For the last 10 years, IRN has been very vocal regarding the ongoing decline in market share and the overall competitive strength of the traditional Big Three. We are somewhat amazed that it has only been in the last year that the popular press has begun to emphasize the increasing fragility of the domestic automotive manufacturers. This declining position is not a new phenomenon. As the accompanying chart illustrates, there has been no growth trend for the traditional Big Three manufacturers since the early 1960’s: Most industry participants who acknowledge this problem only began to notice the competitive difficulties of their Big Three customers in the early to late 1990’s, primarily because of the transformation of the light truck segment that fueled the profits of the Big Three throughout that period. The problem was that the Big Three were treading water in terms of overall production levels while simultaneously hemorrhaging in market share. In 1967, for example, the Big Three produced approximately 10 million vehicles, which represented a 95% market share. In 2000, the Big Three still produced 10 million vehicles, but this now only represented a 57% market share. And this position has continued to deteriorate over the last three years.
Why the Japanese Value Chain Is Winning
While there are many theories as to why the Japanese auto manufacturers have begun to dominate this market, we believe there are five key reasons:
Consistency of Vision and Execution. Talk to any successful Japanese OEM, and they will tell you that they have 4 to 8 core philosophies that drive everything they do. From the president of the company to a shop floor operator, everyone operates off the same fundamental principles. Harvard’s Michael Porter refers to this as “interlocking fit”. The more aligned your employees are, the deeper your competitive advantage. During a recent conversation with a Japanese OEM, he pointed out that their business-planning group is focused on any issues more than five years out. Activities in less than five years are part of their manufacturing execution plan. How many domestic OEMs or suppliers have enough stability in their approach to their business that they could start their planning activities five years out?
A Focus On Cost Vs. Price. One of the biggest advantages of the Japanese is that they focus all of their attention on reducing their overall costs. While there has been some progress in this arena, in most instances, the Big Three focus on reducing price. Profits aren’t high enough in a given year or a particular vehicle is not performing as planned, so an intensive effort is mounted to reduce the cost (normally through decontenting or getting price concessions on purchased components). As a result, the Big Three cost reduction efforts are event driven vs. the systemic cost reduction approach of their Japanese competitors. This is why, over a sustained period of time, the gap gets worse.
An Understanding That the Cost of a Vehicle is Primarily Set in the Design Phase. Related to the previous point, the Japanese clearly understand that once a vehicle or component has been designed and is in production, there is little anyone can do to impact the true cost of the vehicle or part. That is why so much energy is spent on looking for big hit cost reductions at the start of a new program (e.g., 20-30%) vs. the incremental improvements that can be achieved after a program is launched (e.g., 3-5%).
Dominance of Engineering and Manufacturing. Depending upon the company, either engineering or manufacturing drive the key decisions (or these functions are so closely aligned it doesn’t matter which one leads) in Japanese firms. Most of the rest of the functions within the company, such as sales or finance, are viewed as supporting roles to the core functions of engineering or manufacturing. As a result, product decisions are rarely sacrificed for short-term financial gain and product design and execution are much more integrated and seamless. This power equation between manufacturing/engineering and the rest of the company are very different between the Japanese and most Western firms.
It’s the Product, Stupid. The overall key to the Japanese success in the North American market in the last 10 years has been their ability to design product the American consumer wants to buy (and buy again because of their experiencing few quality problems). While there have been a few product missteps, the Japanese have been able to consistently come out with mainstream and niche vehicles that continue to gain market share. One of the reasons they do this so consistently is the effectiveness of their program launch process and their ability to provide a high degree of product customization at mass market pricing. Another reason is that most of the Japanese manufacturers have done an extremely good job of integrating their entire value chain, so they are getting continuous improvement and design feedback from their customers, suppliers, and dealers. This allows them to make mid-term adjustments when necessary and to design new vehicles that clearly appeal to their target audience.
How Do the Traditional Big Three Regain Competitive Advantage?
While things have been pretty depressing for the Big Three over the last five years, there are things each company can do to improve their likelihood of survival:
Ford: Stabilize Leadership. The biggest issue at Ford is that there is no consistency in vision or execution. The existing management team is clearly not all on the same page, so making the current situation better is virtually impossible. It is less an issue of who is in charge than it is that somebody is in charge. Until this uncertainty at the top is resolved, little progress can be made.
Chrysler: It’s the Product, Stupid (see previous Japanese success criteria). While Chrysler still clearly needs to improve its cost structure, what drove its success (and why Daimler originally bought the company) is that it consistently produced vehicles the American consumer wanted to buy. Better, more tightly focused products are the key to Chrysler’s future.
General Motors: Develop Listening Skills. There is no question that GM has the most stable leadership and vision of any of the traditional Big Three. It has made significant progress in reducing its cost structure and using this as a method to stabilize and modestly improve market position. In the past year, however, we have become concerned that GM’s traditional organizational arrogance is rearing its ugly head again and that they are underestimating how much they still have to do to remain successful in this market. We strongly encourage GM to deepen their connection to their end customers and develop more strategic, two-way relationships with their key suppliers.
The next five years will determine whether the traditional Big Three can stabilize, and hopefully improve, its current position.