San Francisco

The automotive industries have just entered a new era of hyper-competition.

No, you have not just had a flashback to 1989. And, yes, the last era is still going strong.

But the operative word is industries. We have become used to automotive manufacturing being in a state of constant margin and product pressure. But while the ripples from the seismic shifts of the last decade continue to move out, new earthquakes are causing different shakes. It means that just as the many fronts of competitive pressure that emerged at the end of the last decade have stepped up in intensity, new fronts have opened up.

The industries providing the means by which these new levels of competition are being realised - information technology and telecommunications - have leapt forward in recent years, creating new opportunities and threats at a bewildering pace. In the background to all this is the impact of regulations in areas such as safety, emission control and fuel economy, forcing car makers to continuously improve their products just to be allowed to stay in the market.

Bottom line pressures begin to bite

The changes are not isolated to the automotive industries, but they are the industries that provide the most immediate of case studies and still the widest implications across other industries. Influential management theorist, Peter Drucker, has referred to automotives as "the industry of industries". This is because they have historically provided a powerful reference point for what is happening across manufacturing and because of their propensity to lead other industries toward the cutting edge, through broad relationships with suppliers and customers and the ubiquitous effects of their products.

Arguably, the emerging information industries, because of their role as the media through which new business organisation is being implemented, are assuming some of that mantle, but automotives remain the brownfields industry of industries.

One of the most important emerging dynamics is that the home of the industries, the US, is starting to directly feel the pressure of import competition in ways that markets such as Australia have been feeling them since the early 1990s; that is, directly on the bottom line. The collapse in the values of the Japanese Yen and Korean Won, combined with the deep recessions in both those economies, have reached the point where the US auto manufacturers now face the prospect of a fully fledged attack on their home markets.

Taking advantage of currency shifts

Ford's executive director of government relations and corporate economics, Martin Zimmerman, says he believes the Japanese in particular have been "pulling their punches" in the US market for fear of exacerbating long-simmering political tensions over trade. The Koreans suffered a credibility problem in the US when they entered the market in the early 1990s because of quality problems. In the US, unlike Australia, their second and third generation vehicles did not overcome the problem, partly because they never established a distribution system that could allow them to deliver enough cars to market.

But Zimmerman believes neither Japan nor Korea can afford not to take full advantage of the price advantage the fall in their currencies has delivered them. Hyundai is planned to target directly the college student market, a natural entry point for its low priced compact vehicles, through direct sales. Daewoo established its own retail stores in Britain at large retail centres, eliminating the need to recruit dealers. It is likely to attempt a similar approach in the US.

At the same time, two large independent and publicly listed corporations in the US have been buying up dealerships from their traditional small business owners, lured by the potential savings in combining advertising, financing and administration costs. Republic Industries and the United Auto Group are still only operating on thin profit margins - around 2% of sales - but that is substantially better than the average for the more than 20,000 independent dealers in the US.

Change has become imperative

While GM and Ford - the largest car makers in the world - have been well served in the past by the independent dealership model, the changes around them have made it inevitable that change at the distribution end of their businesses is an imperative. But they are not just being driven by the need to be reactive.

A decade of focusing on their supply chains has brought immense change and cost savings to the process of making cars. Car designers, working on huge networked computer systems, are no longer bound by the old rules of sequential car design where one part of the process had to be completed before another. Instead, because everyone knows what everyone else is doing, interior designs can proceed at the same time as exterior designs.

Ford, through the combination of outgoing president Alex Trotman's once ridiculed Ford 2000 global manufacturing vision, and the cost-cutting zeal of president elect, Australian Jac Nasser, has stolen a march on GM on many of these fronts. Cycle times have already been slashed, with more to come. Ford is implementing a new global, computer-based product development system it hopes will cut new model design cycles from 26 to 15 months within three to five years. In the past 18 months, according to Zimmerman, $US4.3 billion, or $US600 a vehicle, has been cut from the cost of manufacturing.

These very successes have forced the spotlight onto areas of cost where little progress has been made. John Ochs, director of public affairs for Ford Investment Enterprises, says 30% of the cost of delivering a vehicle to a customer is in the distribution end - advertising, dealer and customer incentives, marketing. Management consultants, A.T Kearney, estimate this as representing $US6,400 of the average $US19,200 cost of a new car. Yet these costs have proved resistant to the types of big savings made upstream by the car companies.

Those pesky customers!

Problems inherent in the distribution system have been exacerbated by changes in customer behaviour. Buyers in the US are increasingly using the internet to discover the cost to the dealer of buying a car, and, armed with this knowledge, exploiting the fractured distribution system by encouraging dealers aligned with the same manufacturer to bid against each other for a sale. Ochs says Ford's research has shown that the major competitors to Ford dealers are other Ford dealers, not those representing other manufacturers.

In an era of low inflation, low margins and global over-capacity - estimated by Zimmerman to be 18 million units now, and to reach 22-25 million units worldwide in the next five years - companies have sought to sell values other than price. Quality of product, speed of delivery, choice, and after sales support are areas of competition just as fierce as price.

Everything depends on the strength of the brand. Customers do not want - or feel the need - to know the details of the vast and intricate network behind their new car. So what that the brakes in their new GM sportscar were manufactured by a company in Melbourne, or that the person they are buying their new Chrysler from is struggling to make their mortgage payments. If something goes wrong, they blame the company with its name on the vehicle, and expect that company to fix it.

McDonalds style consistency

Of the big three US manufacturers, Ford, having been first to consider what global manufacturing meant to its supply chain, has been boldest in restructuring its distribution system. It has embarked on a program of forming joint venture companies with its dealers in medium-sized US cities. Individual dealers have been brought together in single businesses, with Ford itself taking a minority shareholding.

Ford implements a standard business system, provides planning and sets a single, "no haggle" price. Like buying a hamburger at McDonalds, this should mean that the experience of buying a Ford car should be efficient, consistent and more customer responsive, not to mention substantially cheaper to both the company and the customer.

Ochs says that in Tulsa, the first of the cities where the system has been introduced, the number of retail outlet dealerships has been cut from 10 to three or four superstores. Instead of taking the car back to where it was purchased, customers will be able to go to up to 15 satellite service points, also owned by the joint venture.

The dealers also have a new and more painless way to exit the business under the new model. They can sell their share to the other partners or to an outsider who need not be interested in being anything more than a passive partner. If the system succeeds in lifting dealers' margins, people might be attracted to an investment in a well run company that requires them to devote little time to manage the investment.

Outsourcing central components

As apparently elegant as the new system appears in absorbing the legacy of Henry Ford's original distribution system into the age of the empowered and networked consumer, it remains an open question as to how successful it will be in competing with the more radical approaches being discussed by the Koreans.

Ford's decision to take equity is also somewhat at odds with trends upstream in the automotive industry and in emerging new business models. While Ford's Ochs says the company has no plans to exit its equity position - hardly surprising since the system is only just being implemented - the system would lend itself to Ford selling to a third party or even listing the business as a separate company.

Increasingly, businesses are outsourcing large chunks of their value chains to specialist businesses. Components as central as brakes, electrical systems, power steering, seats and information technology products are designed and manufactured by independent companies in association with the so-called original equipment manufacturers. The partnership model that has emerged as the basic way of doing business between information industries companies is being found to be the most efficient model for brownfields manufacturers that once jealously guarded their in house skills.

In some ways, this is for the car industries a return to the days before the moving production line when carriage builders built the bodies of cars on chassis and power train provided by the car companies.

Supplying on a global scale

Nor is there any end in sight to the re-engineering of the manufacturing supply chain. Zimmerman says cost pressure means Ford will continue to have to find more ways to make cars that are based on the same vehicle platform, with cosmetic differences and engineering adjustments for local conditions. He says suppliers who wish to continue to do business with Ford will themselves have to be able to supply on a global scale.

The Automotive Exchange Network, a consortium lead by GM, Ford and Chrysler, seeks to make this easier for both parties by providing a means of bringing supplier transactions onto an electronic commerce system. If successful, ANX will consolidate the existing proprietary e commerce networks of the manufacturers, meaning suppliers will not have to deal with each manufacturer through separate secure networks.

But it will also create a vast global marketplace where potential suppliers will be able to browse through the products of a world of suppliers.

A vast experiment

All of these new systems have had their share of problems. But it is likely that they will ultimately be little more than teething difficulties. Whether successful or not, they point the way to the future. As Zimmerman says of Ford's new dealership arrangements, it is a vast experiment that may or may not become a new standard, but at the very least indicates the company's determination to be at the cutting edge of whatever emerges from the application of new technologies and thinking.

Where does this leave the companies who have manufactured products for one car in one market for 50 years? Probably, either looking to expand, be acquired or retire to join the thousands of former car dealers sitting in a place in the sun.

Further reading:
The Industry Standard - August 24 1998

Executive Agenda, A.T Kearney - March 1998 Premiere issue

Fortune - June 22 1998

The Atlantic Monthly - January 1998.