiative

their partners. The fact is, however, that standardization would initially
impose a much heavier burden of development expenditure on component
suppliers in particular, especially in relation to software engineering. Yet
the smaller suppliers especially will not be able to fund such development
as things stand. In other words, contrary to the economic laws of standard-
ization, we might see precisely the opposite effect occurring: competition
– and hence the car makers’ freedom to choose – might actually be further
restricted as higher expenditure and lower margins drive a number of
suppliers out of the market.
A ZVEI paper on standardization addresses the issue of whether stan-
dardization prevents competitors from distinguishing themselves from
each other. One could take this question a step further and equate stan-
dardization with the interchangeability of products, systems, and ulti-
mately of manufacturers themselves. In this case, one could conclude that,
in committing to standardization initiatives such as AUTOSAR, suppliers
are investing in making themselves replaceable. This obviously cannot be
in their interests. Alongside the need to improve quality and safety,
therefore, there must also be plausible economic reasons for semicon-
ductor firms such as Infineon to take part in development partnerships
such as AUTOSAR and actively advance the cause of standardization.
282 Case studies

By sensibly standardizing basic electronic functions that do not

constitute unique selling points, both car companies and suppliers can rid
themselves of links in the value chain that are necessary, but that do not set
them apart. This will leave them free to focus on activities that directly
impact value creation. In the context of the standardization of automotive
electronics, market players will set themselves apart – and thus compete –
primarily by varying the way they use software and implement specific
functions and operating models.
The important thing is that car makers must not see standardization as a
way to squeeze the entire supply industry into a single mould. Instead, it
must be grasped as a means to reduce complexity and to simplify systems
integration. Standardization must leave room for differentiation. It must
present no obstacles to deeper integration. Thus, if standardization were to
go too far, that would ultimately put the brake on innovation.

Who is responsible for systems integration?

As more and more components and modules need to be integrated, a

further question arises: who will be responsible for systems integration
tomorrow? Is it conceivable that a partner in the supply industry will in
future ensure that all the systems and modules fit together? Devolving full
responsibility (or at least responsibility for large packages of activities) to
a supplier would have two advantages. It would sharply reduce frictional
losses at the interfaces between different systems, and it would vastly
diminish the cost of cross-system harmonization. The downside is that
only a very small number of hand-picked suppliers have the breadth of
knowledge that such a complex assignment would necessitate.
Liability is another key issue in this context. Some auto makers are
currently charting a rather ‘schizophrenic’ course. They want to delegate
system responsibility, complete with liability, to their suppliers. At the
same time, however, they want to retain control because they are afraid of
becoming too dependent. Separate responsibility from competence,
however, and it is only a matter of time before problems begin to arise. It
is not unusual for deficient coordination to threaten entire projects. This
kind of approach does not only place a burden on development: in many
cases, the players involved seem to forget that a working, self-contained
system can be less expensive than the sum of the costs of individual
components if these then also have to be integrated.
Given the large number of players involved, overall project management
is manifestly the key to successful systems integration, and this key must
be in the hands of the car maker. Overall project management forges the
 How electronics is changing the automotive industry 283

link between different suppliers, each of which, in accordance with the car
maker’s specifications, delivers separate but networked sub-systems. If the
companies involved are not brought together around the same table
throughout the entire process, it is unlikely that a workable solution will be
the outcome. Problems are bound to occur in the attempt to develop and
coordinate so many sub-systems. Moreover, the car maker depends on
transparency with regard to the suppliers’ processes. A clear overview of all
tributary processes is essential if all the different systems are finally to be
blended together perfectly in the vehicle concerned.

KNOWLEDGE AND BUSINESS MODEL-RELATED

DEPENDENCIES FOR AUTO MAKERS

Auto makers depend on the expertise of their suppliers, but they equally
depend on their suppliers’ business models. Automotive electronics is such a
complex discipline that specialization within the supply industry is devel-
oping an ever narrower focus. As a result, only a limited number of suppliers
can produce certain systems. Small and medium-sized suppliers might
survive if they have a clear technology lead, but they will have great diffi-
culty realizing the savings on which car manufacturers insist. Semiconductor
firms, on the other hand, definitely need both a certain critical mass and a
broad product portfolio if they are to rise to this challenge.
The scope of competence that stays in-house will largely be determined
by the auto makers’ sourcing strategy. In the United States and to some
extent in Europe, a trend toward purchasing strategies that are purely cost-
driven has been in evidence for some time. This practice has even reached
the stage where many auto companies auction their orders over the
internet. We must nevertheless query the extent to which this kind of
sourcing strategy can foster the long-term collaboration from which
everyone – not only the car makers and their suppliers, but also car buyers
– will ultimately benefit.
Selecting suppliers purely on the basis of cost might let car manufac-
turers save money in the short term. In the long term, however, the draw-
backs will doubtless weigh heavier. This kind of strategy promotes a
narrow focus on price that can choke off innovation and can, at worst, also
undermine quality and vehicle safety. This is surely not the road down
which makers of automobiles wish to travel. Purchasing strategies that are
concerned exclusively with costs are indeed the main hindrance to long-
term strategic collaboration that aims to build win–win constellations
284 Case studies

across different links in the value chain. However, vehicle manufacturers

cannot escape from the productivity vice unless they engage in precisely
this kind of close, strategic partnership with a few hand-picked suppliers.
Large auto makers of the calibre of BMW and Toyota have long since
committed to such strategies – and are now reaping the rewards. Positive
collaboration with suppliers is reflected both in regular supplier appraisals
and in the commercial success of these companies. Toyota, for instance,
actively encourages collaboration between its suppliers. Rather than being
content with a traditional stance right at the end of the value chain, it acts
more like the conductor of a huge orchestra, ensuring that each player
stays in harmony with all the others.

A new quality of collaboration

There is an urgent need to extend this kind of partnership along the whole
value chain. This is because architectural decisions taken unilaterally by
car makers, and the way system component suppliers choose to divide up
their systems, can already have a major impact on the cost structure of
semiconductor solutions. Technologically reliable products can be created
only if auto makers and suppliers collaborate closely as partners. To avoid
the effort and expense of having to cultivate lots of partnerships but to
maintain an element of competition, many car companies today operate a
‘second source’ strategy. In this constellation, the manufacturer concen-
trates on one main supplier and one secondary supplier, to which a smaller
volume of orders is awarded. For technologically less sophisticated
components, system suppliers are free to choose their own component
suppliers – a fact that leaves this procurement market highly fragmented.
For technologically more sophisticated components, car makers usually
restrict the system suppliers’ choice of possible component suppliers. This
short-listing practice is heavily influenced by component suppliers’ tech-
nical expertise, quality and reliability.
Some auto makers also encourage additional component suppliers to
develop proprietary solutions. This makes it increasingly difficult for indi-
vidual semiconductor manufacturers to innovate, however. In this situation,
many of them are unable to tap the economies of scale that are so vital to the
semiconductor industry in particular. Consequently, only large semicon-
ductor firms that bundle the demand that exists in a fragmented market, and
demonstrate technical skills that go beyond their own products, will in
future be able to deliver the necessary level of quality and innovation.
Both auto makers and suppliers that have not yet grasped the impor-
tance of working together as partners must rethink their positions. If they
 How electronics is changing the automotive industry 285

want to stay competitive, both must inject a new quality into their relation-
ships with their suppliers. Ideally, collaboration between components
suppliers, system suppliers and car makers will be very close.
Semiconductor manufacturers must be involved as early as possible in the
preliminary development and development projects run by first-tier
suppliers and the car makers themselves.
For many years, Infineon has been working closely with both system
suppliers and automobile companies in order to supply efficient and opti-
mally tailored semiconductor solutions. To fully understand what an
application requires at an early stage, and to ensure that its solutions
genuinely meet these requirements, Infineon engages in in-depth dialogue
with the car makers. This form of interaction also plays an important part
in the early development of innovative products.

Sub-system/application

Figure 11.9 Business model for a successful future

When development contracts are awarded, finance is often treated more or

less as a mere footnote to the ‘real’ issues. Yet low margins and fierce
global competition have brought many suppliers – and not only the small
and medium-sized enterprises (SMEs) – to the very limits of their
financial capabilities. Working in a highly volatile industry whose capital-
intensive nature places heavy demands on capital markets, semiconductor
firms in particular rate financing as a singularly important matter. In other
industries, low single-digit margins might be enough to satisfy investors
and cover the cost of capital. Not so in semiconductors, however, where
firms have to earn margins upward of 10 per cent. That is why any
286 Case studies

discussion of future collaboration and cost distribution along the value

chain must also look closely at new business models.

THE NEED FOR NEW BUSINESS MODELS

Standardize and cut costs, yes, but make sure you innovate too. Delegate
responsibility and liability, but make sure you stay in control. Avoid
quality costs, but keep the supplier landscape fragmented to avoid
unhealthy dependencies. The fact that many auto makers feel trapped in
this area of conflict is primarily attributable to severe cost pressure.
However, they cannot escape from this area of conflict simply by
dumping all the burdens on the supply industry. The only way out is to
engage in partnership and collaboration all along the value chain.
New business models are needed if car makers and suppliers (including
semiconductor companies) are to master the challenges they currently
face. These new business models must aim to translate innovation into
volume production at reasonable system cost. But they must also seek to
keep system complexity manageable, to master the art of developing new
products under stiff time and cost pressure, and at the same time to uphold
strict quality standards. Forward-looking models will forge value chains
that are based on partnership. Performance and reward will be well
balanced. Business models that focus solely on price should therefore
soon be a thing of the past. After all, innovation is only affordable in the
long run if the inherent costs are not always being passed along to the
previous link in the chain.
This being the case, the central issue is to define who foots the devel-
opment bill, especially for software projects. In future, software will be
much more than just an extra bit tacked onto the hardware. It will increas-
ingly establish itself as a separate product. Car makers have repeatedly
called on the semiconductor industry to put more effort into this area. The
growing importance of software and moves to define a standardized
software architecture will naturally have consequences for semiconductor
firms. The latter will thus have no choice but to tackle the issue of co-
designing hardware and software head on. Even so, it is unlikely that
semiconductor manufacturers will cultivate application-specific software
expertise as a new core competence. For one thing, this would run counter
to the interests of first-tier suppliers. For another, it would be difficult for
semiconductor companies to market this competence in any sensible way.
In the long term, these companies will therefore only contribute software
in the form of hardware-related software (that is, firmware).
 How electronics is changing the automotive industry 287

Innovation must nevertheless be made possible in future, despite the

systemic differences in innovation and product lifecycles between the
automotive and semiconductor industries. To make sure this happens,
durable standards must be fashioned, components must be made available
for longer periods, and the entire product lifecycle – from start-up through
modification to discontinuation – must be accompanied by intensive
communication. At the same time, new approaches to financing and risk
management must be discussed and clarified. Networked organizations,
mergers or collaborative ventures between selected partners would, for
example, be conceivable options. The important thing is that every party
to the automotive value chain must identify and concentrate on its own
core competencies. For their part, car makers should advance the devel-
opment of open standards, ramp up their in-house integration skills and
provide the support that their partners need. In return, suppliers can
position themselves as reliable system partners, contributing stable,
scaleable and innovative solutions.

Figure 12.10 Changes in the value chain

Networked, strategic system and development partnerships with a long-

term horizon are the key to future success. Within these partnerships,
suppliers will do far more than merely deliver components at the lowest
possible cost. They will rather be treated as equal partners who are
involved from the earliest stages of the auto maker’s entire development
288 Case studies

process. When these different players cooperate across the entire value
chain, the car companies can assume responsibility for the system as a
whole, for drawing up specifications and coordinating the various
suppliers. System suppliers can shoulder responsibility for integrating the
applications they deliver, while semiconductor firms such as Infineon can
take care of integrating their chips. Substantial synergies can be derived
from this approach to innovation – synergies from which everyone who
plays a part in the value chain will benefit. Ultimately, the resultant
savings will also help underwrite the cost of innovation.
For all the efforts already in progress, there are still far more questions
than answers about how solutions that satisfy all players can be found to
the challenges raised by automotive electronics. It is, for instance, inter-
esting to ask why the automotive electronics market is so fiercely
contested despite such immense challenges. System suppliers, component
suppliers and semiconductor companies alike are all stepping up their
activities in this market. Although the automobile market as a whole is
unlikely to expand by more than a modest 3 per cent per year, one reason
for such keen interest is undoubtedly the expectation of significantly
stronger growth in automotive electronics. The market for automotive
semiconductor applications, say, is forecast to grow by an average of
around 7 per cent per year between 2005 and 2010 (see Figure 12.11).

Worldwide market for automotive Worldwide market for automotive

electronics (US$ million) semiconductors (US$ million)
5 0 ,0 0 0 3 0 ,0 0 0

4 0 ,0 0 0 7.8% CAGR 8,940 Infotainment

2 0 ,0 0 0
7.2% CAGR
3 0 ,0 0 0 6,724
14,427 Body + 3,935 Infotainment
chassis

10,920 3,150
2 0 ,0 0 0 7,083 Body +
7,806 Safety chassis
1 0 ,0 0 0
5,265
4,919
1 0 ,0 0 0 3,994 Safety
13,657 Powertrain 2,595
10,655
3,511 4,142 Powertrain
0 0
2005 2010 2005 2010

Figure 12.11 Market developments in automotive electronics and

semiconductors
Source: Strategy Analytics, October 2004, August 2005
 How electronics is changing the automotive industry 289

Thanks to its in-depth knowledge of applications, its broad product

portfolio and an appropriate corporate structure, Infineon is well placed to
rise to the challenges issued by car makers. It should therefore benefit
from this growth as it draws on in-house knowledge in areas such as
communications, safety/security and storage products.
Innovation remains the driving force behind the German automotive
industry. The comparative competitive advantage enjoyed by German
auto makers is in large measure attributable to their innovative prowess. It
is also true that the whole world looks up to the German car industry as the
‘most efficient innovator’. However, whilst striving to escape from the
productivity vice, Germany must take great care not to forfeit its compet-
itive advantage to emerging economies such as China and Korea. It can
only defend – and capitalize on – its position if car makers, system
suppliers and component manufacturers all pull together.
290

12

The next evolutionary step

for the automotive industry
is just around the corner:
factors for sustainable
success in the interplay of
OEMs and suppliers
Siegfried Wolf, CEO, Magna International

INTRODUCTION

The automotive world is changing at a rapid speed. The demands of

consumers are becoming ever more differentiated. Their demand for
mobility is increasing, and development and production cycles are
shortening dramatically. Globalization has intensified the speed of
change even more. While auto makers open up new niche markets, new
competitors are pushing into the market. In addition, record price levels
for raw materials are driving up costs and demanding ever more effi-
cient development and production practices. In parallel, hedge funds
have discovered an industry traditionally of little attraction to them,
probing acquisitions which only a few years ago would have been
unthinkable.
Despite these far-reaching processes of change, the automotive industry
is, without any qualifications, one of the key industries of the global
 OEMs and suppliers 291

economy. A high-tech industry with an enormous potential for innovation,

it has fascinated people from childhood. The millions of people visiting
automobile shows around the globe provide a glimpse of the fascination
the automotive world exercises on humankind. Like hardly any other
industry, the automotive industry is linked to strong emotions.
Automobiles are an important part of our daily life. The continuously
growing societal need for mobility becomes manifest in them, and they
have increasingly come to reflect people’s personality. Thus, automobiles
epitomize the desire for individuality like hardly any other product. In a
nutshell, car buyers like to create a ‘home on four wheels’ for themselves.
‘The automobile’ apparently has not lost any of its fascination over the
years. Experts are saying that the automobile will remain the most
important means of passenger transportation in the future. We can antic-
ipate that the fascination for automobiles will not fade – quite the opposite.
The future of the automotive industry, though, is anything but clear.
Over the first years of the new millennium, sales have been slow. As a
result, the pressure for profitability has increased on all original
equipment manufacturers (OEMs). The industry is faced with enormous
structural changes which raise new questions about its value chain. The
market entry of Japanese and Korean auto makers about 20 years ago has
already led to fundamental changes in competitive and market conditions.
More change is to be expected through the market entry of Chinese
OEMs, especially in Europe. For the auto makers, at the beginning of the
new century, new competition has set in which has already reached new
levels, but has not yet reached its peak.
It is interesting to note that in the context of structural change processes,
once again the impetus to define value chains anew has originated within
the industry itself. The far-reaching restructuring processes of the 1990s
were themselves initiated from within the automotive industry, so part of
the automotive world’s fascination is apparently in its nature to constantly
challenge things, to always want to improve things, and to understand
change as an opportunity for improvement. The quest for top performance
is particularly strong within the automotive industry, as several examples
in this volume demonstrate.

A ROLE MODEL FOR OTHER INDUSTRIES

There is hardly an industry that has influenced other branches of the

economy more strongly than the automotive industry. Particularly for the
production of consumer goods, auto makers have set benchmarks and
292 Case studies

established a new way of thinking. The restructuring of value chains that

the automotive industry implemented over the 1990s – keywords being
‘lean production’ and ‘kaizen’ – is increasingly taking place in other
industries as well. Mostly driven by globalization, many enterprises in
very different industries see themselves forced to question their self-
conception and to turn the organization of their processes on its head in
order to be capable of a top-level performance in future. In the wake of
these changes, vertical integration is often reduced, entire production
chains are chopped off, and operations and workflows are designed
completely anew to enable ‘just-in-time’ scenarios.
Take the banking industry as an example. The increased intensity of
competition among financial service providers is forcing open the tradi-
tional value chains. To increase their profitability in international compe-
tition, more and more financial institutions – in cooperation with
specialized service providers – are beginning to separate their primary
(core) processes like sales and product development from secondary (non-
core) processes like order fulfilment. According to industry experts, these
secondary processes are especially characterized by fragmented work-
flows which can be made substantially more flexible. Thus, the thinking
within the financial services industry strongly reminds us of the auto-
motive industry of the 1990s. Even more: the auto industry has become a
role model for other industries.
Look at retailing for another example where concepts from the auto
industry are finding their way into another industry. According to a
McKinsey study, the retail industry, particularly in Germany, aims to
increase its profitability through more efficient process management.
Under the keyword of ‘lean retailing’, the complete supply chain from the
manufacturer to the shelf is being reconsidered. Simplified processes are
being introduced to ensure that goods get to the customer more quickly,
that expensive stock levels are lowered, and that retailers have more time
for service activities.

CURRENT CHALLENGES IN THE INTERPLAY OF

AUTO MAKERS AND THEIR SUPPLIERS

One way in which auto makers are increasingly dealing with the chal-
lenges briefly sketched out above is through alliances. Recently, Porsche’s
taking a financial stake in Volkswagen has received a lot of attention. On a
more operational level, the two auto makers have been long cooperating,
 OEMs and suppliers 293

for example on the shared architecture of the Porsche Cayenne and

Volkswagen Touareg. The list of strategic cooperations could easily be
extended: Toyota and PSA Peugeot-Citroën have entered a manufacturing
joint venture, and Ford and VW have been cooperating since the 1990s.
General Motors, DaimlerChrysler, and BMW have formed an alliance to
develop and build hybrid drive systems.
The rising number of strategic alliances, experts agree, is caused by the
increasing fragmentation of markets. A smaller volume per model, and
proliferation in the number of models, increase development and
production cost per model. In addition, overcapacities have increased
pressure on margins, while innovation and the integration of new tech-
nology into the production process is demanding ever more resources.
OEMs accordingly use strategic alliances as well as modularization
concepts to reduce one-off costs.
There is yet another reason that alliances have a positive effect: the will-
ingness of OEMs to form alliances with their immediate competitors
shows that – notwithstanding their competition with each other, which is
good and necessary – a desire to do the best for the entire industry enters
into their considerations. Behind this is the simple but accurate insight
that the perspective of an individual OEM is improved if there are joint
efforts to increase the global competitiveness of the entire industry.
Accelerated by globalization, the need to lower costs in general and
development costs in particular, along with a need for higher flexibility,
have long been influencing not only auto makers, but increasingly
suppliers as well.
Many suppliers in North America and Europe, especially medium-sized
ones, are therefore in a precarious situation. Besides pressure on their
costs and margins, and development risks passed on to them by the OEMs,
rising prices for raw materials burden the suppliers. They find themselves
in what might be called a sandwich position: from above they experience
the OEM cost pressure, and from below they are pushed by exploding raw
material prices. What remains is the filling in this sandwich, which for
many suppliers has become so thin that you can hardly see it any longer,
only smell it at best.
Some experts forecast that another round of cost pressure would mean
the end for many smaller companies.
Just how serious the situation of the supplier industry is can also be
seen from the rising number of insolvencies, which does not spare large
corporations. Even an industry giant like Delphi had to file for Chapter
11 protection for its North American operations in October 2005. Only
the future can tell what this will mean for its 185,000 employees, and
what the consequences are for the North American market. At the same
294 Case studies

time, the example of Delphi demonstrates the enormous dynamic of

changes, and this leads to the question what factors lead to success in the
market under these conditions.

MAGNA: AN EXAMPLE OF SUSTAINABLE

GROWTH IN THE SUPPLIER SECTOR

The case of Magna International shows that those suppliers that have
moved ahead of the competition, have recognized future challenges early
on and have positioned themselves accordingly, can survive and even
thrive in this environment. Suppliers that aligned themselves strategically
along the requirements of ‘lean management’ during what some have
referred to as ‘the second automotive revolution’ in the 1990s are
nowadays profiting from the structural changes in the industry.
At the same time OEMs reduced their level of vertical integration,
starting a strong trend of outsourcing. Those supplier companies that did
not reduce their role to that of an ‘extended workbench’, but developed
into real production and became engineering partners of the auto makers,
have fared best under these circumstances. But these suppliers also had to
understand the needs and problems of OEMs, and to have the know-how
to proactively offer new products and services.
Generally, a consistent focus on the needs and desires of customers is a
key factor for success in the supplier industry. At Magna, this thinking is
deeply rooted and can easily be illustrated: when a customer says ‘Jump!’,
the Magna response is not ‘Why?’, but ‘How high?’ Behind this is the
simple but absolutely correct insight that a supplier company can ulti-
mately only be as successful as the customers it is allowed to serve.
Another aspect is certainly technological competence. A company that
has identified which technologies will prevail in the market, and that
masters and further develops these technologies, can offer its customers
solutions that put them in a particularly promising position compared
with their competitors. Take all-wheel drive technology for an example,
which Magna has developed to create a decisive competitive advantage
for itself in drivetrain technology. Magna could offer its OEM customers
a specific know-how which the final customers increasingly demanded.
This ability to take extend its thinking to the final customer – or to put it
differently, its customers’ customers – distinguishes Magna from many
of its competitors.
 OEMs and suppliers 295

MAGNA TODAY

Over the past years, Magna has grown very dynamically in both quanti-
tative and qualitative ways. In this context, the acquisition of Steyr-
Daimler-Puch in 1998 was certainly a special milestone. Besides
increasing sales, through this acquisition Magna entered a new
dimension within the auto supplier industry. It added complete vehicle
competence, which meant that Magna was now accepted by OEMs as a
fully fledged engineering and manufacturing partner. Comprehensive
know-how, in combination with a very broad and high-quality product
portfolio, along with a global footprint, really do mark unique selling
propositions.
Based on this, in 2004 Magna accomplished another jump in sales.
Magna Steyr contributed substantially to this by increasing its complete
vehicle production from 118,000 units in 2003 to 227,000 units in
2004, thereby doubling sales and almost tripling earnings before
income and tax (EBIT).

Figure 12.1 Magna International: sales development

With sales of US $20.7 billion, about 83,000 employees, and 279 facilities
(223 manufacturing, 56 engineering) in 23 countries, Magna now is the
world’s third largest automotive supplier.
296 Case studies

Figure 12.2 Magna’s global presence

MILESTONES OF CORPORATE DEVELOPMENT

The success of Magna over the past decades is closely linked to Frank
Stronach’s name. In 1957, Frank Stronach opened a one-man tool and die
shop called Multimatic. In 1969, Multimatic merged with Magna
Electronics Corporation Ltd, and in 1973 the company name was changed
to Magna International Inc. In the years that followed, Frank Stronach led
the rapidly growing company to the top and – partly through systematic
acquisitions – built Magna into the global corporation it is today.
From a strategic perspective, the various acquisitions were undertaken
to strengthen Magna in terms of technology. Over the years, new and
specific competencies have continuously been integrated into the
corporate network. As a result, the knowledge about automobiles within
the company increased steadily. Magna has thus developed more and
more into an outsourcing partner of the most important OEMs.
Following the successful establishment of the company in North America,
which was mainly achieved through organic growth, in the late 1980s Magna
turned increasingly to the European market. Over the following years and
supported by acquisitions, Magna achieved a similarly market-leading
position in Europe. A milestone in developing the European market was the
acquisition of what was then Steyr-Daimler-Puch AG in 1998, which was the
cornerstone for Magna Steyr when it was formed in 2001.
 OEMs and suppliers 297

Other groups also expanded their presence in Europe, step by step,

partly through greenfield plants, partly by acquisitions intended to
enhance and top off their product portfolio. It is noteworthy in this context
that Magna’s rapid growth was occurring in a market that was considered
rather saturated when Magna entered it.
So much for history. But – and this is the decisive question – what have
Frank Stronach and Magna done differently from the competition? Or to
put it differently, what are the decisive criteria on which OEM customers
have increasingly opted for Magna as their supplier partner?
A central aspect in answering this question, besides the strategic acqui-
sitions policy already discussed, is flexibility. Over the years, Frank
Stronach has built up an organizational structure that to this day allows for
a maximum of flexibility. For Magna the ideas of lean management have
never been a management tool which was implemented, but rather part of
the organization’s basic convictions.
The degrees of freedom resulting from this enabled Magna from the
start to focus fully on the needs and desires of its customers, instead of
dealing with a high level of internal complexity. At the same time, its
flexible structure allowed Magna to pick up new challenges and trends
more quickly than its competition, and implement them according to
customer requirements, before they became common knowledge in the
industry. Paired with growing technological competence, this enabled
Magna to capitalize on a special momentum in many business decisions.
Frank Stronach has always relied on the power and the will of his
employees to perform. This employee orientation still is a basic value of
Magna, and is documented clearly in the corporate constitution.

SUCCESS FACTORS FOR CONTINUED

GROWTH

One of the key reasons for the dynamic growth of Magna over the past
year is the company’s ability to identify changes in the automotive
industry early on, and to align itself to the new market conditions. Magna
implemented the guidelines of the lean management principle long before
they became common knowledge. In parallel, the flexibility of all
business processes was supported by a decentralized organizational
structure. In addition, the actively driven enhancement of the portfolio
through targeted acquisitions that was described above has strengthened
the technological positioning of the company.
298 Case studies

Over the course of the dynamic growth process, Magna succeeded in

maintaining the core principles and values of the company – something
many companies have failed to accomplish. Moreover, the distinctive entre-
preneurial culture was transferred to the new added business units. In the
process, Magna’s strong ability to integrate the newly acquired units ensured
its success and allowed for fast synergies between the various units.

Success factor: active portfolio management

The targeted acquisition policy and the sustainable, profitable growth of

the past years have made Magna one of the leading global suppliers of
systems, components and complete modules for the automotive industry.
With regard to the range of products and services, Magna in its current
group structure – Magna Steyr, Magna Powertrain, Cosma, Magna
Donnelly, Decoma, Intier Automotive Interiors, Intier Automotive
Seating and Magna Closures – has become the most diversified auto
supplier in the world. The product portfolio that Magna can offer its
customers ranges from small components to larger modules to complex
systems, all the way to a complete vehicle built on a contract assembly
base by Magna Steyr at the Graz facility.

Figure 12.3 Magna International Group Structure 2005

 OEMs and suppliers 299

Its complete vehicle competence has raised Magna to a new level and
created an exceptional competitive advantage. Major projects like the
Saab 9–3 Convertible, the BMW X3 and the Jeep Grand Cherokee are
proof of the high acceptance Magna Steyr has received for its complete
vehicle know-how. In 2004 Magna Steyr built more than 227,000
vehicles, a sixfold volume increase over 1998. A former low-volume
manufacturer has thus become the world’s largest auto maker without a
brand of its own. In the process, the number of employees increased from
5,000 to about 10,000.
Magna’s all-wheel drive and powertrain competence is organized
within Magna Powertrain. Here, Magna is a worldwide leader in tech-
nology. There is hardly an all-wheel drive vehicle in the premium segment
that does not utilize all-wheel drive know-how from Magna Powertrain.
With the acquisition of New Venture Gear and the integration of what was
previously Magna’s Tesma group, one of the worldwide leading power-
train specialists has emerged.
Cosma is the worldwide largest supplier of metal body systems in the
auto supplier industry. Its product portfolio ranges from small stampings
to structural parts and assemblies and large Class A stampings, all the way
to complete bodies-in-white.
The Magna Donnelly group, which specializes in mirror systems and
electronics, is also the market leader in its business field. Products by
Magna Donnelly find their way into more than half of all vehicles
produced worldwide. In the booming Chinese market, Magna Donnelly
has a market share of about 80 per cent, and about every third mirror
actuator is made by Magna Donnelly.
Magna’s exteriors group is Decoma. As a supplier of complete
vehicle exteriors, Decoma has a leading position in the market. Its
product portfolio ranges from exterior trim components to bumpers,
lighting systems, body side panels, and from tailgates to complete front
and rear end modules.
Intier Automotive Interiors covers the entire vehicle interior, its
portfolio spanning from complete dashboard systems to side and
overhead trim, floor carpets and acoustic systems, to complete vehicle
interior integration.
The focus of Intier Automotive Seating is on the development and
manufacturing of vehicle seats, complete seating systems and seating
mechanisms.
The business fields of Magna Closures are latching systems, electrical
and mechanical window regulators, actuators and mechanisms for doors
and tailgates.
300 Case studies

Success factor: decentralized organizational structure

The far-reaching changes in the auto industry have made flexibility a

more and more important factor over the past few years. The changes in
global markets, the dynamics of which will only increase in future, call for
organizational structures that allow enterprises to react quickly to new
market challenges. The ability to satisfy the needs and expectations of
customers within a very short timeframe has become an important
criterion for a company in setting itself apart from the competition. This
can mean being extraordinarily fast in certain development processes, or
achieving the necessary capacity shifts smoothly.
To ensure a maximum level of flexibility in engineering and manufac-
turing, Magna has been set up in a decentralized structure. This structure
also is the most visible element of Magna’s special corporate culture:
Magna is not structured like a typical large corporation, with its often very
static and strict hierarchic architecture. Instead, the company consists of
many smaller units. The groups are typically made up of individual divi-
sions whose size is normally limited to 300 to 800 employees. If a unit has
grown dynamically and exceeds a certain size, it is usually divided into
smaller units again to allow specialization and a focus on its core compe-
tences. In their daily business, individual divisions operate with a high
level of autonomy and self-organization. On the market, they appear as
profit centres. This set-up guarantees each division and its management a
maximum of personal freedom. This degree of freedom is what makes
Magna an attractive employer for capable and performance-minded
heads. The decentralized structure thus has a substantial role in the ‘war
for talent’ as well.
One up from the divisions are the product groups, which organize
overall back-office functions in group offices, which are always kept very
lean. The groups also coordinate the individual divisions with regard to
marketing and eventually operational synergies.
Magna itself, steered by the Magna Executive Management, provides
the long-term strategic direction and takes care of financial, but also
technological and systemic synergies – like a large umbrella spanning a
lot of medium-sized companies. The corporate roof dictates and
ensures a high level of customer focus, so Magna always shows ‘one
face to the customer’.
Despite its size, Magna is thus nothing like a cumbersome supertanker.
Instead, the company shows more characteristics of an alliance of small
and agile speedboats, manoeuvring highly flexibly and still using the
force of the alliance.
 OEMs and suppliers 301

Figure 12.4 Magna’s decentralized structure

Success factor: entrepreneurship

Because of the changed market situation, high margin and cost pressure
and increasing competition, many companies in the automotive industry –
suppliers as well as OEMs – have started efficiency improvement
programmes again and again over the past years and decades. Often, these
programmes were limited to cost savings only, and in retrospect they
failed to fully achieve the desired effects. While short-time recoveries
were visible, the second and third rounds of many efficiency improvement
programmes indicate that the progress made was not sustainable.
One reason for the limited effectiveness is certainly the fact that within
the company, such efficiency improvement programmes are experienced
negatively, as they are normally linked to severe cuts. In addition, many
approaches are falling short of their goals, as they focus on the conse-
quences of problems, but do not go to their source. In a way, these kind of
measures are always late and seem to be implemented with very
lukewarm motivation.
Magna, in contrast, has a system-active programme to consistently raise
profitability. This programme is barely visible to the outside, but of signif-
icant importance for the positive performance of the past years, as is the
302 Case studies

company’s decentralized structure: at Magna, there is a particularly strong

entrepreneurial culture established over many years. Magna employees on
all levels take care that the company advances and that useless jetsam is
not generated. This way of entrepreneurial thinking is supported by a
system of profit sharing which has proven itself over decades. With its
clear commitment to its employees, Magna has an avant-garde function
within the industry.
Magna has intentionally been set up and managed as a stakeholder-
oriented enterprise over the years. At its centre are investors, employees,
management and society. To ensure that the stakeholders, particularly the
employees, share in the positive development of the company, Magna has
a corporate constitution which exactly predetermines the percentage of
profits shared by employees or given to social causes. The transparency
and the binding character of the corporate constitution make it a role
model not only within the auto supplier industry, and guarantee that the
key stakeholders are all partners in Magna’s growth and profitability.
Driven by the conviction that it is the employees in all areas of the
company who determine the success or failure of the entire enterprise,
through their qualifications, motivation and passion, Magna’s constitution
contains a particularly high social component. In comparison with many
competitors, this is certainly an important differentiator. The system,
which at Magna also is referred to as ‘fair enterprise’, ensures the
constructive cooperation of management and employees. In a very trans-
parent manner, it also ensures that all employees are interested in a good
performance, as they directly participate in the company’s profitability.

10%
20%

55%
6%
Steuern &
Re-Investition 7%

2%

Figure 12.5 Magna’s corporate constitution

 OEMs and suppliers 303

MAGNA’S CORPORATE CONSTITUTION

The Magna corporate constitution defines and describes the central rights
of employees and shareholders. At the same time, it regulates the distri-
bution of profits.
In terms of shareholder profit participation, the constitution deter-
mines that investors receive on average not less than 20 per cent of
Magna’s annual net profit after tax.
A core element of the specific Magna culture is employee equity and
profit participation. This participation, which is laid down in the
corporate constitution, fosters entrepreneurial thinking and thereby
helps reduce inefficiencies. Employees become partial owners and
entrepreneurs within the company. That way, they have a very individual
interest in offering customers innovative and high-quality solutions,
while at the same time holding down costs. With regard to employee
equity and profit participation, the constitution provides that 10 per cent
of Magna’s qualifying profit before tax will be allocated to employees.
These funds are used in part for the purchase of Magna shares in trust for
employees, and in part for cash distributions to employees, recognizing
their length of service.
To obtain long-term contractual commitment from senior management,
the constitution also determines management profit participation.
Thereby, Magna provides a compensation arrangement which, in addition
to a base salary below industry standards, allows for the distribution of up
to 6 per cent of its profit before tax.
To ensure its long-term and sustainable success and to warrant a
continuous innovation process, the constitution spells out that Magna will
allocate a minimum of 7 per cent of its profit before tax for research and
development. This can be interpreted as an indicator how strongly Magna
has committed to adding value to its customers through continuous
product and process innovations.
As mentioned above, social responsibility is a fundamental principle
of Magna. To comply with this, Magna allocates a maximum of 2 per cent
of its profit before tax for charitable, cultural, educational and political
purposes to support the basic fabric of society.
In addition, the constitution requires management to produce a profit.
The minimum profit performance can be interpreted as an essential
contribution to secure the company’s long-term viability. If Magna does
not generate a minimum after-tax return of 4 per cent on share capital for
two consecutive years, Magna’s Class A shareholders, voting as a class,
have the right to elect additional directors.
304 Case studies

To ensure investment is geared to supporting the company’s targets,

Magna Class A and Class B shareholders, with each class voting sepa-
rately, have the right to approve any investment in an unrelated business in
the event that such an investment, together with all other investments in
unrelated businesses, exceeds 20 per cent of Magna’s equity.
Finally, the constitution also governs the composition of the board of
directors. As Magna believes that outside directors provide independent
counsel and discipline, a majority of the members of Magna’s board of
directors are required to be outsiders.

THE MAGNA EMPLOYEES’ CHARTER

Job security

A safe and healthy

workplace
Fair treatment
Competitive wages
and benefits
Employee equity and
profit participation Communication
and information

Hotline

Figure 12.6 Magna’s employees’ charter

Inseparable from Magna’s corporate constitution is the Magna

employees’ charter. The charter clearly defines Magna’s commitment to
an operating philosophy that is based on fairness and concern for people.
Some of the key elements of the employees’ charter illustrate how Magna
succeeds in ensuring its distinct entrepreneurial culture over the long term.
Magna realizes that the best way to enhance job security is to produce a
 OEMs and suppliers 305

quality product at a competitive price. The prerequisite for this is the appro-
priate training and retraining of employees. To encourage individual qualifi-
cations and to expand the knowledge network within the company, Magna
therefore offers special programmes for human resource development.
These include counselling on future professional development; specific
training programmes tailored to individual interests and capabilities; and
assistance in establishing contact with external institutions.
A further aspect in this context is the company’s open communication
and information policy. Through a consistent and company-wide open
door policy, Magna encourages communication within the company and
creates a positive climate for cross-group cooperation.
An instrument like the Magna employees’ charter will only show an
effect if it is more than lip service. An employee opinion survey guar-
antees that these principles are adhered to within the divisions and that
management is upholding them. All employees are surveyed regularly
every 12 to 16 months using a standardized system. The results of the
employee opinion survey directly become part of management evaluation
by Magna’s top executives. They quickly lead to specific action plans to
solve the problems pointed out in the survey.

SUCCESS FACTORS TAKEN TOGETHER:

OPERATING PRINCIPLES

The corporate constitution and Magna’s employees’ charter ensure that

the ‘fair enterprise’ principle is not just a theoretical approach, but is
realized by management and employees alike on a day-to-day basis. The
notion of an ‘entrepreneur within the enterprise’ is therefore particularly
appropriate for Magna employees. The decentralized organization of the
company in largely independent profit centres creates the necessary
degrees of freedom, reduces administrative expenses and allows for an
exceptional closeness to customers. Individual employees within the rela-
tively small and flexible units can be integrated more easily into entrepre-
neurial responsibilities. This substantially increases employees’ own
initiative, in particular in terms of internal efficiency.
Allocating 10 per cent of Magna’s qualifying profit before tax to
employees further strengthens this way of thinking, as performance,
quality and efficiency are directly rewarded. Thus the better the quality
Magna can offer its customers and the more cost-efficiently this quality
can be achieved, the bigger the allocation.
306 Case studies

Magna has positioned itself in a way that brings performance and

compensation into a fair balance and establishes lean management
throughout the company. The dynamic growth over the past decades –
often enough in contrast to the general trend of the industry – proves the
validity of Magna’s basic principles, and shows that entrepreneurial
success and fair cooperation between management and employees do not
exclude one another.

LOOKING AHEAD: THE FUTURE OF

THE INDUSTRY

When looking into the future of the automotive supplier industry, we can
identify four important trends. First, many indicators suggest that in future
those companies that continuously achieve top performances will be
ahead of the competition. This is not only about cost leadership, but more
generally about the interplay of cost and quality, which must be
considered together. Moreover, a consolidation in the supplier industry
will result in performance levels being taken to a new height. The auto-
motive industry will thus remain an industry characterized by top
performance, not merely in terms of technology.
Second, there are many signs that outsourcing on the part of OEMs will
continue. Industry experts estimate that, by 2015, some 77 per cent of the
value will come from suppliers. This is closely related to the efficiency
improvement programmes of the OEMs, as well as the steadily growing
model diversity.
The third important trend in the automotive industry suggests that the
quantity and complexity of engineering projects handled by suppliers will
increase further. This results, among other things, in a greater need for
financing. To remain competitive in future, many suppliers will continues
along their path of relocating manufacturing to countries with lower
production costs. Whether these relocations are associated with a different
level of quality, or whether they will turn out to be the expected success at
all, remains to be seen case by case.
The fourth trend is imminent when the focus of analysis shifts to the
development of the global markets. The weight of Asia and particularly
China, as well as that of Eastern European markets, will grow in future.
China will further develop its position as a low-cost production base as
well as a sales market in worldwide competition over the next few years.
In summary, the following four trends can be confirmed:
 OEMs and suppliers 307

ᔡ The automotive industry will remain an industry of (technological) top

performance.
ᔡ Outsourcing processes at OEMs will continue.
ᔡ The complexity of development processes at suppliers will grow.
ᔡ The markets in Eastern Europe and Asia will gain further weight in the
global competition.

THE CORNERSTONES OF MAGNA’S GROWTH

STRATEGY

Figure 12.7 Strategy for further growth

To continue the successful course of the past years in the light of these
new developments, Magna holds on steadily to a step-by-step strategy of
disciplined, profitable and self-financed growth. On an operational level,
Magna is following four strategic directions:
308 Case studies

Continuously broaden the customer base

As a tier 1 supplier, Magna naturally offers its broad product portfolio to

all OEMs. In so doing, Magna responds to the noticeable willingness of
OEMs to share certain competencies and to capitalize on development
partnerships in their non-core business. In future, Magna will use the
synergies between its groups even more strongly to establish itself as a
qualified value-adding partner and win new customers. In this regard, the
French and Asian OEMs have a high priority.

Develop new markets

More than 100 Magna facilities (manufacturing and R&D) are located in
Europe, and more than 150 facilities are in the NAFTA region. The
company is currently present in Asia, with more than 10 manufacturing
and R&D facilities.
In future, Magna will focus on following its OEM customers into new
growth markets. Of particular interest in this regard are the emerging
markets in Eastern Europe and China. To make the most of these new
potentials, Magna is extending its activities into these growth markets step
by step and consistently. New customer portals in Seoul and Shanghai
have been set up, and capacities at the plants in China and Eastern Europe
are gradually being expanded. Every step into these new markets always
follows the principle of disciplined, profitable and self-financed growth.
In parallel, Magna continues to align its capacities in North America
and Europe to customer needs, and to expand them if needed. As always at
Magna, growth means ‘in addition to’, and not ‘instead of’.

Innovations and technological progress

With over 5,000 employees in research, development and engineering,

Magna counts among the biggest and most capable engineering service
providers in the auto supplier industry. In future, Magna will further
expand its role as a driver of innovation within the automotive industry,
and support OEMs in managing increasing complexity and technological
challenges. To this end, Magna will employ its competencies across the
complete vehicle, to proactively offer its OEM customers responses to
future technological requirements, new legislative regulations and
societal trends. The scope of services ranges from the concept idea, to all
 OEMs and suppliers 309

phases of product, programme and process engineering, to testing and

homologation.
Its complete vehicle competence enables Magna to support auto makers
not only on parts or system engineering, but also – if needed – in the engi-
neering and manufacturing of the complete vehicle.
Of key importance to Magna in this process is its highly skilled work-
force. The best engineers and innovations are of little use if there is no
highly skilled workforce to translate new developments into high-quality
products quickly and in a cost-efficient manner. Thus, Magna has estab-
lished comprehensive training programmes to ensure a ‘world-class
manufacturing’ quality level over the long term.
Some examples of innovation illustrate how Magna is playing a part in
the value chain of OEMs, always keeping in mind the needs of the final
customer, the vehicle driver. Decoma is developing a ‘composite intensive
vehicle’ which will lower vehicle weight substantially, thereby enabling
better vehicle handling and better mileage. Magna’s Intier Interiors group,
based on its competencies in flat cable systems and integrated airbags, is
working to provide solutions for additional hidden load space, thereby
further increasing comfort inside the vehicle. Magna Donnelly is pushing
the development of a camera-based park assist system, and Cosma is
building on its leading-edge know-how in the development and use of
light and high-strength steel to decrease vehicle weight and make vehicles
safer at the same time. Higher security at a lower weight translates into
better mileage and lower insurance rates. At the 2005 Frankfurt Motor
Show, Magna Steyr presented the MILA (Magna Innovative Lightweight
Auto) concept car, which showcases the group’s combined competences
in the shape of an impressive prototype. A range of technologies comes
together in the MILA concept (Figure 13.8): an eco-friendly CNG
(compressed natural gas) powered engine combined with extremely
sporty performance (150 HP, over 200 km/h top speed); a consistent light-
weight construction; a modular design principle with components and
modules developed in advance and optimized in terms of cost and weight;
and advanced vehicle safety thanks to the monocoque body’s high
stiffness. Besides these ‘hard facts’ it is interesting to note the ‘soft fact’
that it only took six months to completely develop and build the vehicle on
show, as all the development steps up to the complete concept vehicle
were modelled virtually.
310 Case studies

Figure 12.8 Concept MILA

Capitalizing on the ongoing trend of OEM outsourcing

According to several third-party studies, the need for technology part-

nerships between suppliers and OEMs will increase further.
Representatives of suppliers do not need to refer to these studies,
though: their day-to-day talks with customers show that they expect ever
more sophisticated and comprehensive solutions from their suppliers,
and that they presuppose the necessary capabilities to be present at the
supplier. With its competences in development and manufacturing,
Magna is positioned very well in both operational and strategic terms.
The strongly growing model diversity and the rising share of niche
vehicles in Europe as well as America and Asia open up excellent oppor-
tunities for Magna to capitalize on this outsourcing trend and expand its
market position.
Of course, suppliers must not make the mistake of taking these opportu-
nities for future business for granted. In the light of current tendencies to
insource, which – particularly in Germany – are partly motivated politi-
cally, suppliers are called on to consistently prove to OEMs that they offer
economically and technologically superior alternatives.
This latter challenge is not limited to current programmes or specified
supply content, but can also relate to new business models and new forms
of cooperation.
 OEMs and suppliers 311

The concept of a ‘peak-shaving’ plant, as proposed by Magna Steyr, can

be interpreted as a sustainable business model for the future which estab-
lishes this kind of technology partnership between OEM and supplier.

Shortened
lifecycles
New price
mechanisms
Serving
additional
niches

Figure 12.9 Peak shaving flex plant

Source: McKinsey, 2004

When we look at the production and sales volumes of various models and
different OEMs, it is clear that in order to cover production peaks – or for
the production of niche vehicles – capacities are required which are not
needed over the full product lifecycle.
Given that strongly varying volumes and inefficient capacity utilization
cause disproportionately high costs, Magna Steyr is currently in
discussion with several OEMs with regard to a so-called ‘peak-shaving’
plant. Such a plant would be operated by an external partner – Magna
Steyr in this case – and become an integral part of OEM strategies for
handling peak levels of production.
The model presupposes that several OEMs would be willing to coop-
erate with direct competitors, in order to generate a benefit for everyone
involved. The current change processes within the automotive industry
and the growing readiness for strategic alliances are indications that there
is a strong potential for this business model.
The operator of this peak-shaving plant must be capable of building
very different vehicles in the same facility. Magna Steyr’s Graz plant is
the tried and tested role model of such a highly flexible factory (‘flex
plant’). Graz currently builds seven different vehicles, each on a separate
platform, for five different brands, and within three very different OEM
312 Case studies

worlds. It goes without saying that the specific brand characteristics for
each brand are maintained. Using the Magna Steyr Production System
(MSPS) to bring the capabilities together and put them to work, Magna
Steyr presents itself to the OEMs as a qualified operator for that kind of
peak-shaving plant.

CONCLUSION

The future of the automotive industry will be characterized by technology

partnerships at eye level, with suppliers increasingly moving from parts
suppliers to module suppliers to systems integrators. This is another evolu-
tionary step for the automotive industry. The rules of this game are not ‘big
beats small’ or ‘strong beats weak’, but rather ‘flexible beats inflexible’, ‘fast
beats slow’, and ‘open and willing to learn beats rigid and bureaucratic’.
Magna will expand its leading-edge competences in automotive tech-
nology to continue setting the pace for technological progress within the
industry. In the interest of a positive evolution of the company and a
lasting improvement of its competitive position, this is a necessary step.

Figure 12.10 Price-based competition versus strategic partnership

 OEMs and suppliers 313

Price-based competition and strategic partnerships can be considered the

end points of a scale within which there are several different stages
(commodities – components – modules – systems – complete vehicles).
The decision where a supplier positions itself on this scale is paramount
for the long-term perspective of the enterprise. For globally active
suppliers with a strong presence in the highly industrialized Western
countries, the movement can only be towards becoming a strategic partner
for OEMs. This means moving away from supplying commodities in a
price-based competition and with a high level of replaceability among
suppliers, and moving towards innovative comprehensive solutions char-
acterized by a lot of know-how and technological sophistication, where
suppliers cannot arbitrarily be replaced. This position must be worked
hard for, though, and it takes a clear decision on the strategic direction. It
also means the necessary resources in terms of personnel and structures
must be put together, along with the innovative solutions with which
customers are approached proactively.
Magna has decided to follow that path. In so doing, the maxim for its
employees will not change in future: ‘Producing a better product for a
better price!’
314

13

BlueTec: the path to the

world’s cleanest diesel
Dr Thomas Weber, Member of the Board of Management,
DaimlerChrysler AG

THE DIESEL DRIVE: A PAST AND FUTURE

SUCCESS STORY

The diesel engine is enjoying immense popularity. In Europe it has

achieved to date a market share of more than 50 per cent among new
vehicles, and this trend – spurred by high fuel prices among other factors
– is further on the rise. To give an example, a total of 7.2 million new
diesel vehicles were registered in Western Europe in 2005. The share of
diesel-powered Mercedes-Benz passenger cars amounted to 54 per cent.
But it is not only in Europe that the diesel drive expected to be heading
towards a promising future: various studies also detect great potential in
‘new’ diesel markets, such as the United States. For the year 2012, JD
Power forecasts that the diesel share will have at least doubled compared
with 2005, so diesel should then account for 10 per cent of newly regis-
tered vehicles in the United States.

TRADITION AND MODERN TIMES:

THE ORIGINS OF THE DIESEL DRIVE

The history of the diesel engine is closely connected to the Mercedes-

Benz brand and the Daimler-Benz company, both the passenger car and
 BlueTec 315

truck divisions. Among the pioneers of the diesel engine is Prosper

L’Orange, who as a member of the board of Benz & Cie AG developed the
prechamber diesel engine and had the technology patented. A milestone in
the history of diesel engines was the first test drive with the first serial-
production four-cylinder prechamber diesel engine in a road vehicle near
Gaggenau on 10 September 1923. The engine delivered a performance of
45 to 50 hp with 8.8 litres displacement, and was used for 5-tonne trucks.
The great savings potential of diesel was already apparent during these
test drives, and was noted down by the delighted development engineers
as follows: ‘The fuel consumption is about 25 per cent lower than that of
our conventional, gasoline-powered trucks.’
At the Geneva Auto Show in 1932, Daimler-Benz presented the Lo
2000 light truck, called ‘Schnell-Lastwagen’ (high-speed truck), which
was equipped with the newly designed 3.8 litre prechamber diesel OM 59,
and which triggered the large-scale breakthrough of the self-ignition
engine. The vehicle achieved sales figures of more than 13,000 units –
stunning for that time.
It was easy to identify diesel-powered trucks from the outside as well:
the word ‘diesel’ was displayed in large letters on the lower part of the
mighty Mercedes star. This pride was justified: Daimler-Benz had long
since taken on a leading role in the development of diesel engines.
Boosted by the success of the diesel engine in trucks and convinced by
the manifold advantages of the diesel engine over the gasoline engine,
Mercedes-Benz was the first vehicle manufacturer to implement the
diesel-combustion principle in a passenger car engine more than 70 years
ago. In the autumn of 1935, the first 170 diesel-powered passenger cars
took to the streets. Almost all of them were taxicabs. One year later, 50
years after the invention of the automobile and 44 years after Rudolf
Diesel had obtained the patent for his diesel engine, the first diesel-
powered serial-production passenger car was presented to an amazed
public in Berlin, in the form of the Mercedes-Benz 260 D. The four-
cylinder diesel engine with 2.6 litres displacement yielded 45 hp and, with
its five-bearing crankshaft, could effectively dampen vibrations. This
allowed an engine speed of 3,200 revolutions per minute, so that experts
soon spoke in awe of the ‘high-speed engine’. The new and robust engine
permitted a maximum speed of 97 kilometres per hour (kph) (60.3 miles
per hour) and only consumed between 9 and 11 litres of diesel oil per 100
kilometres (26.1 to 21.4 miles per gallon). Hence a successful start was
made to using diesel technology for passenger cars, and the way was
paved to further ground-breaking innovations.
In subsequent decades, further milestones followed. The Mercedes-
Benz 180 D – better known as the ‘Diesel Ponton’ – became the cab of the
316 Case studies

Figure 13.1 The first serial-production passenger car with diesel drive,
the Mercededs-Benz 260 D

1950s par excellence, and the ‘Type 180’ could already win the compe-
tition with gasoline engines in terms of sales figures. In 1971, the
millionth diesel passenger car rolled off the assembly line in
Sindelfingen. Over the years, numerous records were set with Mercedes-
Benz diesel passenger cars, and the diesel drive made huge progress
especially in terms of technology. In 1996, the first passenger car with
diesel direct injection was introduced, and 1997 saw a technological
quantum leap with the introduction of common-rail direct injection
(CDI) in combination with four-valve technology. Since then, the abbre-
viation CDI – today available in its third generation with piezo-electric
injectors – is a symbol for both unrivalled fuel economy and enormous
torque boost – a synonym for high propulsion power, which guarantees
lots of driving pleasure and often gives diesel engines a competitive edge
over gasoline engines.
Until today, the essential advantage of the diesel engine over the
gasoline engine was its clearly higher efficiency and the concomitant
lower fuel consumption. Thus the diesel requires between 20 and 40 per
cent less fuel than a comparable gasoline engine. Over the years, the
specific disadvantages, such as the engine-power characteristics and the
creation of vibrations and noise, have been significantly improved with a
whole range of technical innovations, such as first five-cylinder diesel
engines and production-quality turbo-diesel engines.
 BlueTec 317

THE DIESEL ENGINE’S PATH TO LOW

EMISSIONS

Emission regulations for diesel engines in passenger

cars

Apart from the clear boost in performance and the noticeably reduced fuel
consumption, the technological innovations also lead to a significant
reduction in emissions. With today’s Mercedes-Benz C 220 CDI, for
instance, carbon-monoxide (CO) emissions are approximately 92 per cent
lower than those of the Mercedes-Benz 190 D 2.5 of 1993. Improvements,
especially in the internal combustion process and the oxidation-type
catalytic converter, led to a substantial reduction in CO and hydrocarbon
emissions. Through these improvements of the internal combustion
process, it has been possible to reduce nitrogen oxides (NOx) emissions
by about 75 per cent within the last 15 years.

Figure 13.2 Emission reductions for the diesel engine, 1993–2004

If the diesel engine still had any disadvantages over the gasoline engine,
they were specific diesel-engine emissions, especially particulate matter
(PM) and NOx. These two exhaust-gas components are an especial focus
of various countries’ emission standards, which prescribe a continuous
reduction in them over the years, to be implemented via successive stages.
318 Case studies

The exact exhaust-gas limit values for the Euro-5 standard are currently
being discussed in the European Union, and a further reduction of the limit
values for NO and PM prescribed in the Euro-4 standard can be expected.

Figure 13.3 Emission limit values for diesel passenger cars in the
European Union, United States and Japan

For about a year now, the limit values for PM10 particulate matter have
become an issue of increasing public awareness. This was triggered by the
EU’s Clean Air Directive, which was transposed into German national law
in 2002. As a consequence of this regulation, some cities, such as
Stuttgart, will ban truck traffic from passing through, should the daily
average values exceed or approach the limit values. This especially
concerns high-traffic inner-city routes. Whether these measures will lead
to sustainable success must be doubted, especially since various studies
have shown that, in Germany, road traffic only accounts for 25 per cent of
PM emissions.
A significant reduction in diesel particulate emissions and compliance
with future particle limit values could be achieved with the introduction of
the service-free diesel particulate filter for diesel passenger cars in autumn
2003. Since summer 2005, Mercedes-Benz has been offering service-free
diesel particulate filters as standard equipment for all diesel vehicles in
many countries. NOx are the only remaining exhaust-gas component for
which the diesel engine shows poorer values than the gasoline engine. For
NOx, which can lead to irritation of the respiratory system above a certain
concentration and which contribute to the creation of acid rain and the
 BlueTec 319

Figure 13.4 Development and creators of particulate matter emissions

Source: Umweltbundesamt 2004

formation of ozone, the strictest exhaust-gas limit values will be valid in

the United States and in particular in California starting in 2007.

Emission regulations for diesel engines in trucks

The same challenges in terms of NOx and diesel particle emissions exist
for diesel-powered trucks. For these as well, legislators have prescribed
the continuous reduction of emissions over various steps. Starting in
October 2006, the new exhaust-gas regulation Euro-4 will come into
force in the European Union. It will serve to reduce the emission of NOx
by about 75 per cent compared with the legal regulations of 1990. In a
further step, the Euro-5 standard will then lower the limit values for NOx
again from October 2009, an 85 per cent reduction of the limit value
compared with the legal regulation of 1990. With both standards, the
emission of soot particles will be reduced by approximately 98 per cent
compared with 1990. In addition to the European exhaust-gas regula-
tions, there are comparable emission regulations for trucks in the United
States and Japan.
320 Case studies

Figure 13.5 EU emission limit values for trucks

OUR STRATEGY: THE WORLD’S

CLEANEST DIESEL

BLUETEC: modular technology for passenger cars

New solutions for the combustion process and new technologies for the
after-treatment of exhaust gases are required if diesel engines are to be
competitive in the future and to fulfil the requirements of the exhaust-gas
standards. It was already foreseeable that the strict future limit values for
NOx could not be fulfilled through improvements in the internal
combustion process alone. We therefore decided early on to implement
SCR (selective catalytic reduction) technology in order to neutralize the
harmful NOx in the exhaust gas, and we can now present a solution
package for exhaust-gas after-treatment that enables us to comply with the
strictest emission limits worldwide.
 BlueTec 321

Three steps to the world’s cleanest passenger car

diesel engine
We are pursuing the target of developing the world’s cleanest passenger
car diesel engine without compromising on the driving pleasure and
performance provided by high-torque engines. To achieve an optimal
balance of the characteristics of the diesel engine, we are proceeding in
three steps:

ᔡ Step 1: We further optimize the internal combustion process and apply

clean fuels to achieve the cleanest possible and most efficient
combustion, thus reducing the raw emissions to a minimum –
upstream of any exhaust treatment system. This is achieved by a fine-
tuned engine control, four-valve technology, third-generation CDI
using piezo injectors, a variable-geometry turbocharger and a high-
precision exhaust-gas recirculation system.
ᔡ Step 2: An oxidation catalytic converter is used to minimize the emis-
sions of CO and unburned hydrocarbons (HC). Nitrogen monoxide (NO)
contained in the raw emissions is converted into nitrogen dioxide (NO2)
by the oxidation catalytic converter, which however does not reduce the
total amount of NOx. Subsequently, the particulate filter reduces the
particle emissions by up to 98 per cent – a level well below the Euro-4
limit values, which also meets all applicable US emission standards.
ᔡ Step 3: The emission of NOx – the concentrations of which are higher
in diesel engines than in gasoline engines as a consequence of the
diesel design principle – will then be reduced to a level that ensures
compliance with the world’s strictest emission standards. At this point,
the so-called BLUETEC technology is applied, using either a further-
developed ‘DeNOx’ absorption-type catalytic converter or the
AdBlue® injection principle. These technologies, in conjunction with
the SCR principle, are currently forged into the most effective method
of exhaust treatment, resulting in a reduction of NOx emissions of up
to 80 per cent.

BLUETEC with AdBlue® injection

Using its design principle, the diesel engine operates on a lean mixture: in
other words, on a fuel/air ratio with an excess amount of oxygen. This
oxidizing atmosphere however makes it very difficult to chemically
reduce unwanted NOx and to convert them into harmless nitrogen by
deoxidation. The SCR process is based on the addition of the AdBlue®
reductant into the exhaust system. This method is very effective, though
technically demanding. AdBlue® is a hydrous urea solution stored in an
322 Case studies

Figure 13.6 Three steps to the world’s cleanest diesel

on-board container which is injected into the pre-cleaned exhaust flow via
a metering valve. The exhaust’s thermal energy downgrades the injected
AdBlue® into ammonia (NH3), which then induces the reduction of the
NOx into harmless nitrogen and water in the downstream SCR catalytic
converter. A high efficiency rate can only be achieved through an accurate
adjustment of the injected reductant quantity to the operating conditions
of the engine, which is performed with the aid of a sensor at the end of the
exhaust system. This process only requires approximately 0.1 litres per
100 kilometres, and hence the storage tank of a passenger car will be
designed to hold a sufficiently large quantity that it only needs to be
replenished during routine servicing. An electric heating system for the
tank and the lines prevents the freeze-up of the AdBlue® solution and
ensures reliable system operation even at low ambient temperatures.

Figure 13.7 Technology package: BLUETEC with AdBlue® injection

 BlueTec 323

BLUETEC with an advanced DeNOx catalytic converter

As an alternative principle to the BlueTec variant using AdBlue® to
reduce NOx emissions, they can also be trapped in a so-called NOx
adsorption-type catalyst, which retains the NOx during the normal lean-
mixture operation of the diesel engine. A periodic short-term change to a
rich mixture and the corresponding excess of fuel in the fuel/air mixture
then creates reduction conditions in which the accumulated NOx are
removed. The catalytic converter is however subject to ageing, and its
efficiency in reducing NOx decreases in the process. A NOx adsorption
catalyst by itself will hence not be able to comply with the increasingly
strict emission standards in the long term. One elegant solution is the
combination of an improved NOx adsorption catalytic converter
(advanced DeNOx catalytic converter) with an SCR catalyst (without
AdBlue® injection), which results in a new self-sufficient catalytic-
converter system permitting an optimized operating strategy. The design
and adjustment of the complete system requires careful consideration of
the difficult interaction between the oxidation catalyst, advanced DeNOx
catalyst and SCR catalyst, and discontinuous engine operation with a lean
and a rich mixture. An optimal adjustment of the system ensures that the
regular change between lean and rich mixture operation does not affect
engine performance and hence is not noticed by the driver. The result is a
significant improvement of the overall system efficiency and a partial
compensation for the effects of ageing.

BLUETEC

Figure 13.8 Technology package: BLUETEC with advanced DeNOx

catalytic converter
324 Case studies

THE FIRST SERIAL-PRODUCTION PASSENGER

CAR: THE E 320 BLUETEC

We started our BLUETEC initiative for passenger cars in June 2005. At

the Innovation Symposium in New York, the Mercedes-Benz bionic car
was the first vehicle worldwide to show how BLUETEC on the basis of
the AdBlue® injection system can drastically reduce NOx emissions even
in a passenger car. Thanks to the oxidation-type catalytic converter and
the diesel particulate filter, the modern CDI engine with 103 kW/140 hp
falls significantly below the strict Euro-4 exhaust-gas limit values and at
the same time contributes immensely to improved fuel economy. In the
New European Driving Cycle (NEDC), the concept vehicle consumes 4.3
litres of fuel per 100 kilometres (this corresponds to 54.7 mpg) – 20 per
cent less than a comparable serial-production model. US measuring
procedures (FTP 75) testify a fuel economy of about 70 miles per gallon,
which lies about 30 per cent above the value of a serial-production
vehicle. At a constant speed of 90 kph, the direct-injection engine
consumes 2.8 litres of diesel fuel per 100 kilometres (this equals 84 mpg).

Figure 13.9 Mercedes-Benz bionic car study

At the IAA (International Frankfurt Auto Show) 2005, the second

passenger car to use this new technology followed, the concept vehicle S
320 BLUETEC hybrid. It proved that this new technology is also feasible
in a large sedan. The concept vehicle showed how, in the near future, fuel
consumption and emissions can again be drastically reduced while high
dynamic driving comfort is offered. The focus was on combining an opti-
 BlueTec 325

mized diesel engine with the BLUETEC technology and a mild-hybrid

system. The electric motor which is integrated into the powertrain makes
it possible to significantly reduce fuel consumption even more, especially
in inner-city stop-and-go traffic. When coasting or braking, the electric
motor, working as an alternator, regenerates energy and can make use of it
for driving, when the combustion engine has switched off. The measures
implemented on the combustion engine and the electric motor hence
permit a 20 per cent reduction in the fuel consumption of the S 320
BLUETEC hybrid compared with the corresponding predecessor model.

Figure 13.10 Vision S 320 BLUETEC hybrid

At the North American International Auto Show in Detroit in January 2006,

DaimlerChrysler presented further BLUETEC vehicles. In the Vision GL
320 BLUETEC and the Jeep® Grand Cherokee BLUETEC concept vehicle,
BLUETEC was implemented with the AdBlue® injection system. The two
vehicles show that low fuel consumption and the lowest emissions are also
possible with large sport utility vehicles (SUVs). With a consumption of 9.9
litres per 100 kilometres (NEDC) (equalling 23.76 mpg), the Vision GL 320
BLUETEC has the potential of being the most economical vehicle and, with
BLUETEC, at the same time the cleanest diesel vehicle in this class.

Figure 13.11 Vision GL 320 BLUETEC and Jeep® Grand Cherokee

BLUETEC concept vehicle
326 Case studies

The E 320 BLUETEC – also presented in Detroit – will be the first serial
production passenger car with BLUETEC and will be offered, at first only in
the United States and Canada, from autumn 2006 onwards. The BLUETEC
serial production vehicle is the cleanest diesel vehicle the customer can buy
worldwide and therefore has the potential of fulfilling the world’s strictest
exhaust-gas limit values and hence also those of all 50 US states. A basic
requirement for the successful use of BLUETEC is the use of low-sulphur
fuel with a sulphur content of less than 15 parts per million (ppm). This will
be available across the United States from autumn 2006.

Figure 13.12 The E 320 BLUETEC with advanced DeNOx catalytic

converter

The most recent concept vehicle, the Vision CLS 320 BLUETEC, was
presented in Geneva in the spring of 2006. With a fuel consumption of 7.9
litres per 100 kilometres (NEDC) (29.77 mpg), the Vision CLS 320
BLUETEC is also one of the most fuel-efficient and cleanest vehicles of its
class. In contrast to the Vision GL 320 BLUETEC and the Concept Vehicle
Jeep® Grand Cherokee BLUETEC, the E-Class and CLS-Class are
equipped with the advanced DeNOx catalytic converter and the SCR
catalytic converter.

Figure 13.13 The Vision CLS 320 BLUETEC

 BlueTec 327

We are currently preparing this technology for worldwide use in the

various models of our vehicle brands. Which BLUETEC variant will be
implemented depends on the specific market requirements, the driving
cycles and the vehicle design concept. To this end, the technology package
must be adapted carefully to the specific external requirements. European
requirements, for instance, differ entirely from those of the United States.
The development activities for the European market focus on a maximum
reduction in NOx emissions and adaptation to European driving profiles,
as well as an implementation of the BLUETEC technology with as little
effect on fuel consumption (and CO2 emissions) as possible. In 2008 at the
latest, we will offer BLUETEC in passenger cars in Europe.

On the road: BlueTec® in commercial vehicle

applications

We were the first commercial vehicle manufacturer to successfully offer

the BlueTec® exhaust treatment system with SCR technology and
AdBlue® injection for commercial vehicles with a gross vehicle weight
rating above 6 tonnes, which we did as early as the beginning of 2005.
Since then, this technology has fully proven its worth in more than 14,000
trucks of the Actros, Axor and Atego series. Already today, 96 per cent of
these vehicles comply with the Euro-5 emission standards which will
become effective in 2009.
Unlike passenger car owners, truck operators must refill the hydrous
urea solution supply themselves at regular intervals. Despite frequent
assertions to the contrary, the supply of AdBlue® is already ensured on a
broad scale by 2,500 service stations across Europe, from the Arctic Circle
to the south of Spain, and from Dublin to Moscow. As the AdBlue®
consumption amounts to only 2 to 3 per cent of the total diesel fuel
consumption, a very long distance can be travelled with only one tank full,
and there is hence little risk of running out of AdBlue® en route and not
being able to refill in due course.
The BlueTec® diesel technology is essentially based on further-
developed engines and the BlueTec® exhaust treatment method outlined
above. Here the optimal combustion and the accordingly high rate of effi-
ciency result in extremely low fuel consumption and minimal emissions
that – as far as soot particles and PM are concerned – are equivalent to
those of exhaust gases treated by diesel particulate filters. These benefits
are however compromised by relatively high NOx emissions, which are
then treated with the BlueTec® technology. A decision in favour of
BlueTec® is hence a decision not only to comply with the upcoming
328 Case studies

Euro-4 and Euro-5 emission standards, but also to effectively reduce PM

emissions. Independent studies by the TÜV-Nord have proven the effec-
tiveness of this method. Compared to an Actros 1846 with Euro-3 specifi-
cations, a BlueTec® 5-equipped Actros showed a reduction of PM
emissions of 84 per cent and a reduction in nanoparticles, a constituent of
PM, of 80 to 90 per cent. In addition, other legally unregulated emissions
were found to be below the verification limit or virtually nonexistent.
BlueTec® not only has environmental benefits, it also cuts operating
costs because of lower fuel consumption and subsidies in several
European countries. In Germany, for example, the toll per kilometre on
the Autobahn is 2 cents lower for a Euro-5 specification vehicle than the
toll for a Euro-3 compliant vehicle. In Austria, BlueTec®-equipped trucks
are exempt from the prohibition from using the Inntalautobahn at night.

Figure 13.14 BlueTec®-equipped Actros with Euro-4 or Euro-5

emission level and AdBlue® tank

A BlueTec®-equipped truck in typical long-haul operation can save

approximately 1,500 to 2,000 litres of fuel per year, which has been
impressively proven by independent tests: The Trucker magazine for
example took an Actros 1848 equipped with BlueTec® 5 technology on a
350 kilometre round-trip test drive including gradients of up to 10 per
 BlueTec 329

cent. At an average speed of 76 kilometres per hour, the Actros consumed

only 31 litres of diesel per 100 kilometres, equalling 7.59 mpg – a dream
result, as the magazine states in its July 2005 issue.

The road ahead: BlueTec® to be introduced in buses in

late 2006

From October 2006 on, the BlueTec® diesel technology will also be
available in Mercedes-Benz and Setra buses for urban transport, chartered
and overland operation. Further vehicles equipped with BlueTec® 5 tech-
nology are to follow in 2007, already complying with the Euro-5 emission
standard that will enter into force in 2009.
With the introduction of the BlueTec® diesel technology in
DaimlerChrysler buses we will further boost the success of this young
technology in Europe. In Germany alone, more than 5 billion trips are
made by bus every year, which according to a VDA study makes the bus
the second most important means of transport after the passenger car.
The increasingly strict limits of the European emission standards of the
recent years have led to a drastic reduction in the emissions of diesel-
powered buses – and of all other diesel-powered vehicles as well. By
utilizing the BlueTec® technology, we will be able to fulfil the Euro-4
and Euro-5 standards and offer all the economic benefits outlined above
for our buses too.
If a further reduction of the particle emissions beyond the very strict
Euro-4 and Euro-5 standards as achieved with the BlueTec® technology
is required, the BlueTec® emission control system can be combined with
a diesel particulate filter, which will be available as an option for buses
designed for local public transportation from the beginning of 2007 on.
Our system will then comply with the EEV (Enhanced Environmentally
friendly Vehicle) requirements, the currently strictest European emission
standard for buses and trucks, which even exceeds the requirements of the
Euro-5 standard.
Nowadays more than ever, economy and ecology must be reconciled,
and this of course also applies to buses. BlueTec® provides the solution to
resolve this dilemma: the additional cost over current buses equipped with
Euro-3 engines pays off very quickly, as the 6 per cent lower fuel
consumption compared with today’s Euro-3 vehicles means not only a
significant reduction of emissions for the environment, but also a cost
reduction to the bus owner.
330 Case studies

Figure 13.15 Mercedes-Benz Citaro bus with the BlueTec® system

CLEAR OUTLOOK: THE FUTURE OF THE DIESEL

IS BLUE

Offering the best to our customers is our motto when designing and
building our vehicles. This also applies to the diesel drive. This principle
was our guideline for the first diesel passenger cars 70 years ago and
nothing has changed since then. On the contrary: the diesel’s success
story provides an obligation and a motivation for us to think ahead and
make new technologies available to our customers. With BLUETEC, a
further ground-breaking innovation continues the longest diesel
tradition among all automotive manufacturers worldwide, and once
again highlights our great competence in working out revolutionary
solutions in powertrain technology, which at the same time enhance our
technological leadership. BLUETEC sends a clear message: the diesel
drive has the potential of complying even with the strictest exhaust-gas
standards worldwide without compromising vehicle dynamics or
driving pleasure.
In the commercial vehicles division, this innovation has proven its suit-
ability for rough everyday conditions and has turned out to be a true
win–win situation for the customer and the environment. We consider
BLUETEC to be a technology of global importance. We will consistently
promote the introduction of this technology in a multitude of vehicle
models and markets with dedicated commitment – to the advantage of our
customers and to the benefit of our environment.
 BlueTec 331

BLUETEC: PART OF THE ROADMAP FOR

INNOVATIVE POWERTRAIN TECHNOLOGIES

Apart from the ecological advantages that vehicles with optimized diesel
engines in combination with the innovative BLUETEC technology offer
in terms of significantly lower NOx emissions and reduced CO2 emis-
sions, further potentials for reducing fuel consumption can be opened up
on the basis of optimized combustion engines through hybrid vehicles. In
this context it needs to be pointed out that every hybrid vehicle is only as
good as the combustion engine propelling it. Hence every optimization on
the combustion side will also be to the benefit of the hybrid vehicles. One
such optimization is for instance the second-generation gasoline engine
with direct injection, with which we succeeded in performing an inno-
vation leap with regard to fuel consumption and engine performance. The
new, jet-controlled combustion system permits an optimal mixture
formation, significantly improving thermodynamic efficiency. With this
technology, low fuel consumption and excellent engine-power character-
istics are no contradiction. This further development of the combustion
engines is supplemented by high-quality alternative and synthetic fuels.
Only in combination with optimized fuels can fuel consumption and emis-
sions –for both the gasoline and the diesel engine – be further reduced.
The fact that the hybrid drive is no panacea for a general reduction of
fuel consumption and CO2 emissions has been proved by a German auto-
mobile magazine, with a comparison drive between a diesel and a hybrid
vehicle on a course across the United States. Over about 5,200 kilometres,
a Mercedes-Benz ML 320 CDI with a new V6 diesel engine consumed on
average approximately one litre less per 100 kilometres than its hybrid
rival. A large part of the course led over freeways and highways, on which
the diesel drive clearly outranked the hybrid drive in terms of fuel
consumption. Even during city drives, the modern and highly efficient
diesel engine showed all its power and only required about 2 per cent
more fuel than the comparable hybrid vehicle. The comparison test
showed in a quite illustrative manner that the advantages of the hybrid
drive mainly come to the fore in inner-city traffic.
In the years to come, the hybrid – either as mild or as full hybrid – can
supplement the combustion engine, depending on the region and traffic
situation, wherever it is useful and economic for a more efficient use of
fuel and for increased vehicle dynamics and comfort. It is therefore our
objective to be able to answer the various customer requests with a
suitable drive system. With the Two-Mode hybrid system we are devel-
oping a full-hybrid technology in cooperation with the General Motors
332 Case studies

Corporation and the BMW Group, which will improve the performance
characteristics, the fuel consumption and the range of a conventional
hybrid vehicle. The advantages of the new system enable us to offer our
customers convincing hybrid vehicles with attractive performance,
comfort, fuel-consumption and emission characteristics at competitive
prices. With the Dodge Durango, we will introduce the first Two-Mode
hybrid drive to the market in the beginning of 2008, and shortly after that,
we will extend our offer with further models.

BTL fuels (eg SunDiesel)

Figure 13.16 Road map for innovative powertrain technologies

In the long term, the fuel cell continues to be the future drive system for
sustainable mobility. With more than 100 vehicles – passenger cars, buses
and vans – DaimlerChrysler has the largest fuel-cell fleet among all auto-
motive manufacturers that is in daily use by customers worldwide. By the
end of March 2006, the entire fleet had reached a mileage of almost 2
million kilometres (1,243,000 miles) in more than 100,000 hours of oper-
ation. With more than 2,000 hours of operation without loss in
performance, the current fuel-cell generation clearly exceeds expecta-
tions. The ground-breaking further developments of recent years show the
great potential that lies in this comparatively young technology. We
believe in this potential and the added value for the customer and the envi-
ronment. The fuel-cell drive is an integral part of our strategy for inno-
 BlueTec 333

vative drive technologies. We intend to introduce the first fuel-cell

vehicles to the market between 2012 and 2015.
Our integrated approach in drive technology thus contains a number of
measures and technical innovations that contribute to saving resources and
reducing fuel consumption, and that already offer our customers a broad
and attractive technology portfolio. We are consistently following the path
to more sustainability, step by step. But it is certain that vehicle technology
alone will not be able to ensure sustainable mobility. Rather, all parties
involved must be included, starting from the automotive manufacturer and
heading via the mineral-oil industry and the politicians to the customers.

Figure 14.17 An integrated approach: the contribution from all parties

We as automotive manufacturers are facing this challenge and responsi-

bility every day with the utmost commitment.
334

14

Bharat Forge: emerging

players from emerging
regions
Babasaheb N Kalyani, Chairman, Bharat Forge Group

This chapter is about a rapidly growing auto parts company from India that
has become a thriving multinational. I review our progress and argue that
cost arbitrage is a misplaced notion, and it is the intellectual capital
advantage at the macro level, and its management at the micro level, that
explains the emergence of players like us in the global arena. I then attempt
to explain our management philosophy in terms of vision, focus and action.
Through that perspective I dwell on three key business drivers:

ᔡ technology;
ᔡ scale and growth;
ᔡ competitiveness.

Finally I present our perspective about, and plans for, the future, which
essentially hinge on harnessing intellectual capital for providing full
service, innovation and deriving the synergies of a global organization.
With this, the essential proposition to the reader interested in mastering
automotive challenges is that there is a lot that is possible at the company
level through a fundamental business-driven approach coupled with a
risk-taking ability.
The tumultuous macro-level challenges facing the automotive industry are
amplified when they confront parts suppliers to that industry. The demand
derived from nature, whose prospects are in general cyclic, and are specifi-
cally based on the programmes and customers the industry caters for, as well
as the structure that sandwiches an already fragmented base between
 Bharat Forge 335

powerful buyers on one side and powerful raw material suppliers on the
other, almost seem to make the auto parts industry intrinsically unattractive.
Yet we at Bharat Forge can pride ourselves on being a successful global auto
parts company. From our largest single-location factory based in India to
global footprints through acquisitions in Europe and the United States and a
recent joint venture in China, we have achieved visibility beyond the
purchasing departments of the automotive industry.
For the information of those who are yet to know us well, we have risen
to a leading position in the merchant forging industry in just over 40 years
of existence. Today we are the leading supplier to almost all the global
OEMs and tier 1 suppliers for forged and machined engine and chassis
components which are critical for the safety and performance of automo-
biles, like crankshafts and axle beams. We have capabilities in steel and
aluminum forgings that add value to a significant proportion of these parts
through highly complex machining. We support our customers in front-
end design and development, and in post-production testing and vali-
dation. We supply commercial vehicle and passenger car segments as well
as non-automotive sectors such as the oil and gas industry. In certain
product categories we already have global market leadership.
Over the last few years we have experienced a scorching organic
growth rate of 40–45 per cent per year, then topped this up with a spate of
acquisitions. Our consolidated revenue in the financial year ended March
2006 was about US $700 million, of which close to two-thirds was from
outside India. The compound annual growth rate (CAGR) of total group
sales over the last four years works out to 66 per cent, while the corre-
sponding figure for revenue outside India is 110 per cent. The Indian oper-
ation also sells almost half its output abroad (the figure was just about 20
per cent five years ago), and is the largest Indian exporter of auto parts.
The first and commonest reaction to the success of players such as us is
that ‘they are from LCCs (low cost countries)’ and therefore the result of
the outsourcing drives of OEMs. Yet which automotive buyer would use
cost as the sole consideration? For example, the costs of line downtimes
caused by logistics or quality-related problems would be far higher than
can be compensated for by any costs saved at the parts level. Lower costs
can be necessary as ‘qualifiers’ but they can never be sufficient by them-
selves as ‘winners’.
One explanation is that the buyers themselves equip suppliers from
emerging regions (LCCs) with the other ‘hygiene’ factors required, such
as quality systems and supply chain management, in return for getting
lower-cost supplies. While this is true to some extent, it is neither valid for
all companies, nor does it fully explain how some suppliers can be better-
than-average profitable in a sustainable manner, for this requires that they
336 Case studies

become world class, and becoming world class has to be result of an urge
and effort from within.
So finally what explains the fact that there are some emerging players
from emerging regions, like us, who if they have not yet been noticed by
customers, competitors and the world in general, will be over the next
few years?
Before I get into this, let me digress a bit and unequivocally state that
there is an Indian advantage, which indeed provides us with a macro-level
edge, but that advantage is different from what it is normally perceived to
be. Auto part outsourcing is gathering pace as end-vehicle prices are
expected to remain stable in the future while customers expect vehicles to
have more and better features. OEMs and tier 1 suppliers in Western
Europe and the United States are therefore looking to cut costs by
sourcing from or creating bases in the lower-cost economies of Eastern
Europe, South America, South-East Asia, China, India and so on.
The Indian auto parts industry has been growing in double digits for the
last few years, with the exports driving the growth. However, its annual
turnover is still only about US $9 billion, of which about US $1.5 billion
is from exports; it has not even scratched the surface of the global
outsourcing potential. While self-sufficient in many respects, its large
base of more than 6,000 manufacturing units is highly fragmented. Only
around 5 per cent of the companies might be organized enough, for
various historic reasons, to tap this global opportunity.
At the same time, all the reports, predictions and indicators regarding
this industry are highly positive. With every year, a higher proportion of
exports is going to OEMs and Tier 1 suppliers rather than to replacement
markets. According to a report by McKinsey, India-based automotive
component manufacturing has the potential to grow to US $33–40 billion
by 2015, of which US $20–25 billion would be in exports. Growth in
domestic consumption to US $13–15 billion is also not out of reach if we
consider that in numerical terms India has the second largest tractor and
two-wheel vehicle, and the fifth largest commercial vehicle, manufac-
turing base in the world, and also has the fourth largest passenger car
market in Asia.
But is this all merely because India has low labour costs? It cannot be
denied that Indian labour costs per hour are low, but the net impact on the
bottom line after discounting for lower productivity is contestable. Even if
productivity levels improve, this labour cost advantage is not structurally
sustainable in the long run, especially when compared with countries such
as China. Where India scores is in its strong base of intellectual capital,
which allows us to deal cost-effectively where the technology intensity is
relatively high, even if volumes are relatively low. The quality of engi-
 Bharat Forge 337

neers and managers available in India in large numbers and with the right
age profile is what determines India’s competitiveness, and what should
continue to determine it in future. A T Kearney’s 2004 Offshore Location
Attractiveness Index gave India the top position by a comfortable margin
because of its strong mix of low costs and rich human resources. A recent
KPMG report also suggested that, despite infrastructure issues, India is in
an advantageous position for precisely the same reasons.
Let me give you our own example to illustrate the confidence we can
have in our intellectual capital. In the late 1980s when we went for a highly
automated press line to replace hammer technology, we also decided to
replace the blue-collar workforce with college graduates, most of whom
were fresh from college. Our rationale for this was that absorption of the
technology involved a certain level of intellectual maturity and even a
different cultural set-up. Over the years, while the workforce size has gone
up, its mix has moved substantially in favour of white-collar workers.
Today we employ more than 1,200 engineers, and yet our employee cost as
a percentage of the top line has actually gone down.
It is of course one thing to know a fact for oneself and quite another
thing for someone else to buy the argument. The Indian engineering
industry here must give credit to the domestic IT industry for showing the
world that India has an edge in terms of intellectual capital, and for estab-
lishing its credibility in terms of quality of products, service and delivery.
The Indian engineering industry might not yet have found its rightful
place in the global business world, but it is finding its feet and doing so
with a confidence reflected in the investments it is making to enhance
capacities, productivity and technology. To talk about our own forging
industry, it might already be deemed a sunset industry in the Western
world, but for us this market, which could be as much as US $15 billion
depending upon outsourcing levels, presents a growth opportunity.
Let me come back now to the micro or firm level. In my view if we have
been able to achieve something, the explanation for that is quite simple. I
believe that it ensues from three basic, sacrosanct management principles:
vision, focus and action, though our interpretation of these terms might be
a little different from the conventional one. Let me first therefore expand
on each of the three, to make it simpler to relate them to key facets of our
business, both historical and future.

Vision

To us vision means a dream, a concept that might at the first be met with
scepticism. But I feel very strongly that if we have achieved something, it
338 Case studies

was because we first dreamt really big. At the same time, vision cannot be
a pipe dream. Ambitious and yet practical visionary insights can arise only
out of the knowledge and rational analysis of the way industry is likely to
evolve. Vision therefore is not just a one-time target-setting exercise, but
is about the place we must carve for ourselves as the industry evolves. In
other words, vision must also be about reinventing ourselves, our own
future. (As Alan Kay said, ‘The best way to predict the future is to invent
it.’) This reinvention is required no matter how small or large we are,
because external changes are too dynamic, too powerful and over-
whelming to control. Rather than turn the tide, we must learn to swim with
it. To summarize, vision means dreaming big and constantly inventing
newer business models for ourselves.

Focus

Business is all about the judicious allocation of limited resources, such as

managerial and financial. Focus is therefore important so that we do not
spread these resources too thinly, but it does not necessarily imply that we
should be narrow in everything we do. All our resources must be concen-
trated on the core business and its fundamental drivers. The business
drivers might be outside our organization, in terms of what value we must
deliver, or they might be inside our organization, in terms of how we must
deliver that value. This is also the essence of business strategy.

Action

If there is a difference between developed economies and LCCs, it is here,

since LCCs have much ground to catch up, and hence need to be near-
fanatical in implementing their business plans. Ambitious dreams have no
meaning unless we act upon them with equal aggression. Let me illustrate
this with an example. Because of the tooling and set-up costs involved,
there is a certain minimum economic quantity at which we can manu-
facture anything. But when a prospective US buyer visited to evaluate our
manufacturing capability, we produced his product physically in front of
him and presented him with a sample for testing purposes. Needless to
say, we went on to bag a major order. We believe that the risk of (more
comfortable) inaction is higher in most cases than the risk of erroneous
action. ‘Proactive management’ is all about astute vision and strategy,
which is followed up by agile action.
 Bharat Forge 339

Let me now deal with the key facets and developments of our business
to illustrate the above point. There are three fundamental value drivers:
technology, scale and growth, and competitiveness. As I expand upon
these, it will be clearer that these have also been cornerstones of our
historical development. You might wonder why customer orientation does
not find a place here, but the fact is that business is all about delivering
value to the customer, and so value drivers have a meaning only in the
context of customers.

TECHNOLOGY

I would like to elaborate on this issue at some length since I feel strongly
about it, and also because it has a bearing on other aspects that I shall discuss.
Our company was established in the 1960s. Those were the days of the
‘licence and permits’ era, in which Indian industry was shackled. Though
policies favoured self-sufficient indigenous industry and there was an
urgent need for it, it took us four years to get an industrial licence to set up
forging facilities, so production could only start in the mid-1960s. There
was also no technology base available in India. We had to collaborate to
obtain it, and rely almost entirely on the inputs of our collaborator.
Slowly and steadily we established ourselves in a leadership position in
India by the mid-1980s, yet we were not able to make much mark in the
global market, and especially the developed world, despite our almost
decade-long concerted efforts. We slowly realized that what we needed
was a completely different production technology platform for this
purpose, one that ensured a far more reliable process and consistent output.
In the late 1980s we therefore invested in state-of-the-art automated
press lines. The technology was so advanced that there were then very few
people in the world, and no one internally, who understood it fully. We had
to struggle extremely hard to make sure that what was being labelled by
our detractors as a ‘white elephant’ danced to our tune, but dance it did.
Our prospective customers soon started realizing what we could achieve,
and our capability to supply to them technologically complex products in
a highly cost-effective way. Such proactive investments in state-of-the-art
technologies and facilities have indeed been our driving force. Today
another forging facility, equally technologically modern, has come up for
passenger car parts.
Machining is another example. Even today, most forging suppliers do
not have machining capabilities of their own. We recognized that forging
by itself would be commoditized in the long run, and decided to set up our
340 Case studies

own machining facilities way back in the early 1970s, for down-the-line
value addition. Presently our machining generates almost as much value
as forging. Looking at the demand from more and more customers to
outsource the production of fully finished products that can go directly on
their assembly lines, we have just set up another state-of-the-art facility
for machining, which is ahead of the times in terms of ensuring highly
enhanced product quality and delivering it in very low cycle times.
Another key technology focus is engineering function. The forging
industry has come a long way from the days of toolmakers, who were
essentially specialist craftspeople, to computer-aided design, engineering
and manufacturing (CAD/CAE/CAM), where a part drawing can be trans-
lated into a tooling design, which can be directly used to manufacture a
die, and which in turn can produce a physical part as per the original
drawing. In this area we have focused on ensuring that our speed to market
is the fastest by optimizing this entire cycle.
In the ultimate analysis, then, the technological shift is all about
redefining forging from an ancient art to a modern science. The
knowledge earlier resided in those who were also required to execute it:
that is, those who did the work had the knowledge. Today that execution
has been deskilled, as the entire accumulated knowledge has been proce-
duralized and built into the machines and processes. This is central to
ensuring a reliable and consistent output. However, not anyone can simply
buy equipment and start producing as efficiently as anyone else. There are
many touchpoints involved, and that makes the task of technology
management as intricate as the underlying technology.

Scale and growth

Size has its own advantages. It is not, however, merely because there are
production economies of scale, but because there are economies of scope:
greater and better choices the business has regarding research and devel-
opment, marketing, human resources (HR) and long-term investments.
Scale gives you some stature, it enables you simply to sit across the table
with global auto giants. Even today of the more than 300 forging units in
India, only a handful have the size and capability to supply to OEMs
worldwide. We could have been one of the many that do not, but we
pursued scale and growth aggressively. When we decided to go in for
automated presses in the late 1980s, we also decided to go in for capacity
sufficient to put us directly in league with top manufacturers in the world.
The move was fraught with danger: the cutting edge technology and an
investment comparable with our top line back then could have bled us dry!
 Bharat Forge 341

But thanks to such moves, today we have successively reached a global

scale of operations that can provide a wide range of products very cost-
effectively. Over the last 10 years our forging capacity has been ramped
up five times, and it presently stands at 500,000 metric tonnes per annum.
Our machining capacity is also impressive (in numbers per annum):
650,000 crankshafts, 500,000 front axle beams and 600,000 steering
knuckles. We can manufacture parts ranging from 2 to 250 kg in our
closed die forging shop.
Our investments have always been proactive. Further, they have been on a
scale and of a technology that the customers would find ever more attractive.
Our current investment programme, which has already made us the largest
single-location plant, will see this level exceeded by the year-end.
However, even as this investment programme was being conceived, we
had started thinking in terms of inorganic growth. We had already made a
beginning in 2002 by acquiring the order book of Kirkstall Forge, UK.
This move also strengthened our position in the oil and gas sector.
The reason for inorganic growth through capacity acquisition was that
we felt that OEMs, especially European companies, preferred to use
vendors in their proximity for certain sets of products where they could
afford to trade off some cost disadvantages. We actively scouted for acqui-
sition targets, and by the end of 2003 had acquired Carl Dan Peddinghaus
(CDP), and by the end of 2004 CDP Aluminiumtechnik, both based in
Germany and having about 1,000 employees. CDP is one of the oldest and
the largest forging companies in Germany. Founded in 1839, it has plants
at Ennepetal and Daun (near Düsseldorf). CDP Aluminiumtechnik was set
up in 1997 at Brand Erbisdorf (near Dresden), and specializes in the niche
aluminum chassis component segment.
These moves quickly consolidated our position across vehicle and
market segments. As soon as the acquisitions were completed, we also
started enjoying immense intangible benefits, significantly more than the
tangible ones they brought. It was not difficult then to decide to have a
global footprint and to shift our attention to the largest market, the United
States. Rising steel prices and downward pressure on prices from OEMs
have driven a number of suppliers in the United States to Chapter 11 of the
US Bankruptcy Code. Federal Forge Inc based in Lansing, Michigan was
one such company, which had filed for protection in February 2004. It was
on this that we focused our attention. Federal Forge was a 43-year-old
established name for designing and manufacturing complex forged steel
passenger car parts such as control arms, links, steering knuckles and
connecting rods, with a well-regarded client list. From our point of view it
presented a significant opportunity to expand our global network and
establish a presence in proximity to the Big Three.
342 Case studies

In September 2005, we acquired Imatra Kilsta AB, Sweden, along with its
wholly owned subsidiary, Scottish Stampings, Scotland (Imatra Forging
Group). Imatra Forging Group is the largest manufacturer of front axle
beams and the second largest crankshaft producer in Europe. This acqui-
sition completes our global dual-shore capability. We can now produce all
our core products – crankshafts, beams, knuckles and pistons – in a
minimum of two locations worldwide, and provide design and engineering,
and technology front-end support, close to customers for these products.
More recently in March 2006, we have established a Joint Venture (JV)
in China with FAW Corporation, the largest automotive group in China.
With this JV, Bharat Forge is the largest auto forging company in China.
FAW Bharat Forge will progressively position itself as the competitive
cost producer of highly engineered forgings for the international market.
All these acquisitions are aligned to the core of our strategy: to enhance
our competitive advantage by giving complete service and better value to
our global customers, and to continuously strengthen our share of
business with them. In all our acquisitions we have focused on leveraging
the intrinsic strengths of those businesses to significantly improve their
performance. We are happy to note that the same organization and local
management have now been able to grow those businesses, and the group
as a whole has also benefited.

COMPETITIVENESS

There are number of strategic and operational issues involved in maintaining

competitiveness, where to ‘maintain’ it means to continuously improve upon
it. The strategic issue is partly related to the cyclical demand patterns of the
industry. Because of the high capital costs involved, a recession is enough to
drive a company to bankruptcy. Strategically we have reduced the risk to our
business by broadening our customer base. We have also constantly pruned
and focused our portfolio on technologically more complex products. On the
operational front inculcating excellence is critical, but then the auto industry
is a key propagator of its theory and practice. So rather than spending much
time here, I would just like to touch on what we have been able to achieve.
Over the last four years, our employee productivity has gone up 2.5 times,
our cash-to-cash cycle has been cut by one-third through prudent inventory
management, while the sales to net fixed assets ratio has almost doubled.
The future poses more challenges, and therefore it also presents greater
opportunities. In the next two years, we want to double our top line to
reach the US $1 billion mark. That is our ambitious dream. But it is not a
 Bharat Forge 343

mere question of adding capacities, it is more about capabilities. In other

words, it is about brain-power rather than brawn-power. This brings us
back to intellectual capital-led advantages. With this perspective, my
agenda for the future has three main, all ‘soft’, components: service
provider capability, innovation and synergy.

Full service provider capability

I think we are long past being a production-driven organization and have

become a technology-driven organization. Rather than physical volume, it
is the distinctive product that has become important in this shift. We have
already geared ourselves for the next shift, whereby what we will be deliv-
ering is not just the product but also all the services around it, such as
design and development and validation and testing. We presently have
more than 150 engineers working on such services, and as we partner
more and more with our key customers, this number is expected to
increase manifold.

INNOVATION

So far parts suppliers have focused on innovation in terms of production

costs and operational excellence, but gone are the days when auto parts
suppliers would merely produce components to the customer’s drawings.
The domain knowledge related to the parts rests with the parts supplier, and
therefore the supplier is in the best position to innovate and add value. This
might be from design, which actually controls a significant proportion of
final product costs, to quality aspects. The need for proactive co-
development is acknowledged today by most OEMs, and is the key to
compressing speed to market. Our group has undertaken a number of
projects where the knowledge gained by us over the years in the areas of
metallurgy, forging and machining can be applied in a systematic fashion,
thus making us a true development partner of our key global customers.

SYNERGY

With our global manufacturing network we not only have global capacity,
we have added intellectual capital and a valuable set of best global practices.
344 Case studies

Just benchmarking within the group and ensuring that the best practices are
shared and assimilated by all the units would help further improve value of
each of the entities. There are other synergistic benefits that follow, and
there are ways to optimize at the system level rather than locally. For
example we can provide dual shoring capability to customers’ global opera-
tions. We are already pooling our R&D and engineering capabilities.
Management of intellectual capital in a cross-cultural setting is a
different challenge, and not an easy task, but we are working at it through
structured and unstructured integration measures.
I hope I have been able to offer to the reader some insights for mastering
automotive challenges. As a final note, in today’s competitive world we
cannot ever be complacent. Success is not a destination to be arrived at. It
is at best a milestone on the trajectory that we chart for ourselves, where
we are not allowed to sit and rest!
 345

Conclusion
Ralf Kalmbach, Roland Berger Strategy Consultants

The automotive industry counts as one of the key sectors in most

developed economies. It has clearly proven to be among the strongest
global drivers of technology, growth and employment. More than 8 million
people around the world work directly in the production of vehicles and
automotive components. Every year, the industry invests around €70
billion in research and development. These two facts alone provide an
impressive insight into the importance of the automotive industry.
Nonetheless, the sector is no longer just a driver. Its companies are increas-
ingly being pushed by new and ongoing processes of change. A number of
different factors are stepping up the pressure auto makers face today:

ᔡ idle capacities;
ᔡ new competitors hailing from ‘new’ automotive markets, such as
China or India;
ᔡ cost competition between production sites and countries;
ᔡ new technologies;
ᔡ changing legal requirements.

Combined with a change in the overall economic landscape, these factors

translate into an enormous challenge for an industry which requires great
stability and solid planning, given its capital intensity and long devel-
opment and investment cycles.
The automotive industry has always been forced to adjust to significant
changes in overall market conditions, technologies and customer prefer-
ences. In the past, such crises concerned organizational aspects (such as
the R&D and production process crisis of 1992/93). Today, the focus is on
globalization-driven adaptation processes. We are facing a new kind of
challenge. The emphasis is no longer on isolated elements of the business
system. Rather, the technical, political, economic and global structures on
346 Mastering automotive challenges

which auto makers founded their business systems are changing simulta-
neously. Hence, the traditional rules no longer apply.
New markets are emerging – markets in which local automotive indus-
tries develop rapidly, producing new players (such as Bharat Forge) that
instantly take on a prominent global role. These companies appear to
know the new success factors and rules very well, frequently even better
than traditional manufacturers. They are encroaching upon the very exis-
tence of the former market leaders.
Phases of massive change shake industry sectors to their very core, and
the automotive industry will share this fate. Not all companies will be able
to address the opportunities – but also the risks – of such developments
successfully, or even anticipate them. Only a few are in a position to align
themselves with novel conditions that they can take advantage of for their
own success.

THE SUCCESS FACTORS OF TOP PERFORMERS

In numerous projects, Roland Berger Strategy Consultants has been able

to determine which factors are particularly developed in the most
successful companies. These top performers:

ᔡ have in-depth customer understanding;

ᔡ have clear entrepreneurial visions and goals;
ᔡ develop long-term prospects;
ᔡ place a lot of emphasis on customer loyalty;
ᔡ consistently meet the ‘value for money’ promise in both low and
premium price segments;
ᔡ consistently deliver first-rate quality;
ᔡ boast a global presence, but are regionally oriented;
ᔡ are driven by a strong entrepreneurial spirit.

THE PROBLEMS OF LOW PERFORMERS

Low performers have a tough time implementing these success factors.

They frequently fail for very similar reasons:

ᔡ They miss key trends.

ᔡ They either fail to adapt their business system, or do not do so at the
right time or consistently enough.
 Conclusion 347

ᔡ They lack a sustainable corporate strategy.

ᔡ They have no vision, or their vision is not clear enough.
ᔡ They are driven by short-term profits.
ᔡ They do not possess an autonomous profile.
ᔡ They do not provide adequate value for money.
ᔡ Their branding is not consistent.
ᔡ They lack entrepreneurial courage.
ᔡ They do not have an early warning system.

However, the automotive industry has accepted the challenge. Forecasts

issued by prophets of doom such as the Club of Rome, and the
winner–loser scenarios introduced in James P Womack, Daniel T Jones
and Daniel Ross’s book The Machine That Changed The World (Rawson,
New York, 1990), have been made obsolete by reality. Nevertheless, it
should be noted that the next round of the ‘automotive power play’ has
already begun. In the next couple of years, automotive executives will
have to lay the foundations for the survival and future success of their
companies. They will have to overcome crucial challenges and implement
conclusive strategies and business systems. In this context, five action
areas are key:

ᔡ market;
ᔡ globalization;
ᔡ sales;
ᔡ value creation;
ᔡ technology.

THE MARKET CHALLENGE

Automotive markets have changed significantly. Not only have new

markets in emerging economies been added, but substantial changes in
customer behaviour patterns are forcing the industry to pay much closer
attention to its clients and to develop a new understanding of their
demands. The dictum ‘supply generates demand’ no longer applies to the
automotive industry. Customer preferences have shifted enormously or
have even dissolved completely. It was the automotive industry itself,
with its excessive product offerings, that laid the groundwork for this
scenario. Now it must live with the consequences.
348 Mastering automotive challenges

Conventional forecasting models that are based primarily on the inter-

pretation of sociodemographic information simply do not work any more.
Income and social status do not lead customers to certain brands,
segments or products in a world full of niche vehicles and lifestyle
concepts. As a result, the risks for auto makers have increased substan-
tially. After all, huge investments are required to develop and launch new
vehicles. This trend is further accelerated by the decline in the number of
vehicles produced per type – a tribute to strong product programme differ-
entiation combined with ever shorter product lifecycles.
In Europe and the United States, growth is no longer restricted to the
midsize and premium segments – a scenario that has never applied to
emerging markets anyway. Instead, a significant ‘entry-level segment’ is
developing. It encompasses vehicles that cost less than €10,000 in Europe
and even less in markets such as China or India. In these countries, the
entry-level price for ‘individual mobility’ is around €3,000 for a new car.
These market segments are growing disproportionately on the world
market, and are forcing the automotive industry to develop suitable
market, technology and value creation strategies. New competitors that
focus on the entry-level portfolio are emerging, and their low-wage
origins afford them crucial advantages in terms of competitive pricing.
Car makers must rethink and realign their businesses.
In this environment, accessing customers via sales is increasingly
becoming a key success factor. The frequently stiff and multi-level sales
systems inherent in a largely unchanged manufacturer–dealer rela-
tionship do not accommodate this development, but do offer huge opti-
mization potential. Substantial areas for improvement exist along the
entire sales-related value chain, which can increase profits and improve
customer loyalty.
The pressure to innovate in the automotive industry continues to
increase dramatically, and compels companies to completely realign their
development processes and structures to make the complexity and
dynamics of product creation manageable. Modular and platform
strategies as well as standardization, frequently encompassing several
auto makers, are adequate solutions. However, they require deep strategic,
process-related and cultural changes. Auto makers are not only challenged
by changing customer behaviour patterns, but also by a substantial shift in
the importance of market segments.
The key approaches for realignment in this context are explained in
more detail in the following.
 Conclusion 349

Identifying and understanding customer needs

systematically

If you want to understand your customers’ needs you have to know who
your customers are. Determining the target group precisely and clearly
defining the market position and value proposition are absolutely essential
to align product and service portfolios consistently with potential
customers. A comprehensive and consistent brand experience can be
ensured only if high-quality service portfolios are coherently imple-
mented across all sales phases – from the initial customer contact to the
point of sale.
To win customers, create enthusiasm and brand loyalty, companies
must create emotional and rational value beyond the mere product itself.
The automotive industry has made tremendous efforts and has invested
substantial amounts in sales and customer relationship management
systems and initiatives. Nonetheless, it has not yet made a major break-
through in this critical field.

Overcoming the limitations of conventional sales

systems

At their core, automotive sales strategies are not sufficiently focused on

the needs of customers. Instead of meeting customer needs to the fullest
extent possible, excess capacities are pumped into the markets with the
assistance of discounts and complex promotions. These activities yield
only short-term results, as evidenced by the long list of auto makers that
attain only minor success. Not only does this adversely affect profits, it
also causes the brand image to decline, which damages the basis of long-
term success.
Conventional multi-level sales systems involving importers/national
sales companies (NSC) are too time-consuming, too complex and too
expensive. Too much money is invested in sales levels without creating
value at the customer interface. This is an approach auto makers will no
longer be able to afford in markets that are ever more competitive.
To overcome this structural complexity and over-assertiveness, dealers
can be integrated as partners nationally or regionally. Cadillac, for
example, transferred the responsibility for its European sales to
Kroymanns, one of its dealers. Others will emulate this model.
By treading new ground in this way, manufacturers have the oppor-
tunity to defy the fundamental ‘one nation = one NSC’ rule and can use
350 Mastering automotive challenges

their resources far more efficiently. And if they also rigorously streamline
their networks, they will be in a position to optimize sales through profes-
sional improvement and standardization.

Gaining control of the sales channel

The consolidation of automotive sales cannot be halted. The actual key

issue is how to approach this consolidation. Two main directions are
apparent: internationalization and multi-brand sales.
Large, often multinational, dealer groups frequently act as a counter-
balance to auto makers. Thanks to multi-brand policies, they are less
dependent on manufacturers than traditional single-brand dealers, and
are virtually forcing auto makers to cooperate with them and come up
with win–win scenarios. They can no longer resort to confrontation to
enforce unilateral interests. This type of constellation goes hand in hand
with the opportunity to implement the necessary optimization mentioned
earlier by entrepreneurial means. Partnership-based collaboration results
in the optimum utilization of market potential, and brings business
success. The partners have the opportunity to focus on the areas they are
best equipped to cover.
Customer relationships and the translation of brand values into unique
products and services are elementary core competencies of an original
equipment manufacturer (OEM). Implementing these product and service
competencies across the entire sales chain requires an uncompromising
customer, sales and service orientation. These, in turn, are among dealers’
classic core competencies. Bringing these complementary dealer and manu-
facturer competencies together smoothly enables real value to be created.
When OEMs focus on their key competencies and when larger, more
professional dealership partners are created, this development is clearly
fostered. Consequently, the recipe for future success is to turn away from
competitive thinking and embrace collaborative partnership between
manufacturers and dealers. Toyota, for example, uses this partnership
approach not only in its supplier relations, but also in its sales organization;
a concept that makes it much more successful than many of its competitors.

THE GLOBALIZATION CHALLENGE

The automotive industry is steeped in a tradition of globalization. Driven by

General Motors and Ford Motor Company, the development of international
 Conclusion 351

markets began in the early 20th century, when distribution companies were
established in numerous countries. In subsequent years, production sites
were built in Europe and Asia to service the frequently remote sales markets.
The globalization of the automotive industry had thus begun. The drivers
were the same then as they are now:

ᔡ developing sales potential in growing markets;

ᔡ taking advantage of lower wages and fixed costs;
ᔡ leveraging high fixed costs in R&D and production.

While the drivers of globalization have not changed since the early days,
the balance of power and the roles of individual companies in the auto-
motive industry certainly have. GM and Ford may have been the initiators
of globalization, steering this development from a position of ‘invincible’
market power, but markets nowadays are much more fragmented, and the
market power of individual companies has declined. No company can
bypass the basic trends of the industry: the world has become the market
for each and every one of them.

Global expansion happens in waves

Just as demand for vehicles has increased in recent years, particularly in

Asia, the balance of power in the automotive industry has also shifted in
recent decades. The winners were and still are first and foremost the
Japanese, and ultimately also the Korean OEMs. They not only estab-
lished themselves in the North American market in the early 1980s, they
also succeeded in making things very tough for local manufacturers. Their
success was based on the attractively priced, high-quality and low-
consumption vehicles that US auto makers proved unable to deliver.
In recent years, Asian manufacturers have not only been successful
because of their pricing, which was their strongest sales argument until the
early 1990s. They successively took advantage of the flexibility attained
through the quality image they had created, which is extremely important in
North America, and increased their prices. Japanese OEMs can now afford
to stay away from cut-throat price wars while still gaining market share.
Following the successful strategy patterns of the Japanese, Korean auto
makers have entered the US market. They managed to take advantage of
the gap left when their Japanese counterparts ‘upgraded’, and got a
foothold in the American market with less expensive vehicles. From 1994
to 2004, Kia and Hyundai’s CAGR grew by more than 30 per cent and 10
per cent respectively, which makes them the fastest-growing car brands in
352 Mastering automotive challenges

the United States. Like their Japanese role models, they have consistently
upgraded and have already arrived in the lower mid-section of the market
in terms of brand awareness and price.
Once again, a gap is beginning to open up at the lower end of the
market, ‘inviting’ burgeoning Chinese auto makers to move forward.
They will also implement these successful strategies. The outcome is
clear, and it will further worsen the crisis for local US manufacturers.

‘Déjà vu!’

Japanese and Korean brands have also launched an aggressive attack on

Europe. No segment is spared: even in the premium segment, these manu-
facturers have defined products and strategies that promise success. While
the development follows the proven pattern, it is happening more consis-
tently and more quickly than it did in the United States. A gap is already
beginning to emerge at the entry level of the market, which once again can
be seen as an open invitation.
The first batch of Chinese vehicles has already been launched into
Europe. It is only a question of a few years until Chinese auto makers –
thanks to the technology procured from their joint venture partners and
global suppliers – will be in a position to offer high-quality products and
to develop the market from the bottom up. Following the same pattern as
in the United States, established European OEMs will find themselves
under pressure.
Strategic responses comprising more and more complex technology
will no longer do the job, as happened in the early 1990s when Japanese
market penetration began to increasingly encroach upon Europe.
Customer preferences in volume segments have changed because of envi-
ronmental conditions. The competition must now be dealt with in all
segments of cost and quality, otherwise substantial danger looms.
Even today, Asian auto makers have become permanent players in the
European market. Unlike their US counterparts, European manufacturers
were, however, able to slow down their success. The reasons can be
attributed to the strengths of the Europeans in this competition:

ᔡ Europe is the home base of the key premium OEMs.

ᔡ Europe has a strong local auto industry with traditionally high brand
loyalty and (still) high customer loyalty.
ᔡ Southern European manufacturers maintain a stronghold in the entry-
level segment.
 Conclusion 353

ᔡ Technology, innovation and prestige play a major role in getting

people to buy a car.

However, these strengths are relative. They apply only as long as customers
can and must factor them in because of their overall situation. All over
Europe, the sluggish economic development and the all-encompassing
reform of social systems in key economies will lead to changes in the
consumption climate and in consumer behaviour patterns. This will very
likely result in people’s priorities shifting towards lower-priced offers when
it comes to deciding what to buy. The focus of purchase decisions is no
longer on ‘reasonably priced’ but increasingly on ‘cheap’. An adequate
response to this trend is nothing less than a structural shift in the European
auto industry.
Vehicle product portfolios as well as value creation and production site
structures will have to be aligned with the new challenges in the home
market and the opportunities inherent in emerging markets. All of this will
have to occur in a networked business system, which aims to combine the
complementary abilities and strengths of partners and sites in such a way
that the result is competitive advantages which can be implemented on a
global level. Not all auto makers will succeed in this. Some are simply too
small, others too inflexible. The current constellation of successful and
less successful companies will change forever, partly because some of the
players have not been factored in to date. They are only now in the process
of entering the global scene, and have quite a few advantages on their side.
SAIC is representative of this group. China’s largest OEM recently
secured key technology and brand licences from Rover. Nanjing
Automobile bought Rover’s production lines. Both deals pursue the goal
of autonomy from Western joint venture partners, which still dominate the
Chinese automotive industry today.
By taking the right strategic steps, China will succeed in developing an
independent automotive industry. This industry will have learnt a lot from its
Western partners, and will use this know-how as a key strength in competing
with its former business partners. At first glance, very little seems to
contradict the fast emergence of the Chinese newcomers, especially in view
of the enormous progress made in recent years coupled with the will and the
economic possibilities that China has to propel itself into a better future.
On the other hand, the game is not lost yet. Many ambitious companies’
expansion strategies have failed in the past. The objective now must be to
find answers to the following key questions:

ᔡ How can established auto makers take advantage of the opportunities

in the emerging markets without fostering unwanted competition?
354 Mastering automotive challenges

ᔡ What options do European and US manufacturers have to defend their

home markets against increased attack from Asian OEMs?
ᔡ How can established manufacturers utilize new markets to improve
their cost base and thus their competitive positioning on a global level?

Embracing the competition

It is a fact that the impact of globalization is heightening the competition
in the automotive industry, and frequently threatens the very existence of
its players. Those who do not feel the need to take consistent action given
this situation, and who are not willing to question conventional business
systems, have already lost the battle. Established manufacturers must
react to these new challenges proactively and with a clear strategy.
For OEMs clearly positioned in the premium segment, defending their
own market share is less important in the medium term. Their main
objective is to take advantage of new opportunities in these markets
consistently. Manufacturers who have not attained a premium positioning
or are not strongly entrenched in the segment, or those who are suffering
from significant cost disadvantages, will first need to eliminate these
deficits. At the same time, the growing competitive pressure makes it even
more crucial that they steadily take the action necessary on this front,
some aspects of which are already known to them. Consequently, it is
more important than ever to consistently optimize in-house value
creation, which includes – first and foremost – making use of the new
markets offering more attractive production costs. As the examples of
successful auto makers demonstrate, this can work if firms select the
‘right’ partners and integrate them into their R&D and production
network. A thorough understanding of current and future market needs is
indispensable for those wishing to take advantage of the opportunities the
new markets yield.
A Roland Berger Strategy Consultants analysis identifies the key
success factors in relation to global competition. These are:

ᔡ more efficient production systems;

ᔡ modular vehicle concepts;
ᔡ global market presence manufacturing large volumes on global
platforms;
ᔡ high quality thanks to proven technology and stable production;
ᔡ close and intensive integration of suppliers into a network-oriented
business system;
ᔡ continuous improvement instead of technology leaps with every new
generation;
 Conclusion 355

ᔡ understanding of local market requirements;

ᔡ focused development of low-cost competencies;
ᔡ consistent strategies and strategy implementation with a long-term
orientation.

The list of actions is long. However, success on the global market can be
achieved only with a business system that factors in these aspects and is
consistently implemented by top management.

THE SALES CHALLENGE

Value in the automotive industry comes only partly from developing,

manufacturing and selling new vehicles. The after-market is taking on an
increasingly important role. This is concerned with generating value from
business with the vehicles already on the road, in areas like vehicle
financing, maintenance, repair, buying back and reselling used cars, spare
parts wholesale and services. These activities are more profitable than
vehicle manufacturing: 50 per cent of auto makers’ profits stem from the
after-market.
In the automotive industry, there is a clear correlation between profit
margins achieved in individual value-creation activities and their prox-
imity to the final customers. Often, the closer you are to the customer, the
more profitable the business. Consequently, companies selling vehicles,
components and related services strive for this closeness. They try to
optimize their share in people’s ‘mobility budgets’ and also to increase
customer loyalty. As a result, traditional rules, such as ‘original compo-
nents are sold through the original equipment supplier (OES) channel,
generic parts through the independent after-market (IAM) channel’ or
‘spare parts prices are determined by the OEMs and represent binding
reference values’ are increasingly being ignored and replaced by new
provisions, which are strongly affected by a number of crucial factors:

ᔡ Product technology and variety: the increasing amounts of technology

used in areas such as electronics, electro-mechanical systems and
systems integration, as well as the large diversity of brands and
models, make after-sales activities more complicated.
ᔡ Changes in the vehicle population: the development of the vehicle
population impacts the automotive business. Longer model lifecycles,
356 Mastering automotive challenges

third cars and high adoption rates cause the vehicle population to grow
and to age. As a result, the number of cars that are more than 10 years
old is growing at a rate of 3 per cent per year in Germany. The number
of seven to nine-year-old cars is growing at 4 per cent in France and a
hefty 10 per cent in Spain.
ᔡ Development of customer needs: customers’ demands in terms of
service quality, reliability and customer relations are high and rising.
Experiences customers have in other industries will intensify this
development.
ᔡ Changes in consumer behaviour patterns: the growing number of cars
used for business, such as company cars and long-term rentals, in
conjunction with a growing and professional portfolio of pre-owned
vehicles available for purchase, are changing customer behaviour
patterns.
ᔡ New regulations: while block exemption impacts primarily the spare
parts market, Eurodesign affects components with design patents.
ᔡ Specialized prescriber groups: insurance companies and associations
such as Thatcham as well as rating agencies such as Euro-NCAP and
JD Power are gaining influence.
ᔡ Europeanization: in the aftermath of EU expansion, one of the chal-
lenges companies face is how to move into other countries while
keeping distribution costs as low as possible and avoiding grey markets.
ᔡ Sales channel consolidation: in Great Britain and France in particular,
large dealer chains control huge swathes of the market. Consolidated
IAM wholesalers, repair shops organized in corporate groups or
networks, and large fleet operators are also positioned advantageously.
ᔡ New market players: for a while, retail chains were expected to enter
the automotive industry. However, they failed because of the consid-
erable market entry barriers. Banks and financial institutions are real
newcomers, as are leasing companies and fleet operators, which are
now trying to gain a foothold in this attractive market.

Consequently, the changed overall framework is challenging the business

models of all the companies. In order to secure an attractive share of the
value creation in sales and customer service, they will have to redefine
their strategies and organizations.

Changing demand structures in the new car market

Fleet managers (professional car buyers, rental car firms, government

agencies, private companies) are increasingly becoming intermediaries
 Conclusion 357

between OEMs and final customers. Their importance as customers for

auto makers is rising dramatically. Consequently, the business is mutating
from selling cars to selling mobility.
Having attained this role, they are in a position not just to secure
favourable terms and discounts, but they themselves frequently provide
profitable services such as financing and leasing. Thus, pressure on auto
makers rises on a dual front – they lose out on profits because of lower
prices and less value creation.

Setting the used car market lever

Sales of nearly new used cars, or cars less than one year old, are growing
at a rate in excess of 6 per cent per year, which is more than one and a half
times as fast as the used car market overall. This, in turn, is growing by
approximately 4 per cent per year, which is much faster than the new car
market. This can partly be attributed to the increasing importance of fleet
management companies, which resell nearly new used cars. It is also a
result of the common practice of having vehicles registered for one day –
a system used by dealers to ‘doctor’ their official market share by regis-
tering vehicles themselves to subsequently sell them as used cars. In
Europe a massive 15 per cent of all vehicle registrations fell into this
category in 2003.
There are also one-day registrations that are used as an aggressive tool
to increase sales. In Germany, they sometimes make up 25 to 30 per cent
of all registrations. This volume of intentionally produced used cars
makes the professional marketing of used cars indispensable. Although
they require professionalism, these transactions are also very attractive for
dealers. After all, a used car usually yields a much higher profit than a
highly discounted new car.
However, this logic does not apply without restrictions. The flood of
one-day car registrations puts intense pressure on genuine used cars, with
the result that the value decreases and system profitability across the entire
vehicle lifecycle deteriorates substantially. Many auto makers have
brought themselves to the brink of collapse with this practice. Apart from
manufacturing desirable products, which can be sold with less radical
discounts than new cars, auto makers can resolve this issue only by
controlling and managing used car sales activities and flows more strin-
gently. To achieve economies of scale and exploit synergies, they have to
give their pan-European networks some degree of influence over local and
regional dealers, make what they offer transparent, and even out price and
demand differences in the used car markets of the individual countries.
358 Mastering automotive challenges

Improved service

Through their experiences in other areas of life, such as tourism, the retail
trade, telecommunications and financial services, consumers have
become accustomed to higher standards of service. In a world full of very
similar products, service has become an important, frequently crucial
means of differentiation.
The key objective is to increase customer satisfaction levels and conse-
quently create loyal customers. Despite running a range of programmes,
the automotive industry lags noticeably behind other sectors, even though
there is no lack of insight into what to do and how to do it. What is missing
is professional management of service processes through the
OEM–dealer–customer interface. At this time, too many individually
optimized activities inhibit a thoroughly positive and consistently repro-
ducible customer experience. Mushrooming fast-fit chains are using this
deficit to their advantage. Their success is down to excellent service
quality, standardized processes, clear rules, flexibility in what they do and
when they do it, and good value for money.
Customer satisfaction can frequently be achieved at little cost, but it
does require consistent management.

Original spare parts under competitive pressure

In post-accident car repairs, about three-quarters of the spare parts used

are purchased from OEMs. The remaining quarter is sourced from the
IAM. Given that more than 60 per cent of all repair jobs involve replacing
only four to five parts damaged beyond repair, and even wear-and-tear-
related repairs centre on a relatively small number of parts (brake
pads/discs, exhaust, cooling system, oil filter and the like). IAM dealers
and parts manufacturers are eager to expand their share in the supply of
components to repair shops. The introduction of the Eurodesign regu-
lation, which allows suppliers to develop original parts without OEM
approval, favours this development. This regulation is already in force in
Spain and Great Britain; other countries will follow suit.
Suppliers of cheap generic components will therefore enter the
market as competitors. Established companies are compelled to offer
additional value-added services, such as logistical systems, in addition
to attractive prices to help them secure the sustained loyalty of their
professional clients.
 Conclusion 359

Tougher competition in repair shops

About 60 per cent of all repair costs are labour costs. Impacting costs in
this area requires better organization, more professional structures, and
consequently size. Cost savings for customers and profit for workshop
operators can be achieved most effectively if the time it takes to carry out
repairs is reduced. As a result, more is expected from parts suppliers (be
they OEM, OES or wholesaler). Logistics, computerized materials
management systems and constant parts availability are key. However,
this does not mean that parts prices take a back seat. Only completely opti-
mized business systems will protect the future of the spare parts business.

Financial services as an important source of income

Financial services are not a part of OEMs’ core business, yet they make a
substantial and consistent contribution to their profits and revenues. One
key success factor is customer access at the point of sale. This gives the
automotive banks a competitive advantage. With effective customer rela-
tionship management and attractive financing offers, automotive banks play
an important role in ensuring customer loyalty and winning new customers.
The established system is now feeling the pressure of increasing
numbers of fleet and rental car management companies, as well as the
growing number of loan-financed used car sales handled by independent
financial institutions and commercial banks. Conventional strategies are
moving in two directions. First, automotive banks are expanding their
service spectrum and acting as commercial banks. Second, commercial
banks are forcing their way into the automotive market, primarily through
cooperative agreements with large fleet management companies which
have tremendous market power. How successful these strategies will be
remains to be seen. Both paths are certainly plausible and the results, as so
often, hinge on the professional and consistent implementation of
business concepts.

Dealer groups play an increasingly important role

The dealer group segment is taking on an ever more prominent role. In

some regions dealer groups already dominate the market. Dealer
groups will change the structure of the market significantly in the years
to come. Many of them are big enough to establish themselves as
regional multi-brand dealers offering new and used cars of different
360 Mastering automotive challenges

brands while also operating efficient repair shops and handling profes-
sional financial services.
Their regional presence puts them in a position to develop and
maintain close customer relationships. To the OEMs, dealer groups have
a significance that elevates them to the role of ‘genuine’ partners. They
are in a position to achieve a win–win situation with manufacturers by
personalizing all elements of the sales process. At the same time, these
relationships are multilateral. In particular, multi-brands involving
several OEMs that are in fierce competition with each other must be
properly managed. Nonetheless, it is increasingly only the large retail
chains that are in a position to meet the multitude of challenges that
automotive sales present. The OEMs’ recent consolidation of their
distribution networks gives this development an extra push. Auto
makers are acquiring and developing mature partners. A paradigm shift
is on the horizon.
Taking all relevant aspects into account, OEMs are obviously the only
players that can cover the entire value chain with an integrated approach.
They encompass everything from new car sales and buying back and
reselling used cars to repair and maintenance, spare parts wholesale and
financial services. They also have the closest contact with the final
customers. Hence, they really do hold all of the trump cards. Nevertheless,
the success of companies focusing on individual value chain elements
clearly shows that existing structures do not have to stay that way forever.
Whether these firms will be able to safeguard their success in the long run
depends largely on the development of business models that are even
more effectively integrated.
A sales organization that is suitably adapted across all levels will have
to be a central element. Many sales and marketing processes may be on
a European level, such as pricing for new and used cars as well as
marketing. Better control of sales activities can only be achieved with
increased integration, which involves reducing the number of
autonomous national sales companies or reinforcing alliances and group
companies. Overall, sales structures must be more streamlined and
traditional national organizations within the new EU of 25 nations must
be integrated into these structures to optimize distribution costs. In this
context, leaner structures may also involve the regional consolidation of
business divisions. Many departments, from call centres to payroll, are
ideally suited for outsourcing.
 Conclusion 361

THE VALUE CREATION CHALLENGE

The pressure on costs and output in the automotive value chain has consis-
tently increased in recent years. Auto makers and suppliers were regularly
forced to adapt their value creation processes. Whereas initiatives to
increase the efficiency of individual elements of the value chain sufficed
in the past, this approach will not do today.
To be able to grow in spite of stagnating markets and to accommodate
customers’ wishes for ever more personalization, car makers have
expanded their model spectrums dramatically. In just 10 years, the number
of models offered by European OEMs has more than doubled. At the same
time as the technical complexity of cars has skyrocketed, development
times have been cut by 10 per cent to 20 per cent.
However, recent experience teaches us that higher development costs
can no longer be offset by higher product prices, as was possible just a few
years ago. Adjusted for the price of technology and equipment, the
products are becoming less expensive. Pressure on costs is rising and
manufacturers consequently have to raise efficiency levels by any means
possible. The automotive value chain offers substantial potential in three
areas if it is completely revamped. These areas are outlined below.

Roles in value creation

The roles of all stakeholders in the value creation process – OEMs,

suppliers, R&D and production service providers – must be restruc-
tured. Although value creation is increasingly being transferred from
auto makers to their suppliers, the current form of cooperation is not
the optimum approach. Far too often, identical competencies and
resources are maintained at both ends, or the outsourcing simply goes
too far. As a result, a proper mastery of the ever more complex systems
is lacking.
OEMs will have to address a central issue: which competencies need to
be covered to what depth in-house, and in what areas will the company
want or have to rely to a greater extent on external partners or suppliers?
Suppliers and R&D and production service providers, for their part, will
have to gain a clear understanding of where their future business opportu-
nities are, which competencies they require and what strategies they
intend to follow.
One of the factors driving this development is the compelling need to
employ capital more efficiently in all brand-shaping areas. This is
362 Mastering automotive challenges

essential to free up scarce financial resources to fund growth in new

products, technologies and markets.
For the most part, make-or-buy decisions are still made in isolation. All
too often there is no overall concept concerning the future value creation
structure. Manufacturers will systematically have to review all of their in-
house value creation processes and clearly define which services they
want to focus on. For suppliers, this entails understanding the value
creation strategies of their OEM customers in detail and setting up their
own business systems accordingly.
As a consequence, attractive growth opportunities emerge for module
and system suppliers, and huge challenges present themselves for R&D
and production service providers. The OEMs’ greater focus on brand-
relevant competencies increases the proportion of suppliers in the overall
value chain by about 10 per cent, whereas R&D and production service
providers face more difficult times. Given that they primarily serve
business segments that are closer to car makers’ core competencies, they
are more severely affected by insourcing tendencies.

Physical service delivery

OEMs urgently need to optimize their physical R&D, sourcing and

production networks in conjunction with their suppliers. In recent years,
the focus of automotive industry investments has shifted dramatically in
favour of new growth regions (Asia and Eastern Europe). Triad markets
are under enormous pressure. Many companies are compelled to establish
production sites in low-wage countries simply to ensure their survival.
The fact is that as much as 75 per cent of personnel costs can permanently
be saved by moving to low-wage locations, in spite of lower productivity
levels. Where personnel costs account for 25 per cent to 30 per cent of
total production costs, this equates to a total cost reduction of 10 to 15 per
cent, even taking all counter-effects into account. In the intense compe-
tition of the supplier business, a figure of this magnitude can make or
break a company. The trend that sees value creation being offshored to
low-wage countries will therefore not only continue in the years to come,
it will actually accelerate.
With that said that, what solutions are available for sites in high-wage
countries? The main approach is to rigorously adjust controllable costs to
suit the given circumstances. The more personnel costs can be reduced –
for example by bringing in longer working hours or waiving bonuses – the
more insignificant the cost savings of offshoring become. As a result, the
savings frequently drop to a level that renders offshoring no longer worth-
 Conclusion 363

while. This may well be the only way for sites in high-wage countries to
stay in business.

Business model

Increased cooperation and the conscious shaping of cooperation models

between all of the stakeholders in the value chain present significant areas
of untapped potential. Closer networking and improved collaboration
between all stakeholders represent key levers for optimizing the auto-
motive value chain. Contrary to the demands of the business situation,
relations between OEMs and suppliers have deteriorated markedly in
recent years. Considering how interdependent the value chain partners
are, the amount of mistrust and pressure they feed into their relationships
is anything but helpful. The optimized division of value creation and the
realignment of physical service delivery hinge on close cooperation with
the aim of taking full advantage of the potential available. The industry’s
approach to collaboration will have to change radically. Intensive cooper-
ation is a must; however, a few important rules must be observed as well.
These are:

ᔡ Shared projects require clear goals.

ᔡ Corporate cultures must be homogeneous and all persons involved
must ‘fit in’ with the goals and teams.
ᔡ The assignment of responsibilities must be defined clearly and on the
basis of competencies.
ᔡ Opportunities and risks must be shared equally.
ᔡ Rules for conflict resolution must be clearly defined and contractually
stipulated.

In conclusion, only companies that succeed in defining their future core

competencies to suit the future markets, and design their site networks to
optimize costs, will be able to survive. Greater conscious cooperation is
the key.

THE TECHNOLOGY CHALLENGE

Technological progress has been one of the strongest drivers in the devel-
opment of the automotive industry since its emergence more than 100
years ago. Increasing the performance, comfort, safety, economic life and
364 Mastering automotive challenges

driving enjoyment as far as practicable while simultaneously managing

undesired side-effects such as fuel consumption and emissions is what
keeps developers developing and customers buying new vehicles. Hence,
technology competency is at the core of any automotive company – for
OEMs and suppliers alike. The automotive industry has seen enormous
progress in this area in recent years. There is no indication that this devel-
opment will slow down any time soon. Nowadays, mid-size vehicles
perform like only racing cars used to do, and what is considered standard
safety equipment today could previously be had for neither love nor
money, even in luxury vehicles.
The shifting of value creation structures in the direction of suppliers,
which goes hand in hand with technological progress, and the growing
importance of specialized R&D service providers, have made key tech-
nology accessible to all car makers, regardless of their initial competency.
This has resulted in virtually all car brands now having an essentially
equal, very high level of technology. However, technology alone no
longer serves as a primary differentiation factor as it did in past decades.
There are but a few areas of technology that allow auto makers and their
suppliers to achieve sustainable differentiation. Aspects such as safety,
fuel efficiency, environmental friendliness and driving enjoyment
represent such areas of differentiation.
Despite the technology euphoria, it is also apparent that customers
have set clear limits to their ambitions for automotive advancement.
Customers are no longer accepting of everything that is technically
possible, nor are they willing to pay more for it. A painful lesson for auto
makers was the realization that less is frequently more. Much of their
pain stemmed from the complexity of the technical systems they them-
selves had created – and especially from the difficulty of integrating them
into the overall vehicle system. Here too, necessity drove them to rethink
and refocus their approach.
At this time, the automotive industry is undergoing a process of polar-
ization. In the top segment, vehicles boasting 1,000 BHP and more are
being developed, and the lower end of the scale is seeing strong growth in
the entry-level segment. Entry-level cars are primarily reduced to the
basic functions of mobility, and meet these needs robustly and at a
reasonable price. The massive increase in demand for such vehicles is
driven by the opening up of enormous markets (China, India and Russia)
and the breakneck speed of their economic growth. However, these
vehicles have a role to play in more than just the emerging markets. Many
customers in more mature car markets frequently see the benefits of these
concepts and, often under financial pressure, make a conscious decision to
buy such a car.
 Conclusion 365

It is important to note that such vehicles do not contain outdated tech-

nology despite their moderate price tags. Frequently the safety,
performance, consumption and variability standards they have to meet
can only be satisfied with enormous technological effort, even though a
much more level-headed approach is taken to the subject of new tech-
nologies today. That is why the R&D machinery is still running at full
speed. The goal is to adapt vehicles to the constantly and quickly changing
economic, environmental and legal framework while never losing sight of
the issue of customer acceptance.
Auto makers are therefore compelled to participate in the race to find
the best solutions for fuel consumption, weight, safety, comfort,
performance, emissions, costs and alternative drive concepts. This
involves a constantly high level of investment and effort, and those who
back down or give up will lose out. However, ‘being a part of it’ does not
mean doing everything yourself. Only intelligently designed partnerships
and networks can make this complex world manageable and affordable.

Technology strategy is key

One crucial success factor is the ability to understand which are the areas
where customers expect to see technological innovation that differentiates
one car from another, as far as their perception of the brand is concerned.
These are the areas where the OEM must strive to excel, whereas in other
areas the industry standard may well suffice. Furthermore, auto makers
must be able to determine which competencies they themselves must
possess in order to implement their defined technology strategy, and
which can be outsourced to value chain partners. Without this knowledge
and a technology/resource strategy developed on this basis, the balancing
act between functionality and costs can no longer be mastered.
As a result, the development of suitable technology strategies becomes
the key to success. Customers give auto makers plenty of leeway in this
respect. They do not require 100 per cent of the technical content of a
vehicle to stem from a single brand. They have a focused perception of the
elements and functions that are important to them. This provides the
necessary breathing space for cooperative ventures and for concentrating
on brand-shaping technologies.
The aspect of global markets and requirements must also be taken into
account in this context. Auto makers are forced to harmonize the
frequently diverse requirements of multiple markets with their business
systems, including the emerging markets with their entry-level
concepts. What this means is that they must attain global scale by
366 Mastering automotive challenges

exploiting the possibilities and the needs of the local markets.

Decentralized R&D centres and partners as well as local production and
supplier partnerships are absolutely indispensable here. Localized
products (function, cost, design) with a strong global brand form the
basis of success in a global industry.

A compelling need to simplify

Diversity in vehicle portfolios has substantially increased among all

OEMs in the past decade, and it continues to rise. Every imaginable niche
is being filled, and soon companies will be fighting over even the most
minute market potential. As a result, car makers are forced to simplify and
accelerate their development processes. They must also reduce devel-
opment costs substantially, given that the money invested is now spread
and amortized over far fewer vehicles per type. Driven by these forces,
some auto makers are working systematically and intensively to adapt
and/or redesign their R&D structures, processes and strategies. Platform
and modular strategies are often the result.
Besides a mastery of the technology itself, the actual organization of
technology and vehicle development is becoming a core competency,
often representing a crucial success factor. Convincing concepts are
strong levers of business success in this context.

Managing technological progress

The automobile in its current format, with a conventional combustion

engine, is reaching its limits. Fossil fuel resources will be exhausted in the
near future. This puts the very foundations of the industry as a whole in
severe jeopardy, and lawmakers as well as the automotive industry find
themselves under significant pressure.
The industry is being challenged to develop technologies that provide a
prospective solution to the fuel dilemma. The big OEMs fully accept that
they are compelled to innovate, this being the only way to safeguard the
survival of the automotive industry. Moreover, some auto makers quickly
realized that such substantial technological breakthroughs hold a certain
amount of differentiation potential. They have thus pulled ahead with
concepts such as the hybrid engine, giving them high levels of positive
public recognition, which is reflected in high sales figures. This, however,
brought things to a head. The entire automotive industry realized that
these developments are already being monitored by a public which has
 Conclusion 367

been sensitized to high energy prices, and saw that they represent the key
to improved market positioning and increased success.
The race to come up with better solutions is on. Hybrid engines,
BlueTec, fuel cells, hydrogen – there are many ways to attain substantial
improvements in consumption and emissions levels. The task now is to
develop them technologically. The automotive industry has pulled out all
the stops, and is working toward making the consequences of the auto-
mobile more socially acceptable and more environmentally friendly. This
is a milestone it will certainly reach.

Technology as an opportunity

An awareness and understanding of technology must extend far beyond

research and development. Technology is an essential factor in the posi-
tioning of a brand, as it increasingly determines product and brand
strategies, in addition to the focused technology strategies described above.
The repositioning of the Lexus in Europe, where it assumed the role of
innovator in hybrid technology combined with localized design and
customized sales and marketing initiatives, is an example that clearly
shows the opportunities this approach can yield. Mercedes-Benz is yet
another example. From its very beginnings, the brand has been a pioneer
in the segment of ‘fast-running diesel engines’. Consequently, Mercedes-
Benz is strongly committed to pushing the diesel drive concept in the
United States. Mercedes’ ‘BlueTec’ technology, with its superior
consumption and emissions performance, is at the heart of this initiative.
It provides the technological basis to even undercut the extreme limits in
place in some US states, which will help diesel cars gain acceptance. As a
brand, Mercedes will reap the benefits.
As both of these examples demonstrate, the concerted effort of all
departments across the entire company is required to achieve such goals.
How these processes are set up frequently determines whether the tech-
nology and the company will be successful. Technology management is
synonymous with brand management and value management. It is based
on a thorough understanding of customers and their expectations. Only
when technology is a priority issue for top management and an integral
component to be embedded in departmental strategies can all of this
come together.
368 Index

Index
NB: page numbers in italic indicate figures
For directives and regulations see European Union (EU) and legislation

42V vehicle power system 115–17, 126 pioneers of 47–48, 48

automotive industry, shifting balance of
acronyms power in 31–37
ABS: antilock braking system and car makers/component
EBIT: earnings before interest and tax suppliers 34–36, 35, 36
ESP: electronic stability program and customer segments 33–34
NAFTA: North American Free Trade Area and new suppliers 32, 32, 33
NOx: nitrogen oxides and social/environmental issues 36–37,
OEM: original equipment manufacturer 37
R&D: research and development automotive industry and global
SCR: selective catalytic reduction economy 3–24 see also Germany
SUV: sport utility vehicle global automotive industry 3–4
ADAC AutoMarxX ratings 42 automotive industry and globalization
AdBlue® 15, 125, 328 see also BLUETEC challenge 46–48, 48, 49, 49–68
and clean diesel Japan and Korea: conquest of North
Aisin AW 96 America and Europe 48–54
Aisin Seiki 96 European markets 50–52, 52
ALD 195 and new OEMS from China, India and
Alfa Romeo 163 Eastern Europe 52–54
Allianz Danner test 202–03 North America 49–50, 50
AMDEC 200 new emerging markets, survival and
antilock braking system (ABS) 15, 106, success in see emerging markets
185, 220, 226, 235, 270 automotive industry: winners and losers 38,
Asia(n) 43, 48, 50, 83, 93, 219, 234, 238, 38, 39–45
306–07, 336, 351, 352–53, 362 Chinese car industry 38–40, 40
crisis (1998) 61 component suppliers and success
cultures and long-term relationships 65 factors 44–45, 45
OEMs 49, 51, 66 top performers and low performers 40,
Audi 58, 109–10, 112, 125, 237 41, 42–44
100 TDI 237 low performers, problems of 43–44
A8 112 top performers and success factors 42
Electronics Venture 276 automotive markets, global shifts in 26–31,
and hybrid engine technology 125 27, 28, 29, 30, 31
Q7 SUV 125 Automotive Open Systems Architecture
Quattro 110 (AUTOSAR) 226–30, 239, 280,
Auto Distribution 201–02 281, 281
automotive credit 195 innovative products for new market
automotive industry segments 228
as role model 291–92 quality, common goal of 227–28
 Index 369

shared market interests 228–30 dominance in diesel injection systems 95

Automotive Research, Institute for (IFA) Engineering 142
Automotive Research Center (FAW) 65, 254 history of 233–34
automotive semiconductor applications 288 and Mercedes A class 222
Production System 232
Benz & CieAG 315 and subsidiary Blaupunkt 236
Berger, R 42, 44 Bosch, R 233
Bharat Forge 64, 68, 334–44 brand differentiation on basis of platform and
and acquisitions 341–42 module strategies 241–51
and action 338–39 market fragmentation 241–51, 242, 243,
background to 334–37 244, 245, 246, 247, 248, 250, 251
and competitiveness 342–43 brand(s) 107
and focus 338 core 243
and full service provider capability 343 identity/image 34, 35, 82
and innovation 343 loyalty 57
scale and growth of 340–42 positioning 107, 109, 154
and synergy 343–44 premium 108
and technology 339–42 values 132, 160, 243
vision of 337–38 Brazil 17, 22, 47, 54, 61, 63, 64, 234, 261–62
biofuel 19, 22–23 breakdowns, automobile 72
and agricultural sectors 22 Brose Fahrzeugteile GmbH & Co.
biodiesel 23 KG 78–79, 79
bioethanol 22 business models 286–89, 287, 288
and energy crops 22–23 business relationships of OEMs and
and raw materials market 23 component suppliers,
BLUETEC and clean diesel 15, 125, 314–33 deterioration in 91
and commercial vehicle by-wire technologies 115–16
applications 327–30, 328, 330
and E320 BLUETEC: first serial- capacity and competition 6–7
production passenger car 324–27, capacity bottlenecks, unplugging 81
324, 325, 326 car insurance premiums 151
and emission regulations: passenger car lifecycle see sales and after-sales
cars 317–19, 317, 318 challenge
and emission regulations: trucks 319, car magazines 105
320 car makers: core competences that shape the
history of 314–16, 316 brand 73–75, 74, 75
and modular technology for passenger cars ‘candidate blocks’ and influence on brand
320–23, 322, 323 promise 74
and outlook and future for diesel 330 defining future core competencies 75
and roadmap for innovative powertrain outsourcing and cost benefits 74–75
technologies 331–33, 332, 333 CARS 21 group 18–20 see also
and strategy for world’s cleanest legislation
diesel 320–23 and environmental and safety
BMW 8, 58, 74, 81, 100, 109, 111–12, 125, regulations 18, 20
140, 147, 159, 165, 208, 261, 274, 279 recommendations of 18–19
Bank 207–08 and vehicle safety 19–20
and Brilliance 53 car-related services 17
Car IT 276 car-sharing organizations 17
customer satisfaction with 42 case studies 217–344
and hybrid engine technology 125 Bharat Forge: emerging players from
Mini 33 emerging regions see Bharat Forge
sales revenues and EBIT 42 BLUETEC and clean diesel 314–33 see
X3 81 also main entry
World (delivery centre) 159 brand differentiation 241–51 see also
Bosch 66, 116, 205, 219–40, 261, 274 main entry
Competence Centre for Hybrid electronics and change in automotive
Systems 230 industry 270–89 see also main entry
370 Index

General Motors in Europe 252–69 see competence inhouse 283

also main entry component suppliers 70, 77–78
partnership as model for success 219–40 focused on components or
see also partnerships integration 75–79, 76, 77, 78, 79
sustainable success: OEMs and HBPO 93–94, 94
suppliers 290–313 see also main Siemens VDO and Magneti
entry Marelli 94–95, 95
catalytic converters: DeNOx and SCR 326 Concept Vehicle Jeep® 326
challenges conclusion 345–67 see also challenges and
globalization 46–68, 350–55 see also globalization
main entry low performers, problems of 346–47
market 146–70, 347–50 see also market market challenge 347–50 see also main
challenge entry
sales 355–60 see also sales challenge sales challenge 355–60 see also main
sales and after-sales 171–215 entry
technology 103–45, 363–67 see also technology challenge 363–67 see also
technology challenge main entry
value chain 69–102 top performers, success factors of 346
value creation 361–63 see also value value creation challenge 361–63 see also
creation challenge main entry
Chevrolet 100, 259, 260, 266 core competence(s) 71–83, 145
Taho 100 core strategy unit 140
China 6, 7–8, 16, 26, 29, 29, 30, 32, 46, 47, Covisint electronic procurement
48, 50, 54, 58–60, 60, 61, 63–64, 66, platform 100
73, 81, 82, 84, 87, 213, 219, 228, 236, cross-border synergies 158
238, 264, 269, 289, 291, 306, 308, customer loyalty 33, 209, 209
336, 342, 348, 352, 353, 364 see also customer needs 155, 294, 349
Chinese car industry customer-focused technology and product
as growth market 7–8 strategies 129, 130, 130–36
and Buick 57 aligning value chain with technology
and cheap cars 67 strategy 135–36, 136
and Chery QQ 30, 65, 67 and changes in customer
and domestic market 8 requirements 129–31
and five-year plan 8 generating customer-focused
and Geely 46, 65, 67 innovations 133–34, 135
and Hyundai 33 transforming demand to brand-shaping
and OEMs 29 vehicle attributes 131–33, 132, 133
and Rover 353 customer-oriented technology
and value chain 29 management 127, 127, 128, 129,
China National Automotive Industry 129–44
Corporation 39 customer-focused technology and product
Chinese car industry 38–40, 151 strategies 129–36 see also main
and growth of auto market 52–53 entry
Landwind SIV 66 networking with external partners 140–44
Nanjing Automobile 53, 66, 353 see also main entry
progress of 29 operational design, forms of 136–40 see
SAIC 53, 65, 66, 353 also main entry
Chrysler 14, 46, 47, 101, 109, 157 customer relationship management
Citroën C1 99 (CRM) 156–57, 164
clean exhaust emissions technologies 14, customer segmentation 33–34
21–23 customer satisfaction 114–15, 115, 131,
Club of Rome 13, 347 166–67
CO2 emissions 18, 19, 21–23, 327 index (CSI) 253–54
communication technology segments 119 customer, understanding the 154–57
competition 6–7, 12–13, 151–52, 189–90, CRM systems 156–67
191, 238 value-based strategies for 154–55, 155, 156
competence centres 276 customers, accessing via sales 348
 Index 371

customers, expectations and behaviour complex mechanical to complex

of 146–47, 148 electronic systems 270, 271, 272–75
Czech Republic/Kolin 64, 96, 99–100 competence and competition 275
complexity, growth of 274, 275
Daewoo and Chevrolet brand 66 productivity and challenge 272, 273,
Daewoo and Kia 53 274
DaimlerChrysler 8, 34, 43, 52, 64, 70, 107, convergence of electronics and car making
115, 120, 125, 159, 261, 325–26, 325, industry 275–77, 277, 278–79
326, 332 electronics suppliers, importance
Bank 207–08 of 277–78, 278, 279
buses 329 knowledge and business model-related
and development of hybrid engine with dependencies 283–86
GM 100–01 collaboration, new quality of 284–85,
E320 125 285, 286
and offshoring R&D 64 new business models, need for 286–89,
DaimlerChrysler AG 220–21, 237 287, 288
dealer groups 161–62, 196–99, 197, 198, systems integration 279–83
210, 359–60 responsibility for 282–83
Delphi 66, 68, 293–94 standardization and
and Chapter 11 protection 293 competition 280–81, 281, 282
demo car segment 177, 177 emerging markets 54–68
demographic trends 244 and challenges for OEMs and
Denso 96 newcomers 56–61
diesel 14–15, 228–29 see also BLUETEC diversity in regional markets 58–59
and clean diesel first time buyers 57–58, 57, 58
clean 15, 314–33 high fixed costs and operations lacking
globalization of 229 critical mass 59–61, 60
and hybrid vehicles 21 minimal brand loyalty 57–58
high pressure technology 119 price sensitivity 58–59, 59
injection systems 95 demand volatility, exchange rate
particulate filters 14, 119 fluctuations and trade barriers 61
diesel cars and market share 125–26 growing demand restricted to 54–56, 55,
Direct Line 204 56
digital tachographs 11 success strategies for established
Dodge Durango 101 automakers 61–65 see also main
Dresdner Bank 208 entry
success strategies for newcomers 65–67
earnings before interest and tax (EBIT) 42, see also main entry
295 sustained cost advantages in 55–56
Eastern Europe 9–10, 26, 32, 48, 55, emissions 11, 37, 37, 228, 262, 317–19 see
83–85, 162, 170, 189, 219, 234, also European Union
306–07, 308, 336, 362 engineering service providers 66, 71, 80,
economic cycles 16 80, 81
economy cars, demand for 219–20 AVL 66
electronic and software development EDAG 66, 71
cycles 141 finding their focus 80, 80, 81
electronic control units (ECUs) 274 Karmann 66, 71, 81
electronic continuous damping control Magna Steyr 71, 81
(CDC) 267 Pininfarina 51, 66, 71
electronic stability program (ESP) 15, 106, entry-level models 62–63
108, 220–22, 226, 236 environmental issues 36–37
development of 220–21 ESP: a successful partnership 220–22 see
learning from example of 222 also partnerships
and technological challenges 221–22 Eurodesign 174, 188, 188, 189, 203, 210,
electronics 15, 72, 80–81, 113, 136, 237 356, 358
electronics and change in automotive Euro-NCAP 131, 356
industry 270–89 crash test 121–22, 122, 126, 145
372 Index

European Commission (EC) 18, 22, 212 and hybrid engine technology 125,
European Parliament 18 261–62
European Union (EU) 4, 8, 22, 318, 319, 360 and HydroGen3 268
Clean Air Directive 318 Hummer 163, 264
directives 18–19, 37, 229 in Sweden 259, 260, 264
E25 175, 210 Meriva 253, 265
e-Safety program 222 and Red X Team 256
Euro 3 emissions standard for diesel 228 and Rüsselheim Opel factory 255
Euro 4 standard 318, 319 share in US market 43
Euro 5 standard on particulate SUV Graphyte 261
emissions 229, 318, 319, 327 Tigra Twin Top 265, 268
Vauxhall 259, 264
fast-fitters 202 Vectra 253
Fiat 43, 68, 70, 96 Zafira 253, 260, 262, 265
financial institutions, captive and General Motors in Europe 252–69
non-captive 206–09 customer and dealer satisfaction 254–55
captive banks: the German exception 207, design expertise 257–59
207, 208 design trend-setter Europe 268
non-captives: market share in new growth electronics, smart use of 262–63
areas 209 employee motivation and success 256
financial services 17, 151, 165, 192–96, future-oriented approach 269
359 see also insurance growth above industry trends 263–64
automotive trends and change in credit new market challenges 265–66
purchasing 194–95, 194, 195, 196 overcoming weak economy 264–65
banking services 207 portfolio positioning 259–60
banks and leasing firms 17, 292 propulsion and hybrid technology 261–62
coveted by non-automotive quality 257
players 192–93, 192, 193 single-company strategy 266–68
fleets/fleet management services 176–77, specialists and international knowledge-
194, 212, 214, 356–57 sharing 255–56
Ford Motor Company 32, 43, 46, 47, 52, world-class cars: quality and product
68, 70, 100, 157, 163, 293, 350–51 initiative 253–54
and hybrid engines 125 German Association of the Automotive
France 6, 84, 161, 164, 181, 191, 196, Industry (VDA) 227
201–02, 204–05, 208, 211, 213, 356 ‘Quality, the Foundation for Joint Success’
fuel consumption 37, 228 agreement 227, 231
full-service providers/dedicated production German automotive industry 4–7, 9–10,
service providers 81–82 13–17, 20–24, 150, 159–60, 161, 170,
and capacity bottlenecks, unplugging 81 219, 223, 222, 225, 228, 233–34, 239,
and new growth markets 82 252–53, 289
and automobile breakdowns 72
General Motors (GM) 32, 39–40, 40, 40, and biofuels 20–23
43, 46, 47, 48, 52, 57–58, 68, 70, 157, and car buyers 147
163, 167, 235, 293, 350–51 see also and competition and capacity 6–7
Opel and Saab export strategy of 9–10
Astra 253, 254, 260, 265, 268 and flex fuel vehicles 22
Cadillac 163, 252–53, 259, 260, 264, 349 and future challenges 23–24
Corsa 266 global business location strategy of 9–10
Corvette 163, 264 and road safety 20
Daewoo 260 and sales 152
and design and engineering 264 success strategies of 13–17
and development of hybrid engine with wholesalers 201
DaimlerChrysler 100–01, 293 German market, the 10–11, 151
and diesel 125 commercial vehicle segment, growth
and European Design Center, of 10–11
Rüsselheim 257–58, 263, 264 for diesel vehicles 14
and Fiat powertrain joint venture 125, 261 German supply industry 11–13
 Index 373

challenges for 12–13 219, 228, 236, 238, 269, 335–36, 348,
and clean diesel 15 364
and financial/car-related services 17 as growth market 7–8
and outsourcing/partnerships 16 car makers 151
and technology leadership 12, 15 engineering industry 337
Germany 4–17, 20–24, 79, 84, 118, 180, and global IT supremacy 8
181, 191, 204, 211, 213, 229, 235, growth of auto market 52–53
310, 318, 356 see also German low labour costs 336–37
automotive industry; German market and Mahindra 53
and German supply industry Infineon 285
ADAC (automobile association) 113, 254 information technology (IT) 111
as business location 4–6 and software for car makers 276–77
and banks 151, 208 insurance 17, 151, 202–05
business model 6 integrated chassis control (ICC) 267
GDV insurance association 151 intellectual property, safeguarding 64–65
and German Civil Code (HGB) 160 International Technical Development Center
KBS Federal Motor Vehicle Office 72 (ITDC) Rüsselsheim 257, 265
and new market opportunities 6 internet and private trading 152
and Pforzheim 2004 wage agreement 5 in-vehicle technology 80–81
and production sites 9 Italy 51, 84, 189, 211
Weller Group 161–62
global business location strategy 9–10 Jaguar 34, 43, 109
global market(s) 15, 47 see also automotive Japan 6, 8, 11, 26, 46, 47, 49, 53, 54, 66,
markets, global shifts in 96, 105, 170, 213, 225, 230, 235, 238,
and biofuels 22 291, 351
for premium products 15 and hybrid engine technology 123
global sourcing 64 and keiretsu(s) 96–97, 97, 98
globalization 6–7, 47–48, 64, 350–55, 290, Japanese 46, 49, 66
292, 293 see also see automotive automotive industry 32, 39, 44, 234–35,
industry and globalization challenge 351–53
and Asian automotive industry 352–54 brands 50
and changing times 47 supplier (Zexel) 234
and competition and key success JD Power & Associates 131, 166–67, 253,
factors 354–55 268, 356
driven adaptation processes 345 Jeep Grand Cherokee 81, 325
and global expansion 351–52 joint ventures 142
Goldman Sachs 114
green engine technologies 123 Kia 50, 52, 53, 83, 351
Korea(n) 6, 8, 46, 47, 51, 53, 66, 225, 235,
Hella Behr Plastic Omnium (HBPO) 93–94, 260, 289, 291, 351–53
94, 205 cars/brands 39, 49, 50
Honda 97, 100, 114, 124 car manufacturers 32, 151, 234–35
hybrid engine technology 119, 123, Kroymans Group 163, 167, 349
124–25, 230, 261–62, 366
Hyundai 33, 50, 52, 63, 64, 66, 67, 83, 351 labour cost savings 55
hub models 158 lean management principle 297
hubs 169–70 lean retailing 292
legislation 18–19 see also European Union
IAM repairers/wholesalers: technology (EU)
challenge 199–202 Block Exemption Regulation 151–52,
repair level: consolidation towards 160, 165, 173–74, 186, 198, 210
affiliated networks 199–200, 200 Design Protection Regulation 152
wholesale level: consolidation towards ECE regulations 18–19
large buying groups 201–02, 201 Lexus 50–51
iDrive system 42, 111–12 liability 282
India(n) 6, 7–8, 16, 17, 26, 32, 33, 39, 54, location decisions 89
58, 63–64, 66, 73, 81, 82, 84, 213, logistical costs 89
374 Index

low-labour-cost locations and sales: power play and control 161–67 see
survival 87–90, 336–37 also main entry
and detailed location plan 90 sales systems, overcoming limitations
production location, choosing 88–89, 88, of 157–60 see also main entry
89 separate tiers to single network 167–70
products, choosing 87, 87, 88 collaboration with suppliers/
low-pollutant vehicles 11 dealers 168–69
from static multi-tiered model to
Machine that Changed the World, The 13, dynamic network 169–70
347 outlook 170
macroeconomic trends 131 market research institutes 131
Magna Innovative Lightweight Auto (MILA) markets 21, 93, 219, 230, 306–07
concept car 309, 310 global 15
Magna International 294–313, 295, 296, growth of 7–8, 17, 82
312 liberalization of 12
as example of sustainable growth 294 niche 33, 77
and active portfolio management 298–99 triad 26, 33, 53, 61, 82, 84, 103, 105
and corporate development 296–97 Mercedes-Benz 51, 58, 62, 74, 101, 109,
corporate constitution of 302, 303–04 114, 124, 147, 148, 234, 314–16, 316,
decentralized organizational structure 317–19, 331
of 300, 301 bionic car 324, 324
and entrepreneurship 301–02 BlueTec 367
employees’ charter of 304, 304–05 buses 329, 330
group structure of 298, 298, 299 CLK 81
growth strategy of 297–98, 307, 307–12 S class 112, 120–21, 237
broadening customer base 308 Mini 33, 109, 154–55
capitalizing on OEM outsourcing Mitsubishi 43, 44
trend 310–11, 311, 312 module and system suppliers, growth
development of new markets 308 opportunities for 82, 83, 83
innovations and technical module strategy 249, 250
progress 308–09, 310 multi-brand sales 162–64
operating principles of 305–06 multi-brand strategy 243, 250
Magna Steyr 296, 298, 299
Production System (MSPS) 312 network management 128
Magna Powertrain 298, 299 network restructuring 158
Magneti Marelli 94–95, 95, 96 see also Fiat networking with external partners 140–44
and Siemens VDO and brand-shaping value chain
market challenge 347–50 elements 141–42
controlling sales channel 350 and competences and competitive
conventional sales systems, overcoming capabilities 142, 143
limitations of 349–50 from hierarchies to genuine
customer needs, identifying and partnerships 143–44, 144
understanding 349 and outsourcing of value chain
market challenge and strategic elements 141
control 146–70 new cars
competition outside new car fleets 176–77, 176, 177
market 151–52 full mobility service solutions 178, 178
competitive pressure 150–51, 150 market and changing demand 356–57
customer, understanding the 154–57 see product to mobility 176–78
also main entry niche markets/products 33, 77
customers: expectations and Nissan 51, 97, 114, 125
behaviour 146–47, 148 Infinity 51
offers and costs, manufacturers’ approach nitrogen oxides (NOx) 15, 317, 318–19,
to 147–49, 149, 150 320, 327
sales activities as key to success 152–53, non-governmental organizations
153 (NGOs) 18
 Index 375

North America 54, 93, 101, 225, 238, 293, Patterns of Success for Automotive
342, 351 Component Suppliers 44
North American Free Trade Area peak-shaving plant 311, 311, 312
(NAFTA) 9 Peugeot 37, 99
107 99
Offshore Local Attractiveness Index (A K and diesel particle filters 37
Kearney, 2004) 337 political framework: CARS 21
offshoring 55, 84 group 18–19 see also CARS 21
Opel 67, 252, 253–55, 256, 258, 259, 260, group and legislation
263–66, 267, 268 Porsche 81, 109, 125, 162, 276, 292, 293
operational design, forms of 128, 136–37, Boxster 81
137, 138–40 Cayenne SUV and hybrid engines 125,
component-oriented development organi- 293
zations drive complexity 137 Engineering Group 276
functional teams reduce platform strategy 246–48, 247, 248, 249
complexity 137–38 premium vehicle brands 109
function-oriented development production sites 9–10, 55, 83–91, 258–59,
organizations guarantee customer 351
focus 138, 139, 140 Production Technology, Fraunhofer Institute
outsourcing 12, 16, 75, 210, 310 for 255

particulate matter (PM) 14, 37, 119, 229, quality promotion and assurance 256
317, 318–19
partnership(s) 219–40 R&D 5, 7, 8, 15, 21, 24, 44, 61, 107, 144,
and AUTOSAR see Automotive Open 226, 308, 344, 345, 351, 354, 261,
Systems Architecture (AUTOSAR) 362, 364, 366
and cost-effective structures and processes global networks 64
230–33 Renault 19, 121–22, 145, 181, 191, 203
and balancing innovation and cost lead- Clio 181
ership 231–32 design to cost approach 63
and importance of geographical Laguna 121
proximity 231 Renault/Nissan: Dacia Logan 53, 63, 151
and mix of high-cost and low-cost repair and service 182–87, 359
countries 232–33 car pool: six- to nine-year-old
and process optimization 232 segment 185, 185, 186
and ESP 220–22 see also electronic car technology: threat or
stability program (ESP) opportunity? 186, 186, 187
and global change 238–40 customer demand for reliability/
and joint responses to future satisfaction 182–85, 183, 184
challenges 239–40 return on capital employed (ROCE) 44, 75,
and trust 240 172, 172, 193
independence and responsibility return on equity (ROE) 152
in 223–37 Roland Berger Strategy Consultants 67, 77,
competence and broad footing support 85, 113, 152–53, 154, 162, 271, 354
independence 224–25 RB Profiler 154, 155
inequality of power 224 Rover 53, 66, 353
and international presence 233–36 Russia 54, 64, 66, 73, 82, 87, 364
and Bosch 233–34, 236
and global responses to local Saab 109, 253, 258, 259, 260, 261, 264–65,
requirements 235 268
and shifting growth regions 234–35 BioPower 261
and long-term perspective 236–37 Brand Center, Trollhätten 258–59
and need for stamina/perseverance 237 Technical Development Center,
and technological leadership, common Trollhätten 265
goal of 225–26 safety features 15, 106, 119
suppliers and responsibilities 226 ABS 15, 106, 185, 220, 226, 235, 270
376 Index

airbags 15, 51, 106, 108, 270 sales: power play and control 161–67
belt warning indicators 20 auto makers 164, 164, 165
ISOFIX child restraint systems 20 dealers 161–64
passenger protection systems 108 new players 165
sales and after-sales challenge 171–215 partnerships 166–67
acceleration of change, factors sales systems, overcoming limitations
in 173–74 of 157–60
automotive value chain during car and optimization programmes, limited
lifecycle 172, 172, 173 success of 159–60
capture of value along car and potential for improvement 157–58,
lifecycle 211–15 158, 159
fully captive scenario 211–12 segmentation 33–34, 93, 219
fully non-captive scenario 212–13 selective catalytic reduction (SCR) 14–15,
retail scenario 213 320
striking the balance 213–15 Schuh, Prof Dr G 255
demand shifts and redefining market Seger, K 109
rules 176–96 Siemens VDO 66, 94–95, 95 see also
new cars: product to mobility 176–78 Magneti Marelli
see also new cars Skoda 8
repair and service 182–87 see also Slovakia 64
main entry small and medium-sized enterprises 12,
spare parts 187–91 see also main 285
entry Smart car 34
used cars 179–82 see also main entry software 136
‘user chooser’ business model 179 architecture 280
financial services challenge 192–96 see development process 113
also financial services South Africa 61, 63
threats and opportunities for market South America 26
players 175–76 Spain 84, 161, 189, 208, 211, 356, 358
threats/opportunities and new spare parts 187–91, 358
challenges 196–210 captive parts/accident-driven
dealer groups: relationship market 187–88, 188, 189
challenge 196–99, 197, 198 see also wholesaling and competition 189–90,
dealer groups 190, 191
financial institutions, captive and Steyr-Daimler-Puch 295, 296
non-captive 206–09 see also main strategic alliances 94–95, 293
entry strategies
IAM repairers/wholesalers: expansion 353
technology challenge see main entry export 9–10
insurers: the influential module 249, 250
challenge 202–05, 205 multi-brand 163–64, 243, 250
OEMs: captive business model platform 246–48, 247, 248, 249
challenge 209, 209, 210 success 13–15, 61–65
parts suppliers: market access technology/product 127–28, 135
challenge 205–06, 206 value-based 154
sales challenge 355–60 value chain 140
dealer groups, importance of 359–60 studies/surveys
financial services as source of Cap Gemini Car Online Study (2005) 42
income 359 on BlueTec® exhaust treatment
improved service 358 (TÜV-Nord) 328
new car market and changing demand on car manufacturers and automotive
structures 356–57 suppliers (RWTH) 254
original spare parts and competitive on customer satisfaction 166–67
pressure 358 on electronics 113
repair shops and tougher on electronics value and suppliers/car
competition 359 makers (McKinsey) 277
used car market: setting the lever 357 on export strategies 67
 Index 377

on India-based automotive component failure, reasons for 110–13, 111, 112

manufacture (McKinsey) 336 mature technologies 113–15, 114, 115
on low-labour-cost locations 85 non-establishment of
on multi-brand sales 162 technologies 115, 116, 116–17
on patterns of success in component Thatcham 174, 205, 356
supply industry 77 tiger economies (Asian) 26, 27
on process management in retail industry Toyota 32, 42, 46, 49, 52, 96, 97, 98–99,
(McKinsey) 292 100, 114–15, 123–25, 131, 166–67,
success strategies for established 228, 230, 350
automakers 61–65 and business relationships with component
developing low-cost competencies 62–63 suppliers 96
global R&D, production and sourcing Aygo 99
system 63–64 compared with GM 39–40, 40
globalizing mangement structures and and hybrid engine technology 123, 126
personnel development 65 and joint ventures 96
local market requirements, understanding and key customer opinion leaders 124
and meeting 61–62 Lexus/Lexus RX400h 123, 124, 145
safeguarding know-how 64–65 plant with PSA in Kolin (CR) 96, 99–100
success strategies for newcomers 65–67 Prius 33, 37, 123
developing autonomous technology and PSA Peugeot-Citröen 293
competences 66–67 triad markets 26, 33, 53, 61, 82, 84, 103,
developing independent brands 66 105
developing products fit for global
market 66–67 unique selling points (USPs) 35, 169, 282
implementing export strategies 67 United States of America (USA) 11, 21, 26,
sustainable success: OEMs and 32, 51–52, 67, 105, 158, 213, 222,
suppliers 290–313 see also Magna 229, 234, 234–35, 283, 348
International used cars 179–82
and automotive industry as role and creation of vicious circle 180–82
model 291–92 and ‘nearly new car’ system 179–80
and future of the industry 306–07 and professionalism in management 180,
system suppliers 142 181
systems integration 279–80, 282–83 and setting the lever 357

Tata 46, 53, 65, 66 value chain 35, 128, 135–36, 167, 215, 276,
technology challenge 363–67 287, 287, 288, 309
managing technological progress 366–67 strategies 140
progress or pitfall 103–45 see also value chain automotive, paradigm shift
customer-oriented technology in 272, 274
management and technology value chain breakdown: focus on core
development competence 71–83 see also
simplification 366 individual subject entries
strategy as key 365–66 car makers: focused on core
technology as opportunity 367 competences that shape the
technology development 105–26 see also brand 73–75
technology development and component suppliers: focused on
customer components or integration 75–79
and ecology, safety and convenience 119 engineering service providers: finding
and focus on customer 119–26, 122, 124 their focus 80–81
from demand to value 117–18, 118 full-service providers/dedicated
in transition 105–10 production service providers 81–82
and competitive pressure 105–06, module and system suppliers, growth
106, 107 opportunities for 82–83, 83
emotion and innovation 109–10 value chain: business model and
innovation as standard 107–08, 108 networking 91–92, 92–101
without customer focus 110–17 closer collaboration, need for 101
378 Index

collaboration and cross-shareholdings: cost of 17

OEMs and component suppliers cross-over models 148
(Japan’s keiretsus) 96–97, 96, 97 flex fuel 22
collaboration between OEMs and hybrid 21
component suppliers without cross- low-pollutant 11
shareholdings: Toyota 98, 98, 99 minivans 27, 105
collaboration between OEMs: MPVs 44, 105
DaimlerChyrsler, GM and niche 16, 81–82, 265
BMW 100–01 pick-ups 27, 49
joint ventures between component premium 17
suppliers: HBPO 93–94, 94 roadsters 265
joint ventures between OEMs: Toyota sport utility (SUV) 15, 16, 27, 34, 44,
Peugeot Citroën Automobile 49, 105, 148, 252, 260, 265
(TPCA) 99–100 supermini 16
strategic alliances between component vans 49, 105
suppliers: Siemens VDO and Magneti Verheugen, G 18
Marelli 94–95, 95 Volkswagen 14, 43, 44, 51, 52, 64, 81, 83,
value chain challenge: networks 69, 69, 110, 125, 147–48, 151, 165, 234, 235,
70–71, 71, 72–102 292, 293
and key challenges 102 Beetle 61
value chain: footprint, growing pressure on Fox 30, 62
existing locations 83–91 Golf/IV/V/City 61, 62, 110–111, 148
low-labour-cost locations and Jetta 62
survival 85–90 see also main entry Phaeton 34, 110, 147
solutions for locations in countries with Polo 62
high labour costs 90, 91 Volkswagen Financial Services 195, 207,
value chain, key levers of 70, 71 207, 208
value creation 12 Volvo 109
business model 363
challenge 361–63 wages, hourly 55–56, 56
physical service delivery 362–63 Weber, T 120
roles in 361–62 Western Europe 26, 84, 159
VDA and Ad Blue® 15 Womach, J P; Jones, D T, and Ross, D 13,
vehicle model cycles 113, 114, 141 347
vehicle safety 19–20, 37 World Trade Organization (WTO) 63
vehicle types
4x4s 16 ZVEI: German electrical engineering
compact 15, 16 and electronics industry
convertibles 16 association 279