Supply Chain Frontiers issue #46
Auto manufacturing is commonly described as a “mature” industry, yet it is undergoing dramatic change in terms of product and market leadership, technology, and the geography of production. Asia is at the center of these changes. In response, the Malaysia Institute for Supply Chain Innovation (MISI) plans to launch a dedicated research initiative to understand the supply chain implications of the auto industry’s transformation.
Innovations such as the Toyota Production System have shaped auto manufacturing across the globe. Now, the business is moving into a new evolutionary phase where Asian automakers, driven in part by the transfer of know-how from established players in the West, will lead the way in critical areas such as manufacturing innovation. The Economist Intelligence Unit (EIU) estimates that in the next five years, one out of every two cars will be produced in Asia.
Asian countries offer a relatively stable base for these advances at a time when the rest of the world – especially western countries – is in economic turmoil. A recent report from the EIU projects that the ASEAN region will achieve an annual average growth rate of 6.3% until 2016.
How will the auto industry change in light of these trends, and what will be the role of supply chain management going forward? First, let’s look at the demand side.
The World Watch Institute estimates that the global automotive fleet increased from 50 million units in 1950 to over 550 million vehicles in 2004, and is projected to exceed 50 billion vehicles by 2050.
According to the EIU, the number of vehicles per 1,000 inhabitants in certain key markets is as follows: United States (453), Japan (423), India (7), and China (4). The growth rate of the auto market until 2014 in top markets is estimated as: China (4.7%), Eastern Europe (2.1%), South America (1.9%), and the rest of Asia (5.7%).
Rising consumer-buying power in the Asia-Pacific region is one of the main drivers of this demand. Emerging markets are expected to account for 84% of the increase in car purchases over the next decade, with China alone contributing 25%. The lack of a substitute product along with poor public transportation systems in many parts of the world also will contribute to the upsurge in car sales.
The pattern of demand is changing as well. Buyers are moving away from high-emission cars and toward low- or zero-emission vehicles, for example, prompted largely by recent hikes in the price of fuel. Complementary developments in fuel cells, hybrid cars, batteries, solar energy, and compressed natural gas technology also will impact future buying decisions.
The supply-side picture is equally as complicated. An excess of manufacturing capacity resulting from the industry’s expansion in the 2000-to-2006 time period caused downstream pricing pressures and market share erosion. In the face of these competitive threats, manufacturers launched new models and introduced price cuts to sustain sales growth and market share.
A number of other factors have impacted supply in the auto industry; the most notable ones are listed below.
Redrawn production map. In 2010, China’s annual auto production capacity reached 3.5 million units. India is also a major player. The country has the world’s second-largest forging company, and excels as a supplier of components owing to its low overheads and labor costs. India offers a 20%-to-30% cost advantage over US competitors and a margin of some 36% compared to 13% in peer countries. It also is worth noting that most battery suppliers are located in Asia.
Mega suppliers.Traditionally, tier-one suppliers are at the apex of the supply pyramid. Today, these top vendors have been joined by a new class of larger vendors: the 0.5 supplier. These are large multinational companies with a significant presence in Asia. Since content from suppliers accounts for more than 60% of the manufacturing cost per vehicle, and this figure is projected to reach 75% within the next five years, the emergence of larger suppliers could have a significant impact on supply chains.
Accelerated innovation. In the past, the auto industry changed at a relatively slow pace, but that is no longer the case. Car development cycle times have shrunk from 48 months in 1994 to 24 months in 2012. Moreover, since 1990 the average life span of a car model in developed countries has halved to just four years. Lighter cars made of low-weight composites and advances in telematics are examples of innovations in the pipeline.
The end of consolidation? Some analysts believe that increasing demand for small, fuel-efficient cars will reverse the consolidation trend that has characterized the industry over recent decades and lead to more fragmentation. This, in turn, could reconfigure the supply picture.
The supply chain management implications of these changes are far-reaching. Here are some general observations.
- To cope with regulatory and market uncertainty, a tightly integrated supply chain will be essential to address future challenges in the auto supply network.
- SKU proliferation could force the industry to shift away from a build-to-stock and toward a build-to-order supply network. In other words, the focus will shift from economy of scale to economy of scope.
- The involvement of strong suppliers (i.e., the technology owner responsible for a significant portion of the value-added activities) in automobile production will require new operating procedures, methods, and mindsets. Manufacturers will have to manage a stronger supplier base without compromising the tight integration of the supply chain.
- Developments in key areas such as battery and fuel technologies will require automakers to find effective ways to integrate emerging suppliers into the auto design process and into supporting supply networks. These powerful players are likely to change the industry’s clock-speed, and automakers must have a plan to deal with them. Another threat posed by these entrants is their ability to create new markets and competitors.
- Global supply networks will have to be realigned as manufacturers in the Asia-Pacific region become more dominant. At the same time, these regions will be the new markets for cars.
The rules that have guided the auto industry for many decades are now being rewritten. Supply chain management is at the forefront of these changes, giving the profession a crucial role in redefining the industry and helping automakers to make the transition.
This article was written by Dr. Javad Feiz Abadi, Assistant Professor, Director Research, Malaysia Institute for Supply Chain Innovation. For more information on the article and the auto industry research at MISI, contact the author.