Bypassing Detroit's Bumpy Road


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Lessons the Indian automotive industry can learn from Detroit's experience (2006)

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Bypassing Detroit's Bumpy Road

  1. 1. 10/18/2009… Date:09/11/2006 URL: Back Bypassing Detroit's bumpy road ACHAL RAGHAVAN As the Indian auto industry pushes forward with its aggressive global growth plans, there are lessons it can pick up from Detroit's current problems. ACHAL RAGHAVAN draws up some strategic directions for the domestic auto sector. During the first half of 2006, GM and Ford announced fairly bleak financial results for their US operations. Still making losses, GM continues to push forward on its turnaround plan, based mainly on huge structural cost reductions. GM's global market share is down to 13.8 per cent compared to 15.1 per cent last year — though GM attributes this mainly to an employee discount sale it held last year. Ford is also in the red, and has announced an accelerated "Way Forward" recovery programme. Mr Alan Mulally, formerly of Boeing, has taken over as the new CEO at Ford, replacing Mr Bill Ford, who retains his position as Executive Chairman. DaimlerChrysler, while making profits overall, is struggling to make progress with its Chrysler Group operations in the US, many years after the celebrated "merger of equals". In contrast, Toyota is continuing to make steady gains, while maintaining its healthy bottom-line. Hyundai is recovering lost ground. Geely, a Chinese manufacturer, has announced plans to launch a sub-$10,000 car by 2008, introducing thereby a new element to the competitive scenario. Barring a few die-hard conservatives, the typical American customer is no longer responding to the "Buy American" appeal. Successful automotive companies are shedding national identities ( "Japanese", for instance), and becoming truly global. Turnaround strategies As the Indian auto industry pushes forward with its aggressive global growth plans, are there some strategic lessons it can pick up from Detroit's current problems? Let us look at some of the issues, and the lessons to be learnt. On September 15, Ford Motor announced an accelerated "Way Forward" turnaround plan. The key features of this plan are: Cut operating costs by $5 billion by 2008 — mainly through eliminating 14,000 white-collar jobs, offering buyout packages (VRS schemes) for all workers, and competitive operating agreements at 30 plants. Sell/close all Automotive Component Holdings (ACH) plants by 2008. These are plants that Ford had taken over from component Visteon last year, to bail it out of its own financial difficulties.… 1/4
  2. 2. 10/18/2009… Ironically, Ford had spun Visteon off as an independent entity in 2000 — much like GM's move with Delphi. Renew/refresh 70 per cent of Ford's North American product line-up by 2008. Reduce production capacity by 26 per cent by 2008. Ford has cited rising gasoline prices, lower truck (pick-up) sales, and increases in cost of inputs such as steel as the reasons for its current state. There are no surprises in this list. Gasoline prices go up, sales of gas-guzzlers go down, and there is a scramble to develop and launch more sensible, fuel-efficient vehicles. A look at the Ford turnaround strategy tells us that all the moves are reactive — cut costs, close plants, reduce capacity, and "refresh" the product line. GM's own turnaround strategy is not very different. The winning strategy To win in today's highly competitive automotive market, the global player needs to hit upon a game- plan which is a combination of the following strategies: Exciting new vehicles, introduced in rapid succession, that draw the customer to the showroom. A motivated dealer network that makes the purchasing experience a pleasure, and after-sales service that is world-class. Consistent on-road performance that ensures the customer's brand loyalty and repeat purchase. A lifetime `cost versus value' equation that beats every other brand in the market. Operational excellence of the highest order across all functions in the value chain, which gives the car manufacturer a definitive cost advantage. Stated in such simple terms, this does not seem to be an impossible task. After all, this is what all good companies are expected to do. But automotive history has shown that very few companies manage to get this combination just right, and maintain it consistently over a period of time. The key differentiator This brings us to new product development, which is really where market leaders such as Toyota and Honda score over Detroit. They seem to read market shifts and preferences way ahead of everyone else, and proactively roll out new products that hit the "sweet spot" repeatedly, and bang on time. What does this mean for the industry? "Operational excellence" — in terms of JIT, lean manufacturing, TQM, TPM, zero defect, Six Sigma, et al — now stands deconstructed as a set of techniques and disciplines that can be learnt (or copied). But really knowing what the customer wants — that critical core competence — is beginning to look like a fine art.… 2/4
  3. 3. 10/18/2009… The successful auto company uses its engineering and operational expertise to satisfy the customer's emerging tastes and needs before someone else does. Given that design and development of a new vehicle platform is still a 12-24 month exercise, reading the shifts in market tastes well ahead of anybody else becomes critical. Some strategic directions The good news is that the players from India are still at a very early stage of their evolution, and can, therefore, learn from the experience of others. Based on what has been happening in the US over the last few decades, we can draw up some clear strategic directions for the domestic auto industry: Enhance the ability to get close to the customer on a continuous basis, and really understand where his/her preferences are headed. The key is to spot these shifts in time. Invest in focussed R&D and engineering capabilities that are fast, flexible and responsive to market needs for new cars. For long, Detroit engineers thought that they could tell customers what they really needed. Learn from that experience. Continue to work on innovative cross-functional processes to compress the "time-to-market". Re-examine costs on a continuous basis, and evaluate every fixed/semi-fixed cost carefully. Legacy costs, as GM and Ford have shown, are virtually impossible to shake off. Look at white-collar productivity with the same intensity as you would examine the shop-floor. Partner your component suppliers and treat them as "almost equals", so that they develop a sense of ownership of your success and go that extra mile for you. Use their accumulated expertise in cost-effective design. Help them eliminate waste, and take a share of the resultant cost reductions. Take a hard look at the strategy of creating wholly-owned components/systems suppliers. Seeing what has happened to Delphi and Visteon, is it really feasible for such subsidiary companies to supply anything substantive to their parent's competitors? Do not take your eyes off the Indian market, as you go on your globalisation drive. Remember how Ford and GM lost market share in their own home turf — the US. The customer will go where he gets better value for money, regardless of the perceived nationality of the car company. "Low cost" is giving way to "best value". Seek continuous inputs from the customer to understand this "value" — and deliver it ahead of others.… 3/4
  4. 4. 10/18/2009… (The author is a strategy and business excellence consultant based in Bangalore. He was formerly Executive Director, Ingersoll-Rand (India). He can be contacted at © Copyright 2000 - 2009 The Hindu Business Line… 4/4