It's not the Business Model

For several months, a number of domestic automotive executives and automotive pundits have been saying that the business model is broken. This certainly seems to be the case. During 2001, the second highest production year ever, losses at Chrysler Group and Ford Motor Co. were in the billions, while General Motors Corp.'s auto profits were down 80% over 2000.

And while GM's market share in December rose slightly, the combined market share of the domestic OEMs has continued the decline that began in the late '70s. Meanwhile, Honda Motor Co. Ltd. and Toyota Motor Corp. continue to make money and increase their market share in the U.S.

Do these results suggest the model is broken? Certainly for Honda and Toyota the model is fine. For the domestics, however, a strong case can be made, not that the model is broken, but that they just don't know how to implement the model.

In its most simplistic macro description, the automotive business model has three fundamental components: 1) the OEM-supplier interface, where suppliers get the goods needed to the OEM for vehicle manufacturing; 2) the internal operations of the OEM, where the primary focus is on the design and assembly of vehicles; and 3) the OEM-end customer interface, where the OEM strives to meet the needs of the marketplace. For the model to work, all three components must be balanced. Honda and Toyota have done so with obvious success. The domestics have not.

None of the three domestics, while improving, is doing as well as Honda and Toyota in their internal operations or end customer interface. The three domestics face daunting challenges in containing internal costs as they strive to improve design and assembly. Honda and Toyota also are challenged in this area, but they have been much more effective in keeping their operations under control. And, while the domestics recognize the need to quickly bring more exciting vehicles to market, their past actions suggest that they are not particularly sensitive to the needs of their dealers. This is not the case with either Honda or Toyota.

It is the OEM-supplier interface component of the business model, however, that demonstrates the greatest differences between the domestics and Honda and Toyota. At no time during the past 15 years, except for the Tom Stallkamp era at Chrysler, has any domestic OEM acted with as much concern for maintaining good supplier relations as have Honda and Toyota.

Our 12-year study of North American automotive OEM-supplier relationships has found that Honda and Toyota have acted in a consistent manner with their respective supply bases in several key areas over this entire period. Since we began our study in 1990, Honda and Toyota have constantly placed greater emphasis on quality vs. cost when selecting suppliers than do the domestics, and they continue to emphasize the importance of quality throughout their relationship with suppliers. The domestic OEMs always have placed greater emphasis on cost when selecting suppliers, while showing considerable variation in how they balance cost with quality. Our most recent study found that the domestic OEMs place from two to more than four times as much emphasis on cost as on quality, depending upon the goods involved, when selecting suppliers.

The initial emphasis on quality when selecting suppliers carries over to the manner by which Honda and Toyota work with their suppliers. Studies have found that, even in the same plant, U.S. suppliers perform at much higher levels of efficiency when supplying Honda and Toyota than when producing goods for the domestic OEMs.

Honda and Toyota expect their suppliers to be around long-term. And if the supplier is not performing as expected, Honda and Toyota will work with the company to get its costs down or improve quality — whatever it takes to make the supplier's goods competitive. How often do such activities occur between the domestics and their suppliers today? Rarely.

Honda and Toyota also conduct all supplier-related activities, whether commercial or engineering, in an environment that continually builds on and reinforces trust. For example, when working with a supplier to reduce costs or improve quality, they show concern for the supplier's economic viability by working with the supplier to protect its profit margins. These are not selfless actions. Both Honda and Toyota realize that it is in their long-term best interests to have an economically strong supply base that trusts them. Consequently, they act accordingly toward their suppliers — something that the domestics do not do. Still, our studies found that Honda and Toyota carry out all of their supplier interface activities while applying considerable price reduction pressure on parts makers.

The domestic OEMs, over the years, have benchmarked the Japanese and subsequently successfully emulated them in numerous areas associated with the internal operations and OEM-end customer components of the model. Today, however, no domestic OEM is emulating Honda and Toyota in the supplier interface component of the model. Like the proverbial 3-legged stool, the automotive business model doesn't work if one of its major components is weak. That is the case at the domestics. The business model works. For the domestics, it's the implementation that's the problem.

John W. Henke Jr. — John W. Henke Jr., Ph.D., is President of Planning Perspectives Inc., a Birmingham, MI-based consultancy specializing in manufacturer-supplier interactions, and a marketing professor in the School of Business Administration at Oakland University. He can be reached at [email protected].