Value Chain in OEM Coatings

Dr. Karl-Friedrich Doessel

November 2013

Agenda
OEM Coatings as part of total Car Manufacturing Cost
Participants in OEM Coatings Value Chain
Roles and Expectations of
Consumer
OEM
Paint Company
Application Equipment Manufacturer
Supplier of Raw Materials
Globalisation
Regulatory Framework
Differences in Time to Market along the Value Chain
Summary

OEM Coatings as Part of total Cost

Source: McKinsey PTW-HAWK-Survey

Value Chain in Car Production

Total Process Cost

Distribution

25%

Manufacturing
Process

15%

Material

55%

R&D

5%

Paint Shop Cost

(incl. CED)

70%

Coating
Process

30%

Material

OEM Coatings Value Chain

Supplier of
Raw Materials

Paint
Manufacturer

OEM

Application
Equipment

Consumer

OEM Coatings Value Chain

Roles and Expectations
Supplier of
Raw Materials

Paint
Manufacturer

OEM

Consumer

Application
Equipment

Consumer Role
Purchasing decision to buy new car
Expectations
Color, choice of color / differention
Appearance
Durability
Cost
Environmental compliance in car use and manufacturing

Consumer as a Customer

Lower Cost of car and color options

Higher Quality
Appearance, Durability, Color
Scratch resistance
easy to clean
matt surface
corrosion protection
multi color car
high chroma colors

Paint Quality: Areas of Focus

Source: GM, SurCar 2013

PQ: Exterior Appearance Contribution

Source: GM, SurCar 2013

Source: GM, SurCar 2013

Source: GM, SurCar 2013

OEMs Surcharge Policy on Colors

(in Germany, based on online configuration options)

VW Golf
# colors
36
no surcharge
1
avg. cost/
1455
max cost/
2140
VW Phaeton
# colors
16
no surcharge
2
avg. cost/
1642
max cost/
3900

VW Passat
12
2
637
1720

GM Astra
11
2
452
680

Ford Focus Toyota Auris

8
9
2
1
387
467
555
525

Audi A6
14 (+)
2
943
2750

BMW 520i
13 (+6)
2
829 (2517)
3600

BMW 740i
13 (+4)
2
914 (2350)
2350

Benz E200
12
2
976
1963

Benz S
10
1
1151
2059

Color Economics
Today over 85% of car buyers select surcharge color
Customizing / differentiating a mass produced car
Based on 1 mio cars sold per OEM
added margin/profit for OEM color is
340 mio (Ford, GM)
up to > 1,000 mio (other OEMs)
added revenue for PaintCo is ca. 80 mio
Putting color on the car is a major part of value creation
for the OEM
Outsourcing this process is hardly considered by the OEM

Total Cost of Paintshop

/ car
282

300
10

250

268 (- 14)

247 (- 35)

9
53
48

8
40

200

66

59
56

150
67

64

53

86

88

90

Standard

3 wet

primerless

100

50

Indirect Matls
Energy
Labor
Capital
Paint

Paint Material Cost is 1/3 of total Cost Process Cost is 2/3

OEM Coatings Cost Structure

Cost/Car
Cost of Paint
90
Cost of Paintshop Operation
150 - 400
range defined by age/design of paintshop
Cost increment for effect colors versus solid colors
cost of Paint
20
cost of Manufacturing
20

Cost increment for effect color is < 10% of added revenue

Color is a real money maker for the OEM

OEM Coatings Value Chain

Roles and Expectations
Supplier of
Raw Materials

Paint
Manufacturer

OEM

Consumer

Application
Equipment

OEM Role
Low cost manufacturing of durable, good looking cars
Expectations
Low cost, reliable, global supply of paint and equipment
Attractive color design proposals from raw material and
paint suppliers
Wide operating window from material and process high FROK
Environmental compliance, reduced energy demand

CAGR of global Car Production

2013 - 2017

Regional Shift Follow your Customers

China is the biggest market for car production

China and South Asia have the highest growth rates
Paint production and raw material production have to follow
Regulatory compliance becomes increasingly important
China emissions law requires w/b basecoat
China GHS, chemical inventories
REACh etc. make global sourcing more difficult

Globalisation requires capital, people/Know-how, and

TIME !!

Average Time to Market in Automotive Coatings OEM R & D

hours

days weeks months 2 years +2 years

Project
Management

Troubleshooting
minor paint adjustments
Product upgrades (some new raw materials)
Application Technology
Strategic R&D, new raw materials, chemistries
Toxicologic testing, registrations required

Raw material Co.s typically work on a different time scale than paint Co.s

OEM Coatings Value Chain

Roles and Expectations
Supplier of
Raw Materials

Paint
Manufacturer

OEM

Consumer

Application
Equipment

Paint Manufacturer Role

Low cost, reliable, global supply of paint meeting OEM spec.
Create improvements in performance, color, cost
Environmental compliance of paint and safe use
Expectations
Low cost, reliable, global supply of raw materials
Environmental compliance of raw materials
Innovation offered with new raw materials and processes

Paint Company as a Customer

Lower Cost of raw materials

Consistent Delivery & consistent Quality

global availability (at competitive cost)

pretested raw materials

proven durability in formulations

broad application field covering all OEM specifications

Higher Quality

Appearance, Durability, Color

Environmentally Compliant Products

Differentiation to competitors

Annual Basecoat Development Task PaintCo Europe

PaintCo Styling

500 800
@ 3000
per color

OEM selection PaintCo Development

150
competitor
colors

200 colors,
1000 products
incl.
pairs, triples
for s/b, w/b, 3-wet
low bake,
bell-bell,
bell-spraymate

150
150PaintCo
DAS
colors
Cost pa: 2 Mio

new Product
sales

100
10 Mio

1 Mio

OEM Color Development

Cost Implications
In OEM component business the OEM (normally) fully
pays the upfront development cost and necessary
investments (tooling) while the supplier agrees to a
fixed pricing curve
In OEM coatings the supplier (normally) bears all the
development cost
Depending on the product lifetime volume
development cost is a major cost contributor
70% of the product developments never go
commercial
50% of the commercial products never travel the
experience curve (less than 3 batches per year)

Value Creation - Subtotal

Average consumers pay 1000 to get special color
OEMs have average 90 cost/car for paint and
additional cost of 40 to produce special color vehicle
(still average OEM profitability is only 5 10%)
Average OEM paint co. has profitability of 10% with
substantial business risk in R&D and capital investment

OEM Coatings Value Chain

Roles and Expectations
Supplier of
Raw Materials

Paint
Manufacturer

OEM

Consumer

Application
Equipment

Application Equipment Manufacturer Role

Low cost, reliable, global supply of OEM paint shops
Paintshops with safe and compliant operation
Create process improvements for lower cost, higher FROK
Expectations
Paint materials meet new process requirements
Wide operating window from paint materials

OEM Application Equipment Manufacturer

Business Model different to other participants of
value chain
(one time) investment versus variable cost
Investment cycle for OEM paint shops: 25 years
New business mostly based on
Regional growth / new plants in China
Environmental regulations change to waterborne
Cost reduction by process changes with payback < 2a

OEM Application Equipment Manufacturer

Reduced
Market Size for
Coatings

Source: Drr SurCar 2013

OEM Coatings Value Chain

Roles and Expectations
Supplier of
Raw Materials

Paint
Manufacturer

OEM

Consumer

Application
Equipment

Supplier of Raw Materials Role

Low cost, reliable, global supply of raw materials
Environmental compliance of raw materials
Innovation offered with new raw materials and processes
Expectations
Receive clear signals and longer term commitment from
customers / partners in the value chain

From Chemicals to Painted Car Body

- R&D new monomers

- New resources

.. 3 years + .
- Polymer synthesis / testing
- Industrialization

.. 4 years + .
- Paint formulation / testing
- OEM tests and approval

.. 5 years + .

TSCA

- Painting / curing equipment

- OEM pilot series
- Investment and SOP

KECI

.
IECSC

.. 4 years + .

OEM Coatings Value Creation Summary

OEM Coatings today offer long durability, attractive
appearance and color choices
Average consumers pay 1000 to get special colors
OEMs earn more than 1 bio Euro by color choices
Paint Companies can only capture 5-10% of this
Raw Material suppliers capture 2-5% of the total
Globalisation is a major factor for growth
Regulations have to be observed when going global
Time to Market varies between days and 10 years
along the value chain