In recent years, the automotive component supply market has grown consistently at around 3 to 4 per cent per year. Better still, this growth has been profitable. The world’s 500 largest publicly traded component suppliers have thus seen their return on capital employed (ROCE) rebound sharply since 2002, following the slump that lasted from 1997 through 2001 (see Figure 4.7).
The value chain challenge 75
Payroll
2.5
0.9 1.5
0.5 0.5
0.3 0.9
13.3
8.8 9.2
0.2 1.5
Supplier's margin
Remaining overhead in the event of outsourcing
‘Buy’ costs
‘Make’ costs Supplier's price Materials
Factory overheads SG&A Logistics
13.9
11.8
-4%
0.4
Figure 4.5 Sample cost comparison calculation for make-or-buy decisions (in euros)
Source: Roland Berger Strategy Consultants
76 Major challenges
• Inventory all resources/skills available worldwide
• Boost resources by outsourcing non-core activities
• Identify HR/resource requirements
• Identify existing gaps
Interior
Figure 4.6 Example of how an OEM might define its future skill sets
Source: Roland Berger Engineering Study
11.1
1999 2000 2001 2002 2003 2004
ROCE
EBIT ROA
Figure 4.7 Profitability of the world’s 500 largest publicly traded automotive component suppliers
Sources: Bloomberg, Roland Berger Strategy Consultants
As OEMs continue to farm out activities and areas of competence to external suppliers, the market for automotive components will continue to present attractive growth opportunities in the years ahead. The question is, what strategies will enable individual component suppliers to exploit this lucrative potential to the full?
To answer this question, Roland Berger Strategy Consultants have combed the global component supply industry in search of particularly successful and less successful companies. We then compared the strategies they have pursued over the past five years. Our investigation found that successful suppliers behaved differently from their less successful competitors in five key business dimensions. These dimen-sions are company size, product portfolio, customer portfolio, R&D spending and the degree of vertical integration.
Statistical evidence confirms a clear link between company size and earnings power, for example – although the correlation is by no means directly proportional, as business used to believe back in the days when big was always beautiful. In fact, our analysis shows that, alongside the heavyweights, small component suppliers too tend to be markedly more profitable than their medium-sized rivals.
There are several reasons for this. Many small component suppliers service highly profitable niche markets, for example, and are well protected by the patent rights they own. Moreover, owing to their relatively small sales revenue, these companies have not generally been targets for acquisition by their customers. Many of the mid-sized companies we examined are currently evolving from family-owned and/or family-run businesses to large corporations. In this transitional phase, they often lack The value chain challenge 77
Successful suppliers Less successful suppliers 1
< EUR 0.4 billion
Sales of
EUR 0.4 – 4 billion
Sales
> EUR 4 billion
Low
Figure 4.8 Patterns of success in the automotive component supply industry
Source: Roland Berger Strategy Consultants
the necessary structures and management resources, or they are simply trying to service too many product groups at once.
A clear relationship can likewise be identified between profitability and the focus of a company’s product or customer portfolio. Top performers generate 86 per cent of sales with their one largest product group and 58 per cent of sales with their three largest customers, for instance. Suppliers whose performance is substandard tend to have a much more diffuse product and customer portfolio.
It will doubtless come as no surprise to discover that the top-performing component suppliers are also those that invest above-average sums in research and development. The same companies also outstrip the low performers in terms of their degree of vertical integration. Apparently, numerous campaigns to shrink the value chain have not (yet) positively impacted the annual financial statements.
Many of the more successful small and mid-sized component suppliers have a strong focus on gaining a perfect mastery of individual compo-nents. The more these companies grow, however, the more important it becomes for them to acquire the skills needed to integrate individual sub-modules or components into complete systems or finished sub-modules. Only then can they meet OEMs’ demand for external partners that possess end-to-end value chain competence (in design, simulation, production, assembly, and in test bed, off-road and on-road testing) as well as compre-hensive process management, subcontractor management and logistics skills.
One copybook example of a company that has systematically acquired these integration skills is Brose Fahrzeugteile GmbH & Co. KG, head-78 Major challenges
Average ROCE, 1997–2003
Business clusters, by sales (US$ m) 9.4 10.0
7.8 7.1 7.3
6.4 4.8
7.2 6.6 8.8
0 - 50 - 100 - 250 - 500 - 750 - 1,000 - 4,000 - 7,000 - 10,000
-Figure 4.9 Correlation between profitability and company size
Source: Roland Berger Strategy Consultants
quartered in Coburg, Germany. Since its inception in 1919, Brose has systematically and ambitiously transformed itself from a component manufacturer into an integrator of modules and systems (see Figure 4.10).
Back in 1928, Brose made the first manual window lifters ever. Electric lifters came in 1963, followed by electronically controlled devices in 1986. A year later, the first door module, consisting of a window lifter, window pane, window guide and impact protection unit, was fitted in an Audi 80 Coupé. Since then, things have moved fast. Today, a Brose door module is made up of a wide range of add-on components, such as speakers, locking systems, sealing elements and control elements for the wing mirrors. To complement its window lifter and door module business, the company gradually also moved into seat adjustment and locking systems. The reward for this relentless and systematic accumulation of competencies has been impressive indeed: Brose has averaged 13 per cent annual growth for the past 50 years, expanding faster and more sustainably than virtually any other automotive component supplier.
One key success factor at Brose has been a style of management focused rigorously on the long term. Others have been optimal interplay between mechanical, electrical and electronic components, an ability to respond swiftly to changing market conditions and customer require-ments, and a healthy mix of technology and cost leadership.
The value chain challenge 79
Degree of integration
1986 Electronic window lifters
1987 Door modules
2002 Integrated door modules
Door systems with frames
1928 Manual window lifters
Figure 4.10 Brose Fahrzeugteile – how a component manufacturer became a module supplier
Source: Brose Fahrzeugteile GmbH & Co KG