automobile industry

The Automotive Industry

Growth Opportunities For Minority-Owned Businesses

MED Week 2001

This Report Was Written And Produced For:

By:By:By:By:

The Asaba Group, Inc.Lakeview Office Park www.asabagroup.com214 North Main Street, Suite 207 Tel. 508.655.8100Natick, MA 01760 Fax. 508.655.1955

U.S. Department of Commerce

Minority Business Development Agency

Ronald N. Langston

National Director

This analysis on the automotive industry was prepared by The Asaba Group and is the Group’s interpretation of the economic trends of the automotive industry. The study is not a Commerce Department report, but was developed for the sole purpose of discussion amongst industry experts. The conclusion and analysis of the report do not necessarily reflect the views of the U.S. government.

Express Gratitude And Acknowledgement ForContributions To The Project:

Minority BusinessDevelopment AgencyRonald N. Langston

General MotorsDavid AllenBob KuftaGarrett Quarles

Daimler ChryslerJethro Joseph

Ford Motor CompanyRenaldo JensenElliot Hall

Johnson Controls, Inc.Barima Opong-OwusuReginald LaytonBridgewater Interiors, Inc.Ron Hall

VitecBill Pickard

Saturn Electronics and EngineeringWally Tsuha

Piston AutomotiveVinnie Johnson

Content

Project Overview 3-6

Industry Overview 7-13

Supply Chain Realities 14-22

Competitive Insights/Implications 23-27

Growth Strategies 28-47

Joint Ventures/Alliances 48-56

4

Project Charter

It should place emphasis on the following:

� Industry trends and issues with the industry

� Market opportunities for growth

� Growth strategies and critical success factors

� Address current issues/challenges to Minority Business growth

The Asaba Group Retained To Assist InIdentifying Growth Opportunities And Strategy

Develop A Report That Identifies The Opportunities ForMinority-Owned Businesses In The Automotive Industry

5

Project Approach

IndustryOverview

Supply Chain Realities

Competitive Insights/Implications

Growth Opportunities

Key Strategies/Tacticals

6

Executive Summary

Automotive Industry experiencing a slowdown in sales from record sales year in 2000

� Industry analysts forecast continued sales decline through 2003

Slowdown has created a difficult business environment for small to mid-sized businesses

� Minority suppliers not immune to these problems

Evolving Supply Chain roles present challenges to MBE’s in Tier I positions� Higher degree of cost surveillance, higher demands for investment in innovation and

manufacturing

� Some MBE’s will have to focus on Tier I and II Suppliers to achieve sustainable growth

� Tier I Suppliers beginning to push cost pressures down the Supply Chain

Operating risks associated with industry sales slowdown can be reduced through diversification

� By platform, customer group and targeting Tier I Suppliers

Growth opportunities identified in different areas of the Supply Chain� Will require focused strategies to achieve sustainable value creation

Content







8

Key Highlights

Industry experiencing a slowdown in sales from a weakening economy� Auto manufacturers sustaining 16 Million sales run rate by increasing marketing expenses

� Rising fuel prices and and unemployment weakening demand for new vehicle purchases

� Industry analysts forecast continued sales decline through 2003

U.S. Automotive market seeing increased competition from foreignmanufacturers

� Domestic Automotive manufacturers losing share to foreign manufacturers– Historical profit centers, Minivans, Pickups and SUVs, face eroding profits

Automotive manufacturers cutting production levels in response to slowing sales and reducing fixed costs

� DaimlerChrysler announcing plans for 40% cost reduction over next 5 years– Plans 15% cut in overall production level in 2001 compared to 2000

� GM and Ford have announced company-wide cost reduction between 10% and 16%

� Production plans cut about 15% on average compared to 2000

Diversified conglomerates continue to divest automotive operations � Textron, Inc. – divest its automotive business in the wake of a slowdown

� Small to mid-size businesses experiencing difficulty in this environment

9

Automotive Sales On A Downward Trend After Record Year In 2000

6.0

6.5

7.0

7.5

8.0

2000 2001

January to May Sales

Units(MM)

SOURCE: Automotive News, Asaba Group Analysis, Autopolis, Merrill Lynch

14.0

15.0

16.0

17.0

18.0

2000 2001E

Units(MM)

Annual Sales

% Change(5.6%)

% Change(8.0%)

17.4 MM

16.0 MM7.1 MM

7.5 MM

Strong Impact On Industry Performance

10

Current Year Sales Maintained By Increased Levels Of Marketing Incentives

SOURCE: Lehman Brothers, Merrill Lynch, Automotive News, Asaba Group Analysis

16.4

15.3

16.0

17.0

17.2

15.8

17.0

15.0

15.5

16.0

16.5

17.0

17.5

Nov'00

Dec'00

Jan'01

Feb'01

Mar'01

Apr'01

May'01

Seasonally AdjustedAnnual Rate (SAAR)

Units (MM)

1,341

1,4171,367

1,462

1,7621,825

1,931

1,200

1,400

1,600

1,800

2,000

Nov'00

Dec'00

Jan'01

Feb'01

Mar'01

Apr'01

May'01

$/Vehicle

Average Incentives/Vehicle

11

Existing Inventories Have Dropped In Response To Incentives And Reduction In Production

78

89 8995

70 6875

0

20

40

60

80

100

Nov-00

Dec-00

Jan-01

Feb-01

Mar-01

Apr-01

May-01

Big 3 Inventories (Days Supply)

Days Inventory

SOURCE: Automotive News, Asaba Group Analysis

Units(000)

Big 3 Domestic Production

60Days

687

588 560620

837

761

920

0

200

400

600

800

1,000

Nov-00

Dec-00

Jan-01

Feb-01

Mar-01

Apr-01

May-01

Implications For Minority Suppliers?

12

15.5 MM

16.9 MM

17.4 MM

16.0 MM

14

16

18

1999 2000 2001E 2002E

Industry Slowdown Forecasted For 2001 And 2002

Vehicle Units (MM)

SOURCE: Merrill Lynch, Automotive News, Asaba Group Assessment

How Will This Affect Minority Suppliers?

13

Industry Slowdown Creates A Difficult Business Environment For Small And Mid-Sized Companies Example: Trucking And Logistics Companies Have Been Vulnerable

$0.28$0.32

$0.00

$0.10

$0.20

$0.30

$0.40

4Q1999 1Q2001

$1.27

$1.60$1.45

$0.00

$0.50

$1.00

$1.50

$2.00

4Q1999 4Q2000 4Q2001

WagesPerMile

DieselFuel

Prices

Rising Fuel Prices

Rising Wages

295

601700

1,300

1,000

1,150

0

200

400

600

800

1,000

1,200

1,400

4Q1999 1Q2000 2Q2000 3Q2000 4Q2000 1Q2001

Trucking Company Failures

Minority Suppliers Not Immune To These PressuresSOURCE: A.G. Edwards, Wall Street Journal

Number of Company Failures

Content







15

Key Highlights

Automotive Manufacturers (OEM’s) declining profitability will increase focus on cost reduction

� Tier One Suppliers remain under price pressure and cost surveillance from OEM's

� Grow in importance through innovation and manufacturing large modules and systems

Manufacturers reducing costs and levels of investment capital (Fixed Costs)

� Reducing number of car platforms

� Outsourcing more to large suppliers (Product, Technology Development, Product Testing, etc.)

� Driving investment efficiency with Facilities and Tooling related decisions

Tier One Suppliers that survive industry consolidation will drive for cost reduction at lower tiers

� Most planning rationalization of supply base (Tier II and III Suppliers)

� Minority Suppliers need to focus efforts on big suppliers to achieve sustainable growth

16

Auto Manufacturers Have Experienced Declining ProfitabilityLikely To Continue With Declining Sales And Overcapacity

2.2%

4.5%

2.2%2.2%

3.5%

4.2%

5.7%

3.4%

4.5%4.5%

3.2%

2.3%

3.4%

3.9%

3.5%

3.8%

4.3%

3.6%

4.3%

4.9%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

1997 1998 1999 2000

SOURCE: Valueline Investment Report

Net Profit Margin %

Cost Surveillance/Squeeze Will Continue On Tier I Suppliers

17

27

1717

8

24

17

7

15

0

10

20

30

1997 2004

Automotive Manufacturers Continue To Rationalize Car Platforms

Implications

� OEM's achieve greater part/system commonality– Increases economics of scale

� Limits OEM's ability to achieve huge profit differentiation

� Increases dependency of few large suppliers

Number of Platforms

SOURCE: Standard & Poor’s, The Office for the Study of Automotive Transportation at University of Michigan, Asaba Group Analysis

Increase Concentration Of Purchasing With Larger Suppliers

18

Automotive Manufacturers Moving Large Chunks Of The Vehicle To Fewer Suppliers

General Motors announces outsourcing of complete interiors business

� A single supplier for each vehicle program

� Suppliers (System Integrators) must be able to design, engineer, and manage all other

suppliers and components

� Suppliers are expected to identify minority supplier partnerships and content in order to be

considered

� Key System Integrators are:

Visteon, Delphi, Magna, Faurecia, Johnson Controls, Inc., Lear and Venture

Minority Suppliers Should Understand These Dynamics

19

Large Automotive Suppliers Getting Bigger To Meet Demands Of OEM'sDriven By Continued Industry Consolidation And Divestitures

Top 10 Suppliers (Revenue)

1. Delphi ($25 B)

2. Visteon (18.5 B)

3. Dana ($9.5 B)

4. Lear ($14 B)

5. Johnson Controls ($11.8 B)

6. Magna ($10.1 B)

7. Bosch ($17.8 B)

8. TRW ($11 B)

9. Denso ($16.4 B)

10. Eaton ($4.0 B)

54.2B

83.5B

0

30

60

90

1994 2000

Revenue ($ B)

SOURCE: Automotive News

CAGR94-00

7.9%

Top 10 North American Auto Suppliers

20

The Consolidation Has Led To 3 Or 4 Global Suppliers For Each Major System

Engine/Transmission/Torque Management

� Bosch

� Lucas

� Denso

� Delphi

Cockpit Systems/Driver Interfaces/Interior Trim

� Johnson Controls, Inc

� Faurecia

� Lear

Rolling Chassis/Drive Train

� Dana

� Magna

� Thyssenkrupp

� Delphi

Corner Modules and HVAC

� Delphi

� Visteon

� Valeo

� Behr

Minority Suppliers Must Focus On These Suppliers For Growth

21

Tier One Suppliers Beginning To RationalizeTheir Supply Base

4,500

2,500

0

2,500

5,000

Current Planned

Delphi Spend: $13.5 B ArvinMeritor Spend: $8.1 B American Axle & Mfg Spend: $4.7 B

# of DirectSuppliers

2,000

1,000

0

750

1,500

2,250

Current Planned

# of DirectSuppliers 330

230

0

200

400

Current Planned

# of DirectSuppliers

SOURCE: The Economist Intelligence Unit Automotive Report, PricewaterhouseCoopers, Automotive News

22

Large Suppliers Bear Increased Responsibility For Cost Reductions

Most will cut costs by 20 to 30%

Will drive shake-out and consolidation in the lower tiers

Capturing effective responsibility for technology, design, manufacturing and sourcing choices

Pushing standardisation across customers and avoiding being backed into supplying the ‘tail’ of low-volume, non-standard products

Both cutting cost and investing in capabilities

Content







24

Key Highlights

Top line risks can be mitigated by revenue diversification• Focus on high volume platforms, i.e., greater than 500,000 units

– Ford CW170 or VW A4

• Diversify revenues by customer group; sales incentives may be masking demand weakness

– Domestic Manufacturers versus Imports

• Diversification can be achieve by targeting Tier One Suppliers

Identified growth initiatives must be articulated by value chain roles• Tiering nomenclature not adequate for strategic decision-making

• Gross profit dollars (value added) lies with component specialist and system / module

suppliers

Geographic scope of supplier competition can be defined by an optimisation• Trade-off between product-specific cost and freight

Three growth paths are available to Minority Suppliers• Largely independent of commodity and industry dynamics

– Low cost

– New categories/markets

– Solutions provider

25

Big 3 Manufacturers Sales Declining While Imports GrowingSignificant Revenue Risks Associated With Big 3 Customer Concentration

Big 3

4.5 MM

Big 3

5.1 MM

Imports

2.6 MM

Imports

2.4 MM

3

4

5

6

7

8

Jan to May 2000 Jan to May 2001

% Change00-01

(5.6%)

4.2%

(10.4%)

January To May Light Vehicle Sales


VehicleUnits (MM)

7.5 MM7.1 MM

Minority Suppliers Must Diversify Revenues By Reducing Revenue Concentration

26

Minority Suppliers Can Reduce Industry Volume Sensitivity By Focusing On High Volume Platforms

Top 20 Passenger Car Platforms, 1999

0200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,0001,800,0002,000,000

VW A4Honda V

SOVWA00

/A04GM T30

00Toyo

ta 56

0TVW B5

Toyota

414T

Honda Acc

ordGM S42

00GM W

bodyRen

ault 6

4Ren

ault 6

5GM N bodyFord BE91

Ford CW170

Fiat B

Ford DN 101

GlobalVolume

SOURCE: Autopolis

Minority Suppliers Must TargetHigh Volume Platforms To Be Successful

27

Reduction Of Top Line Revenue Risks Can Be Achieved By Targeting Tier One Suppliers

Insights

� Drives for part commonality across customers and region

� Company focuses on being a component/technical specialist

– Innovation to drive growth and margin

31%Ford

68%Americas

19%DaimlerChrysler

18%Europe

13%GM

14%Asia

4% VW

27%Others

0%

25%

50%

75%

100%

Auto Customer Region

6% Toyota

$3 B $3 B

SOURCE: Company Reports/Interviews

Example: Borg-Warner Is a Global Supplier of Components/Assembliesfor Power Train Applications

MBE's Must Seek To Do Business With These Companies

Content







29

Three Identified Growth Strategies

Lowest Cost and Focus on High “Doing MoreBest Value for Growth Application for Customers”

Key Commodities

Low CostNew Growth Categories/

Markets

Solutions Provider

Each Requires A Different Strategic Orientation

Independent of Commodity and Industry Dynamics

30

Each Requires Unique Focus And Capabilities

� Injection molding

� Metal processing

� Cut & Sew/build-to-print/shoot & ship

Process/Commodity Examples

� Economies of scale

� Understanding cost drivers (ABC)

Basis of Success

� Rollup consolidation

� LBO/Acquisitions

Growth Approach/Tacticals

� Light materials

� Electronic applications

� Navigation Systems

� Engineering and design

� Application development

� Low-cost/flexible manufacturing

� Build compatibility

– JV/Alliance

– M&A

� Automotive testing (non-production)

� Subsystem assembly/development

� IT/Sequencing operations

� Commodity management

� Lower transaction cost

– Outsourced operations

� Extend geographic reach

� M&A

� JV

Low CostCommodity

Producer

New Growth Categories/

Markets

Solutions Provider

Low Cost Strategy

32

Focused On Low Value Added Commodity Group And Processes

Global Global % Change NA Sales NA Sales % ChangeSales 1999 Sales 2000 1999-2000 1999 2000 1999-2000

Supplier ($MM) ($MM) ($MM) ($MM) ($MM) ($MM)

Lacks Enterprises 255 255 0.00% 222 219 -1.35%

Becker Group 300 235 -21.67% 300 235 -21.67%

Carlisle Engineered 315 303 -3.81% 312 294 -5.77%Products Inc.

Plastech Engineered 300 300 0.00% 300 300 0.00%Products Inc.

American Showa Inc. 736 976 32.61% 300 351 17.00%

Key Plastics, LLC 551 576 4.54% 358 380 6.15%

Average Size 410 441 7.65% 299 297 -0.73%

Plastic Processing (Injection Molding)


Little or no growth in North America• Players stole share or grew by acquisition• Global growth largely acquisitions

33

Same Observation With Metal Processing –Machining And Stampings



Global Metal Technologies 225 228 1.33% 214 217 1.40%

Pilot Industries Inc. 300 260 -13.33% 246 237 -3.66%

Gibbs Die Casting 280 340 21.43% 252 282 11.90%

Talon Auto Group 290 300 3.45% 276 285 3.26%

Ogihara America 363 369 1.65% 289 295 2.08%

Harvard Industries 318 318 0.00% 312 312 0.00%

Amcast Automotive 451 500 10.86% 271 315 16.24%

Mayflower Vehicle Systems 650 540 -16.92% 406 335 -17.49%

Citation Corp. 395 409 3.54% 391 405 3.58%

Shiloh Industries 535 630 17.76% 535 630 17.76%

Average Size 381 389 2.29% 319 331 3.79%


Critical Mass Appears To Be $300 MM To $400 MM

34

Opportunity In Commodity Groups With High Degree Of Fragmentation

0%

20%

40%

60%

80%

100%

Plastic Processing Revenues Metal Works Revenues

Plastics and Metal Processing Highly Fragmented and Captive to Auto Industry

(1) Includes Injection, Extrusion and Blow Molding Suppliers (2) Includes Machinery, Welding and Stamping Suppliers

Top 3Suppliers

$310 MM42.9%

Top 3Suppliers

$562 MM51.2%

$723 MM $1,099 MM

20+

$413 MM

19+

$537 MM

AverageRevenue/Company

$187 MM

$28.3 MM

AverageRevenue/Company

$103 MM

$20.7 MM

(1) (2)

SOURCE: Data based on a sample of 210 minority suppliers to major Automotive Manufacturers; Asaba Group Analysis

Consolidation/Rollup Opportunity to Attain Required Critical Mass for Cost Competitiveness

35

Heartland Industrial Partners Provides A Model From Consolidation And Tier II Growth

Heartland Industrial Partners Led by David Stockman (former OMB Director)� Focus on becoming a “Tier II Titan”

� Based on two platforms: Metals and Interiors

� Each platform expected to grow to $6 Billion within six years

Metals PlatformDesigner and supplier of low cost metal formed assembly modules

Acquired Companies to form new company called Metaldyne Corp.

� MascoTech, Inc. – $1.1 Billion in Revenues; metal forming

� Simpson Industries, Inc. – $150 Million in Revenues; precision machining

� Global Metal Technologies, Inc. – $228 Million in Revenues; castings

Interiors PlatformAcquired companies to form interior component parts supplier

� Collins and Aikman – $1.9 Billion in Revenues; interior trim and molded parts

� Becker Group – $235 Million in Revenues; plastic parts/molding

� Joan Fabrics – $NA Million in Revenues; automotive fabrics

SOURCE: Company Reports, Industry interviews, Automotive News

New Markets/Categories Strategy

37

Electronics Segment/Application Strong Area For Growth Opportunities

Key Features/Applications

� Next Generation Braking Systems

� Steering Systems

� Plug and Play capability for entertainment systems

� Climate-Control Systems

� Dashboard Instrumentation

� GPS Navigation System

� Airbag Control Modules

894

1,319

0

700

1,400

1998 2003

CAGR98-03

8.1%

SOURCE: Dataquest, Inc.

Driven by Continued Innovation in Automotive Safety, Comfort, and Entertainment

Electronic Content Per Car

$

Strong Growth Compared To Industry Growth Of 2% to 3%

38

Emerging Electronic Applications And Technologies

• Access Control

• Burglar Alarms

• Roadside Emergency Assistance

• On-Demand Content

• Audio

• Video

• Games

• Mobile Internet

• In Car Entertainment

• Remote Diagnostics

• Brake

• Headlights

• Suspension

• Dash board Instrumentation

• Dynamic Navigation

• Traffic Information

• Concierge Services

Minority Suppliers Must Consider Partnering With Companies With Core Technology Expertise

TelematicsVehicular FunctionsInfotainmentSecurity

39

Telematics And Navigation Are Highest Growth Opportunities

$4.2 B

$24. B

$47.2 B

0

25

50

2000 2005 2010

Worldwide Telematics Market

$ B

SOURCE: UBS Warburg

30

500

3,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1998 2000 2005

Units(000)

Navigation Systems (US)CAGR00-1027%

CAGR00-0543%

Key Suppliers To Target• Bosch• Fujitsu• Delphi• Visteon• Siemens

Purchased Components• Dashboard Displays• Driver Interface Boards• Software and Database Services• Higher Voltage Batteries

40

Minority Suppliers Must Position Themselves In Core Areas Of The Value Chain

Components Sub-Assemblies

ElectronicModules

Systems/Functions

• Passives

• Sensors

• Fasteners

• Offshore Manufacturing

• Asia, Africa, Latin America

• Cables

• Wire Harnesses

• PCB

• Low Cost Manufacturing

• Mississippi, Ohio

• Mexico

• Honduras/Philippines

• Application Modules

• IC Integration

• ASIC/Optical

• Design/Engineering/ Test/Qualification

• Manufacturing

• Mexico

• Fuel Systems

• Navigation Systems

Electronic Commodity Value Chain

HIGH VALUE

41

Electronic Category Shows Strong Growth In U.S. And Globally



Hitachi Auto Products 390 422 8.21% 386 418 8.29%

Sumitomo Electric 400 499 24.75% 380 474 24.74%Wiring Systems

Saturn Electronics 250 500 100.00% 245 490 100.00%and Engineering

Stoneridge Inc 675 700 3.70% 574 581 1.22%

Osram Sylvania Inc 600 689 14.83% 396 455 14.90%

Alps Automotive 677 780 15.21% 310 359 15.81%

Clarion Corp. Of Am 931 992 6.55% 298 268 -10.07%

Hella NA Inc 1,438 1,625 13.00% 259 349 34.75%

Stanley Electric U.S. 1,710 1,790 4.68% 434 422 -2.76%

Electronic Components/Sub-Assemblies Suppliers

Average Size 786 889 13.10% 365 424 16.27%


Growth Due To Increased Content Per Vehicle

42

Electromechanical Applications Are EvolvingInto Electronic Solutions



Motorola Inc. 2,680 2,700 0.75% 1,822 1,701 -6.64%

Panasonic Auto 1,950 2,100 7.69% 604 630 4.30%Electronics Co.

Mitsubishi Electric 3,000 3,090 3.00% 720 742 3.06%Auto America

Siemens Automotive 3,600 3,700 2.78% 1,260 1,295 2.78%

Calsonic NA Inc 2,717 3,826 40.82% 519 800 54.14%

Eaton Corp. 4,200 4,000 -4.76% 2,940 2,800 -4.76%

GKN Automotive Inc 3,900 4,300 10.26% 1,404 1,548 10.26%

Electronic Modules Suppliers

Average Size 3,150 3,388 7.57% 1,324 1,359 2.66%


Large Suppliers With Design And Integration Skills– Possible Joint Venture Partners

Solutions Provider Strategy

44

Minority Suppliers Who Aspire To Be Solutions Providers Must Think Like Their Customers: Systems Integrators!

Collaboration Customer-Centricity

Product/Services Hybrid

How They

Fulfill

Their

Promises

(Shared Risks, Early Involvement,

& JIT/ILVS)

How They

Interact

With Their

Customers

(Co-location, Global Footprint &

“Doing More”)

How They Differentiate Their Offerings

(Consumer-oriented, Proactive Innovations/solutions, & Application Development)

45

411

3,253

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2000 2004

Most Opportunities Are Linked To Large Tier One Suppliers Focused On Delivering Total Systems

Key Suppliers

• Johnson Controls, Inc.

• Delphi

• Faurecia

• Lear

• Venture

Some Opportunities

• Sub-Systems and Modules

• Components/Parts

• JIT and Sequencing


Example: Interiors/Cockpit Systems

North American Cockpit Market

Units(000)

Estimated at $140 Billion Globally

In Most Situations, These Are OpportunitiesTo Create JV’s With Suppliers

46

Non-Production Opportunity – Automotive Testing Services

Estimated at $15 Billion globally and growing about 3-5% yearly

� U.S. Market size estimated at approximately $6 to $8 Billion

Market boundaries not well defined

� Automotive manufacturers in-source large portions of the testing needs

– With value chain reconfigurations and OEMs’ new focus, expect willingness to outsource most in-house functions

– Most large suppliers preoccupied with OEM product development issues

� Current outsourced market highly fragmented and in “low-tech” areas

Value proposition exist in ability to provide specialized know how, shorten time to market and lower economics

� OEM’s – Seeking third party validations and standardsWant Tier I suppliers to perform full systems testing

� Tier I – Looking for turnkey solutions for testing needs, both at componentand sub-system level

47

Automotive Testing Is A Fragmented Marketplace

Industry Observations

Involve all activities• Testing Raw Materials

• Components

• Systems and Modules

• Prototypes

Most companies are under $100 Million in revenuesFull-service engineering and design firms offer testing services

• Much larger in revenues0%

50%

100%

US Market Segments

SOURCE: McKinsey & Company, Asaba Group Analysis

U.S. Testing Market

$6-8 Billion $6-8 Billion

500 SmallCompanies

andFew FSS

Companies

Standardized

Consultative

Specialty

Minority Suppliers Should Capitalize On This Opportunity

Content







49

Joint Ventures And Alliances Are CommonGrowth Vehicles Similar To Mergers And Acquisitions

11,00010,10011,10011,500

10,200

12,500

8,8008,000

7,000

5,200

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1996 1997 1998 1999 2000

M&A Transactions

JV's/Alliances

SOURCE: Forbes, Thomson Financial

M & A’s vs. Alliances/JVs

Number ofTransactions

CAGR96-00

JV’s/Alliances: 18.1%M&A: 1.9%

Minority Suppliers Must Leverage AlliancesTo Grow And Achieve Tier One Status

50

An Approach To Develop Alliances

The process has four major dimensions. They are:

Careful attention must be paid to each dimension to give an alliance the properfoundation for success

Strategic alliance needs to be firmly grounded in a clear strategic understandingof current capabilities and those needed in the future to be successful

Alliance planning process that can establish objectives and evaluate alternatives

StrategicRationale

Configurationof an

Alliance

PartnerSelection

Managing theAlliance

51

Alliance Planning ProcessDimension #1 –– Strategic Rationale

� Globalization

� Deregulation

� New markets

� Developments in technology

� Changing Demographics

� New entrants

StrategicRationale

Configurationof an

Alliance

PartnerSelection


1

SituationAnalysis

� Internal trends

� Own strengths

� Own weaknesses

� Time as a competitive weapon

Identification ofStrategic

CooperationPotential

� Contribution to free cash flow

� Value drivers

Evaluation ofShareholder

Value Potential

Strategic Rationale

52

Alliance Planning ProcessDimension #2 –– Configuration of an Alliance

� Horizontal, vertical or diagonal direction

� Research and development, marketing and sales, production and logistics, procurement, or recycling

StrategicRationale

Configuration ofan Alliance

PartnerSelection

Managing theStrategicAlliance

Field ofCooperation

� Time horizon

� Resource allocation

� Degree of formalization

Intensity ofCooperation

� Systems

� Processes

� Products/services

� Competencies

� Brands

Analysis ofOpportunities for

Cost/BusinessProcess Overlaps

2

Configuration of an Alliance

53

Alliance Planning ProcessDimension #3 –– Partner Selection

� Common intention

� Compatible visions

� Balanced positions of power

� Mutual gains

� Controlled risks

� Potential for increasing shareholder value

StrategicRationale


PartnerSelection


FundamentalFit

� Harmony of business plans

� Common specification of appropriate configuration

� Similar planning horizons

� Global market fit

StrategicFit

� Assimilation

� Transfer

� Resistance

� Decision processes

� Entrepreneurial

CulturalFit

3

Partner Selection

54

Alliance Planning ProcessDimension #4 –– Managing the Alliance

� Form of contract

� Legal entity

� Political, tax, legal and cartel aspects

StrategicRationale


PartnerSelection


ContractNegotiations

� Levels of coordination

� Task-oriented management

� Interaction-oriented management

CoordinationInterface

� Active consensus and crisis management

� Adaptation of structures and processes

� Organizational learning

� Continuous improvement

Learning,Adaptationand Review

4

Managing the Strategic Alliance

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Keys To Success

Build Knowledge

The up-front analysis prior to negotiations lays the groundwork for building asolid base:

� Assessing mutual needs

� Establishing share risk

� Developing common goals in an environment of trust between potential partners

Gain Experience

Enabler of success is a function of people selected by each organization. The more experienced and capable, the greater likelihood of success.

Leverage Credibility and Success

Manage the partnering process as a portfolio leverages the knowledge, learning and key competencies developed from prior experiences. Leverage it.

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Framework To Guide Alliance/JV/M&A Decisions

GrowthOptions

PrimaryBusinessRationale

Commodity/Processing

Supplier

Sub-System/Sub-ModuleAssembly

Component/TechnologySpecialist

ModuleDeveloper/Solutions

• Strategic Investor

• Strategic Investor

• ---• ---• New technologies

• New applications

• Joint venture

• Shared resources

• ---• 3rd party sourcing alliance

• ---• New capabilitiesSolutions Provider

• Acquisition• Acquisition• Joint venture• ---• New Products/ Categories

• Joint venture• Joint venture• Joint venture

• Acquisition

• Acquisition• Geographic Markets

New Growth

• ---• ---• ---• Acquisitions/ Roll ups

• Economies of Scale

Low-CostCommodityProducer

Minority Supplier Options

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automobile industry

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