Booz co: 2012-us-automotive-industry-survey-and-confidence-index
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Booz co: 2012-us-automotive-industry-survey-and-confidence-index Booz co: 2012-us-automotive-industry-survey-and-confidence-index Document Transcript

  • 2012 U.S. Automotive IndustrySurvey and Confidence Index“A Return to Optimism”
  • 2 Booz & CompanyAutomotive Practice Contacts:ChicagoBrian ColliePartner+1-312-578-4637brian.collie@booz.comNew YorkScott CorwinPartner+1-212-551-6578scott.corwin@booz.comMedia Contact:New YorkMargaret Kashmir+1-973-879-7213margaret.kashmir@booz.com
  • 3 Booz & CompanyEXECUTIVESUMMARYA Return to FundamentalsThe global economic crisis, the collapse of automotive sales in2008–09, and the rise of emerging markets such as China and Indiahave combined to force the U.S. auto industry to revolutionize. Theindustry is rallying around a novel view of what a new-car sale shouldbe: less frequent and more profitable.According to Booz & Company’s 2012 U.S. Automotive IndustrySurvey and Confidence Index, the mood among auto executives isbuoyant—with more than 90 percent of respondents describing thecurrent state of the industry as either somewhat better or much betterthan last year. The survey was completed in early March, and the in-dustry’s consensus at that time was that U.S. auto sales will reach 13.7million in 2012—a nearly double-digit improvement over last year’ssales, but also lower than recently revised industry forecasts.There’s a telling paradox here. Autoexecs are expressing optimism eventhough projected sales are way offfrom the roughly 17 million vehiclesautomakers were selling per yearduring the last decade. So whatsdriving this return to optimism?We believe the survey results illustrate the potential this industry hasto be a profit engine when it is able to more closely align supply withdemand—i.e., when it returns to the fundamentals. Many major automanufacturers and suppliers have undertaken significant efforts in thepast few years to clean balance sheets, remove excess capacity, andrestructure costs—effectively hitting the “reset” button to make moreefficient use of production capacity and make a profit at far lowervolumes. Now as volume rebounds, driven in large part by pent-upContinued on page 4
  • 4 Booz & Companydemand, easier credit, and greater consumer confidence, executives arebeginning to see their efforts pay off, with many companies reportingrecord profitability over the past few quarters.It remains to be seen whetherthe industry has made a historicadjustment to a “new normal.”Nevertheless, early signs are promising.The industry clearly has expressed a very sober collectiveunderstanding that it needs to grow smartly—namely, not let capacitygrow faster than natural market demand. Gone, for now, is thereflexive pursuit of greater market share, with OEMs focused onserving and delighting motivated consumers rather than trying to findbuyers for an overabundance of vehicles—i.e., making more profit onfewer sales. Of the OEM executives who responded to our survey, 92percent say they are either producing just enough or too few vehicles tosatisfy demand. And 77 percent say their companies are reducing or atleast holding the line on price incentives.The U.S. auto recovery demonstrates that with stronger balance sheets,legacy liabilities shed, debt reduction, and product/capital investment,this industry can return to consistent levels of profitability at lowerannual sales volumes.Detroit Versus the WorldLast year was a good one for the Detroit 3 as they saw their share ofthe overall U.S. automobile market grow at the same time that themarket grew. And the vast majority of respondents—86 percent ofsuppliers and 72 percent of OEMs—believe that the Detroit brandswill either boost their market share further or hold on to the sharethey already have in 2012. Longer term, however, with the exceptionof Ford—which an impressive 90 percent of respondents believe willmaintain or grow market share—respondents are less bullish on thefuture growth prospects of the Detroit 3.Executives were much more bullish on long-term market-shareprospects for Hyundai/Kia and Volkswagen/Audi, with 88 percent and72 percent of respondents respectively citing these two OEMs as likelyto grow share over the next five years. Similarly, respondents were alsorelatively bullish on prospects for Chinese OEMs. Chinese automakershardly have a toehold in the U.S. now—their market share is less than1 percent, and that stems from Geely’s acquisition of Volvo. However,53 percent of our survey respondents expect Chinese automakers toreach or exceed a 4 percent share of the market by 2020, with Geely,Continued on page 5
  • 5 Booz & CompanySAIC, and Chery cited most often as the Chinese OEM likely to havethe leading share position in 2020. But perceptions may not match thereality, as industry leaders are suggesting a rate of penetration muchfaster than historical precedents—specifically the Japanese and Koreanmanufacturers’ growth in the U.S.Are the Chinese really poised toquickly and effectively grow marketshare in the U.S. market?Booz & Company’s China team thinks the emergence of Chinesemanufacturers is real, but not likely to occur as fast as the surveyresults suggest. The actual performance and capabilities of the leadingChinese vehicle manufacturers—as well as their readiness to competein developed markets such as the U.S.—is overestimated for severalreasons. First, the size and scale of these companies are fairly small,especially if the sales volumes of their Western joint-venture partnersare not included. In most cases, the joint venture itself far overshadowsthe relatively young Chinese brand. In addition, the domestic marketin China is geared to first-time buyers in hypercompetitive entry-level segments, where margins are difficult to sustain, so their overallprofitability is typically quite low. That reduces the resources thesecompanies have to expand overseas. Furthermore, none of the leadingChinese manufacturers has yet achieved a major product or processbreakthrough that could give it a significant competitive advantage.This is in sharp contrast to companies like Toyota, which built itsinitial position in the U.S. through its famed Toyota ProductionSystem, a new and superior operating model.To crack global markets, Chineseautomakers will need to developworld-class global supply chainsand supplier partnerships, offercompetitive financing products,and deploy the talents of a globalhuman resources pool.That won’t happen overnight. It will also take some time for Chinesecarmakers to learn to compete in markets where they don’t have thebenefit of a low-paid labor force, management team, and supplierContinued on page 6
  • 6 Booz & Companybase or the favorable subsidy policies of the central and local Chinesegovernment. Finally, they need to build a retail network and brand inthe U.S., which is a substantial investment. Nevertheless, many Chineseautomotive executives aspire to capture a meaningful share of the U.S.market. Eventually, the U.S. market will see more new competitorsemerging from China who will likely offer well-equipped models atvery low prices, putting significant pressure on incumbent players.Alternative PowertrainsThough a tiny fraction of the market, vehicles that run on alternativepowertrains are here to stay, say our survey respondents. The case forfull-hybrid cars seems strongest; 70 percent of respondents say they aremore confident in that category than they were a year ago. Auto execsare more skeptical of fuel-cell or battery electric cars—with 75 and 71percent of respondents respectively saying they are less confident inthese two powertrains compared to last year.But most car execs say the futureof alternative powertrains ishighly dependent on continuedgovernment support.If government support continues, 58 percent believe, non-gas carscould achieve a market share of 10 percent or more. In the absenceof government support, however, this figure drops to 30 percent, astark contrast indeed. Moreover, greater adoption of this automobilesegment will depend not just on continued support but on the rightkind of support. Truly disruptive technologies such as plug-in vehicleswill require a more balanced approach to government assistance,such as infrastructure support for a national grid of rapid-cyclecharging stations.Consumer DigitizationOver the coming years the digitization of the vehicle will continueto accelerate, and do so across all facets of the vehicle, includingvehicle systems, safety, and in-vehicle connectivity and entertainment.Presently OEMs are considering a wide range of alternatives for inte-grating consumer digitization into the vehicle. Thirty-eight percent ofOEM respondents say they intend to create their own digitization andconsumer connectivity platform. This may run counter to consumerpreferences. While OEMs should maintain relatively closed systemsaround vehicle systems, customers want the “plug and play” flexibilityoffered via their smartphones, not automaker-controlled internetContinued on page 7
  • 7 Booz & Companyconnectivity, social media, entertainment, telephone, and navigation. Thisdisconnect, coupled with new “distracted driver” regulations, meansOEMs will likely need to rethinktheir approach to in-vehicleconnectivity and entertainment.“Black Swan” PreparednessThe 2011 Tohoku earthquake was a major source of disruption forautomakers last year. Of OEM respondents, 55 percent say theircompanies faced “some” or “significant” impact from the event.A significant number of suppliers, 42 percent, were also hurt. Andthese numbers would likely have been substantially higher if OEMsand suppliers had not had safety stock and redundancies in place tomitigate the impact of this momentous event. The upheaval has forcedthe auto industry to confront a fundamental weakness in lean manu-facturing. Though the idea of “just-in-time” delivery has helped boostthe industry’s fortunes over the past three decades, it proved to be amajor impediment for automakers, particularly those in Japan thatwere trying to recover quickly from the disaster.How automakers should best prepare for the next major disruptionin their production remains unclear. Auto executives are seeking waysto better prepare—92 percent of OEM executive respondents and 85percent of supplier executive respondents say so. For now, nobody isconsidering simply boosting inventories. The steps respondents saythey’ve taken include “identifying risks,” sorting out “contingencyplans” with suppliers, “localizing their supply base,” and, in the caseof nearly a third of respondents, increasing the use of “dual sourcing.”This move to build new organizationalcapabilities clearly signals that theindustry was not prepared for amajor disaster of this magnitude.Continued on page 8
  • 8 Booz & CompanyFour Forces to Shape the IndustryIn summary, the results of this year’s survey tell an important story offour forces likely to shape the new automotive industry. Reemergence of Fundamentals: The U.S. auto recovery demonstratesthat with stronger balance sheets, legacy liabilities shed, debtreduction, and better product, this industry can return to consistentlevels of profitability at lower annual sales volumes. The industryclearly has expressed a very sober collective understanding that itneeds to grow smartly—specifically, to not let capacity grow fasterthan natural market demand. This has been a product-led renaissanceand there is strong confidence in the attractiveness of current vehicleofferings and product portfolio. Similarly, suppliers are unwilling tocede leverage in their relationship with OEMs and are working tostretch existing production capacity further, postponing new capacity.A new normal is emerging with anemphasis on building brand equitywith consumers, improving theexperience, continuing to improve thecost position, and competing globally.Shifting Demand Centers: The U.S. remains the most profitableautomotive market in the world, and the place where all globalmanufacturers need to succeed. Over the long term, though, emergingmarkets have much stronger growth prospects. This shift requiresautomakers to preserve their competitive position in developed, maturemarkets while also funding the investment necessary for longer-term growth elsewhere. To that end automakers must gain a greaterunderstanding of the requirements, dynamics, and needs of emergingmarkets, and they must assess how best to compete in markets withfundamentally different economics, consumers, and competitors.Powertrain and Technology Uncertainty: There remains a strong viewthat improvements in internal combustion engines are still possibleand can generate meaningful increases in fuel efficiency. Confidence isstronger in full and mild hybrids, while skepticism remains about thepotential of full-electric and fuel-cell vehicles. The adoption rate ofalternative powertrains is highly dependent upon governmentsupport, fuel prices and availability, and OEM/supplier willingnessto make investments.Beyond alternative powertrains, the industry is on the cusp ofsignificant technological changes that could result in breakthrough,Continued on page 9
  • 9 Booz & Companyparadigm-shifting innovation, especially in vehicle connectivity thatcould result in creating real innovation in personal mobility. Whethera company is a leader or a follower, playing in these new markets willrequire a significant investment in both financial and human capital.As such, companies should be very selective with where they placetheir bets and do so only after they have confidence that they have thedifference making capabilities necessary to win and that such bets arecoherent with their broader strategy.Interconnected Supply Chain: The unfortunate events of the Japanesetsunami and floods in Thailand brought home the limitations of a leanglobal supply chain to “Black Swan” events. Actions taken in responseseem highly appropriate given what happened: assess the damage,weigh future events and probabilities, work with suppliers to be betterprepared, and build new organizational capabilities. Overall, though,we wonder though whether the industry is sufficiently prepared for thenext “Black Swan” event, or whether these actions were a one-timeresponse to a discrete occurrence. These measures are expensive and,in a brutally competitive sector, they eat into margins. Accordingly,companies in the industry must determine an appropriate level ofinvestment in risk mitigation—low enough to be cost-effective,and high enough to ease the risk of being surprised by the nextsupply-chain disruption.ConclusionThe executives of the auto industry’s leading companies have manyreasons to feel proud this year. They haven’t coasted on bailouts;they have learned some hard lessons and built a stable platform forprofitable growth. They now face several external risks, ranging fromchanges in government regulation to potential fuel disruptions fromthe Middle East and continued economic woes in Europe. Yet if historyis any guide, the greater risk could be from becoming overoptimisticabout the market and expanding to meet demand that does notincrementally grow as quickly.Here’s another scenario, though: If the U.S. industry can staydisciplined and preserve the efficiencies it fought so hard to implement,it will remain cost competitive with the most efficient car markets inthe world. It will be smaller than in the artificially inflated boom yearsof the past, but with a far greater focus on fundamentals. And it willsell higher-quality cars at greater profits. Which path the industrytakes lies within its own control, provided it can avoid repeating themistakes of the past.Continued on page 10
  • 10 Booz & CompanyKey Data Highlights• Relative to last year, industry executives are significantly more bullish on thestate of the automotive industry, with 94 percent of OEMs and 92 percent ofsuppliers describing it as either “somewhat” or “much better” than last year• Approximately 52 percent of OEM respondents are forecasting revenuegrowth in excess of 11 percent for 2012, compared to just 32 percent ofsupplier respondents• 34 percent of suppliers and 55 percent of OEMs say cuts in capacity haveleft them constrained• 77 percent of OEM respondents claim to be either holding the line onincentives or significantly reducing them• Automotive executives cite Hyundai/Kia (88 percent) and Volkswagen/Audi(72 percent) as the OEMs most likely to grow market share over thenext five years• 53 percent of respondents project a U.S. market share of 4 percent or morefor Chinese OEMs by 2020• With continued government support, 58 percent of respondents believe,alternative powertrains will command more than 10 percent of the marketby 2020. However, without continued government support, this figure dropsto 30 percent• Relative to 2011, respondents are significantly more confident in thelong term prospects of full-hybrid (70 percent of respondents describedthemselves as more confident than last year) and mild-hybrid powertrains(65 percent), but less confident in the long-term prospects for battery electricand fuel-cell electric powertrains (~70 percent of respondents describedthemselves as less confident)• 55 percent of OEMs and 42 percent of suppliers say they were impactedby the 2011 Japanese earthquake and tsunami (a figure which would havebeen higher if not for risk mitigation steps that had already been taken),demonstrating how global the U.S. auto supply chain is today• 92 percent of OEM executive respondents and 85 percent of supplierexecutive respondents say they are seeking ways to better prepare for future“Black Swan” events
  • 11 Booz & Companydetailed dataanalysisA Return to OptimismPerceived State of the Industry Compared to January 20111%0%63%66%6% 7%1%0% 0% 0%MuchWorseSomewhatWorseAbout theSame31%26%SomewhatBetterMuchBetterOver the next five yeaindustry market to seannual GDP growthFive Year Outlook for the U3MuchWorseSomWKey Drivers of Strong 2011 Industry PerformancePercentage of respondents that ranked a driver in their top 3OEMsThe improvement in the industry’s performance was driven inlarge part by the industry restructuring and pent-up demand22%Availabilityof Credit30%PricingDiscipline34%BetterProduct46%ImprovedCustomerConfidence48%ProductionDiscipline/TightInventory58%Pent-UpDemand62%IndustryRestructuringSuppliers16%PricingDiscipline22%Availabilityof CreditRespondents forecast U.S. sales in 2012 to approach 14MAverage U.S. Light Vehicle Sales Forecasts2012-2016OEMSupplierOEMSupplierPerceived State of thefrom 2011 U.S. Auto Indusy Compared to January 20110% 0%1%0%63%66%6% 7%About theSame31%26%SomewhatBetterMuchBetter47%63%50%34%2%3%MuchWorseSomewhatWorseAbout theSameSomewhatBetterMuchBetterdustry Performanceed a driver in their top 3ustry’s performance was driven instructuring and pent-up demand46% 48%58%62%Suppliers58%68%72%OEMSupplierPerceived State of the Industry January 2011 Compared to January 2009from 2011 U.S. Auto Industry Survey• Relative to last year, industry executives are significantly more bullishon the current state of the automotive industry, with 94 percent ofOEM respondents and 92 percent of supplier respondents describingthe industry as somewhat or much better than last yearContinued on page 12
  • 12 Booz & CompanyA Return to Optimism (Continued)Continued on page 13• This is a stark contrast from last year’s study, where 53 percent ofOEMs and 37 percent of suppliers said the industry was about thesame as or worse than January 2009Vehicle manufacturers and suppliersare increasingly profitable, and manyindustry executives are now far morebullish about their own prospects,and those of the industry at large,than they have been in recent years.It’s a success story that would haveseemed implausible back in 2009.Yet the industry’s current strengthstems from a combination of internaland external factors that has resultedin a far better alignment betweensupply and demand.
  • 13 Booz & CompanyMore Closely Aligned Supply and Demand• This return to optimism is driven in large part by a much betteralignment between supply and demandContinued on page 141%0%6% 7%1%0% 0% 0%MuchWorseSomewhatWorseAbout theSameSomewhatBetterMuchBetterOver the next five yeaindustry market to seannual GDP growthFive Year Outlook for the U4%6%Little to no growth3MuchWorseSomWKey Drivers of Strong 2011 Industry PerformancePercentage of respondents that ranked a driver in their top 3OEMsThe improvement in the industry’s performance was driven inlarge part by the industry restructuring and pent-up demand22%Availabilityof Credit30%PricingDiscipline34%BetterProduct46%ImprovedCustomerConfidence48%ProductionDiscipline/TightInventory58%Pent-UpDemand62%IndustryRestructuringSuppliers16%PricingDiscipline22%Availabilityof CreditRespondents forecast U.S. sales in 2012 to approach 14MAverage U.S. Light Vehicle Sales Forecasts2012-201616.0Units(Millions)15.014.011.612.813.714.615.413.012.00.02010 2011 2012 2013 2014 2015 2016OEMSuppliery Compared to January 20110% 0%1%0%63%66%6% 7%About theSame31%26%SomewhatBetterMuchBetterOver the next five years executives expect the U.S. automotiveindustry market to see steady growth - at levels consistent withannual GDP growthFive Year Outlook for the U.S. Auto Industry86% 86%47%63%50%34%2%3%MuchWorseSomewhatWorseAbout theSameSomewhatBetterMuchBetterdustry Performanceed a driver in their top 3ustry’s performance was driven instructuring and pent-up demand46%ImprovedCustomerConfidence48%ProductionDiscipline/TightInventory58%Pent-UpDemand62%IndustryRestructuringSuppliers16%PricingDiscipline22%Availabilityof Credit30%BetterProduct34%ProductionDiscipline/TightInventory58%ImprovedCustomerConfidence68%Pent-UpDemand72%IndustryRestructuringales in 2012 to approach 14Mcasts15.4OEMSupplierOEMSupplierPerceived State of the Industry January 2011 Compared to January 2009from 2011 U.S. Auto Industry Survey
  • 14 Booz & CompanyMore Closely Aligned Supply and Demand (Continued)Continued on page 15• To the supply side, over 70 percent of respondents cited industryrestructuring as being one of top three drivers of strong 2011industry performance—reflecting the great (and rewarding) lengthstaken to clean balance sheets, remove excess capacity, and restructurecosts, in essence significantly lowering the break-even costs formany companies• This restructuring, combined with the strong rebound in sales, drivenin large part by pent-up demand, is driving record profitability formany companies
  • 15 Booz & CompanyStrong Growth• Specific to their own companies, both OEMs and suppliers alike are“very confident” of profitable revenue growth in 2012, with OEMsslightly more so than suppliers• 52 percent of OEMs and 32 percent of suppliers forecast growth inexcess of 11 percentContinued on page 16Specific to their own companies, both OEMs and Suppliers areconfident of profitable revenue growth in 2012, with OEMsslightly more so than SuppliersConfidence in Profitable Revenue Growth over Next 12 Months42%35%51%41%4%5%Less Confident2%0%Not Confident Confident2%18%Neutral Very ConfidentPlanned Growth in 2012 U.S. RevenueOEMSupplierOEMSupplier27%40%24%2%0%2%0%NegativeGrowthNo Growth 1%-5%29%18%6%-10% 11%-15%23%14%Greaterthan 15%How will this growthExpected 2012 RevenueOEMSupplier6%2% 1% 0%Don’tKnowMucSlow21%OEMs credit their current product portfolio and pipeline as the reason for their positive outlImportant Internal Factors Contributing to Positive 2012 Future Outlook – OEMsPercentage of respondents that ranked a factor in their top 3Specific to their own companies, both OEMs and Suppliers areconfident of profitable revenue growth in 2012, with OEMsslightly more so than SuppliersConfidence in Profitable Revenue Growth over Next 12 Months42%35%51%41%4%5%Less Confident2%0%Not Confident Confident2%18%Neutral Very ConfidentPlanned Growth in 2012 U.S. RevenueOEMSupplierOEMSupplier27%40%24%2%0%2%0%NegativeGrowthNo Growth 1%-5%29%18%6%-10% 11%-15%23%14%Greaterthan 15%How will this growthExpected 2012 RevenueOEMSupplier6%2% 1% 0%Don’tKnowMucSlow21%60%OEMs credit their current product portfolio and pipeline as the reason for their positive outlImportant Internal Factors Contributing to Positive 2012 Future Outlook – OEMsPercentage of respondents that ranked a factor in their top 3“Other” includes internalprocess execution, leadership,and strategic vision
  • 16 Booz & CompanyBehind the Growth Predictions2%0%2%0%NegativeGrowthNo Growth 1%-5% 6%-10% 11%-15% Greaterthan 15%6%2% 1% 0%Don’tKnowMuchSlowerSlower AboutEqualFaster10%Engineering/R&D10%Other16%Sales18%Ability toInnovate18%CustomerExperience/Relationship20%CostPosition25%Marketing25%RetailNetwork/Footprint29%ProductPipeline60%FinancialPositionOEMs credit their current product portfolio and pipeline as the reason for their positive outlook in 2012Important Internal Factors Contributing to Positive 2012 Future Outlook – OEMsPercentage of respondents that ranked a factor in their top 3CurrentProductPortfolio69%“Other” includes internalprocess execution, leadership,and strategic vision5%Other7%Marketing19%Sales FinancialPosition27%20%Engineering/R&DCostPositionProductPipeline43%38%28%CurrentProductPortfolio55%CustomerBase andRelationships58%Ability toInnovateFor Suppliers, though product is important, customer mix, and to a lesser extent cost position,play a key role in shaping outlookImportant Internal Factors Contributing to Positive 2012 Outlook – SuppliersPercentage of suppliers that ranked a factor in their top 3OEMs and 34% of Supplier respondents saye presently capacity constrainedOf the OEM executives who responded to our survey, 92% say theyare either producing just enough or too few vehicles to satisfy demand“Other” includes internalprocess execution, leadership,and strategic visionContinued on page 17
  • 17 Booz & CompanyBehind the Growth Predictions (Continued)• OEMs credit their current product portfolio (69 percent) andpipeline (60 percent) as the reason for their optimism in 2012.This has created a wealth of attractive new vehicle choices forcustomers—whether it be more stylish exteriors, comfortableinteriors, performance, fuel efficiency, or consumer-friendly technol-ogy, customer have some of the best choices in years• Suppliers are more nuanced in their response. While they viewproduct as important, customer mix (i.e., will they reward innova-tion, will they pay for value created) and, to a lesser extent, cost areviewed as key drivers of a positive 2012 outlook• This response from suppliers illustrates two key insights: First, not all customers are attractive partners, as some are morelikely to reward innovation and pay for value created than others Secondly, unless a supplier is in a position to create end-user pull,drive demonstrable reductions in OE costs, improve fuel effi-ciency, or be a trusted solutions provider for an OEM’s problems,it is hard not to have the competition resorting to meeting basicrequirements at the lowest cost—and in such situations, having thelow-cost position on the supply curve is paramountContinued on page 18
  • 18 Booz & CompanyBullish ForecastingOver the next five yeaindustry market to seannual GDP growthFive Year Outlook for the U4%6%Little to no growthAvailabilityof CreditPricingDisciplineBetterProductImprovedCustomerConfidenceProductionDiscipline/TightInventoryPent-UpDemandIndustryRestructuringPricingDisciplineAvailabilityof CreditRespondents forecast U.S. sales in 2012 to approach 14MAverage U.S. Light Vehicle Sales Forecasts2012-201616.0Units(Millions)15.014.011.612.813.714.615.413.012.00.02010 2011 2012 2013 2014 2015 2016OEMSupplierOver the next five years executives expect the U.S. automotiveindustry market to see steady growth - at levels consistent withannual GDP growthFive Year Outlook for the U.S. Auto Industry8%10%86% 86%4%6%Little to no growth Steady growth consistentwith GDPStrong growthand prosperitydustry Performanceed a driver in their top 3ustry’s performance was driven instructuring and pent-up demand46%ImprovedCustomerConfidence48%ProductionDiscipline/TightInventory58%Pent-UpDemand62%IndustryRestructuringSuppliers16%PricingDiscipline22%Availabilityof Credit30%BetterProduct34%ProductionDiscipline/TightInventory58%ImprovedCustomerConfidence68%Pent-UpDemand72%IndustryRestructuringales in 2012 to approach 14Mcasts14.615.42013 2014 2015 2016OEMSupplierContinued on page 19• Auto executives forecast sales of passenger vehicles will approach14 million in 2012—a number slightly below SAAR figures from Q12012 but nevertheless a strong improvement over 2011
  • 19 Booz & CompanyBullish Forecasting (Continued)Continued on page 20• Mid-term, respondents forecast that U.S. sales will settle into a levelmore consistent with historical growth, in line with the GDP, andreach 15.4 million in 2016Externally, several factors areturning in the industry’s favor.Consumer confidence is rising,and credit is more widely available.Rising fuel prices are making new,more fuel-efficient models moreattractive. Pent-up demand is alsospurring sales. The average U.S. caris currently more than 10 years oldand has logged more than 100,000miles; both numbers are far abovehistorical averages. Many consumerswho put off purchasing a new carduring the dark years of the recessionhave fewer reasons to do so muchlonger, and rising gas prices are alsoprompting some buyers to upgradeto more fuel-efficient models.
  • 20 Booz & CompanyDetroit Three Expected to Remain Strong in 2012Lose Share Maintain Share Gain ShareMercedes Nissan/InfinitiHonda/AcuraGM Chrysler/Dodge/FiatBMW/MiniFord VW/AudiToyota/LexusRespondents are optimistic that the Detroit 3 will be able to buildon 2011 success and maintain or grow market share in 2012Expected Detroit 3 Market Share Performance in 201230% 29%42%57%14%28%Lose Market Share Maintain Market Share Grow Market ShareGeelySAICCheryBYDFAWDongfeng4%Greatwall3%JAC2%ChangAn1%GACExecutives see a bright future for Chinese OEMs, forecasting a rateof U.S. market penetration more rapid than historical precedentForecasted Chinese OEM U.S. Share in 2020Chinese OEMs wiU.S. Share throug47%0%-4%32%4%-8%11%8%-12%10%12%+U.S. Market Share ofKorean OEMs was 5%as recently as 2008Forecast Share %OEMSupplierContinued on page 21• Respondents are optimistic that the Detroit 3 will be able to build on2011 success and maintain or grow market share in 2012• The Detroit 3 have made great strides in improving distribution,quality of vehicles, and the overall sales experience• Their biggest future risk likely stems from the remaining gap betweentheir fully burdened labor rates relative to foreign transplants
  • 21 Booz & CompanyForecasted Change in Market Share Over the Next Five YearsLose Share Maintain Share Gain Share7%66%27%Mercedes13%47%40%Nissan/Infiniti16%53%31%Honda/Acura20%46%34%GM28%40%32%Chrysler/Dodge/Fiat28%46%26%BMW/Mini31%59%10%Ford38%52%10%VW/Audi72%24%4%Hyundai/Kia100%88%10%Toyota/LexusRespondents are optimistic that the Detroit 3 will be able to buildon 2011 success and maintain or grow market share in 2012Expected Detroit 3 Market Share Performance in 2012Over the next 5 years, executives believe Hyundai/Kia and Volkswagon/Audiare the OEMs most likely to gain market shareExpected U.S. Market Share Changes in Next 5 Years30% 29%42%57%14%28%Lose Market Share Maintain Market Share Grow Market ShareExecutives see a bright future for Chinese OEMs, forecasting a rateof U.S. market penetration more rapid than historical precedentForecasted Chinese OEM U.S. Share in 2020Chinese OEMs with Greatest Potential to CaptureU.S. Share through 20202%OEMSupplier• In terms of vehicle sales, executives collectively cite Hyundai/Kia (88percent) and Volkswagen/Audi (72 percent) as the OEMs most likelyto grow market share over the next five years• It is important to note, though, that in the current growth environment,relative market share may not be as significant as it was five years ago• In a rising market, now that all manufacturers have effectivelylowered their cost base to become profitable at lower volumes, theycan enjoy the benefit of annual increases in market volumes wherethey sell more vehicles profitably. They do not need to obsess overslivers of share to the degree that they did in the past because of thezero sum dynamics of competing in an industry operating annually athistoric peak volumes year in and year outContinued on page 22The battle for market share is no longer as relevant asit was five years ago. This shift will enable OEMs tomaintain a better balance between supply and demand,and focus on medium- and long-term profitability.
  • 22 Booz & CompanyChinese OEMs and the U.S. MarketLose Market Share Maintain Market Share Grow Market ShareGeelySAICCheryBYDFAWDongfeng4%Greatwall3%JAC2%ChangAn1%GACExecutives see a bright future for Chinese OEMs, forecasting a rateof U.S. market penetration more rapid than historical precedentForecasted Chinese OEM U.S. Share in 2020Chinese OEMs wiU.S. Share throug47%0%-4%32%4%-8%11%8%-12%10%12%+U.S. Market Share ofKorean OEMs was 5%as recently as 2008Forecast Share %Gain Sharethe Detroit 3 will be able to buildr grow market share in 2012ance in 201230% 29%42%57%n Market Share Grow Market Share24%Geely21%SAIC19%Chery11%BYD9%FAW6%Dongfeng4%Greatwall3%JAC2%ChangAn1%GACor Chinese OEMs, forecasting a ratee rapid than historical precedenthare in 2020Chinese OEMs with Greatest Potential to CaptureU.S. Share through 202011%8%-12%10%12%+U.S. Market Share ofKorean OEMs was 5%as recently as 2008cast Share %Continued on page 23• More than half of all respondents project that Chinese OEMs willhave a U.S. market share of 4 percent or more by 2020, just twoproduct cycles from now• 21 percent predict the Chinese will achieve a market share of morethan 8 percent, suggesting a rate of penetration much faster thanhistorical precedents—specifically the Japanese and Korean manufac-turers growth in the U.S.
  • 23 Booz & CompanyChinese OEMs and the U.S. Market (Continued)Continued on page 24• Booz & Company’s China team thinks the emergence of Chinesemanufacturers is real, but not likely to occur as fast as the surveyresults suggest. These manufacturers currently represent less than 1percent of the U.S. market, and even in the most optimistic case areunlikely to reach 4 percent by 2020• Geely (24 percent), SAIC (21 percent), and Chery (19 percent) werecited most frequently by respondents as the Chinese OEM likely tocapture the greatest share of the U.S. market by 2020The U.S. remains the most profitableautomotive market in the world, andthe place where all global manufacturersneed to succeed. But over the longterm, emerging markets have muchstronger growth prospects. This shiftrequires auto makers to preserve theircompetitive position in developed,mature markets, while also fundingthe investment necessary for longer-term growth elsewhere. To that end,automakers must gain a greaterunderstanding of the requirements,dynamics, and needs of emergingmarkets, and they must assess howbest to compete in markets withfundamentally different economics,consumers, and competitors.
  • 24 Booz & CompanyAlternative Powertrains:All Bets Are Off Without Continued Government SupportElectric Electric HybridAlternative powertrains will gain share – however, adoption ratesare seen as being extremely sensitive to government supportExpected U.S. Market Share of Alternative Powertrains by 2020Continued Government Support29%13% 14% 14%0%-5% 5%-10%%ofResponses10%-15% 15%-20%No Government Sup18%5%7%20%-25% 25%-30% 30%+2050%0%-5% 5%-1%ofResponses20205%12%Plug-InHybrid39% 40%42%14%Mild Hybrid Full Hybridn share – however, adoption ratesnsitive to government supportternative Powertrains by 202014%5%-20%No Government Support18%5%7%20%-25% 25%-30% 30%+12%20%50%0%-5% 5%-10%%ofResponses10%-15%4%15%-20%13%0%1%20%-25% 25%-30% 30%+Continued on page 25• Alternative powertrains will gain share; however, adoption rates areseen as extremely reliant on government support• Without government assistance, half of all respondents to the surveybelieve this segment will remain limited to 5 percent or less of theU.S. market by 2020• Alternatively, close to 60 percent respondents see penetration ofalternative powertrains approaching 10 percent or more of the U.S.market by 2020 with continued government support
  • 25 Booz & CompanyAlternative Powertrains:All Bets Are Off Without Continued Government Support (Continued)Continued on page 26• Moreover, greater adoption of this automobile segment will dependnot just on continued support but on the right kind of support. Trulydisruptive technologies such as plug-in vehicles will require a morebalanced approach to government assistance, such as infrastructuresupport for a national grid of rapid-cycle charging stations• The future level of government subsidies for consumers who buythese cars, along with support for companies working to advancebattery technology, may have an uncertain future in the currentfiscal environmentEven with government support,adoption rates of alternative-powertrain vehicles have fallenshort of expectations thus far,because the inherent cost differentialshave proven too expensive tobe recovered in traditional dutycycles and without a sizeable andsustained increase in fuel prices.
  • 26 Booz & CompanyMost Executives Are Bullish on Hybrids, Skeptical on Pure ElectricOf the various powertrain choices, respondents are most confidentabout the long-term prospects of full hybrid and mild hybridCurrent Confidence in Long-Term Prospects of Alternative Powertrains vs. 2011Expected Leading Alternative Powertrain in 2020OEMSupplierLess Confident More Confident25%12%12%2%4%10%Fuel CellElectricBatteryElectricPlug-InHybrid70%30%Full Hybrid65%35%Mild Hybrid45%55%Plug-In Hybrid29%71%Battery Electric25%75%Fuel Cell Electric39% 40%42%14%Mild Hybrid Full HybridAlternative powertrains will gain share – however, adoption ratesare seen as being extremely sensitive to government supportNo Government SupOf the various powertrain choices, respondents are most confidentabout the long-term prospects of full hybrid and mild hybridCurrent Confidence in Long-Term Prospects of Alternative Powertrains vs. 2011Expected Leading Alternative Powertrain in 2020OEMSupplierLess Confident More Confident25%12%12%2%4%10%Fuel CellElectricBatteryElectricPlug-InHybrid70%30%Full Hybrid65%35%Mild Hybrid45%55%Plug-In Hybrid29%71%Battery Electric25%75%Fuel Cell Electric39% 40%42%14%Mild Hybrid Full HybridAlternative powertrains will gain share – however, adoption ratesare seen as being extremely sensitive to government supportExpected U.S. Market Share of Alternative Powertrains by 2020Continued Government Support29%13% 14% 14%%ofResponsesNo Government Sup18%7%20%50%%ofResponsesContinued on page 27• Of the various powertrain choices, respondents are most confident inthe long-term prospects of full hybrid and mild hybrid and less sureabout the future prospects for plug-in, fuel-cell and battery-electric autos• 40 percent of OEMs and suppliers believe full hybrids will be theleading alternative to the conventional gas internal combustionengine in 2020• Outside of full hybrids: Suppliers were significantly more bullish on mild hybridsrelative to OEMs OEMs were more mixed in their response, with significantnumbers continuing to see a future for plug-in and electric vehicles
  • 27 Booz & CompanyCapacity Constraints• 34 percent of suppliers and 55 percent of OEMs say cuts in capacityhave left them constrained• Instead of ramping up to match the highest rate of recovery—theequivalent of recalibrating to the high-water mark—vehicle manu-facturers are maintaining a highly disciplined stance thus far. Somemanufacturers are operating with very low inventories; some reportas little as 15 to 20 days sales outstanding (DSO), which is far lowerthan peak levels of 100 DSOs experienced a few years agoContinued on page 28Position R&D Position PipInnovate55% of OEMs and 34% of Supplier respondents saythey are presently capacity constrainedCurrent Capacity SituationOf the OEM executiare either producingCurrent Production Situat41%Leaving opportunion the tableOEMSupplier55%34%36%51%15%9%Still have more capacitythan market demandsComfortable withcurrent capacityCapacityconstrained3%Aggressively usingpricing to win businesIn light of more advantageous supply-demand dynamics, OEMs andSuppliers describe themselves as being disciplined about pricingCurrent Pricing Approach – OEMsCurrent Pricing Approach19%53%24%Significantlyreducing useof incentivesHoldingthe line onincentivesOpportunisticallyincreasingincentives4%Significantlyincreasing useof incentivesThese results suggest adramatic departure frompre-recession behaviorwhere filling the factory wthe norm for many suppl7%arketing19%Sales FinancialPosition27%20%Engineering/R&DCostPositionProductPipeline43%38%28%CurrentProductPortfolio55%CustomerBase andRelationships58%Ability toInnovate, though product is important, customer mix, and to a lesser extent cost position,e in shaping outlooknal Factors Contributing to Positive 2012 Outlook – Supplierspliers that ranked a factor in their top 3plier respondents saynstrainedOf the OEM executives who responded to our survey, 92% say theyare either producing just enough or too few vehicles to satisfy demandCurrent Production Situation - OEMs41%Leaving opportunitieson the table51%Production in line withmarket demand8%Producingtoo much55%34%36%51%omfortable withurrent capacityCapacityconstrained39%58%supply-demand dynamics, OEMs andas being disciplined about pricingCurrent Pricing Approach – SuppliersThese results suggest adramatic departure frompre-recession behaviorwhere filling the factory wasnternaln, leadership,on
  • 28 Booz & CompanyCapacity Constraints (Continued)Continued on page 29• Similarly, suppliers have managed to regain some leverage over man-ufacturers, and they are loath to surrender that leverage. As overallvolume and orders rise, many suppliers are choosing to postponeinvesting in new fixed assets, opting instead to add overtime shiftsand other incremental approaches to optimize existing capacity. Asurvey by the Original Equipment Suppliers Association found that76 percent planned to run overtime shifts in the first quarter of 2012,and more than half of our respondents said they were constrainedby capacityThe industry clearly has expressed avery sober, collective understandingthat it needs to grow smartly, bynot letting capacity grow fasterthan natural market demand.
  • 29 Booz & CompanyCapacity Constraints (Continued)Continued on page 30• Maintaining tighter production discipline and lower inventories is akey aim for OEMs• 84 percent of OEMs cite simplifying build combinations as one ofthe three most effective strategies of maintaining tighter productionand lower inventories• Manufacturing flexibility is a close second at 73 percent22%2%Other Increased useof regionalwarehouses27%Centralizedproductionorders based onaggregate dataImprovedcommunicationwith dealers onlocal demand45% 47%ImproveddemandforecastingcapabilitiesSimplificationof buildcombinations84%73%ManufacturingflexibilityMaintaining tighter production discipline and lower inventories is a key aim for OEMs,and many are achieving this through simplification of build combinationsEffective Strategies for Maintaining Tighter Production and Lower Inventories – OEMsPercentage of OEMs that ranked a strategy in their top 3Approximately 60% of Supplier Respondents say they areactively looking at acquisitions – with expansion into newregions or segments the primary aimPursuing Acquisitions or Divestitures – Suppliers28%59%Acquisitions DivestituresPrimary Driver for Pursuing Acquisition(s)As demand rebounds, suppliers are working hard tostretch current capacity further and postpone committingto major capital investment until absolutely necessary—a tightrope act indeed, for getting this wrong could meanshutting down vehicle production.
  • 30 Booz & CompanyHolding the Line on Incentives and Pricingon the tablethan market demands current capacity constrained3%Aggressively usingpricing to win businesIn light of more advantageous supply-demand dynamics, OEMs andSuppliers describe themselves as being disciplined about pricingCurrent Pricing Approach – OEMsCurrent Pricing Approach19%53%24%Significantlyreducing useof incentivesHoldingthe line onincentivesOpportunisticallyincreasingincentives4%Significantlyincreasing useof incentivesThese results suggest adramatic departure frompre-recession behaviorwhere filling the factory wthe norm for many supplContinued on page 31• 77 percent of OEM respondents claim to be either holding the lineon incentives or significantly reducing them. According to Edmunds.com, sales incentives for March were down more than 3 percentfrom the prior month, and nearly 10 percent from March 2011,putting them at their lowest level for any March since 2002
  • 31 Booz & CompanyHolding the Line on Incentives and Pricing (Continued)Continued on page 323%Aggressively usingpricing to win business39%Opportunisticallyusing pricing as a leverto win program58%Maintaining strongpricing disciplinesupply-demand dynamics, OEMs andas being disciplined about pricingCurrent Pricing Approach – Suppliers19%nsOpportunisticallyincreasingincentives4%Significantlyincreasing useof incentivesThese results suggest adramatic departure frompre-recession behaviorwhere filling the factory wasthe norm for many suppliers• 58 percent of supplier respondents claim to be maintaining strongpricing discipline – providing evidence to suggest that the days ofsuppliers providing big price markdowns may be over. In interviews,suppliers who had complained for years about “taking it on thenose” now say the crisis has shifted the balance of power. There isno longer excess capacity on the supplier side; instead, suppliershave more pricing power. Those who are truly differentiated—interms of technology, manufacturing, or branding—report thatthey have more leverage now over manufacturers than they canremember having beforeGiven more advantageous supply/demand dynamics, both vehiclemanufacturers and suppliers saythey are being more disciplinedabout pricing.
  • 32 Booz & CompanyIndustry Consolidation2%Other Increased useof regionalwarehousesCentralizedproductionorders based onaggregate dataImprovedcommunicationwith dealers onlocal demandImproveddemandforecastingcapabilitiesScoManufacturingflexibilityApproximately 60% of Supplier Respondents say they areactively looking at acquisitions – with expansion into newregions or segments the primary aimPursuing Acquisitions or Divestitures – Suppliers28%59%Acquisitions DivestituresPrimary Driver for Pursuing Acquisition(s)22%16%5%Other Achieve greaterscale/reduce costsEnhancecapabilities57%Facilitate expansioninto new regionsor segmentsContinued on page 33• Over half of supplier respondents claim to be activelypursuing acquisitions• 57 percent of supplier respondents are looking at acqui-sitions as a means to facilitate expansion intonew regions and segmentsApproximately 60% of Supplier Respondents say they areactively looking at acquisitions – with expansion into newregions or segments the primary aimPursuing Acquisitions or Divestitures – Suppliers28%59%Acquisitions DivestituresPrimary Driver for Pursuing Acquisition(s)22%16%5%Other Achieve greaterscale/reduce costsEnhancecapabilities57%Facilitate expansioninto new regionsor segments
  • 33 Booz & CompanyRelative Competitive PositioningVery PoorPerformancePoor Performance Strong PerformancePerformance MatchesCompetitorsGood PerformanceVery PoorPerformancePoor Performance Strong PerformancePerformance MatchesCompetitorsGood Performance100%Compared to competitors, OEMs view cost position, customer experience,and financial position as their most significant areas of weaknessPerceived Performance Relative to Key Competitors – OEMsCustomerExperience/RelationshipCostPosition9%24%41%11%23%32%100%Suppliers meanwhile cite their sales / marketing capabilities and cost positionas their most significant areas of weaknessPerceived Performance Relative to Key Competitors – SuppliersMarketing CostPositionSalesHow effective is your company at translating customerneeds into product features? (Supplier only)24%2%4%11%54%26%5%CustomerBase andRelationship14%47%33%CurrentProductPortfolio8%55%31%6% 6%6%27%44%21%Engineering/R&D11%38%41%10%Ability toInnovate23%35%30%12%ProductPipeline11%49%30%10%36%48%13%2%2%FinancialPosition27%33%28%10%2%Engineering/R&D17%52%29%2%4%Sales6%42%43%9%Marketing11%50%30%9%CurrentProductPortfolio17%44%28%2%9%ProductPipeline15%48%26%2%9%RetailNetwork/Footprint9%39%37%15%Ability toInnovate8%50%31%2%9%FinancialPosition31%29%21%2%17%30%2%Continued on page 34• OEMs feel very strongly about their product position, asdemonstrated by the very strong scores on engineering/R&D,product pipeline, current product portfolio, and ability to innovate• OEMs believe that they still need to do significant work on customerexperience and improving the retail network footprint. One wayseveral manufacturers—including GM, Audi, and VW—may beaddressing this disconnect is through the appointment of verysenior executives to be responsible for the customer experience andto ensure a real alignment of the brand experience with customerinteractions
  • 34 Booz & CompanyRelative Competitive Positioning (Continued)Very PoorPerformancePoor Performance Strong PerformancePerformance MatchesCompetitorsGood PerformanceVery PoorPerformancePoor Performance Strong PerformancePerformance MatchesCompetitorsGood PerformanceCustomerExperience/RelationshipCostPosition9%11%100%Suppliers meanwhile cite their sales / marketing capabilities and cost positionas their most significant areas of weaknessPerceived Performance Relative to Key Competitors – SuppliersMarketing CostPositionSalesHow effective is your company at translating customerneeds into product features? (Supplier only)Effective at Translating Customer Needs Into Product Features56%21%2%Not Effective Minimally Effective Effective22%Industry Leader4%11%54%26%5%CustomerBase andRelationship14%47%33%CurrentProductPortfolio8%55%31%6% 6%6%27%44%21%Engineering/R&D11%38%41%10%Ability toInnovate23%35%30%12%ProductPipeline11%49%30%10%36%48%13%2%2%FinancialPosition27%33%28%10%2%Engineering/R&DSales6%Marketing11%CurrentProductPortfolioProductPipelineRetailNetwork/Footprint9%Ability toInnovate8%FinancialPosition2%Continued on page 35• Historically suppliers have not successfully communicated their valueproposition to customers. Not surprisingly they view their marketing,cost position, and sales capabilities as the most significant areas ofweakness• Achieving the low-cost position is key for comparable products, andabout a third of OEMs and a quarter of suppliers say they fall short
  • 35 Booz & CompanyRelative Competitive Positioning (Continued)Continued on page 36Respondents have a relatively favorable opinion in termsof how they see their companies stacking up against keycompetitors. Whether these responses are reflectiveof reality or overly optimistic will likely be tested,especially as the industry reaches its new normal. Ifcompanies are too bullish about their positions, it couldlead to a return of excess capacity across the industry.
  • 36 Booz & CompanyNew Technologies38% of OEM respondents say they intend to create theirown platform for integrating digitization and connectivityPlans for Integrating Digitization/Connectivity – OEMs17%14%7%Outsource toconsumerelectronicsplayersEstablisha flexibleplatform in aconsortiumAllow consumers/external systemto plug into car24%Allow suppliersto developplatformRespondents cite In-Vehicle Connectivity and Entertainmentas the technology most likely to see widespread adoptionover the next 5 yearsTechnologies Most Likely to See Widespread Adoptionin the Next Five YearsPercentage of respondents that ranked a technology in their top 320%42%48%52% 52%85%Other “Green”MaterialUsageActiveSafetySystemsComposite/Light(er)-weightmaterialsLEDLightingPassiveSafetySystemsIn-VehicleConnectivityandEntertainment1%38%Create ownplatform2011 will sadly be remembered for the devastating earthquake and tsunami in Japan,an event which impacted 55% of OEMsProduction Impact of the Japanese Earthquake and Tsunami34% 35%26%21%8%13%26%21%7%“Other”higheras a resshortagneedingvehicleOEMSupplier38% of OEM respondents say they intend to create theirown platform for integrating digitization and connectivityPlans for Integrating Digitization/Connectivity – OEMs17%14%7%Outsource toconsumerelectronicsplayersEstablisha flexibleplatform in aconsortiumAllow consumers/external systemto plug into car24%Allow suppliersto developplatformRespondents cite In-Vehicle Connectivity and Entertainmentas the technology most likely to see widespread adoptionover the next 5 yearsTechnologies Most Likely to See Widespread Adoptionin the Next Five YearsPercentage of respondents that ranked a technology in their top 320%42%48%52% 52%85%Other “Green”MaterialUsageActiveSafetySystemsComposite/Light(er)-weightmaterialsLEDLightingPassiveSafetySystemsIn-VehicleConnectivityandEntertainment1%38%Create ownplatform2011 will sadly be remembered for the devastating earthquake and tsunami in Japan,an event which impacted 55% of OEMsProduction Impact of the Japanese Earthquake and Tsunami35% “Other”OEMSupplierContinued on page 37• Respondents cite in-vehicle connectivity and entertainment as the tech-nology most likely to see widespread adoption over the next five years• Presently, OEMs are considering a wide range of alternatives forintegrating consumer digitization to the vehicle—38 percent ofOEM respondents say they intend to create their own digitizationand consumer connectivity platform. This may be a potentiallyrisky strategy, given that personal technology devices have farshorter product cycles than automobiles—witness the ubiquity ofGPS systems on mobile phones—and that a single family may havemultiple drivers who share multiple cars
  • 37 Booz & CompanyJapanese Tsunami ImpactOutsource toconsumerelectronicsplayersEstablisha flexibleplatform in aconsortiumAllow consumers/external systemto plug into carAllow suppliersto developplatformCreate ownplatform2011 will sadly be remembered for the devastating earthquake and tsunami in Japan,an event which impacted 55% of OEMsProduction Impact of the Japanese Earthquake and Tsunami34% 35%26%21%2%8%13%26%No impact -supply chainnot affectedNo impact - hadsafety stock4% 3%21%7%SignificantimpactOtherNo impact - avoidedinterruptions throughredundanciesSomeimpact“Other” includeshigher marginsas a result ofshortages andneeding to retrofitvehicles after saleOEMSupplier• The unfortunate events of the Japanese tsunami and floods inThailand brought home the limitations of a lean global supplychain when faced with “Black Swan” events• Of OEM respondents, 55 percent say their companies faced“some” or “significant” impact from the event. A significantnumber of suppliers, 42 percent, were also hurt. And thesenumbers would likely have been substantially higher were it notfor OEMs and suppliers having safety stock and redundancies inplace to mitigate the impact of this momentous eventContinued on page 38
  • 38 Booz & CompanyPreparing For the Next “Black Swan”16%15%8%0%6%Other No actiontakenBuiltredundanciesinto sourcingCreated neworganizationalstructure for riskmanagementMoved toincrease theuse of dualsourcing26%Moved tolocalizesupply baseIdentified risksand developedcontingencyplantsWorked withsuppliers oncontingencyplanningContingency planning is viewed as the most important action for preparing forsuch “Black Swan” events, but to date, action has laggedImportant Preparatory Steps for “Black Swan” Events and Steps Actually Taken by Respondents19%19%12%15%3% 4%Other No actiontakenCreated neworg. structure forrisk management45%Builtredundancyinto sourcingMoved toincrease theuse of dualsourcing52%29%Moved tolocalizesupply base26%59%42%Identified risksand developedcontingencyplants68%51%Worked withsuppliers oncontingencyplanning32% 31%Company Position in Value ChainLocation of Company Headquarters Primary Function of RespondentPosition of Respondent“Other” predominantly represents Dealers“Other” includes market research, manufacturingstrategy, risk management, and regional BU headsManagerCorporateStrategyOtherOEM1%Finance Company/Auto LeasingNorth AmericaEuropeAsia0%South AmericaEVP2%OtherC-LevelVPDirectorSupplyChainSupplier34%Sales andMarketing24%17%7%75%13%12%32%60%11%12%14%10%13%24%8%2%Dealer Development2% ITEngineering/PD14%FinanceManufacturing8%6%OtherBusinessDevelopmentIn Top 3 Important MeasuresAction TakenContinued on page 39• Respondents say they are seeking ways to better prepare for future“Black Swan” events• Actions taken to date seem highly appropriate given what happened.Both suppliers and manufacturers took steps to assess the damage,weigh future events and probabilities, and work with suppliers to bebetter prepared
  • 39 Booz & CompanyPreparing For the Next “Black Swan” (Continued)Overall, we wonder though whetherthe industry is sufficiently preparedfor the next “Black Swan” event,or whether these actions were aone-time response to a discreteevent. Risk prevention measuresare expensive and, in brutallycompetitive sectors, they eat into tightmargins. Accordingly, companiesin the industry must determine anappropriate level of investment inrisk-mitigation—low enough to becost effective, and high enough toease the risk of being surprised bythe next supply-chain disruption.
  • 40 Booz & CompanyDemographicsandMethodologyBooz & Company conducted its U.S. Automotive Industry Survey andConfidence Index—an annual study examining the current state of theU.S. automotive industry, the key challenges facing it, the attitudesof its executives, and what companies are doing in response—over afour-week period during February and March 2012.Two hundred and eight automotive executives from more than 75automotive vehicle manufacturers and suppliers participated in theonline survey. Thirty-two percent of the respondents were employees ofOEMs, and 68 percent work for auto parts suppliers. Three-quartersof the executives were from U.S.-based firms. More than 50 percent ofrespondents were VP level or above.Due to rounding, percentages used in all questions may not total 100percent. Where cited in the charts, certain questions were only asked ofOEM respondents and others just of suppliers.Booz & Company is a leading global management consulting firmfocused on serving and shaping the senior agenda of the world’sleading institutions. Our founder, Edwin Booz, launched the professionwhen he established the first management consulting firm in Chicago in1914. Today, we operate globally with more than 3,000 people in 60offices around the world.We believe passionately that essential advantage lies within and that a fewdifferentiating capabilities drive any organization’s identity and success.We work with our clients to discover and build those strengths andcapture the market opportunities where they can earn the right to win.We are a firm of practical strategists known for our functional expertise,industry foresight, and “sleeves rolled up” approach to working withour clients. To learn more about Booz & Company or to access itsthought leadership, visit booz.com. Our award-winning managementmagazine, strategy+business, is available at strategy-business.com.
  • © 2012 Booz & Company Inc.Booz & Company is a leading global management consultingfirm, helping the world’s top businesses, governments, andorganizations. Our founder, Edwin Booz, defined the professionwhen he established the first management consulting firm in 1914.Today, with more than 3,300 people in 59 offices around theworld, we bring foresight and knowledge, deep functionalexpertise, and a practical approach to building capabilities anddelivering real impact. We work closely with our clients to createand deliver essential advantage.For our management magazine strategy+business,visit www.strategy-business.com.Visit www.booz.com to learn more aboutBooz & Company.