Auto: Not the Only One in Deep Stuff

Let’s face it: Nowadays, things in the auto industry seem to be about as appealing as a series of periodontal treatments by someone with the dental inclinations of Laurence Olivier's character in Marathon Man.

Let’s face it: Nowadays, things in the auto industry seem to be about as appealing as a series of periodontal treatments by someone with the dental inclinations of Laurence Olivier's character in Marathon Man.

So it comes as a surprise that in a recent article in Strategy + Business (a publication that you ought to read, if you don’t already) titled “Six Industries in Search of Survival,” auto is not one of the six.

That deserves repeating: Auto is not among the six industries in search of survival.

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Well, that’s not entirely true. That’s because the people at Booz & Company, who publish the magazine and who did the research, wrap auto into a larger category, Engineered Products and Services. Still, not having it called out in and of itself is rather refreshing.

So, with a bit of schadenfreude, here’s what they discovered, with a bit of auto-related commentary:

Chemicals: “Demand is now rising on average, but only from severely depressed levels—in some cases, demand had declined by 40%.” Hmm. . .sort of like auto. “Simply put, there is far too much capacity in chemicals to support viable margins, and new supply from cost-advantaged companies around the world continues to come on line.” Again, auto-like: new entrants to the market, as well as continued global overcapacity. “Now more than ever, leading firms must aggressively take action to enhance those parts of their companies that are capable of generating superior returns, and sell off or close down those that never will.” Arguably, companies like GM have done this, so that’s a bright spot.

Retail Banking: “. . .the focus of banks will shift from acquiring new customers to building deeper relationships with existing ones.” This is something that car companies need to pay attention to. “Additionally, to succeed over the long term, banks must bring down operational costs—not just by capturing traditional back-office savings but also by taking a hard look at distribution costs.” Dealers are the ones that create relations in auto, and the trimming of dealerships, which can represent distribution costs, can have a deleterious affect on relationships.

Consumer Packaged Goods: “Simply put, today’s supply chains were built on yesterday’s blueprints, in a world where low energy and transportation costs, cheap labor, relatively inexpensive raw materials, and scarce environmental regulations were fixed assumptions. The supply chain of the future, by contrast, will require capabilities to make it leaner, greener, and more tailored to manage increasing fragmentation and complexity.” Auto companies have been forcing suppliers to meet “world prices,” which is code for off-shoring production. That may not be particularly viable going forward.

Engineered Products and Services: You may recall that there has long been a zeal among North American and European auto OEMs to outsource and to build factories in places like China. The other shoe is beginning to drop: “Newly industrialized giants on the receiving end of the outsourcing trend have been developing their engineering and services skills for years. Now they are poised to aggressively compete with their Western counterparts.” The phrase “reap what you sow” comes to mind.

Oil and Gas: “. . .demand for gasoline will also remain under pressure in the coming years as mandates for biofuels, the popularity of hybrid and diesel vehicles, and perhaps the use of natural gas in fleets and elsewhere exacerbate supply pressures.” Having recently filled up my tank, I’m not too sympathetic.

Technology: The same sort of outsourcing story. Western brands go to places like China and end up with companies that will compete with them: “Ultimately, these firms will begin to go well beyond manufactured goods for other companies to brand, and create their own brands at highly competitive price points.” Think Acer in PCs and Vizio in flat panel TVs.

As editor Karen Henrie writes in her introduction to the article: “although most companies recognize that they must transform to survive and succeed in the future, they are ill equipped to do so. Many lack the capabilities they will need; most are not properly structured to respond to these changes as they unfold.”

Worse yet, I’d argue, is that many of them don’t know that they are insufficiently staffed to get the job done and so they try to replicate what they’ve done in the past.