Scandinavian Automotive Suppliers EUREKA PRO-FACTORY Brokerage Event
The need for suppliers to cooperate with international partners
Agenda The characteristics of the Global automotive industry One example: The characteristics of the Scandinavian automotive industry Scandinavian Automotive Suppliers Association Trends in the automotive supplier business. How we cooperate Working relationship index Summary
The global automotive industry Globally Turnover, 2 trillion Equal to the 6th biggest economy in the world 50 million employees One of the cornerstones of the EU economy 3 % of the EU GDP 6 million employees in production of vehicles and components 33 billion in investments Thereof 20 billion in R&D Contribution to the EU net trade balance: 33,5 billion
The global automotive production 2015: 8,8 million jobs and 15% of the global GDP 76 Million vehicles 80 70 60 50 40 30 20 10 0 57 2005 2015 FAST 2015: Mercer Management/ Fraunhofer
70 % of the growth from China, Europe, India Light - Duty Vehicle Sales % growth Million vehicles 80 7 70 60 50 40 30 20 10 China India E Europe S Korea S Americ W Europe Japan US Rest of W 6 5 4 3 2 1 China India E Europe S Korea S Americ W Europe Japan US Rest of W 0 2007-2012 0 2007-2012 Source: J.D. Power, Global Automotive Sales Forecast
The aftermarket The Global aftermarket: 158 billion The European aftermarket: 60 billion The market can be divided into IAM, Independent After Market, and OES, Original Equipment Supply. IAM include wholesalers as well as suppliers with their own brands for the aftermarket OES is the vehicle manufacturers part of the aftermarket The size of IAM and OES varies from market to market. In the EU the split is 50/50, in the US it is 80/20 and in Japan 20/80 Within the EU each party tries to increase their share of the aftermarket That s why suppliers and vehicle manufacturers have different approach on Block exemption, Design rights, The right to repair clause, etc.
Potential Mergers Renault-Nissan & Chrysler Fiat & Ford Hyundai & Fiat/Honda & PSA Renault-Nissan & GM/VW Honda & Volkswagen VW & Hyundai Honda & Hyundai Access to the North American market Access to the European market Access to emerging markets Access to hybrid and diesel technology Increased product range Cost reduction Source: A.T. Kearney
Increased added value The suppliers increase their part of the added value and create 3,3 million jobs 80 70 65 77 60 % 50 40 30 35 23 OEM Suppliers 20 10 0 2002 2015 FAST 2015: Mercer Management /Fraunhofer
The automotive supply chain Fewer Tier 1 suppliers A more extended supply chain OEM Tier 1 Tier 2 Tier 3
Suppliers invest in R&D The suppliers invest as much as the OEMs in R&D 60 % of new technology from the suppliers From 1,3 to 6,22 % From 0,23 to 7,96 % % of turnover 4 3,5 3 2,5 2 1,5 1 0,5 0 OEM 3,8 3,8 Suppliers PWC Global Automotive Financial Review 2007 and Oliver Wyman
Conclusions The interdependence between vehicle manufacturers and their suppliers is considerable and continues to increase The monitoring of the supply chain is crucial Success in the automotive industry, for both OEMs and suppliers, depends on how well they work together, as well as how they interact with other actors in the cluster, such as universities, R&D institutes, etc.
Agenda The characteristics of the Global automotive industry One example: The characteristics of the Scandinavian automotive industry Scandinavian Automotive Suppliers Association Trends in the automotive supplier business. How we cooperate Working relationship index Summary
Brands Foreign owners Vehicles are developed from concept to finish product Export share: 85 95 %
Scandinavian Supplier Industry Studies have identified 1000 1100 suppliers. About 50% of them are small, i.e. less than 3 million turnover. The 500 biggest companies have a turnover of more than 14 billion, employ about 90 000 people in Sweden and are Subsidiaries of the world s biggest suppliers, 16 of the 30 biggest are present Scandinavian owned companies of significant size, globally active, i.e. Autoliv, Plastal, SKF, Kongsberg, Haldex, SAPA, SSAB, Ruukki, etc. Small and middle-sized companies, mostly family owned, some of them based on innovations Service providers IT companies
Agenda The characteristics of the Global automotive industry One example: The characteristics of the Scandinavian automotive industry Scandinavian Automotive Suppliers Association Trends in the automotive supplier business. How we cooperate Working relationship index Summary
Clepa 70 Corporate members National Associations ACS AFIA AGORIA ANFIA AOEM/ASA AUTIG FIEV ILEA MAJOSZ RAI SAS/FKG SERNAUTO SMMT VDA Associated members ACCENTURE ACMA INA NAPAK SINDIPECAS SUPPLY ON TAYSAD Partners EUROBAT EUROFORGE EUWA EWFA
Scandinavian Automotive Suppliers Founded 22 years ago Scandinavian organisation: Norway, Finland and Sweden About 330 members including their subsidiaries Financed by the industry 13% 12% 22% 53% Service fees Seminars Advertisements Public Partners
Objective Act as the sector s spokesperson towards industry, politicians, authorities and media Create meeting places to increase and spread information, strengthen relations between the suppliers, and create opportunities for growth Initiate activities to strengthen competence
Agenda The characteristics of the Global automotive industry One example: The characteristics of the Scandinavian automotive industry Scandinavian Automotive Suppliers Association Trends in the automotive supplier business. How we cooperate Working relationship index Summary
Important trends Soaring raw material prices Price pressure stays Profitability is too low R&D grows in importance, especially in environment technology but could we afford? Warranty issues more and more crucial Internationalisation and re-structuring is a never ending process Tougher working relations
Raw materials Significant price increases over the past 2-3 years Steel increased between 35 and 60 % and takes off again Resins increased between 15 and 50 % due to oil prices There will not be a return to previous price levels Compensation from the customer, everything from 0 to 100 % Steel: Big companies 70 80 %, small companies < 70 % Foundries: Good compensation Aluminium: 100 % Plastic/Rubber: Very little compensation
Price pressures The end customer sets the price level and therefore also the cost level Demand on price decreases, 3 5 % annually Suppliers are asked to invest in development, tooling and equipment. Plus internationalisation. Extended payment terms reduces working capital Big differences exist between the vehicle manufacturers regarding co-operation with suppliers
Profitability far too low Vehicle manufacturers net margin 2005 on average 3,04 % * Independent suppliers net margin 2005 on average 0,85 % ranging from 18,5 % to +7,2 % * The Swedish supplier industry net margin 2006: On average 5,2 %, up from 2,3 2003. The situation I North America GM, Ford, Chrysler 36 suppliers applied for Chapter 11 since year 2000 PricewaterhouseCoopers
Big difference between top and bottom ROCE % 20 18 16 14 12 10 8 6 4 2 0 2000 2002 2004 2006 Source: Roland Berger/Rothschild Supplier Database 2007 Top Bottom
Difference between top and bottom The most profitable have a more diversified customer base more activities in low cost countries Other important factors are Lean Overhead Benchmark is <6%, Acceptable 8 %, Weak >12 % Efficiency in R&D Commodity: 3-4%, Innovation: 6-8 % of turnover Material costs reduction Benchmark is minus 5-6 % annually, average is 3-4 % och 1-2 % is weak Source: Roland Berger/Rothschild Supplier Database 2007
Needed: Investments in R&D The automotive industry within the EU invests annually about 20 billion in R&D 50 % of this comes from the suppliers The vehicle manufacturers focus on adaptation and design The suppliers develop technologies for components and systems ABS, ESP, Airbags, Common rail injection, Navigation systems, etc. The top 20 suppliers within the EU invests about 8 billion Bosch invested 2005 3 billion in R&D applying for 3000 patents
Increased warranty EU-directive: Minimum two years and unlimited mileage Some OEMs have introduced up to a five - seven year warranty period Warranty issues affecting EU becoming increasingly important: VM warranty costs between 2%-4% of sales Overall value of EU warranty estimated as 10 billion Increased demands on the suppliers To cover cost like towing, courtesy car, etc. To cover costs even if no fault found, System and engineering responsibility shifting to Suppliers, increasing Supplier warranty responsibility Increasing cost per warranty claim
Internationalisation Projects are increasingly global Common platforms, modules and components Emerging markets are growing rapidly Follow your customer gets more and more important Suppliers need to invest in other countries Internationalisation also strengthens the company on the domestic market Important to utilise low-cost country options
Labour costs /hr 30 25 20 15 10 5 0 Labour cost including social costs Romania Russia China Slovakia Lithuania Estonia Poland Czech R Hungary France Sweden Germany
Challenges for German Suppliers 2007 100 90 80 70 60 50 40 30 20 10 0 (%) 2007 Price pressure Raw material prices Quality improvements Cars from low cost countries Lower volume North America More innovation Lower volume Europe Lower volume Asia Source: Roland Berger/SupplierBusiness.com
How will the working relations develop? 80 70 60 50 40 30 Better Same Tougher 20 10 0 Source: Roland Berger/SupplierBusiness.com 2007
There is a need for cooperation Customers move to other regions and countries might be necessary to look for partners in other areas The competitive situation might need a partnership or investment in low cost countries The raw material cost situation demand a tighter cooperation between supplier and their raw material suppliers and R&D partners like universities, R&D institutes, etc. The challenges in R&D ask for an even deeper cooperation The early involvement of suppliers in the development process is key (Birgit Behrendt, Ford of Europe vice president of purchasing)
but how do we cooperate?
Agenda The characteristics of the Global automotive industry One example: The characteristics of the Scandinavian automotive industry Scandinavian Automotive Suppliers Association Trends in the automotive supplier business. How we cooperate Working relationship index Summary
Position paper: Content General Terms and Conditions Development work IPR Processes Time Schedules Late changes Prototypes Resources Quotation Request for quotation Volumes Material prices Specifications Ratio Tooling Cost Split Up s Price reductions Reverse Auctions Spare part prices Currencies Payment conditions Payment Invoicing Netting Responsibility Recalls Supply interruptions Logistics Warranty
CLEPA Guidance Note on OEM s Terms & Conditions These Guidelines serve the purpose to point out issues of concern for automotive suppliers in OEM s Standard Terms and Conditions and the CLEPA Position and Principles on these subjects. However these Guidelines are not binding and each CLEPA member should negotiate the OEM s Standard Terms and Conditions ( T&C ) independently. The Seven Areas of Concern on OEM s T&C The Seven CLEPA Principles Formation, Content and Duration of the Contract =>Consensus and Commitment instead of unilaterally imposed Terms Responsibility, Warranty and Liability => Balanced sharing of risks and opportunities Intellectual Property => Honoring IP Ownership and Protection of Confidential Information Audit rights and Information => Respecting Independence and Entrepreneurship Aftermarket and Spare Parts => Unrestricted access to the Independent Aftermarket Code of Conduct => Accept diversity by individual approach Dispute Resolution, Applicable Law and Venue => Consider mutual interests
Purchasing contracts (1) The Buyer may periodically update the Global Terms and Conditions and the Web-Guides. Revisions to the Global Terms and Conditions..are binding on the Buyer and the Supplier.
Purchasing contracts (2) The Buyer may make changes to its order for the Goods or Tooling at any time. These may include changes to the design, specifications, engineering level, materials, packaging or shipping date, time or place of delivery. The Supplier will make all changes requested by the Buyer.
Purchasing contracts (3) The Buyer can terminate this contract at any time for any reason. Buyer shall not be liable to make payments to seller for product development, engineering costs, facilities..
Purchasing contracts (4) In the event of a termination, the buyer will pay the supplier cost or allowances.
Purchasing contracts (5) In the event of a termination, the Buyer will pay the supplier cost or allowances.that the Buyer in his sole discretion may elect to pay.
Agenda The characteristics of the Global automotive industry One example: The characteristics of the Scandinavian automotive industry Scandinavian Automotive Suppliers Association Trends in the automotive supplier business. How we cooperate Working relationship index Summary
Index components and variables Components Relationship Buyer communication Buyer help Buyer hindrance Supplier profit opportunity Working relations variables 1. Supplier trust of OEM 2. Supplier perception of working relations with OEM 3. OEM has open and honest communication with suppliers 4. OEM communicate timely information 5. OEM communicate adequate amounts of information 6. Help OEM gives to suppliers to reduce costs 7. Help OEM gives to suppliers to improve quality 8. OEM late/excessive engineering changes 9. Conflicting objectives across OEM functional areas 10. Supplier given flexibility to meet piece price/tooling cost objectives 11. Supplier involvement in OEM product development process 12. OEM shares savings from suppliers cost-reduction proposals 13. OEM rewards high-performing suppliers with new/continued business 14. OEM covers sunk costs on cancelled or delayed programmes 15. OEM concern for supplier profit margins when asking for price cuts 16. Supplier opportunity to make acceptable return long term
Working relationship index WRI < 250: Customer treats suppliers in an opportunistic manner and, in turn, treat their customer similarly. Little mutual trust and the relation is poor or very poor. WRI >250 - <350: The working relations are adequate with good mutual understanding and mutual trust. Customers and suppliers support each other and there are opportunities for suppliers to make a reasonable profit. WRI >350: Working relations are truly excellent. Suppliers strive to be operationally the best and undertake strategic activities such as investing and sharing new technology in anticipation of future business.
WRI 2002-2007 450 400 350 300 250 200 150 100 Toyota Honda Nissan Chrysler GM Ford 50 0 2002 2003 2004 2005 2006 2007
What does a high WRI give to the OEM? Lower costs Lower transaction costs Reduced piece price Lower total cost of doing business Lower product development costs (supplier increase investment) Higher quality Improved scheduling and forecasts Improved product development Greater supplier sharing of new technology New products to market faster Greater end-user satisfaction Greater supplier support/value Suppliers allocate best resources and expend greater efforts Suppliers provide greater support beyond contractual obligations Suppliers are more willing to invest for future opportunities with customer Greater likelihood of supplier sharing cost data
Quote by Prof. John Henke The business benefits of having strong supplier working relations are too powerful for any company, whether in the automotive industry or any other sector, to ignore.
A good example MEUR Started in 1982 4 MEUR in 1997 ISO 9001-cert in 1994 ISO 14001-cert in 1997 TQM-award in 1998 QS9000 in 2000 ISO/TS16949 in 2003 34 % annual growth the last 15 years Family owned company 120 100 80 60 40 20 0 1998 2000 2002 2004 2006 2008
Thanks!