On Strategy: Survey Says...

Columns From: 6/1/2007 Automotive Design & Production, , partner from Roland Berger Strategy Consultants , , Partner from Roland Berger Strategy Consultants

A global survey of suppliers shows little optimism—to put it mildly.

A recent survey of 130 senior executives in the global automotive supplier industry by Roland Berger and SupplierBusiness.com has revealed key insights into the status quo and major trends in the supplier industry, while confirming that pressures on suppliers will only increase in the short term. For example, most automotive supplier executives believe 2007 will be even harder than 2006. Expectations differ from region to region, however. European suppliers are less pessimistic about future conditions in the industry than their North American rivals and—surprisingly—also than Asian suppliers. Another finding is that suppliers with revenues of under USD 1-billion seem to be more optimistic than their larger competitors.

As expected, executives are worried most about further increases in pressure on prices, the unclear outlook for raw material prices, and the accelerating shift toward low-cost/low-tech components. Compared to last year, suppliers in North America and Europe appear to be much less concerned about low production volumes. Rather, quality issues are increasing in importance, as is the pressure to innovate. As for the impact on industry structure, suppliers expect that this additional market pressure will further accelerate industry consolidation. 76% of the executives anticipate the ongoing consolidation in their industry to continue.


Priorities, Relationships, Globalization

Asked about their key management priorities for 2007, executives gave absolute precedence to reducing overhead costs, followed by moves to increase low-cost country sourcing and improve launch management for new products. Furthermore, specifically improving R&D efficiency is another key issue cited by 68% of supplier executives. Increased outsourcing of development activities to low cost countries looks to be an increasingly attractive alternative as a result of these priorities. However, such outsourcing cannot happen overnight.

Business relationships between suppliers and OEMs will not improve in 2007. 36% of executives believe these relationships will deteriorate further, while 45% expect the quality of their relationships to stay the same as in 2006. Compared to last year’s survey, a significant number of suppliers expect other aspects than just unit prices—especially tooling payment terms and intellectual property issues—to play an important role in 2007 negotiations. However, price and related issues still remain the most important areas of contention, by far.

The automotive industry will remain a key driver of globalization. 80% of executives believe that the pace of globalization will accelerate. India has dramatically gained ground and will receive top investment priority over the next 12 months. This is because many suppliers have already built up a Chinese presence in recent years but are not yet on the ground in India. Russia, too, will attract greater attention from the supplier community, though still not as great as China.


Tech trends

The introduction of new technologies and innovations will likewise gather speed in 2007—at least in the opinion of 43% of our survey participants. Fuel injection technology/treatment of emissions (84%) and active vehicle safety (82%) are considered the two most important technology areas in the medium to long term. 2007 will see increased global acceptance of fuel-efficient engine technologies. Asked about the future of diesel engines outside Europe in the next five years, 85% of suppliers’ executives said they expect an increase in both acceptance and volumes in North America and Asia.

At the same time, however, enthusiasm about hybrid engines is easing slightly. Nearly half of the respondent suppliers believe that hybrids will still have a global market share of less than 3% by 2010, up from only 37% in 2006. The share of optimists who predict a greater than 5% share has fallen from 20% to 15% in the past year.