Change in the auto industry happens in a flash. Today's independent supplier is tomorrow's systems integrator subsidiary. Which companies will survive and prosper? Joseph Gorman, CEO of supplier TRW Inc. of Cleveland, told engineers in a Jan. 27 breakfast address in Detroit that the winners will be companies that have global operations, are market leaders, realize the value of standardization, have superior supply-chain management, make the best use of their facilities and use e-commerce effectively. Gorman's address kicked off the SAE 2000 World Congress. Edited excerpts follow:
It was Mark Twain who said 'It's a good idea to look ahead, but not further than the eyes can see.' It was also Mark Twain, I thought - I'll have to look it up - who said 'Even if you're on the right track, you'll eventually get run over if you're not moving fast enough.'
Now we can see the future - at least so far as we need to see it to change, to know what will separate the winners from the losers. And we know we have to move very rapidly in order to survive and be a winner. We know that, at the end of the day in this very competitive industry, there will be winners and there will be losers.
Knowing that, what are some of the key challenges? It's an industry where the paradigms are changing at a furious pace. It's not business as usual in any sense of the word. Competition is fierce and getting worse. Relationships are increasingly confrontational and even threatening at times. Consolidation will continue at a high pace, both among the OEs and the suppliers. Strategic partnering is increasingly important to success. And the list could go on. With that, let's move toward what it takes to succeed.
WE MUST BE GLOBAL
What will characterize the winners? In general, the winners will have to be truly global. Let me offer some statistics. When I grew up in the industry, I thought '3 x 15 and five': 15 million vehicles produced in North America, 15 million produced in Europe, 15 million in Asia and five million elsewhere, largely South America and Eastern Europe.
Now it has changed a bit. It's 17, 17, 14: North America, Western Europe and Asia. And five, again in Eastern Europe and Brazil. But the rest of the world, that five, is going to change and change rapidly. We all know that, but that's why we must be global.
Some additional statistics. It turns out that there are 600 million vehicles operating worldwide today. There are 6 billion people. In the U.S., the car population is three for every four people. In Germany, it's one for every two people. In Russia, six for a hundred. In India and China, three and four per thousand. Now it doesn't take a genius to figure out there are going to be more automobiles in the rest of the world.
Imagine the populations of China and India alone. If someday we could expect the automotive per capita population to be the same as Germany's today, we'd have 600 million vehicles in China alone. Now that's not likely to happen soon, if at all. But even if you had one out of ten in China, you'd have 120 million vehicles. So put all that global warming stuff aside. The automobile will grow and grow strongly throughout our lifetimes and beyond.
JUST CHECK CHINA
If we're really concerned broadly about mobility, think of the example of bicycles in China. In China, up until 1979, they rationed bicycles. Only party officials and prestigious people were allowed to have a bicycle. The reforms of 1979 allowed anyone to have a bicycle who wished a bicycle. They had to make 50 million bicycles a year in China.
So imagine, as again we move from bicycles to motor scooters to automobiles. That kind of long-term thinking ought to govern how we think and what we do. Because we know it is coming, inevitably. It's a global industry, and the winners had better be on board to participate in that growth.
The winners will also be systems capable and module capable. That's a very important point. Suppliers have to be able to supply quality systems, well engineered, ready to install. Importantly, the OEs have to be ready, willing and able to accept those systems and modules. And only those OEs who are adept at that will be winners. Achieving world-class capability here is not easy. It requires major cultural change, by OEs as well as by key suppliers. It requires major paradigm shifts, changes in the way we think, changes in the way engineers at the OEs think, changes in the way engineers at the suppliers think. Changes in purchasing policies and purchasing cultures. These systems will be integrated and interactive and will fill all sorts of needs.
In our case, at TRW, we've positioned ourselves to make smart occupant restraint systems: airbags, seat belts, sensing. Those are coming. For the leaders in the industry, the rudimentary smart systems are in place. The same thing is true in the chassis safety system arena. It's critically important, in terms of governing the vehicle in the optimum safe fashion, for the steering to be integrated with braking, for both to be integrated with suspension, so that you have control of the vehicle - smart, interactive integrated systems. And with the LucasVarity acquisition, we've positioned ourselves to be the clear leader in those smart chassis systems.
More broadly, smart systems will involve safety, crash avoidance, navigation, communication, analysis of potential or existing problems in the performance of the automobile, waking up a dozing driver, traffic congestion avoidance, precluding an impaired driver from starting a car, and much more. We as suppliers have to be ready to supply, and the OEs have to be ready to receive, in order to be winners. Winners in general will be relatively customer and region neutral. In other words, don't be too dependent on one region or one customer. The consequences can be dire.
Another characteristic of winners: They will be the market leaders. Leaders in market share globally, leaders in technology globally - product technology and process technology. Critical mass is vitally important. Leadership globally provides this critical mass, and those that have it will win and those that don't will become second tier, third tier, or lose out entirely.
Winners in general will also be those who have learned how to standardize. We have only touched the surface of the benefits of standardization. Huge cost savings can be achieved. There is no reason why we can't provide basically a standardized product to a dozen automakers, if the automakers will work with us to do so. The cost savings are enormous.
There is no reason to have a different buckle for a seat belt, one car platform to another, but that's exactly what happens. And the list could go on, for dozens of nondifferentiating products that the consumer basically cares little about. The winners will be the leaders in standardization.
The winners will also be those who have the leanest and best integrated supply chain management system. I'm talking about from the very beginning of the system of supply, raw materials, to the end customer and beyond, including the aftermarket. I want to direct your attention particularly to transaction costs. I cannot believe how much this industry spends on transaction costs: five suppliers instead of one or two, five sets of engineers focusing on a particular product instead of one or two. The list goes on. The redundancy is enormous and huge cost savings can occur if we're smart enough to find ways to get those transaction costs out of the system.
The winners will also have learned how to optimize their facilities. As I move around talking to customers, I'm often told what the expectation is, in terms of market share. And I shake my head. Every time I do that, the total of market share to be gained exceeds 100 percent. Yet often we will build facilities with the anticipation that everybody's going to gain market share, so that you end up with too much capacity. You should be putting in facilities for 80 percent of a region's capacity or a customer's capacity and then making certain you've got standardization of product and process to the point where you can modulate factories all over the world to take advantage of the peaks and the valleys of demand. Yet as we suppliers and as we OEs look around, we see there is excess capacity all too often in many places. Optimizing the scarce capital we have, the scarce facilities, is critical in terms of the winners.
E-commerce. Some of us get it, others of us will get it, and some don't and won't. Those who don't and won't will be the clear losers. The winners will use it to a competitive advantage. Precisely how? Most of us don't know yet. That's evolving. But you had better get with it and be ahead of the curve, not behind the curve, with everything from simple communication with your customer to actual commerce over the Internet.
MORE WINNING TRAITS
There are other characteristics that the winners will have:
Passion for customer satisfaction, continuous improvement, superior quality and proprietary products. Ideally, suppliers will produce proprietary products and get some price protection and competitive protection by doing that.
Relentless drive to take the waste out of the system.
Worker empowerment and involvement, of course.
Naturally, shareholders care a bit about superior financial performance.
All are important. But perhaps the most important is for there to be created and continued a win-win arrangement between supplier and customer. I mean OE to first tier supplier and first-tier to those below. Unfortunately, in many cases, we are in grave danger, I believe, of tilting dangerously out of balance. This is not only unhealthy, but it could be fatal to both OE and supplier, or to first tier supplier and his or her bag of other suppliers. OEs need to have a strong, vibrant, innovative, reliable supplier. That can happen only if there is a win-win relationship between the two.
We all ought to vow today to do something about this, bring those relationships back into the proper sort of balance for the balanced best interest of all within the chain. In addition to that, what respectful advice do I have for all, including the OEs? Far fewer suppliers, earlier involvement of suppliers, more reliance on the suppliers for technology, joint technology development, joint training. Two-way trust is critically important. Open, effective, two-way communication. Seamless and boundaryless relationships. If we can get there, we will have gone a long way toward bringing these relationships back into the proper kind of balance.
Finally, we need to have less, not more, vertical integration. And I'll go out on a limb here and say that I believe that the OEs, in the future, who are least vertically integrated, will be the most successful OEs, relying on sophisticated expert suppliers for much of what they do. The OE's proper role, among the winners, will be to be systems integrators. Designers and systems integrators.