Survey: Supplier Migration to Emerging Markets

DETROIT –The auto parts business will grow in all regions – to the tune of $228 billion a year – between now and 2010, concludes a study by Roland Berger Strategy Consultants LLC. But the manufacturing footprint of the players will be realigned with forecasted global shifts in market share.

The study, entitled The Odyssey of the Auto Industry; Suppliers Changing Manufacturing Footprint, pegs the global parts industry at $876 billion in 2003 and projects it will reach $1.104 trillion by 2010.

Members of the Original Equipment Suppliers Assn., representing $70 billion of revenue or one-third of the parts industry in the U.S., were surveyed for the study that was initiated in November 2003.

Slicing up the global pie, mature markets such as North America and Western Europe will grow 2% annually, says Wim van Acker, a managing partner with Roland Berger.

North America will go from $258 billion in 2003 to $293 billion in 2010 – $35 billion a year in additional value. Western Europe will go from $251 billion to $294 billion.

The Far East will double that growth rate, going from $272 billion to $361 billion. At a slightly lower rate of 3.4% annually is South America, slated to increase to $43 billion from $25 billion.

At an impressive 8% growth per year is Eastern Europe’s projected increase from $37 billion in 2003 to $64 billion in 2010.

In short, emerging markets will grow at four times the rate of mature markets. North America, while still a major market, is expected to lose 2.9 percentage points of share of the global market, largely due to the fact that the combined share of the Big Three has shrunk 10 percentage points. The U.S. auto industry lost nearly 190,000 jobs from 2000 to 2003, falling to 1,126,000 from 1,315,000 – 70% of them in automotive parts, says van Acker.

North America and Western Europe are expected to lose 11% and 20% of production share, respectively, mainly to Asia and Eastern Europe that will see their share in global factory revenue grow 165% and 131% from 2003 to 2010, he says.

Within North America, the U.S. share of global production will decrease 18%, with the Midwest taking the hardest hit. Canada does not fare much better, with a 12% loss. Mexico bucks the trend, with its share of global production to increase 43% by 2010.

If there is a positive note, the U.S. is competitive with its peers, says Roland Berger partner Antonio Benecchi. But there is an intimating gap when compared with low labor cost countries. Manufacturing costs are broken down into three areas: hourly labor, benefits and liability costs, many of the latter related to asbestos claims.

The U.S. costs amount to $33.60 an hour. Germany is higher at $43.90. France comes in at $31.70 on this cost index, while Japan is at $23.90 and Canada, $23.80. Middle ground is occupied by South Korea at $11.20. Then the index drops with Taiwan at $5.90; Mexico at $3.20 and China at $1.30.

The gap with the low-cost countries appears insurmountable, says Benecchi. But a lean supply base in North America comes close to closing it when you factor in the cost of switching to a new supply chain in another part of the world.

Government initiatives also can help level the playing field by reducing overhead burdens, says Benecchi.

Recommendations include higher tax incentives during launch, improved political strategy, better educational and training programs, lower health care costs, the enforcement of fair trade practices and the balancing of union/employer rights.

Hans Jehle, president of Mahle Inc., the North American arm of the German supplier, says the U.S. offers incentives for new plants, but questions the fairness of not rewarding established companies with incentives to help retain existing plants.

The survey shows suppliers expect cost pressures to get worse before they get better. The majority of respondents say they believe cost targets for the next three years will exceed 10%.

To cope with their inability to achieve cost-reduction targets, suppliers are looking to move to low-cost locations, says Benecchi.

Other potential changes to their manufacturing footprint, in descending order of priority, are: moving closer to a customer and idling or closing excess capacity. In some cases, the solution is expansion of select capacity and even adding new factories in strategic areas.

To expand globally, many are adopting a “hub and spoke network” to maximize investment, says Benecchi. Global headquarters remain the hub for decision-making and research and development. But there is a growing recognition of the value of regional hubs with manufacturing facilities and some management activities. Once technology is proven, it’s transferred to the regional hubs, says Benecchi.

Local spokes tend to be assembled at a customer plant or supplier park. And more companies are establishing a shared service center to centralize such functions as engineering and drafting in countries such as India.

Allocation of investment will be defined according to this global hierarchy, says Benecchi.

As for migration trends, China may be one of the most attractive countries in terms of a growing market, but it scores low as an attractive manufacturing base because of the risks and challenges.

Continental Teves is enjoying a growth rate of 50% annually in China, says Joe Gaus, vice president-electronic braking and safety.

Those entering China “need enough money to wait five to seven years for payback, if necessary,” Benecchi cautions.

Pitfalls are aplenty: currency fluctuations, relying on a local partner for success, infrastructure issues and unexpected start-up costs, uncertain demand and issues surrounding the protection of intellectual property.

It all points to a slow, well-researched approach, with conservative planning that can be expanded.

That is the course chosen by Tenneco Automotive. Timothy E. Jackson, senior vice president-global technology, says the supplier invested 20 times more in South America than in China.

“The easiest way to get money out of China is don’t put it in,” Jackson says. He agrees with the study’s findings that Eastern Europe will grow rapidly, and says India and Southeast Asia deserve strategic investment.

It’s important not only to identify a country with a strong potential, but also the location within that country, says Benecchi. Local help is invaluable and if the business case is there, local experts also can help identify any government assistance. Such assistance should not be part of the viability of the business case, but is the icing on the cake.

And globalization is not a must for everybody, says Benecchi. A supplier can expand regionally.

The complete Roland Berger/OESA report will be available in two weeks.

[email protected]