AAM: R&D Cutbacks Bad Strategy

TRAVERSE CITY, MI – With the relentless pressure from auto makers to chop component costs, the auto industry’s suppliers often have little recourse but to cut their own costs. An easy target, in many operations, is research and development.

But suppliers that cut R&D do so at grave peril to their long-term competitiveness, says Yogen N. Rahangdale, vice president-operations and planning at American Axle & Mfg. Inc.

In a presentation at the Management Briefing Seminars here, Rahangdale stresses that to maintain manufacturing competitiveness and efficiency, suppliers – no matter how cash-strapped – must continue to invest in R&D.

Suppliers often make the “critical mistake” of reducing R&D expenditures during lean times, says Rahangdale. “These are the companies that save their way to bankruptcy.”

New American Axle U.S. headquarters symbolic of the supplier’s commitment to R&D.

Rahangdale has watched the tangible proof of his philosophy, as AAM – a heavy investor in R&D – has emerged as one of the industry’s most successful and profitable major suppliers. The company boosts its R&D budget by 10% annually, he tells Ward’s, and has increased by tenfold the number of engineers it employs since the company’s creation in 1994.

Rahangdale says investment in new technologies and manufacturing capabilities, driven through R&D, is the only way suppliers can survive in the global marketplace.

And the picture for the future doesn’t provide much relief: He says global overcapacity and the U.S.’s high labor and manufacturing costs only will intensify the industry-wide crunch for lower costs, noting there currently is about 35% more global capacity than the industry needs.

Rahangdale says by 2010, indicators point to a capacity for 105.3 million units, but a utilization of just 71.1 million, an overproduction of nearly 35 million units. In addition to overcapacity, suppliers face challenges in the form of demand for global pricing and escalating global production costs.

Rahangdale says any supplier’s formula for successful future manufacturing will have to include strong investment not only in R&D but also in worker training.

“The skills of the American workforce are a critical advantage,” he says, but adds that education for engineers in the U.S. remains affordable when compared to other endeavors.

Says Rahangdale: “I find it appalling that only 6% of college graduates (in the U.S.) are engineers. It’s 30% in Asia.”

[email protected]