January is a good time to throw out the old and bring in the new, so expect to see a lot of old business models stacked in the garbage bins out behind OEMs and suppliers this month. Everybody hates to throw away stuff that used to be valuable, but the old models haven't been used in a couple of years, and now they're just gathering dust and taking up space.
You know the business models I'm talking about. They're the ones that said small companies couldn't expect to survive in the long term and that the future belonged to big, high-tech conglomerates.
And they had to make big, complex systems. Didn't matter much what kind of systems they were, as long they were big and complicated, preferably with lots of electronic integration. These would be the Alpha dogs in their markets and force everyone else into submission — and Wall Street would reward them handsomely.
It's the philosophy that drove merger mania throughout the 1990s. Remember catch phrases like “critical mass?” Companies were all looking for “economies of scale” so they could become the “low-cost producer.” Well, that's all over now.
According to those models, merged giants like DaimlerChrysler and conglomerates like ITT Automotive now would be dominant while smaller companies likeAG and & Mfg. Inc. would have their tails between their legs. Instead, the opposite is true.
In fact, a new study by the North American Automotive practice of Accenture and the Center for Automotive Research (CAR) shows that of the hundreds of supplier mergers that took place from 1996 through 2000, few actually achieved greater than 20% market share in any one segment. There still are too many suppliers in some segments such as commodity stampings, hard trim and injection molding to allow any company to rise to the top and stay there with sufficient supplier power.
Whoops. Time to take those junky economic models in the basement and give 'em the old heave ho.
The new study from Accenture/CAR, titled “Value Created, Value Lost: Why the Automotive Industry isn't Holding onto Profits,” recommends that instead of trying to get bigger at all costs, suppliers concentrate on achieving a single goal: domination of a selective component or system to reach more than 25% market share in major segments where the total number of suppliers shrinks to less than five. The authors admit it's not rocket science, but in retrospect it makes a lot more sense than most of the plans that were floating around in the 1990s.
One new company that seems to be pursuing such a new business model isCorp., which was formed last January by uniting MascoTech Inc. (engine and drivetrain components), Simpson Industries Inc. (modular engine and wheel-end/suspension parts) and Global Metal Technologies Inc. (aluminum die cast components, including transmission, engine and chassis components).
In November it announced it was reorganizing into three product-oriented groups: the Chassis Group, the Transmission and Driveline Group and the Engine Group.
The products aren't sexy; they can't be hooked into mobile broadband whatevers and trotted around Wall Street like prize ponies — they're castings and connecting rods, for crying out loud. But they are related: by what they're made of, by the customer plants they're shipped to, by the way they're processed. And the little piece of the world in which they exist is ripe for change.
CEO Timothy D. Leuliette is hoping to take all these unglamorous, related parts and turn them into high-value modules that are processed faster and more efficiently. “I don't think we'll ever be the lowest-cost supplier, but we'll be the highest-value supplier,” he says.
One of his favorite operations is a metal-casting operation that molds and ships sophisticated transmission valve bodies so fast that the packing boxes sometimes catch on fire. Molten aluminum is unloaded from a thermos-like truck at one end of the plant while at the other end finished castings head off to customers before they've had a chance to cool. “There is no inventory,” effuses Leuliette.
He isn't promising 1,000% returns overnight for his new company, but he's confident his economic model can deliver big returns to patient investors. Interior supplierCorp. created more value for its long-term investors than probably 90% of the dot-coms, he points out.
recently announced it had booked new contracts that will generate $2.6 billion in sales from 2002 through 2008, so it seems that a number of auto makers and Tier 1 suppliers are quite literally buying his strategy — even some very picky Japanese auto makers.
Will this new, more sober business model pay off better than some the others? It looks promising.
The bigger question might be whether we'll ever have ample time to find out. General Electric Co. is revered in the investment community for its ability to create shareholder value, but it took 20 years to become the powerhouse it is today. It tookeven longer. And by the way, Rome wasn't built in a day, either.
Listen to Drew Winter and other Ward's editors Monday and Thursday on WJR 760 AM radio in Detroit.