MSL STEERING COMMITTEE

ASSESSING GLOBALIZATION AND SUPPLY CHAIN STRATEGIES OF AUTOMOTIVE MATERIAL SUPPLIERS

Francisco Veloso
Massachusetts Institute of Technology Cambridge, Massachusetts Materials Systems Laboratory

AN EMERGING GLOBAL VALUE CHAIN

Industry Trends
Drivers Increase Outsourcing Reduction in direct OEM suppliers Standardization Supply chain disaggregation New supplier roles Pressures on suppliers for global presence and performance Global Specialists Global Integrators Firm Consolidation

Opportunities in Emerging Areas

Market growth Barriers to imports Low factor costs No worker barriers to new forms of supply chain organization New OEM and supplier investments Experiments with new manufacturing and sourcing systems Regional innovative supply solutions

Effects

Industry expansion and new forms of supply chain organization taking place in emerging regions

Supplier Strategies

Massachusetts Institute of Technology Cambridge, Massachusetts

Materials Systems Laboratory

INCREASING VEHICLE OUTSOURCING

Percentage of Vehicle Value

PSA

45% 70%

1985 1997 2000 (est.)

50% Renault 65% 80%

65% Fiat 75%

Massachusetts Institute of Technology Cambridge, Massachusetts

Source: Wards; Automotive News

Materials Systems Laboratory

VEHICLE GLOBAL SALES TREND

Emerging markets Triad

100%=

48.3
25

54.4
26

62
35

68

Millions of Vehicles

39

75

74

65

61

Demand growth will take place mainly in emerging markets

1994

1999

2005

2010 Forecast

Massachusetts Institute of Technology Cambridge, Massachusetts

Source: Automotive News, IMC - Forecast

Materials Systems Laboratory

SUPPLIERS AGGRESSIVE MARKET EXPANSION

Large and Small firms alike
Company Major Products Globalization Strategy

Federal Mogul US Zanini Spain

Components for Engine Systems Hub Caps

Sales increased 276% from 1997 to 1998. Growth strategy: focused acquisitions Sales increased 30% from 1997 to 1999. Growth both through acquisitions and green field investment in Europe, Latin America and India Sales increased 52% from 1997 to 1999 Development through investment in new plants in France and Brazil

Simoldes Portugal

Injection molded components for interiors

Massachusetts Institute of Technology Cambridge, Massachusetts

Source: Company web pages, Federal Mogul 10k report

Materials Systems Laboratory

VALUE CHAIN DISAGGREGATION

Example Situation Impact of spin-off

American Axle

GM internal axle, chassis component, spun off in 1994 GM diesel engine producer, taken over by Roger Penske Fiats Stamping operations in Brazil passed to Usiminas

Shed estimated 10-12% overhead Increased sales from $1.5 to $2.0 bil. Sales doubled by 1994 Highly profitable Major innovator in diesel technology Growth in sales of 116% of of further-processed products from 1996 to 1997

Detroit Diesel

Usiminas

Early examples of disaggregation are showing Early examples of disaggregation are showing increased cost savings and innovation due to a higher increased cost savings and innovation due to a higher level of entrepreneurship as a higher scales achieved level of entrepreneurship as a higher scales achieved

Massachusetts Institute of Technology Cambridge, Massachusetts

Source: Industry Press; Mckinsey

Materials Systems Laboratory

SUPPLIER POSITIONING IN THE VALUE CHAIN

2nd + Tier 1st Tier

Component
Commodities
Small Stamps Small Injected

Subsystem
Differentiated Commodities
Rear View Mirror Fuel Injector Steering Column Medium Value Added Grey-Box Design

System
Development Components
Door Dashboard ABS High Value Added Black-Box Design

Parts
Low Value Added Build to Print

Growth Strategy
Massachusetts Institute of Technology Cambridge, Massachusetts

Materials Systems Laboratory

EXAMPLES OF SYSTEM INTEGRATION

Danas Brazilian Rolling Chassis Dana core products include axles, brakes, driveshafts, structural products and engine components Now moving to provide complete modular systems across the world Leading example is complete chassis to new Chrysler Dakota pickup truck
! Invested $15 million in new plant ! Incorporates 200 parts from 70 suppliers ! Represents one-third of truck value ! Chassis assembled and placed in Chrysler's line within 2 hours of order

Lear seat and interior integration In 1985 most auto revenues came from selling seat frames Entered complete seats business through acquisitions:
! Ford (1993) and Fiat (1994) operations ! Automotive Industries (1995) ! Keiper, Dunlop Cox and ITT (1997) ! Delphi and Hyundai businesses (1998)

These purchases included global networks in virtually the whole world Growing to be a full interior supplier
! Acquisitions and JV to access technology in acoustics, instrument panels and trims

Massachusetts Institute of Technology Cambridge, Massachusetts

Source: Automotive Industries; Wards Automotive Reports; Hoovers online

Materials Systems Laboratory

CONSOLIDATION TREND WITHIN SUPPLIERS

Largest 100 North American based suppliers 15 29 25 32 24
Worldwide Sales less than $100 million $100-$500 million $500-$1000 million $1,000-$5000 million over $5,000 million

20 Companies in segment

15 36 28 5
1992

47

11
1995

13
1998

Massachusetts Institute of Technology Cambridge, Massachusetts

Source: Automotive News

Materials Systems Laboratory

MATERIAL SUPPLIER COMPETITOR PERSPECTIVE

Goal: Explore new global opportunities generated in the auto supply chain through the development of innovative material based solutions that can generate increased value added for the OEMs and the supplier From Supplier of steel coils or blanks Global supplier of aluminum ingots ... To Supplier of fully formed body parts to the assembly line Global supplier of aluminum castings ...

Critical issues yet unanswered: What value do new supply chain configurations generate? Who is more likely to capture the value created? Which strategies ought to be pursued by materials suppliers? Focus of Research

Massachusetts Institute of Technology Cambridge, Massachusetts

Materials Systems Laboratory

MATERIAL SUPPLIER EVOLUTION IN SUPPLY CHAIN

From

Regional or global automotive raw material suppliers

Raw Material Supplier Raw Material Supplier

To Global raw material supplier, component manufacturer or system integrator

Component Supplier

System Integrator

Assembler

Distributor

Raw Material Supplier

Raw Material Supplier

Component Standard standard Setter setter

System Integrator

Assembler

Global car Distributor integrator

Raw Material Supplier

Raw Material Supplier

Component Component Standard Specializer specializer Setter

System Integrator

Assembler

Global car Distributor integrator

Raw Material Supplier

Raw Material Supplier

Component Component Standard specializer Specializer Setter

System Integrator

Assembler

Global car Distributor integrator

Massachusetts Institute of Technology Cambridge, Massachusetts

Materials Systems Laboratory

CASE STUDY: USIMINAS-FIAT STAMPINGS

Goal:

Assess economic implications of the 1993 agreement to subcontract part of Fiats stamping operations to Usiminas Fiat
Reason: Release space and resources to invest in assembly capacity Expected Increased capacity Benefits Reduced asset intensity

Usiminas
Reason: Add value to its product

Expected Move downstream into higher Benefits value products Sales growth of 116% on further-processed products from 1996 to 1997 Impact on Costs Investment in press shop? Sharing presses among clients? Factor costs? Logistics costs? Other?

Impact on Costs

Manufacturing vs. Sourcing cost? Logistics costs? Other?

Massachusetts Institute of Technology Cambridge, Massachusetts

Materials Systems Laboratory

EXPECTED EFFECT OF OUTSOURCING ON COST

Cost Driver Factor Costs Effect

Reasoning
Margin on raw material sale is reduced Usual OEM wage premium is absent in supplier Reduced transaction costs on scrap material Increased cost of transporting finished goods rather than raw materials Shared capacity among several clients Cost of capital in OEM vs. Supplier can go either way Stamping technology and practices are likely to be the same Depend on efficiency of firm organization Can initially assumed to be the same Important to assess difference in cost to understand implications of decision for both supplier and assembler

Logistics Costs Fixed Costs Processing Costs Overhead Costs

TOTAL COSTS

Massachusetts Institute of Technology Cambridge, Massachusetts

Materials Systems Laboratory

CASE STUDY: ALUMINUM ENGINE BLOCKS IN BRAZIL

Continue with Cast Iron Engine Blocks Import Cast Aluminum Engine Blocks Breed Local Manufacturers of Cast Aluminum Blocks

Advantage Capabilities already in place Inexpensive Manufacturing Disadvantage Solution against industry trend Prevents international alignment of purchases

Full economies of scale in foreign plants No local investment or long term commitment to one supplier Expensive logistics costs Significant import costs due to Brazilian regulation

Aligned with industry trend Lighter more efficient cars are a plus in Brazil due to gasoline price Important investment to develop local capabilities Low scale may require several automakers to commit to one supplier

There are important economic trade-offs between There are important economic trade-offs between scale, required investment and logistics scale, required investment and logistics
Massachusetts Institute of Technology Cambridge, Massachusetts

Materials Systems Laboratory

ALUMINUM ENGINE BLOCK COST BEHAVIOR

Very preliminary results
$180 $160 $140 $120

Aluminum Brazil

CROSS -OVER CROSS -OVER Aluminum Imports from Germany

Cost

$100 $80 $60 $40 $20 $0 0 25,000 50,000 75,000 100,000 125,000

Investing in Brazil is a difficult decision due to limited and fluctuating scale

150,000

175,000

Production Volume
Massachusetts Institute of Technology Cambridge, Massachusetts

200,000

Materials Systems Laboratory

ILLUSTRATIVE

CASE STUDY: HYDROFORMED ENGINE CRADLE

Rover 75

Cases Considered : Integrated Hydroformer: Integrated Tube Maker: Integrated Tube/Hydroformer: Integrated Materials-to-Tube Maker: Integrated Materials-to-Hydroformer:
Massachusetts Institute of Technology Cambridge, Massachusetts

Material Supplier

Slitter

Tube Maker

Hydroformer

Materials Systems Laboratory

COST BREAKDOWN OF BASE CASE

Inventory 2.6% Warehousing 0.4% Transportation 8% Maintenance 5% Building 1% Materials 45% Overhead 8%

11% Logistics Cost

53% Variable Cost

Labor Energy 2% 6%
Massachusetts Institute of Technology Cambridge, Massachusetts

Tooling 16%

Machinery 6%

36% Fixed Cost

Materials Systems Laboratory

Sensitivity for Material Supplier in Supply Chain

$44.00 $42.00 $40.00 $38.00 $36.00 $34.00 $32.00 $30.00 $28.00
25%/yr

Cost per Part

$0.56/kg $0.50/kg

$0.04/kg $0.08/kg

$40/hr 10 %/yr $6/hr

2 shifts 3 shifts

Base Case $31.42/part

Co st

fC ap ita l

eR at e

Pr ice

M at er ia l

W ag

Massachusetts Institute of Technology Cambridge, Massachusetts

Co st o

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Materials Systems Laboratory

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ILLUSTRATIVE

Costs by Process Step

100 90

$31.42
Logistics
Carrying Warehousing Transport Maintenance Cost Building Cost Overhead Cost Tooling Cost Main Machine Cost Energy Cost Labor Cost Material Cost

Cost per Part, %

80 70 60 50 40
Fixed

$17.08 $14.90
Variable

Slitting

Tube Making

Hydroforming

Massachusetts Institute of Technology Cambridge, Massachusetts

Materials Systems Laboratory

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