cars can be assembledin 60 laborhours. - oliver wyman · cars can be assembledin 60 laborhours....

Cars canbe assembled in60 labor hours.

2009automotivemanagerCustomer R&D Procurement Production Sales Services

TRENDS , OPPORTUN I T I ES , AND SOLUT IONS FOR THE DECIS ION MAKERS IN THE AUTOMOT I VE I NDUSTRY

But it also can bedone in 15.Thisis one of the centralfindings of The HarbourReport™ 2008.*

*See page 10 for more details

Dear Readers,

Editorial

3automotivemanager 2009

The economy is slowing around the world as the financial crisis works itsway into the real economy. The automotive industry has taken an immediatehit. In many geographic markets, plunging sales have become a fact of lifeduring the second half of 2008. Worried consumers, price decreases andresidual value risks are making the situation increasingly difficult. At thesame time, prices for raw materials are volatile, and massive investments inenvironmentally friendly vehicles are now unavoidable.

But it is too early to cry doom. Automotive companies have overcome previouscrises and emerged stronger from each one. Governmental support doesindeed help and needs to create similar international competitive conditions.But the rescue must come from within – particularly in the balancing actbetween addressing customer priorities and cost-cutting. Fast, sustainablesavings along the entire automotive value chain must be achieved with apragmatic approach. The model pipeline with environmentally friendly drivesystems must be designed with the customer’s needs in mind. In stagnatingmarkets, a determined commitment to sales and operational excellenceat the point of sale are also important. And finally, this is an ideal time foracquisitions and partnerships aimed at tackling development tasks ortapping new markets and acquiring new customers.

In this issue of Oliver Wyman’s automotivemanager, you as a manufacturer,supplier, or dealer will find many practical suggestions, high-value actions,and first-hand reports. We trust you will find these insights interesting anduseful, and we look forward to a continuing dialogue with you.

August JoasHead of Oliver Wyman Automotive Practice

Table of Contents

4

Lean Production

22 E-Drive: Hype and Reality

Do manufacturers have to be preparedfor all alternative drive technologies?

By Jan Dannenberg and Jan Burgard

16Complexity: The AutomotiveIndustry’s Hydra

The customer decides how manyvariant types are necessary

By Peter Bosch and Christian Heiss

13Truck Makers Should HeedCustomers’ Concern

About Operating Costs

The study “Truck Customer 2008”shows what customers in

Germany, France, and Chinaexpect from commercial-vehicle

manufacturers

By Romed Kelp and Rémi Cornubert

19Optimizing the Cost BaseWhile Creating

Superior Customer Satisfaction

Customer-relevant processesshould not be cut to death

By Fabian Brandt and Peter Bosch

07

10

Production Consulting ServicesFrom a Single Source

Exploiting further cost-cutting potentialthrough lean production

By Ron Harbour and John Lucci

Productivity Gap NarrowsAcross North America and Europe

Flexibility in the factory isdemanded like never before

By Ron Harbour and Michelle Hill

24

26

Cost-Cutting Aftera Vehicle Series Starts

Suppliers win with abalance of action andsustainability

By Lars Stolz andChristian Heiss

European Suppliers onthe Razor’s Edge

Successful supplierstake all approachesto achieve permanentcost optimization

By Jan Dannenbergand Jean-François Laget

R&DCustomer Procurement Production

automotivemanager 2009 5

37 Portrait August Joas

“Our work must focuson feasibility anddeliver ‘real impact’.”

28

30

21

32

34

On the Fast Track With M&A

Stock prices rise when theannouncement is made

By Markus Mentz and Thomas Kautzsch

No Car Without Insurance

Manufacturers must supplycomprehensive insurance

By Matthias Bentenrieder and Hendrik Todte

The After-Sales Growth Program

Using a direct offensive to fight offtough competitors

By Sven Wandres and Fabian Brandt

39 Good Times, Fast Cars

The commentary“High beam”highlightstrends beyond theday-to-day business

By Christian Kleinhans

38 Guest Article

The automobile is beingreinvented

By Dave McCurdy

Truck Customer 2008

Automotive Suppliers –A High-PerformanceIndustry

The Harbour Report™2008

Commercial VehicleManufacturerCooperation in Salesand Service

M&A in theAutomotive SupplyIndustry

TurnaroundManagementand PerformanceImprovement

40

Separate Production,Joint Repairs

Partnerships have not beenoff-limits for a long time now

By Matthias Bentenriederand Romed Kelp

The Hidden Gemfor Private Equity Investors

How the fledgling Chineseauto market becamean attractive investment

By Raymond Tsang and Po Hou

Sales Services Commentary PublicationsProfile

Lean production –exploiting furthercost-reductionpotential

Production Consulting ServicesFrom a Single Source


Customer R&D Procurement Production Sales Services

Oliver Wyman has extended the range of services it offers to theautomotive industry. The acquisition of Harbour Consulting and furtheradditions of experts in production strategies and processes to ourinternational Automotive Practice underscore the firm’s standing asthe leading management consultant for automotive manufacturers andsuppliers. Oliver Wyman’s unparalleled expertise in all aspects of theautomotive value chain, from R&D to after-sales service, has thus beenmarkedly strengthened in the area of production.

Around the world, the automotive industryis facing major challenges. On one hand, theagenda includes CO2-reducing technologiesand optimization of the product line. On theother hand, automotive firms are beingthrashed about the financial crisis, exchangerate fluctuations, rising raw-material prices,as well as stagnation and growth occurringsimultaneously in various regions. The im-pending transformation will significantlychange all links in the value chain. Produc-tion, the most complex and highly developedlink, will be most profoundly affected.

Conflicting imperativesFaced with growing cost pressure, productionwill have to juggle an increasing number oftechnologies, equipment demands, and mod-el and drive system variants, while havingto reduce manufacturing costs and invest-ment levels. At the same time, the demandsof the world’s growing markets must beserved more vigorously with local productionembedded in intelligent networks. Further-more, new manufacturing clusters, produc-tion trends, logistics concepts, and changesin product streams will affect the complexproduction processes. Nearly all manufac-turers and suppliers are aware of theurgency to streamline production. Yet, thiscan only be done successfully in the contextof the overall value chain.

Detailed expertise and measurable resultsOliverWyman’s Automotive Practice has deepexperience in the development of businessmodels as well as R&D,downstream,and prod-uct strategies for OEMs and suppliers. OliverWyman is the first international managementconsulting firm to offer a complete range ofspecialized consulting services for production.The portfolio extends from value-added andmanufacturing strategies, through networkand site planning, to the optimization of pro-duction lines and jobs and the implementa-tion of lean-management concepts.

Consulting for direct and indirect businesssegments draws on a unique combination:First, specialized production and lean-opera-tions consultants have detailed knowledgeand extensive experience. Harbour Reportteams, for instance, visit more than 80 fac-tories around the world each year. The Har-bour Report™, a benchmark study publishedby Oliver Wyman, which acquired HarbourConsulting in January 2008, represents anunmatched database on productivity in theautomotive industry. Second, Oliver Wymanoffers expertise in automotive programmanagement and methods, as well as teamsthat work well side-by-side with the clientteams. Our goals are to achieve measurableimprovements in quality and flexibility, sta-bility and reliable planning, as well as costand output, as quickly as possible.

Ron Harbour,John Lucci

8

Tailored strategies and toolsSuccessful production consulting relies onspecific knowledge about markets and cus-tomers, as well as trends in society andtechnology. We use our analysis of growthopportunities and customer preferences togenerate target portfolios of skills and targetprofiles of operating locations, as well as rec-ommended steps to modify parts of the va-lue chain. This applies to the company’s ownproduction activities and to work done withsuppliers, service providers, and customers.The use of numerical parameters that shapea company’s targets is an indispensable partof any effort to introduce and manage pro-duction strategy, but the optimal set of suchindicators must be custom made.

Scope of servicesServices in production consulting range fromoptimizing the entire production network orspecific production lines to special programsfor maintenance, quality or flexibility. Manu-facturing due diligence is carried out for pur-chasers of businesses.Annual manufacturingassessment and benchmarking enables im-provements to be objectively measured andexposes existing weaknesses.

Before plants are reorganized and placed inoperation, the production concept and facto-ry layout have to be designed or refined. Wefocus our attention here on the alignment ofwork stations, logistics, and assignment oftasks, as well as optimization of throughput,work pace, idle times, and capacity utilization.The integration of the supply chain rightdown to the operation’s physical logistics istypically an important component. In thissensitive environment, interaction among allplayers from the plant manger to the assem-

bly-line worker and from the works councilmember to the head of human resources isessential for achieving sustainable results.

Good intentions are not enoughAutomotive companies introduced processesof lean production, continuous improvement,and zero-defect production years ago. So far,however, few manufacturers and suppliershave actually reached the goal of continuousimprovement. While lean management andthe comprehensive tool kit associated with ithave achieved some initial successes at mostcompanies, the results still were not alwaysmeasurable and the effect lasted only aslong as dedicated lean consultants remainedon-site. Boom years with broad variety ofmodels, very high plant utilization rates, andan increasingly complex model range did therest in those fast-paced times.

Anchored in a lean cultureBuilding a sustained culture of lean manage-ment takes years, yet most companies needimprovements as quickly as possible, and theydemand measurable results within observ-able project times and project costs. For thisreason, Oliver Wyman is taking a newapproach that links traditional top-downmeasures with quickly measurable boosts inefficiency and the sustainable developmentof structures and training for the long-termpromotion of a lean culture. The appropriatelean methods and tools are put in practicewith a standardized, five-step program forimprovement of quality, productivity, andflexibility. The results: A “first time-through-quality” culture of production diminishes theneed for quality controls; labor effectivenessand machinery operating rates are improved;and the workload on each station is balanced.

A holistic view of the lean-production system

Partnermanagement

Formal organization and leadership

Production technology

Workplacesystem

Performance measurement,management systems (KPIs)

Engineering

Quality

Maintenance

Leadership, employee system and culture

Logistics,material

flow

Production network

Production strategy

Level Elements

Production structure

Production processes

Productionnetwork

Individual plants

Culture & employees

Source: Oliver Wyman

Vision & objectives

Value-added structure


Integration of senior leadershipLean management should breed a culture ofcontinuous improvement throughout the fac-tory organization by means of training andcoaching. The goals here are stable and de-pendable production processes that combinehigh standards of quality, effectiveness, andprofitability. This program also integrates up-per-level management more closely into pro-duction processes and expands the processknowledge and the sense of responsibilityamong all employees. Targeted benchmarks,presented simply, promote communicationacross staff levels, fueling a sustainabletransformation.

Uniform worldwide systemsThanks to the know-how,worldwide coverageand the necessary size of Oliver Wyman,leanprojects can be organized and supported inmany plants simultaneously. This approachalso promotes the strengths of a uniform,standardized lean-plant management sys-tem across multiple operating bases – afundamental requirement for a customer-specific production system.

Efficient interface managementInterfaces with customers, suppliers, andother direct and indirect departments are asource of efficiency gains that remains large-ly unexploited. Better networking and trans-parency, clearly delineated shared processes,institutionalized contacts at many levels,escalation paths, and other instruments canhelp reduce mistaken deliveries, down times,and buffer stocks.

The design-for-manufacturing program ana-lyzes the products, production processes, andsolutions of major competitors. In the pro-cess, it identifies opportunities and the costpotential of production-optimized goods. Thegoals here are simpler products and workprocesses, shorter throughput times, and thereduction of material consumption, machin-ery requirements, and retooling. A relatedconsulting service links purchasing and keysuppliers more closely to production in orderto set up common processes and problem-solving at various levels.

Most manufacturers and suppliers acknowl-edge the need to make improvements inproduction. Properly initiating such activitiesis a major challenge that should be tackledwithin the larger context of all value-addedstages in automotive engineering.

Overall concept for optimizing automobile production

2-4 weeks 6-9 months 9-15 months

1-2 years

ongoing

Tools(Excerpt)

Performanceof plant/

productionnetwork

Rollout

Rollout

Rollout

Rollout

- RFI

- Leanassessment

- Line balancing

- Layout optimization

- Tool use

- 5S

- Roles &responsibilities

- Error proofing

- Teardown

- DFA/DFM

- CIP

- Rollout management

- Expert pooling

Rollout

CIP = Continuous Improvement Process DFA/DFM = Design for Assembly/Manufacturing RFI = Request for Information

Source: Oliver Wyman Manufacturing Team

Value levers

- Continuous improvement

- Efficient product design (DFA/DFM)- Collaboration production/ engineering

- Sustainability of shopfloor measures- Behavioural change of management and operators

- Continuous improvement- Layout redesign- Line balancing- Maximized operator and machine utilization

- Definition of “Quick Wins”- Focused recommendations

DFA/DFM

Optimizationmaintenance/quality

Shop floor management

Shop floortransformation

Pilot

10

Despite losing billions of dollars and substantial market share asAmericanconsumers shift from large trucks and SUVs to smaller cars, the threeDetroit-based automakers have reached near parity with their Japaneserivals in manufacturing efficiency, according to The Harbour ReportTM 2008.

Productivity GapNarrows Across North Americaand Europe

Of the six largest automakers in North Ameri-ca (General Motors, Toyota, Honda, Ford,Chrysler, and Nissan), the gap between themost and least productive is now just 3.5 laborhours per vehicle, or about USD 260, downfrom10.51 labor hours,orUSD709 per vehiclein 2003.Chrysler showed the biggest improve-ment, cutting its total manufacturing laborhours per vehicle by 8 percent to 30.37, ap-proximately the same number recorded byToyota. Performances of the other four com-panies were all similar: Honda, 31.33 hours;General Motors, 32.29 hours; Nissan, 32.96hours; and Ford, 33.88 hours.

In Europe, the gap between the most andleast productive remains wide (from lessthan 20 hours per vehicle at the best plantsto more than 60 at the worst). Some automak-ers have made substantial progress towardthe types of sustainable manufacturing pro-cesses that characterize the world’s best com-petitors. Others have only just started or arejust starting to implement the most basictools of lean production.

Hours per vehicle reflects time worked by alldirect and indirect labor involved in manu-facturing a vehicle.This includes both hourly

Ron Harbour,Michelle Hill



and salaried workers who are assigned toeach company’s stamping, engine, transmis-sion, and assembly plants. The total hoursworked are divided by the number of vehi-cles produced in the calendar year to yieldthe labor hours per vehicle. It is not a meas-ure of how long it takes for the vehicle to beassembled, rather it measures the quantityof labor required to produce a vehicle.

Productivity mattersAs labor becomes a smaller portion of thetotal cost of producing a car or truck, whyshould this metric matter? Detroit automak-ers are losing money in their home market(as all are now) primarily because of two mainfactors. First, the labor agreements they signeddecades ago that committed to paying retire-ment and health care now add a burden ofUSD 1,000 to 3,000 per car penalty. Second,the strict dealer franchise laws make it nearimpossible and costly to eliminate the sur-plus brands and dealers costing the compa-nies billions.

One reason productivity matters is that themoney saved by streamlining the manufac-turing process can be invested in more tech-nical features, higher-quality materials, andenhanced performance of vehicles. Betterquality can improve and reinforces a brand’sreputation,which allows the best performersto charge a higher price for their products.The Detroit Three’s ability to improve prod-uctivity has been impressive and will helpthem as competition grows fiercer and con-sumers move to smaller, more fuel-efficient(though sometimes less profitable) vehicles.Like the movie “Rocky,” Chrysler, Ford, andGeneral Motors are in the fight of their lives,but at least they’re going into this fight as fit,from a manufacturing standpoint, as they’veever been.

Flexibility is the new differentiatorThere are two primary reasons for the rela-tively strong financial performance of Toyota,Honda, and Nissan and the disastrous lossesat Chrysler,Ford,and General Motors.The firstis that the Japanese automakers have beenfar less dependent on large pickup trucks andSUVs for sales and profits. They’ve learnedhow to make money on small cars years ago.

The second is that they have been more flex-ible in adjusting their mix of products tomeet changes in demand. Ford is beginningto convert a large SUV assembly plant near

Detroit to production of three models de-rived from its small C platform. But it will take16 to 18 months to complete the retoolingand engineering work before the smaller mod-els go into production. In today’s market, itdoes not make sense to have truck plantsand cars plants. A plant is a plant, and com-panies have to be able to adjust to changesin consumer taste as quickly as they happen.

Flexibility is reflected through capacity utili-zation. When demand falls, or shifts awayfrom one market segment to another, themost flexible manufacturers will find a wayto respond to that change without closingplants. Ford of Europe has been very suc-cessful at reducing its manufacturing foot-print to match its market share. As theEuropean market remains divided between amature, high-cost model in Western Europeand a high-growth, low-cost model in East-ern Europe, older plants in the West will notsurvive unless they can consistently operateat close to full capacity and at close to thecost of their newer counterparts in the East.Another element of flexibility is achievingthe best balance of labor and automation.There are many cases of plants that are soautomated that they risk hurting productiv-ity because some of the most modern equip-ment can break down. The right balance willbe determined by the relative labor cost in aplant’s region and the skill level of workersin monitoring and maintaining the equip-ment in their plant.

“We’re in a market now where you can’t have truck plantsand car plants. A plant is a plant and you have to beable to adjust to changes in consumer taste as quicklyas they happen.”

1 Focus on in-process quality; reduce labor andtime devoted to inspection and repair.

2 Increase cooperation between manufacturingand product development to improve designfor manufacturability and drive out complexityand variation.

3 Develop standardized manufacturing systemswith flexible work teams trained to continuouslyimprove processes and rebalance work loads.

4 Strike a balance between labor and automationthat is appropriate for the labor costs andtechnology in a given region.

Four strategies for improvinglabor productivity

Global labor productivity comparison in 2008

Emphasize in-process quality and reduceinspect-and-repairThere are a variety of strategies that canlead to better productivity. Buyouts of olderhigh-wage workers and two-tier wage struc-tures are part of Chrysler’s, Ford’s, and GM’sstrategy in the U.S. But standardized work in-structions, flexible work teams, and designsthat reduce the complexity of option packagesand structural variations have also contrib-uted. Focusing on quality drives better produc-tivity, but only if the quality is built in thefirst time. Too often, large numbers of peopleand labor hours are devoted to inspectingand repairing the vehicles not built right atfirst. Without a robust process for tracing adefect to its root cause, the defect can occuragain and again.

Oliver Wyman´s The Harbour Report™North America 2008

The Harbour Report™ is the leading benchmarkanalysis on manufacturing performance in theNorth American automotive industry.The annualbenchmark analysis examines productivity,procurement and capacity utilization in the areasof assembly, stamping facility and drive train.By taking this approach, it can show whichcompanies are developing systems and processesthat optimize quality, lean manufacturing, con-tinuous improvement processes, the applicationof workers and technology, product complexityand work-flow design.

Production Productivity Gap Narrows AcrossNorth America and Europe

0 5 10 15 20 25 30 35

Labor hours per vehicleNote: Excludes plants < 30,000 units/year


OEMs in Japan

OEMs in NA/EU

OEMs in NA/EU

OEMs in Korea

OEMs in China

OEMs in Mexico, South America

< 70

< 70

< 70

12


The truck sector worldwide is going through a cyclical downturn.Over the next few years, the main goals of makers of heavy commercialvehicles will be to retain customers and to tap new sources of revenuesand earnings. To accomplish these goals, they must have a better under-standing of customer needs and address these needs with customizedproducts. Oliver Wyman’s study, “Truck Customer 2008,” offers insightsinto the priorities of commercial vehicle customers and identifies themost pressing areas for manufacturers to act.

Truck Makers Should HeedCustomers’ConcernAbout Operating Costs

For the second time,Oliver Wyman conducteda survey of truck customers that focused onthe present and future significance of roughly50 buying criteria in six categories, as well asthe fulfillment of these criteria by individualmanufacturers. In all, about 1,000 commer-cial vehicle customers in China, France, andGermany were surveyed.

Costs concerns rise to the topThe quality of the vehicle itself remains ex-tremely important.However,truck customerssee no need for major changes in terms ofcomfort, safety, or technical innovation. Bycontrast,customers expressed concern aboutcost-related issues such as purchase price,operating costs, and the range of services. In

all countries and customer segments, pur-chase and life-cycle costs are the most cen-tral buying criterion for trucks, now and inthe near future. Yet the importance of theissue to customers has not been matched bya response from manufacturers. Truck cus-tomers expect manufacturers to help themlower their operating costs. In addition, cus-tomers want improved service quality andavailability of replacement parts at repairshops. In emerging markets, customers alsocriticized the extent and the quality of therepair-shop network. Customers voiced adesire for increased reliability and shorterdowntimes; other related services are particu-larly important for larger fleets and maturetruck markets.

Romed Kelp,Rémi Cornubert


14

Significant regional differencesThe ranking of customer needs and expec-tations differ significantly by country, sug-gesting that truck manufacturers mustincreasingly adjust their product lines tomeet regional requirements. While Germanand Chinese customers focus on the overallcosts of trucks, French customers say thatpurchase price is the critical factor and thatoperating costs play a secondary role. Of thecountries surveyed, the French are the mostsafety- and environmentally conscious buy-ers of trucks. In Germany, the length of re-pair times is the third most important factor,while it ranks seventh in France and 15th inChina.Germans are concerned about warran-ties and goodwill, while Chinese commercialvehicle customers pay more attention to thevehicle brand – a sign of a fragmented marketwith wide differences in product character-istics.

In China, foreign truck manufacturersstill lag in serviceGenerally speaking, Chinese commercial ve-hicle customers do not rate foreign brandshigher than domestic ones such as FAW orDongfeng. Chinese customers do considerforeign vehicles to be technically superior todomestic models, particularly in terms ofmaintenance requirements and cabin com-fort. But European models cost significantlymore and have a much smaller service net-work than domestic competitors do. Serviceis a general problem for Chinese customers.

Only 15 percent of commercial vehicle cus-tomers surveyed in China use the brand’srepair shop; the rest rely on their own orindependent workshops. Those who do usebrand-name repair shops complain about highprices and long delivery times for replace-ment parts. In particular, they criticize thehigher hourly costs for mechanics’ work andthe long distance to the nearest repair shopof foreign brands. At the same time, localbrands in emerging markets cannot meetthe rising demands being placed on vehiclesand must be retrofitted.

All truck manufacturers in emerging marketsshould think about investing heavily in ser-vices. The survey’s findings in China clearlyshow that both domestic and Europeanbrands will be in a good starting position iftheir service is solid and affordable. In thisarea, partnerships with competitors or spe-cialists should be considered, as they allowfor sharing high initial investments. In suchmarkets, the range of financing services iscritically important, and the survey foundthat needs in this area were insufficientlycovered.

Low-cost trucks have little appealThe Oliver Wyman survey asked about de-mand for Asian and Eastern European low-cost trucks in Germany and France. Germancustomers have no interest in low-cost trucksmade in emerging markets, with about two-thirds of German customers considering ve-

The most important customer requirements in a country comparison

1Question in China: Importance of the availability of spare parts on the open market

Source: “Truck Customer 2008,” Oliver Wyman analysis

Fuel consumption

Reliability &need for repair

Down-times

Vehicle’s mileage cost

Availability of spare parts

Safety

Warranty and goodwill

Service quality

Vehicle's purchase price

Most important differencesVehicle Costs Workshop offering of manufacturer

6

Rank in Germany

1

2

3

4

5

7

8

9

Rank in France

6

4

7

22

9

2

16

5

3

Rank in China

2

1

15

6

51

9

24

12

7


hicles produced in China, India, and Russiato be of unacceptable quality. Vehicles fromEastern Europe fared only slightly better.French customers have a more positive atti-tude toward vehicles made in these countries,with 15 to 20 percent of French customersviewing these vehicles as having comparablequality. Customers expressed doubts aboutlow-cost trucks’ reliability, safety, and servicenetwork.

Rethinking the business designThe study highlights areas that are espe-cially relevant in the context of the currentslowdown in sales worldwide, and suggests anumber of recommendations.First, the broadtask is to reduce and also to make transpar-ent to the customer the overall vehicle costs.Frequently, premium manufacturers do notexhaust their full potential. Vehicle manu-facturers must examine their entire valuechain to determine how they can influencecosts in order to lower end-customer prices.Significant savings might be found by re-ducing the vertical integration of manufacture,since customers no longer consider in-houseproduction of engines to be a decisive factor.

Taking a long-range perspective, the studyresults also raise the question of whetherthe truck industry’s current business design,with its focus on added value in develop-ment and production, is sustainable. If costincreasingly becomes a decisive factor andthe vehicle itself has little differentiation,manufacturers could narrow their focus tovehicle conception, integration of parts, andoperation of sales and service networks.Theseare the most important elements that drivecustomer satisfaction, and will likely remainso in the foreseeable future. Production ofcomponents could be gradually turned overto value-added partners. If this step weretaken, the impact on the OE business mustbe kept in mind. Such a new focus would freeup capacities that could be used to optimizesuch areas as sales or repair-shop perfor-mance and higher-value services.

Creating needs-based productsIn mature markets such as central Europe,products and services should be tailored forspecific regions and customer segments. Thedefinition of each segment should derivefrom detailed knowledge about customer pri-orities, leading to corresponding product andservice ranges. For higher-value services such

as fleet management, mobility guarantees,service contracts, or short-term rentals, thestudy shows that offerings – possibly throughpartnerships with specialized providers inindividual areas – and customers’ perceptionof those offerings must be improved. To date,customers have not been won over by thecurrent range of offerings,but many considerit to be an important area.Even if commercialvehicle manufacturers do a decent job ofmeeting the needs of their customers acrossbrands and markets, this is not sufficient togain a competitive edge. Manufacturers willhave to tailor their offerings to specific cus-tomer requirements in different segmentsand regions. In mature markets, two goalsshould be to improve the interface betweenthe customer and the manufacturer, and togenerate additional revenue by offering intel-ligent services. In emerging markets, theservice structure must be improved in orderto match brand promises and to removedoubts about vehicle availability and quality.

1 Improve workshop service: This is a decisive pur-chasing factor and the place where the customer’scost position can be improved. Starting points areexpanded and standardized repair-shop formats aswell as intelligent planning of the sales and servicenetworks.

2 Create operating cost-optimized offerings:Operating costs are customers’ most importantconcern and can be addressed in numerous areas,from purchase and use to residual value. Thatalso applies to the sales pitch.

3 Develop specific offers for regions and segments:The best offering for target customer groupsrequires deep knowledge about the groups persegment and region.

4 Improve and communicate added-valueservices: Customized offerings and enhancedcommunication activities about the servicerange in such areas as fleet management andservice contracts will increase customers’willingness to buy and satisfaction.

5 Sustainable business design: Because there arefewer and fewer differences in commercialvehicles, manufacturers must constantly scrutinizetheir business design. By employing a reducedvertical range of manufacture, for instance,they can use newly tapped resources to bolsterimportant customer-contact interfaces.

Five recommended actions for truckmanufacturers

Customer Truck Makers Should Heed Customers’Concern About Operating Costs

Vehicle and feature variants have proliferated in recent years,with a segment such as compact cars having huge numbers of possiblecombinations. Despite attempts to address this problem, new varianttypes re-appear like the many heads of the mythical hydra.

Complexity: The AutomotiveIndustry’s Hydra

Formanyyears,complexityhasbeenaddressedand reduced through the use of module strat-egies, differentiating software, design guide-lines, and production-line standards.Frequent-ly, though, these traditional approaches havenot been sufficient or sustainable.

Pragmatic approach necessaryWhat breeds complexity are a range of factorsincluding additional vehicle models, engines,optional features,country types,differentiated

needs of customer groups, legal requirements,and competitive demands. Frequently, themanufacturer bears some responsibility, asa culture designed to exploit every marketopportunity also fuels the proliferation ofoptions. An overloaded catalogue of featurescreates both higher costs and increased errorrates.

The pragmatic question about whether addi-tional options or functions bring real benefits

Peter Bosch,Christian Heiss


16

tends not be asked, because of the lack ofclear criteria. Yet a large number of custom-ers do not notice the many options andhigh-quality technical features or, if they do,fail to appreciate them. This applies to seriesfunctions as well as to special functions with-in individual features. The time has come

to “slim down” for the customer’s sake, aslong as a feature is not critical to long-termbrand positioning.

But which variants are crucial factors in pur-chasing decisions? And for which part of theproduct is the customer willing to pay a pre-mium? Drawing on customer surveys andhistorical purchasing data, Oliver Wyman’sapproach creates a systematic variant-typemanagement and coordination of productfeatures.

Customer-based variant-type managementThe first step is to determine the number ofnecessary variant types. This is done withthe help of a selected model series, startingwith a “zero based” model and making itnecessary to justify each additional option.The range is then systematically developedon the basis of derivations, various drivetrains, country models, and their combina-

tions, visualized in a complexity driver tree.With a maximum of 100 drivers, all optionsand combinations can be shown.

Optimize product substanceFor every basic variant type, examine theproduct “substance” – that is, the character-

istics and functions of series and specialoptions. Build a “gray list” that consists ofall characteristics not relevant to brand posi-tioning. For instance, this would include acomplex sports chassis for a user-orientedhigh-volume brand. A “black list” containscharacteristics that do not have any pur-chase-influencing impact on customers,including two very similar variants of seatupholstery.

Using “strategic-choice analysis,” one canthen evaluate the relevance to customers ofthe range of special features. This methodol-ogy simulates a purchasing environment anddetermines the impact of various options orproduct characteristics on the customer’s be-havior. With the help of a demand-elasticitycurve,the price is set at a level thatmaximizesrevenue. The model uses alternative variantsto forecast customers’ switching habits withina brand as well as among competitors.


A comparison of zero-based and incremental approachesThe zero-based approach facilitates significant projectsuccess at acceptable costs

Status Zero-base Result Status Incremental decision

Result

Radical reduction with minimum restrictions

Clear and substantial changes

Reversal of reasoning

Many small decisions - Little effect- Long line of argument- Difficult goal setting

Weak arguments as a result of little information

Zero-based approach Incremental approach

?


“Reducing complexity must be evaluated from the customer’spoint of view. More does not necessarily mean better.”

Striving for process-related anchoring

With variant-type management process

Without variant-type management process

Reduction from “a one-time initiative”

250

200

150

100

50

02002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


Successor modelCurrent modelNumber of variant types

Year

Optimal variant policies do not just enhancebrand value; they also allow the customer tobetter see and understand the benefits of aparticular package. And they improve themanufacturing margin per sold vehicle.

Anchored in processes and cultureTo maintain control over variant growth,complexity management must become afixed, cross-divisional component of busi-ness processes, just as processes includequality, customer satisfaction, or total costof ownership components. Strong complex-ity management can add earnings of up to300 euros per vehicle, as well as improvingfundamental metrics such as sold vehicles,customer satisfaction, and reliability.

Customer Complexity:The Automotive Industry’s Hydra

Slaying the hydra, the many-headed serpent

in Greek mythology, was one of the 12 labors

of Hercules, made more difficult because each

time he cut off a head, another grew back.

Yet Hercules and his nephew Iolaus figured out

a solution and defeated the hydra.

18


Optimizing the Cost BaseWhile CreatingSuperior Customer SatisfactionEconomic recession has increased the importance of the cost positionsof automakers and suppliers for their commercial success. Even ineconomically good times, their profit levels have been markedly belowthose of other sectors. At the same time, large investments are beingplanned – to develop CO2-cutting technologies and to meet expandingcustomer requirements and legal regulations.

Typically, companies go through phases ofless activity followed by sweeping efficiency-boosting programs that feature across-the-board budget cuts and layoffs, withouthaving too much sustainable impact. Suchcost-cutting frequently leads to drops in prod-uct and service quality, measures that lowercustomer satisfaction and the chance of

creating sustainable customer loyalty. Anexample are the product-cost programsintroduced by many manufacturers at thebeginning of the 1990s, causing lower prod-uct quality. Those programs continue to havea negative effect on the brand image andcustomer satisfaction of the individualmanufacturers today.

Fabian Brandt,Peter Bosch


Reducingfixed costs

100% 25%

10%

5%60%

New processes

Total cost of the European wholesale level

Bundling and outsourcing

Transfers

Target personnel

Source: Oliver Wyman project example

Costs

Focus on the customer’s prioritiesThe challenge is to optimize costs systemati-cally and sustainably, while also maintainingor even improving customer satisfaction. Itis important to distinct between processesthat directly address specific customer re-quirements and those that are primarily inter-nal and affect customers only indirectly. Inthe sales area, for instance, customer-rele-vant processes on the wholesale level in-clude offer preparation, complaint hotlines,and order handling. These areas should beoptimized to promote growth and customersatisfaction. By contrast, internal processessuch as payroll accounting and humanresources can be trimmed to achieve costefficiency.

In one project with a European vehicle mak-er, we determined that overall wholesalecosts could be reduced by 40 percent. Thecompany cut a quarter of costs through bun-dling and outsourcing, and about ten percentthrough process optimization. An additionalfive percent came through efficiency-focusedtransfers to the manufacturer or to largeretail groups. At the same time, customersatisfaction rose significantly in the affectedmarkets over two years following the effi-ciency-boosting programs. Similar programscan be effectively carried out in develop-ment, administration, and indirect produc-tion areas.

Sustainable success

To ensure that efficiency gains in indirect areas havelong-term success in terms of earnings and customersatisfaction, there are five principles that managersshould follow.

1 Direct the cost program to the market andcustomer. The “voice of the customer” is theundisputed basis for all optimization activities.

2 Focus measures on the added value that theyproduce for internal and external customers.This results in a sensible balance of performance-and cost-optimized organization.

3 Direct the optimization solutions at marketperformance, not at costs. Many processesoperate more effectively and cost efficiently withlean structures and less duplication. The mostimportant customer-relevant processes must beimproved, not cut to death.

4 Draw on best practices and benchmarks ofleading organizations in the automotive industrythat focus intensely on customers.

5 Communicate the changes jointly from manage-ment and central employees. Otherwise, thereis a strong possibility that motivation and sales willdecrease, particularly within the sales force.

Successfully optimizing costs for more satisfied customers

20

Customer Optimizing the Cost Base While CreatingSuperior Customer Satisfaction

Markus Mentz,Thomas Kautzsch

Done right, mergers allow companies to gen-erate growth, increase their profitability andcompetitiveness, and increase shareholdervalue – and the automotive supplier industrysucceeds in doing this. Oliver Wyman ana-lyzed the direct (transaction-related) resultsof 192 mergers and acquisitions announcedand implemented between 1981 and 2004.For the transactions analyzed, the shareprices of the companies intending to makean acquisition, each adjusted for marketeffects, improved on average by a statisticallysignificant 1.6 percent within the time spanof five days before and after announcementof the proposed deal. In light of the generallymore negative valuations of M&A activitiesfor companies making acquisitions, this is anunexpected finding. It shows the potential ofmergers to increase shareholder value.

Despite the cultural risks of internationaldeals, stock markets respond positively tothese deals as well. With share prices gain-ing an average of 1.8 percent for nationaltransactions, the price increase for interna-tional and transcontinental M&A totals 1.5percent and 1.6 percent, respectively. As aresult, the global automotive supplier in-dustry also performed well in cross-bordertransactions.

Take early actionDespite the positive outlook our study sug-gests, mergers pose significant challenges.In roughly 40 percent of the transactions ex-amined, the acquiring company achieved,at most, no return. For the integration to un-fold successfully, M&A management mustbe addressed long before the transaction.Including integration issues into strategicconsiderations before the actual transactiondecision is crucial for success. In addition tostrategically selected acquisition candidatesand a clear game plan, effective manage-ment of post-merger integration is essential.This begins at early on and extends from theinitial communication of the targeted goalsto the realization of concrete synergy meas-ures in the newly created direct and indirectcompany divisions.

Upturnof 1.8%

On the Fast TrackWith M&AStock markets respond to mergers and acquisitions (M&A) by automotivesuppliers much more positively than to the mergers of companies inother industries. The Oliver Wyman study “Mergers and Acquisitions inthe Automotive Supplier Industry” shows that stock prices of companiesin that industry generally begin to rise immediately after a strategictransaction is announced. This is why tier 1 suppliers in particularshould pick up the pace in terms of M&A. They are the suppliers thatmust react quickly and globally to manufacturers’ rising demands.


1 Include integration measures early in the process.

2 Create a comprehensive integration architecture.

3 Communicate the integration strategy quickly.

4 Leverage enthusiasm and the willingness tochange shortly after the transaction.

5 Consider differing corporate cultures duringintegration efforts.

Five recommended actionsfor successful M&A management

Electric cars are all the rage. In the race to find the first alternativedrive system capable of being mass marketed, a few players are startingto emerge from the pack. Manufacturers are now working with energyproviders, oil companies, suppliers, and even governments to develop thenecessary infrastructure. Yet despite the euphoria, it’s likely that alter-native drive systems will remain a niche market over the next decade.

E-Drive: Hype and Reality

Cars powered by electricity, fuel cells, or hydro-gen are making headlines alongside theindustry’s sales crisis. For instance, duringthe span of just a few weeks in mid-2008,Renault Nissan signed partnership contractsand government agreements to develop anetwork of recharging stations in Israel,Den-mark, and Portugal. By 2010, the companyintends to develop cars powered exclusivelyby electricity for these markets. InnovativeHonda,meanwhile, is concentrating on hydro-gen drive systems and intends to have themready for serial production within ten years.

Consumer enthusiasm dictates a presenceThe public’s enthusiasm for rechargeablevehicles has now reached such heights that,for image reasons alone, automakers cannotafford to ignore the technology. With its hesi-tant approach to hybrid drive systems, theGerman automotive industry now mustworry about the possibility of falling behindin research on a popular, environmentallyfriendly technology for the second consecu-

tive time. To prevent this from happening,BMW will be testing how more than 100 Minisoutfitted with electric-drive systems performunder everyday driving conditions. Daimleris launching the Electro Smart and candetermine over the next two years whethere-vehicles are fleeting or here to stay. Re-search on electric drive systems is also beingpropelled by the growing number of localregulations being introduced around theworld to combat particulate matter. LikeLondon, other European cities could soonintroduce municipal “congestion charges” topromote zero-emission vehicles. Consumersgenerally favor such pollutant-free mobilityschemes, at least for now.

The facts must temper that presenceEngineers argue that, in the end, battery-driven vehicles consume more energy thando gasoline-powered vehicles. Supporters ofelectric cars counter by pointing out thatmore electricity in the future will come fromrenewable energy sources. In any case, the


22

Jan Dannenberg,Jan Burgard

high efficiency level (nearly 90 percent)achieved by the latest electric drive systemsnearly offsets the increased primary-energyneed for electricity production and trans-mission. Still, the electric motor does notreach the efficiency level of a modern dieseldrive system without a hybrid engine.

Another issue is that batteries are relativelyexpensive, their disposal poses an environ-mental threat, and they can be used for onlya limited time. Makers of electric vehicleswill also experience high system costs asso-ciated with the exchange of empty batteriesfor fully charged ones. In the Norwegian elec-

tric auto “Think City,” such a concept costs200 euros a month. Higher costs and lowerefficiency indicate that the enormous develop-ment costs of a pure electric vehicle will windup serving a relatively small niche market.

However, it makes sense to develop a pureelectric drive system for two reasons. First,consumers are very interested in the work onclean vehicles, so this research has a positiveimpact on the manufacturer’s image.Second,automakers must prepare for situations inwhich electric autos are more attractive thanconventionally powered vehicles as a resultof government efforts, like those in London.

“Double betting” is a logical strategyPublic subsidies, new consumer priorities,and technical progress make it difficult toforecast the share of conventional and alter-native drive concepts in the next ten years.According to current estimates, alternativedrive systems could have a share of 17 per-cent in the world market by 2015. To preparefor all market eventualities, automakersmust consider investing in a range of tech-nologies, both conventional and alternative.Their greatest challenge is to develop a newelectro-drive platform that largely elimi-nates such traditional components as thedrive train and brakes in order to save onweight and cost. Such a platform could beused for both a battery and a fuel-cell car.

1 If fuel-cell drives can be developed, they couldsomeday squeeze all other systems from the market,as no other system can match their efficiency.It’s not clear when affordable fuel cells capableof daily use will be introduced, but widespreadadoption should not be expected before 2020.

2 Pure electric drive systems will succeed as emission-free, short-distance vehicles primarily in densecities, driven primarily by more affluent consumers.

3 Hybrid-drive systems are an interim solution thatcan save a maximum 30 percent of energy. Butthey remain viable for a mass market as long asbatteries or fuel cells remain relatively expensive.

The future of drive technologies

Development of drive-system technologies Share of global productionof passenger and light commercial vehicles (2005-2015)

Otto engine

Diesel engine

Alternativepower trains 1% Fuel cell

5%Alternative fuels

48.5 mn(77%)

53.3 mn(74%)

46.5 mn(62%)

12.6 mn(20%)

14.4 mn(20%)

15.8 mn(21%)

1.9 mn(3%)

4.3 mn(6%)

12.7 mn(17%)

~ Units

CAGR~ - 0.3%

CAGR~ 2.1%

CAGR~ 21.4%

12%Hybrid andelectric drive

63 mn 72 mn 75 mn

2005 2010 2015

CAGR~ 1.8%

CAGR = Compound Annual Growth Rate

Source: Industry database, Desk research, Interviews with experts, Oliver Wyman analysis

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%


Cost pressures are being brought to bear on automotive suppliers evenfor current vehicle series. Approaches that factor in not just procurement,but also development and production, are proving to be the mostsuccessful. But companies must move fast to integrate these approachesinto business processes.

Cost-Cutting AfteraVehicle Series Starts

Saturated markets and overcapacity are put-ting intense cost pressure on automakersand suppliers. The markets can cope withonly a limited number of additional vehicles.Recent forecasts for Western Europe andNorth America assume that following thedramatic drop in volume experienced inrecent months, the recovery will take severalyears. Growth will move on a long-term basisonly around one percent per year. Even Asiaand other emerging markets are not growingas fast as manufacturers’ capacities, leading tofurther price pressures across all segments,intensified by the lack of differentiationamong products, and, in turn, cost pressures.

Savings potential in procurementand productionThe industry can counter such pressures byscrutinizing its largest group of costs: raw

materials, purchased parts, and in-houseproduction and assembly. These tend to risebecause of high raw material prices and theaddition of vehicle features. Lowering priceswithout taking a hit on profit margins re-quires continuous optimization of productcosts even after the start of a series produc-tion. By that point, the key parameters havebeen set, specifications defined, and toolsprocured, and the remaining term and thusamortization time often prevent changesrelated to large investments.

Nonetheless, companies can still reap signif-icant cost savings once the series has beenlaunched, with a direct effect on profitability.Mid-sized suppliers in Germany, for instance,have been able to save up to ten percent ofproduct costs across a broad product rangeafter production had begun.

Lars Stolz,Christian Heiss

Foto:Blindtext


24

These companies generally make use ofcomprehensive approaches that help reduceboth material and technical product costs. Intheir regular procurement waves for keygroups of components, auto suppliers nowdraw on subcontractors from low-cost coun-tries. Yet, even in higher-cost regions such asGermany, savings can be achieved by rigor-ously exploiting the competitive situation.

Reducing technical product costs involvesoptimizing current production, assembly, andlogistics, as well as reaching into engineering.This requires comprehensive analyses pre-pared by cross-functional teams from prod-uct development, procurement, production,quality, logistics, and the research depart-ment. The analyses range from comparisonswith competitors’ products and other produc-tion processes through cost, value, or specifi-cation analyses, to factor cost simulations, toadaptation of the design for manufacturingor assembly requirements.

Best-practice companies use incentive systemsto activate the expert know-how throughouttheir supply chain, and together with theirsuppliers hold intensively prepared work-shops to develop options to lower their costbase. Companies then can generate their costreduction opportunities, evaluate their poten-tial, and implement them. Top managementmust actively support these programs toensure that the identified savings potentialis not diluted by weak implementation.

Fast and sustained action neededIn our work with OEMs and suppliers, wehave found a key success factor to be thebalance between fast action and sustain-ability. After all, delays in identifying savingsand implementing programs will reduce thetime during which such a measure can payoff. Hasty individual measures will preventthe structural integration of cost reductionsinto the suppliers’ organizations. A properbalance will ensure lower operating costsover the long term, allowing companies tocounter persistent cost pressures.

1 Rigorous integration of all areas, from procurementthrough product development and production.

2 Establishment of cross-functional teams withshared responsibilities.

3 Integration of expert know-how from the entirevalue chain, including existing and new suppliers.

4 Comprehensive analytical preparation, throughproduct-specific methods such as product andprocess benchmarking as well as cost analyses.

5 Rigorous implementation to maximizecost-cutting benefits during the remaining term.

Five success factors to lower productcosts in series production

Continuous and massive product cost cutting neededin series production

Cost-cutting potential

Life-cycle costs

Start ofproduct design


End ofproduction

Start ofproduction

- Comprehensive programs required to pinpoint potential- Remaining product life span reduces the number of viable measures with high one-time costsTypically

identifiablecost reductions

30-40%

2-8%


Falling prices and intense competition are turning the automotivesupply industry into one of Europe’s most competitive sectors, asdocumented by an Oliver Wyman survey. To date, most suppliers havebeen able to boost productivity every year and drive profitable growth.And the more globalized the suppliers are, the better their productivitygains. Globalization skills thus continue to be important, along withcost management and a customer orientation.

European Suppliers onthe Razor’s Edge

European suppliers have transformed them-selves into high-performance players in aglobal market, according to a study, “Auto-motive Suppliers – A High-Performance Indus-try” by Oliver Wyman and HypoVereinsbank,which is based on a comprehensive surveyof top managers in Europe. These suppliershave been lowering their prices by an aver-age 2.4 percent a year, while boosting theirproductivity by 3 percent and investing morethan 5 percent of sales in research and devel-opment. As a result, European suppliers wereable to increase sales by an average 3.4 per-cent a year between 2001 and 2006, in manycases accompanied by rising returns.

Although EBITDA margin remained unchangedat about 11 percent during this period, the

average return on equity rose from 2.4 per-cent to 5.3 percent, with operating earningsrising from 2 percent to 4.2 percent of sales.Although differences in performance are verylow, growth rates within the sector divergedconsiderably: While the top 25 players man-aged to improve on all key indicators, theaverage total return on equity in the bottomquartile declined from 1.9 percent in 2001 to1.4 percent in 2006, with operating earningsamounting to 1.2 percent.

Common success factorsThe study sought to identify the key factorsbehind the business success of automotivesuppliers, and found that the same factorsapply irrespective of company size, businessmodel, or scope of activities. The surveyed

Jan Dannenberg,Jean-François Laget


26

managers report that long-term economicefficiency is the key factor as measured byoperating earnings, cash flow, return onsales, and sales growth. “Soft” factors arealso important at many companies, particu-larly employee satisfaction and job creation.More than 75 percent of the surveyed manag-ing directors and management board mem-bers are even willing to forgo short-termoptimization of their business success in

favor of these criteria. Other factors men-tioned by respondents include customer ori-entation, an entrepreneurial approach, costmanagement, employee qualification, andstrong innovation. Top companies in the sec-tor rank above average on all these criteria.

The study highlighted a significant correla-tion between business success and customerorientation. The more that companies tailortheir services to manufacturers’ and motor-ists’ needs, the more successful they are inthe market. While the respondents think thatthey have successfully positioned their com-panies to meet manufacturers’ requirements,they are a long way from optimally servingthe end consumer. At the moment, for exam-ple, only about 50 percent of all automotivesuppliers conduct market research, and fewR&D departments tailor their product strate-gies to end consumer priorities.

Developing low-cost offersFuture competitiveness depends on suppli-ers’ ability to boost productivity. To date, vol-ume providers as well as module and systemproviders have achieved this best throughplants in low-cost countries. However, manyEuropean suppliers say they are not able todevelop cheap modules for emerging mar-kets in Asia, America, and Eastern Europe.They acknowledge that the target price is akey metric and that production capacitiesmust be set up to allow for the developmentof truly low-cost products.

Cautious about globalizationSuppliers themselves regard the gap betweentheir current positioning and global marketrequirements as their greatest challenge.Most rate their own global coverage as mere-ly satisfactory to good, while low performersacknowledge that they are badly positioned.Small and mid-sized companies, in particu-lar, shun the high risks related to internation-alization, and they fear that managementresources would become overtaxed. As a re-sult, they focus mostly on European locations

and say they will make their move only whenautomotive manufacturers actively demandglobalization of suppliers.

Faced with continued globalization,new com-petitors from low-cost countries, as well aspre-financing requirements, warranty risks,rising material costs, and increasing productcomplexity, few suppliers see any marginfor error – one surveyed manager called it

“rolling along the razor’s edge.” To date, how-ever, the sector has managed to master thechallenges it has faced and improved its ownperformance capacity. Suppliers know thatthey will have to improve their cost base andtheir global positioning in coming years ifthey want to continue to achieve profitablegrowth.

“Suppliers are like top athletes – success or failure can boildown to a hundredth of a second. Only companies thatachieve top scores on nearly all success criteria will succeed.”


1 Top performers should test all available meansto permanently optimize their cost base.There must be no “sacred cows”when it comesto cost-cutting.

2 European suppliers must extend their technologyleadership in cooperation with the automotivemanufacturers to improve both functionsand costs.

3 In the low-cost vehicle segment, the fastest-growing segment in automotive, low-cost modules,development capacities, plants in low-costcountries, and local sales resources must be set up,offering consistently high quality adaptedto local specifications.

4 Just like automakers, suppliers must considertheir end consumers more closely by undertakingmarket research.

5 Suppliers should look for suitable networkpartners and restructure their own organizationsaccordingly.

6 A globalization strategy must be worked outindependently or in cooperation with partners.

Six recommendations for automotivesuppliers

Partnerships are no longer taboo in the European commercial vehicleindustry. Manufacturers are entering alliances in response to requirementsgenerated by new technologies and customer needs, as well as to lowersales per location. The new Oliver Wyman study, “Commercial VehicleManufacturer Cooperation in Sales and Service,” shows which partner-ships make the most sense for Western European manufacturers.

Separate Production,Joint Repairs

European truck manufacturers’ procurementand production activities have long followeda uniform strategic logic – except for thesales and service network, which account forabout 20 percent of a truck manufacturer’scosts today. Individual manufacturers’ net-works still differ significantly in terms ofstructure, set-up and density. Equally variedare the sales base layout, controlling options,and the range of services. Manufacturershave hesitated to abandon these fixed struc-tures in favor of a uniform strategy as theyfear that this could threaten their existinglocal business.

Yet the need for change in this regard isbecoming more acute. Mobility guarantees,comprehensive service agreements, and cus-tomers’ rising service demands are forcingmanufacturers to act.At the same time,manu-facturers are faced with declining sales perlocation at regional distribution and serviceoutlets.

Strong willingness to cooperatePartnerships are proving to be essential stra-tegic options that allow companies to closethe gap between increasing requirementsand declining sales. The latest Oliver Wymanstudy shows that 70 percent of all compa-

nies frequently enter into partnerships withdownstream links in the value chain, such asbody manufacturers, rental firms, or leasingfirms. In its Sector Information Center, forexample, Mercedes-Benz displays completevehicles in cooperation with more than 60body manufacturers and informs customersabout sector solutions. MAN provides replace-ment vehicles in cooperation with Europcar.Only 30 percent of truck manufacturers, onthe other hand, also occasionally cooperatewith companies from other sectors, and justten percent enter into such alliances regular-ly and with foreign providers. One of theserare examples is Iveco Finance Holdings, ajoint venture of Iveco and Barclays Bank.

Even reservations toward other truck brandsare disappearing in view of the competitiveenvironment. Half of those surveyed are al-ready working to some degree with competi-tors on sales and service. Here, partnershipswithin companies dominate, such as the sys-tematic joint service offering by Renault andVolvo, or between different commercial vehi-cle segments. For example, Volvo and Nissan,and MAN and Volkswagen are cooperatingat select locations. Most survey respondentsthink this does not damage the individualbrands.

Matthias Bentenrieder,Romed Kelp


28

Sights set on newmarkets and more productsThe commercial vehicle sector has seizedthe benefits of partnerships and has set itssights on two goals in particular: improvedmarket exploitation and an extension of theservice spectrum to offer one-stop shopping.While most companies achieve their goal ofextending their service ranges, only a fewhave managed to tap their markets moredeeply. Nonetheless, the surveyed truckmanufacturers see more opportunities thanrisks from partnerships.

Manufacturers attribute any shortfalls in at-taining their targets primarily to in-housefailures, caused by the partnership processesbeing insufficiently defined. In addition, com-mercial vehicle manufacturers focus moreclosely on the implementation of partner-ships than on the underlying strategy. Thestrategy, however, is where the success of anoperation is often decided.

So far, few manufacturers have defined howthe demands placed on sales and servicewill change. Forwarders with more than 50trucks grew by 90 percent between 1999 and2005. For this reason, manufacturers mustredefine the increasingly important interplayamong key account management, regionalsales forces, and branch sales. They shouldalso analyze and secure the optimal densityand quality of the service network for eachregion – including networks built throughpartnerships.

Better services, lower costsThe study“Commercial Vehicle ManufacturerCooperation in Sales and Service” identifiesthree areas of interest to sales and servicepartnerships for truck manufacturers: First,manufacturers should cooperate even more

closely with body manufacturers, includingthrough joint sales, in order to offer custom-ers solutions from a single source. Second,alliances with partners from other sectorssuch as telematics or financial services offerbenefits in the provision of customer-orientedservices related to the more or less inter-changeable truck product. Cases in point in-clude fleet management, remote diagnosis,replacement vehicles, and financial products.And, third, partnerships with competitorsfor jointly operated service points may proveto be advantageous – but remain off-limitsin many cases. Such joint locations can helpcut costs, for example, when the service net-work of two niche players cannot be operatedeconomically. In a medium-sized Europeanmarket, both could save sums in the double-digit millions through joint network operation.This, however, means that manufacturersmust abandon the idea of always offeringsales and service from a single source.

1 The growing number of long-distance transportson increasingly long routes makes a dense servicenetwork more and more important.

2 Trucks’ declining service and repair requirementsmake a sufficiently extensive service network incountries with a low market share very expensive.

3 An increasing number of major customerswant centralized key account sales and specificservices – frequently across national borders.

4 Aside from traditional sales through regional salesforces, major customer and sector sales operationsare emerging that jointly draw on service.

Four trends in commercial vehiclesales and service

Partnerships extend the service range

Global

Local

Area of activity

Single driver Large fleetCompany size

Truck &body

Leasing & rental

Cross-border financing

Special accessories Maintenanceagreements

Financing

Fleet management

Telematic services

Serial customized products

Source: “Commercial Vehicle Manufacturer Cooperation in Sales and Service,“ Oliver Wyman study


30

The Chinese word for “crisis” consists of two ideograms meaning“danger” and “opportunity.” Faced with slowing auto sales, loweringdealer margins, and more than a few bankruptcies, potential investorssuch as private equity funds can be forgiven for concluding thatChina’s auto dealerships are in crisis. However, there is increasingevidence to suggest that the dangers facing the dealership sector couldhelp to revamp the sector and thus be turned into an opportunity tocreate value for intelligent investors.

The Hidden Gemfor Private Equity Investors

On the surface, it is difficult to develop aninvestment case for the auto dealershipindustry. Though the market is quite concen-trated at the front end, with top ten playerstaking 44 percent of market share, the restof the market is shared by tens of thousandsof small dealers across the country, withno dealer having yet developed anythingremotely resembling nationwide coverage.Furthermore, dealer margins have little varia-bility, and customer prices are essentiallyfixed – the average dealer operating marginis just under two percent. The vast majorityof dealers are unsophisticated in their man-agement and operations know-how.

The reason for this low degree of sophistica-tion across the industry is essentially a lackof incentive to improve. With low car pen-etration and a rapidly growing market, mostdealers have not had to work hard to achievesubstantial profits. Besides, with sky rocket-ing property prices, dealers often see thedealership as a side business as they watchthe land on which the dealership sits doubleand triple in value.

Of late, however, the situation has changed.The combination of growing competition,slowing car sales, declining dealer margins,and a cooling property market will force

Raymond Tsang,Po Hou



0% 44% 100%

Guangwu

Jidong

Beixing

Yongda

Dachang

Mingdu

Dalian Toyota

Windstar

Hengtong Huatai

Guangfeng

Top 11-20

Top 21-48

Others

Over 40,000 players

Source: China Commerce Statistic Year Book 2007, CATARC Statistics, Private Company Database, Oliver Wyman analysis

Top ten players have a market share of 44 percent

Develop strong OEM relationships. Success-ful OEM relationships require a combinationof cordiality and bargaining savvy to obtainfavorable policies and support from OEMs.Scale is certainly one important factor, but,for instance, Shanghai’s Yongda has also cre-ated a powerhouse of multi-brand dealer-ships in Eastern China, allowing it to obtainsignificant concessions from OEM partners.

Adopt best practice HR operations. More sothan in other markets, China’s dealershipmarket is very much a people business. Atthe same time, a lack of qualified talent andintense competition has caused turnover inthis sector to run as high as 40 percent insome cities. Dealerships that develop HR poli-cies that allow them to hire, train, develop,reward and retain the best and the brightestwill create significant strategic control.

dealers to return to their core. By implement-ing a few key initiatives,auto dealerships canbecome a highly lucrative sector for directinvestors:

Scale up. Investors need to help dealers toscale up on operations and network throughconsolidation. Increasingly stringent dealerpolicies will require large investments inknow-how and human capital, which will beoffset by greater economies of scale. Thoseplayers that can quickly realize networkeffects through quick consolidation will beable to differentiate themselves.

Focus on downstream profits.As the installedbase of vehicles continues to grow, the abilityto maximize profit capture from downstreamofferings will become critical. By 2015, down-stream businesses are expected to accountfor 65 to 75 percent of the industry’s profits.Dealers must adopt measures to enhancedealer loyalty and focus on building a broaderafter-sales network.

Completely carefreeMore and more insurers are offering products containing extendedservice warranties to their customers. When a problem occurs, insurersgenerally send the vehicles to independent garages, a development thatis costing manufacturers and dealers service-department business. Bypackaging insurance, financing, and other services, manufacturers anddealers can hold onto their service-department customers. Offering insur-ance policies at the point of sale has a good deal of expansion potential.

No CarWithout Insurance

When HUK-Coburg began to offer a packageof liability and collision insurance that alsocontained an extended service warranty in2004, the company became the brunt ofcompetitors’ jokes. But while overall policiesin force grew only by 0.9 percent annuallybetween 2004 and 2007, HUK-Coburg achieveda growth rate nearly twice as high. Today,there is hardly an auto insurer that does notoffer its own warranty rate.

Comprehensive service is well receivedCustomers are content to let the insurerselect the garage because that can lowertheir premiums. At Axa and HUK-Coburg, forinstance, customers save nearly 15 percent.When a liability claim is filed, the insurerselects the partner garage to handle therepairs and manages the claims manage-ment itself. Customers benefit in multipleways, not only do they receive a premiumreduction, they get pick-up, drop-off, clean-ing, and replacement-vehicle services. As a

consequence, dealers and manufacturerslose out as they see their profitable service-department business slip away.

Volkswagen succeeds with insuranceGiven the surge in garage programs, the saleof insurance at the auto dealership has be-come a key component of earnings for manu-facturers and dealers. The issue for them isnot new, but most attempts to address it havefallen short in the past.

However, Volkswagen’s product solutionssuch as the “Carefree Maintenance” programshow that insurance policies can be success-fully offered at the point of sale. In the pastthree years, Volkswagen Bank has increasedits portfolio of policies in Germany by about30 percent a year. It has also achieved annualgrowth of about nine percent in otherEuropean countries. Through comprehensiveaccident management, the automaker pro-vides complete coverage for necessary

Matthias Bentenrieder,Hendrik Todte


32

services. Volkswagen Insurance Service, thepartner network with its own accident spe-cialists, and the VW customer hotline, pro-vide an easy first contact for claims. With its“Clever Repair” program, VW offers cus-tomers the option of conducting completerepairs with original parts or the repair ofonly damaged components. Mobile so-called“Clever Repair” units fix problems on the

spot. Hence, VW’s comprehensive servicesare increasing customer satisfaction and, asa result, the image of individual dealers.

Agenda for a successful insurance businessIn light of these market changes Oliver Wy-man has identified seven courses of actionfor automakers and dealers that will deter-mine their success in the insurance business.

Slightly increasing policy portfolio and decreasing premiumsfor car insurance

Agenda for a successful insurance business

Innovative and simple products. Auto salesrepresentatives need simple products andneed to bring forward convincing argumentsin order to sell insurance to customers. Stand-ard products offered by insurance firms rarelyfulfill these requirements. A product bundletailored to the dealership and its target cus-tomers is required.

Integrated sales process. To sell insuranceproducts, sales representatives need a sim-ple, integrated process with good technicalsupport.

Bonuses for sales representatives. The grow-ing importance of insurance must be reflectedin the remuneration and incentive systemsof the sales representatives.Setting minimumpenetration targets and/or linking bonusesto the service-department business can begood first steps in this direction.

High penetration rates. Individual auto deal-erships need a high penetration rate to allowfor tailored insurance products such as fixed-rate premiums for special offers or model-

related rate options with special discounts.Only a sufficiently large number of policiescan build a balanced risk mix that forms thebasis for attractive insurance premiums.

Subsidized premiums. For the individual in-surance product or for integrated bundles,the actual insurance premium should besubsidized. This will boost the number ofsold policies and form an attractive mix ofcustomers.

Joint profit model.As a result of an increasingnumber of customers and an improved riskmix, manufacturers and insurers will benefitfrom a joint profit model. Insurers can letmanufacturers and dealers share in theirhigher profits instead of just paying themcommissions.

Systematic portfolio management. System-atic management of the existing client baseprevents customers from migrating to otherinsurers. This approach can include specialoffers, like a free winter inspection, whenpolicies are renewed early.

Insurance policiesIn millions

Booked premiumsIn billions of euros

120

100

80

60

40

20

0

25

24

23

22

21

202003 2004 2005 2006 2007

98.0 98.2 99.1 100.2 100.9

2003 2004

22.5

2005 2006 2007

22.322.0

21.2

20.8

Explanatory note: Includes liability, collision, comprehensive and bodily injury insuranceSource: GDV (Association of the German insurance industry), 2008


30%earnings contribution

34

The After-SalesGrowth Program


With an average contribution margin of about 30 percent formanufacturers and more than 50 percent for dealers, after-sales isa crucial source of income for the automotive industry. Service, as animportant customer touch point, is also a fundamental driver ofcustomer satisfaction. At the same time, the intensity of competitionbetween manufacturer channels and independent providers isincreasing. Oliver Wyman has identified ten crucial areas wheremanufacturers should act if they want to secure sustainable marketleadership in after-sales service.

The after-sales business is going throughprofound change worldwide. While estab-lished markets in Europe and North Americaare declining as a result of decreased serviceneeds per vehicle, business is markedlyclimbing in emerging automotive regions inAsia and South America, because of signifi-cant volume growth there. By 2015, global

after-sales markets are expected to grow to atotal of USD 424 billion, roughly 16 percenthigher than in 2008. At the same time, com-petition is growing more intense. Fast fittersand intermediaries like insurance firms andleasing companies are pushing their way intothe market, challenging the dominance ofmanufacturer-linked channels. In the worst-

Sven Wandres,Fabian Brandt


case scenario, this means that the manufac-turers will lose up to 35 percent of their totalafter-sales revenue and up to two-thirds oftheir earnings to independent channels by2015. Their networks could consolidate byup to 50 percent, and market leadership inafter-sales service would be lost.

Expanding market sharesTo counter this scenario, manufacturers willhave to implement aggressive growth pro-grams in vehicle segment II, i.e. the five toseven years old used cars, employ customer-loyalty tools such as maintenance contractsand extended warranties, and use their owngarage formats in the independent aftermar-ket. The loyalty of major customers, fleets,and intermediaries to OEMs must be wonthrough attractive offers in sales, service, andespecially customized high-quality processes.

Through a superior, integrated soft-franchisemodel, the manufacturer can bolster systemleadership in after-sales on a sustainablebasis. The manufacturer becomes a systemcenter and ensures a uniform market pres-ence and a consistent brand experiencefor customers by managing a few key per-formance indicators. In broad terms, thisapproach offers the OEMs an opportunity toboost market shares by up to five percent by2015 and to effectively use after-sales as aninstrument for customer satisfaction andcustomer loyalty.

Focus on the customerThe key to bolstering market leadership is asharp focus of the entire organization on thecustomer and earnings. Manufacturers canimprove customer satisfaction and loyalty byintroducing far-reaching measures that ex-tend all the way to dealers. Among businessand fleet customers, for example, manufac-turers must offer an integrated, needs-basedline of services.

A comprehensive networking of after-salesservice with the new vehicle business, as wellas financial services and a central, uniformhandling organization on the manufacturerand dealer levels, can address critical custom-er needs.The same applies to uniform marketprices and conditions for fleet customers.And to acquire small-business customers,the dealer organization should be providedadequate funding and bonus structures. Cus-tomers of older vehicles (segments II and III),

where manufacturers’ market shares haveeroded, must be addressed in a targeted man-ner as well. Signal prices, in the form offixed-price campaigns for segment II vehicles,can be effective here. Change-of-owner strat-egies, extended warranties, segment- andcurrent-value-justified prices for genuine

parts, and an intelligent bundling of prod-ucts and services will strengthen customerloyalty to the brand. A needs-based exten-sion of the product range with accessories,competitively focused price differentiation,particularly for cross-brand small compo-nents, and greater service for handling andlogistics will all help to secure customerloyalty to the dealer.

Market specific strategiesAutomotive growth markets in Asia and SouthAmerica offer the greatest growth potentialfor after-sales service. Manufacturers mustcreate high-performance service networks and

1 Customer structures change. In mature markets,society is aging, the income structures are polarizing,and the number of female customers as importantpurchase decision makers is increasing.

2 Business and fleet customers as well as inter-mediaries are becoming more important. In 2015,business customers will have a 60 percent shareof registrations. This will increase the demand forcomplete solutions.

3 Garage systems and fast fitters are becoming anincreasingly threat to the OEM after-sales.

4 Format innovations in after-sales lead to broaddiversification from the service factory to thefleet-management operation.

5 Greater use of electrical systems and electronics in-creases the technological complexity of the vehicle.

6 The proliferation of models and options as wellas the shortening of the model cycle will continueto increase the range of parts.

7 Consolidation in retail and the dominance ofmulti-brand operations will spread, particularlyin the major markets of continental Europe.

8 The purchasing loyalty of dealers is fading, andmanufacturers are increasingly competing againstone another in after-sales service.

Eight trends in after-sales service

“Manufacturers can win the battle for market shares inafter-sales service by waging an offensive against independentproviders and simultaneously strengthening the loyaltyof current customers.”

create sufficiently attractive offerings to winover the best dealer partners. Professionalemployee recruitment, qualification and re-tention as well as development of effectivewholesale structures will form the basis forservicing of vehicles that are newly intro-duced to the market. Integrated customerretention initiatives in Asia and SouthAmerica help to sustain the market positionof the manufacturers from the beginning.

The situation is different in the mature,commoditized markets of Europe and NorthAmerica. In addition to securing current busi-ness, manufacturers should consider directtargeting of providers in the independentaftermarket. Current-value-justified lines ofparts and all-makes assortments might workhere, aimed at the core business of alterna-tive providers.

Competitive price strategies and active pricecommunications can win back the cost-con-scious regular customers of independentproviders, provided that adjustments of the

conditions and margin systems can refocusthe sales system on these customers. Bydirectly entering the independent market,manufacturers can also participate in thestrong growth of this segment – eitherthrough professional sales of parts in inde-pendent channels or through their ownbrand-independent service formats.

Determined introductionA sustainable after-sales strategy calls formanufacturers to bundle all sales activitiesand sensibly integrate the sales channels,formats, and structure of the network. Fur-thermore, future market changes as for in-stance the Block Exemption Regulation 2010in Europe must be considered, and cost-cut-ting endeavors at the manufacturer, whole-sale, and retail levels must be exploited.Manufacturers, importers, and dealers mustwork together to achieve leadership in after-sales service. Oliver Wyman uses a provenimplementation program to safeguard themanufacturers’ market leadership in after-sales service.

36

Services

Agenda for profitable growth in after-sales

2

1

43

5 6 7 8

9 10

Customers/Markets

Bolsteringdealer purchasing loyalty

Differentiating between partsprices and bundling

Cost efficiency and performance gains

Creating a product strategy for the inde-pendent aftermarket

Forming a integratedchannel, network and format strategy

System leadership soft franchise

Regainingused-carcustomers

Increasingcustomer satisfac-tion and loyalty

Conqueringemerging markets

Developing abusiness strategy for fleet customersand intermediaries

Channels and formatsProducts Prices

Enabler


The After-Sales Growth Program

Portrait

August Joas is head of the Oliver WymanAutomotive Practice, which has offices inEurope, the Americas, and Asia. Joas helpsautomotive companies develop and imple-ment programs for profitable growth andsustainable increases in efficiency.

The central goal of all projects carried out byOliver Wyman is to recommend and helpimplement actions that will produce concreteresults and, above all, measurable success.“The critical point is to understand the cus-tomer’s challenges and needs,” Joas says.“Ourwork must focus on feasibility and deliver a‘real impact.’ Our global automotive team ismeasured against this standard every day.”

Joas laid the foundation for his work todaywhile he was a student. In addition to earninga master’s degree in business and a doctoratein strategic marketing, he assumed opera-tional responsibility in domestic and inter-national business early on. He worked withProfessor P. W. Meyer,a former board memberat GfK, one of the world’s largest market-research firms, on strategy and marketingprojects for industrial companies. After com-pleting his college education and spending ayear in South Africa, Joas moved to Munichin 1990 and became a consultant withUnter-nehmensberatung München (UBM),a firm thatwas acquired by Mercer Management Con-sulting in 1993. Mercer has been known asOliver Wyman since 2007.

In addition to nearly 20 years of experience inconsulting, Joas has also acquired hands-onmanagerial experience in industry. Followinga restructuring project in the supplier sector,he served for 18 months as an interim CFO.In this position, he carried out the recom-mendations on organizational development,cost reduction and performance improve-ment that he had proposed as a consultant.“By working on-site, that is, directly in theplant or at the point of sale, you feel the dailypressure to perform that companies face.” Inanother project, for an automaker, the objec-tive was to tap growth opportunities in sales.Working with his team, Joas developed stra-tegic growth plans on an international basis

and packages of operational measures. “Wehad to overcome internal growth blockadesand organizational barriers before the oppor-tunities in the market could be exploited,”he says.

In recent years, Joas and his team have sys-tematically worked to turn the AutomotivePractice of Oliver Wyman into one of theleading international management consul-tancies for the industry. Clients worldwidenow include automakers, component suppli-ers, and service providers. Practice expertiseextends across the entire automotive valuechain and focuses on growth strategies, effi-ciency-boosting programs, and the resultingtransformation processes.

Business success, he says, hinges on buildinga highly motivated, passionate, and qualifiedteam, a global network of experts skilled inall relevant issues facing the auto industry.Team spirit is also a personal priority forJoas; he is a member of the Oliver Wymansoccer team, on which he has been playingeach week for nearly 20 years.

Joas sees several major challenges for theautomotive industry. “Automakers are ab-solutely world class when it comes to inno-vations and new technologies,” he says, “butthere is a considerable need for action interms of a commitment to the customer.Faced with continuing strong cost pressure,companies must also constantly ferret outproductivity and efficiency potential. In lightof the current market weaknesses cost excel-lence and flexibility certainly are crucialsuccess factors for every firm in the automo-tive industry.”

He describes one of the most critical chal-lenges this way: “Companies must makesure that their products and services do notturn into a ‘commodity’ over the long term.Success depends on having an excitingbrand experience for the customer, and themanufacturers must work on this with pas-sion and emotion – from the members onthe board of management down to eachemployee.”

37

August Joas

A Passion for Cars

automotivemanager 2009

August Joas, head ofglobal Automotive Practice

Dave McCurdyGuest Article

U.S. Automakers Are Moving Fast to MeetHigher Fuel Economy Standards

When President Bush signed into law thelandmark Energy Independence and SecurityAct inDecember2007,environmentalists andautomakers joined in applauding the 40 per-cent increase in fuel economy standardsand a corresponding 30 percent reduction ingreenhouse gas emissions that the law re-quired.While automakers acknowledged ourresponsibility to advance the United States’energy security, we cautioned that meetingthese challenging standards would be diffi-cult if consumers were not made part of thesolution.

The rise in gas prices during the first half of2008 succeeded in doing just that. Consum-ers are responding by purchasing smallervehicles and changing their driving habits.Fleet-wide fuel economy is increasing andgreenhouse emissions from the auto sectorare falling.

At the same time, automakers are respond-ing with innovation. Decades of research anddevelopment are yielding new technology forsafer, cleaner, and more fuel-efficient autos.Globally, the auto industry invested USD 74billion in research and development in 2006.In fact, four of the top ten R&D spendersaround the world were automakers. An auto-motive revolution is underway as engineersand scientists design the future of mobility.

To understand how dramatic and how fastthe shift to smaller, more fuel efficient vehi-cles has been, consider this: Prior to March2008, there had only been one month (May2007) in the last six years in which passengercars outsold light trucks (minivans, SUVsand pickup trucks) in the U.S. In fact as re-cently as February 2008, light trucks outsoldpassenger cars by 53 percent to 47 percent.However, since then, higher gas prices and atroubled economy have led to a dramaticshift in consumer buying habits. As of August2008, passenger cars were outselling lighttrucks by 53 percent to 47 percent. Drivinghabits are changing as well. According tothe U.S. Department of Transportation, sinceNovember 2007, Americans have driven 53.2billion miles less than they did over the sameperiod a year earlier – topping the 1970s'total decline of 49.3 billion miles.

Our concern with fuel economy regulationshas always been that automaker product de-cisions alone cannot guarantee compliancewith Corporate Average Fuel Economy (CAFE)standards. Because CAFE is based on the mixof vehicles sold each year, whether a manu-facturer meets the CAFE standard or notdepends both on what products are offeredand on what products consumers purchase.While the law holds manufacturers respon-sible for meeting CAFE standards, in reality,consumer purchases play a huge role indetermining whether a manufacturer meets,exceeds, or falls short of the standard in anygiven year. For the past several years, con-sumers valued fuel economy, but they valuedmany other attributes such as passenger andcargo room, performance, towing, and haul-ing capacity more. So while meeting higherCAFE standards remains a challenge, the risein gas prices allows automakers to swimwith rather than against the current.

With more than 100 models that achievehighway fuel economy ratings of more than30miles per gallon,U.S. automakers are work-ing hard to meet consumer demand for morefuel-efficient vehicles. And with 70 modelsof alternative fuel automobiles powered byhybrid electric technology, clean diesel, andethanol (up from just 11 models in 2001),automakers are continuing their efforts tobring alternative fuel vehicles to market. Foryears, automakers have pushed for a com-prehensive policy to increase fuel economystandards that includes autos, fuels,and con-sumers. Now, with higher gas prices here tostay, and a new nationwide standard, we arewell on our way toward reaching our goal ofenhancing energy security, reducing emissions,and ultimately saving consumers money.

This isn’t the first time the auto industry hasfaced challenges, and it won’t be the last.This industry remains a vital organ of theU.S. economy, accounting directly or indi-rectly for one of every 10 American jobs. Ourability to adapt to this new market is an im-portant element to the overall U.S. economicrecovery. Through this dynamic transforma-tion, we will reinvent the automobile by pro-ducing cleaner, safer, and more fuel-efficientproducts than consumers have ever seen.

Dave McCurdy, presidentand CEO of the Allianceof Automobile Manufacturersin Washington, D.C.

38

Image:AAM

High Beam

Commentary

Good Times, Fast Cars

The automobile has long been a toy, a favoritechild, the incarnation of our mobility dreams.Yet now it has become a scapegoat, stigmatizedby environmentalists and city planners. Thedays of “good times, fast cars” may be over,the end of a glorious age characterized byincreasingly safer, larger, more luxurious, andemotive cars. Are we returning to the roots ofthe automobile, the bare essentials, perhapseven a declaration of denial on wheels?

In an era of rising mobility costs, putting thepedal to the metal seems to be turning into aprivilege of a few, and average drivers are beingforced to simply do without – already today,about one in ten European car customers planto switch to a smaller, less powerful vehicle.

The magic formula to attract customers inthe future may look like this: smaller carswith smaller engines, less weight, and reducedfunctionality. The industry has good reasonfor its fervent effort to develop more efficientdrive systems,more sophisticated energy andweight management, as well as alternativefuels and low-cost solutions. More than Euro240 billion will be invested over the nextten years. Will that be enough?

Yes and no. No doubt, technical innovations formthe basis for the business’s future.Without them,companies would soon find themselves on thetechnological and commercial sidelines. But morethan technology is needed. The key questionsare: What does the customer really want, andhow much is he or she willing to pay? After all,only one in ten customers will pay extra foran environmentally friendly vehicle.

For many people, the car is simply a meansof transportation, and it must be affordable,not only in terms of its purchase price, but alsoin its daily costs. For good reason, therefore,R&D departments are investing large sums ofmoney to improve fuel efficiency.

Christian Kleinhans

39

However, the automobile is more than a meansof transportation. It is the most emotive form ofindividual mobility, conveying a sense of indi-vidual freedom and other elements of personalvalues and lifestyle. Despite the environmentaldebates, people want emotive products that canprovide an exhilarating driving experience andrelatively low mobility costs.

More than ever, therefore, innovation andemotion must form a symbiotic relationship.The future of the automobile belongs to vehiclesand vehicle concepts that are both innovativeand emotive, and that re-define the drivingexperience. The industry must develop emotiveproducts that go easy on their customers’ pocket-books, but still offer the sort of driving experiencethat sets the automobile apart from all othermodes of transportation.

Then we can again embrace the motto: “Goodtimes, fast cars.”We must keep our eyes fixed onemotive, exciting products that offer an economi-cal driving experience for all desires and tastesas well as provide a good fit with the brand!

“High Beam” highlights currentdevelopments in the automotiveindustry by looking beyond day-to-day business – at times critically,at other times enthusiastically,but always incisively – to fuel thedebate among industry players asthey compete for the most success-ful strategy. While not everythingshould be taken seriously, it shouldprovide entertaining food forthought. The author looks forwardto receiving readers’ suggestionsand comments.

Publications

40

Truck Customer 2008The commercial vehicle industry is evolving into a matureindustry where specific customer know-how is becominga more critical factor. The study “Truck Customer 2008”is based on a survey of about 1,000 truck customersin China, France, and Germany. It offers a comprehensiveoverview of customers’ current and future needs,and provides strategic guidance to manufacturers.

Matthias Bentenrieder, + 49 89 939 49 [email protected]

Romed Kelp, + 49 89 939 49 [email protected]

The Harbour ReportTM

The Harbour ReportTM is the leading benchmark analysis on manufacturingperformance in the North American automotive industry. The annualbenchmark analysis that appeared for the first time in 1989 examinesproductivity, procurement and capacity utilization in the areas of assembly,stamping facility and drive train. The Harbour Report™ does not just focus ondevelopments over the previous year. Instead, it explores events that extendback several years. By taking this approach, it can show which companies aredeveloping systems and processes that optimize quality, lean manufacturing,continuous improvement processes, the application of workers and technology,product complexity and work-flow design. The 2008 edition for the UnitedStates has just been published. In Europe and Asia, the report is an exclusivestudy available only to manufacturers.

Ron Harbour, +1 248 649 [email protected]

Michelle Hill, + 1 248 649 [email protected]

R&DCustomer Procurement Production

41

Commercial VehicleManufacturer Cooperation in

Sales and ServiceIn Europe, those involved with sales and

service networks for commercial vehiclesare increasingly feeling the pressure to

make changes. The latest study shows thatcooperative agreements are one way to facefuture challenges. In particular cooperating

partners can contribute service expertiseand help reduce the high costs associatedwith dense networks of service locations.

Matthias Bentenrieder, + 49 89 939 49 [email protected]

Romed Kelp, + 49 89 939 49 [email protected]

Automotive Suppliers – A High-Performance IndustryOliver Wyman and HypoVereinsbank examined over 50 factorsin business management success in the study entitled “AutomotiveSuppliers – A High-Performance Industry,” with a view towardthe importance of these factors and their impact on the automotivesupplier industry. In the past, suppliers have sought to become eithercost leaders or technology/innovation leaders. But today, they needto combine these strategies. Other considerations are success factorssuch as a clear customer orientation, business management practices,innovation leadership, highly qualified employees andcost-effective manufacturing.

Jan Dannenberg, +49 89 939 49 [email protected]

M&A in the Automotive Supply IndustryStock markets are reacting much more favorably to mergersand acquisitions among automotive suppliers than to M&A inother industries. Shares in the automotive supply industryoften rose the moment strategic corporate transactions wereannounced. This is true of both national and internationalmergers, as the Oliver Wyman study “Mergers and Acquisitionsin the Automotive Supply Industry” shows.

Markus Mentz, + 49 89 939 49 [email protected]

Turnaround Managementand PerformanceImprovementEnsuring sustainable success hasbecome increasingly difficult forcompanies. Today, crises are lesspredictable, bear greater risks, andthe measures necessary to preventthem are becoming exceedinglycomplex. This brochure of expertiseis primarily geared toward topmanagement in charge of operativeperformance-enhancement initiativesfor their company or individualcorporate divisions.

August Joas, +49 89 939 49 [email protected]


Sales Services

01Matthias Bentenrieder+49 89 939 49 [email protected]

- Sales strategies and innovative business designs- Downstream strategies and optimization- Passenger cars and commercial vehicles

02Peter Bosch+49 89 939 49 [email protected]

- Sales and downstream- Strategy development and implementation- Research and development

03Fabian Brandt+49 89 939 49 [email protected]

- Sales and after-sales- Quality management- Commercial vehicles

04Jan Burgard+49 89 939 49 [email protected]

- Innovation management- Value creation strategies- Network strategies

05Rémi Cornubert+33 1 450 23 [email protected]

- Development and procurement- Strategy development and implementation- Performance improvement and cost efficiency

06Jan Dannenberg+49 89 939 49 [email protected]

- Research and development- Innovation and technology strategies- Brand management

07Ron Harbour+1 248 649 55 [email protected]

- Production increase and optimization- New factory planning, development and execution- Production strategies and processes, redesign andcost optimization

- Benchmark analyses, product teardown, operationaldue diligence support

08Christian Heiss+41 44 208 77 [email protected]

- Product cost optimization in development and procurement- Performance increase in production- Product and portfolio strategy for OEMs and suppliers

09Michelle Hill+1 248 649 [email protected]

- Cooperative benchmarking- Productivity specialist- Benchmark analysis

10Po Hou+ 86 10 6533 [email protected]

- Mergers & acquistions, joint ventures- Market entry strategies- Components

11August Joas+49 89 939 49 [email protected]

- Growth strategies- Organization, change- Performance improvement, efficiency

12Thomas Kautzsch+49 89 939 49 [email protected]

- Private equity- Industrial products and services- Mergers & acquisitions, post merger integration

Our experts

42

OliverWyman Authors in This Issue

01 02 03 04 05 06 07 08 09 10 11

13Romed Kelp+49 89 939 49 [email protected]

- Commercial vehicles- Profit improvement- Strategy and organization

14Christian Kleinhans+49 89 939 49 [email protected]

- Brand, product and technology strategies- Growth strategies and business design innovation- Product cost optimization and engineering excellence

15Markus Mentz+49 89 939 49 [email protected]

- Mergers & acquisitions- Restructuring- Strategy development

16Jean-François Laget+33 1 45 02 30 [email protected]

- Strategic sourcing- Competitiveness program- Manufacturing excellence

17John Lucci+1 248 649 55 42 [email protected]

- Manufacturing strategy development & deployment- Operational due diligence- Shop floor transformation

18Lars Stolz+49 89 939 49 [email protected]

- Product development and product cost- Supplier- Automotive downstream

19Hendrik Todte+49 89 939 49 [email protected]

- Sales and marketing financial services- Automotive growth strategies- Core competency management

20Raymond Tsang+86 21 6103 [email protected]

- Market entry and growth strategies in China- Sourcing and supply chain strategies- Mergers & acquisitions

21Sven Wandres+49 89 939 49 [email protected]

- Growth strategies and international rollout- Sales and after-sales- Commercial vehicles and passenger cars

43

Publisher's information

PublisherOliver WymanMarstallstraße 11, 80539 Münchenwww.oliverwyman.com

Editorial staffCorinna Konen/[email protected] Schulz/[email protected] Wandres/[email protected]

Concept and layoutWunderamt GmbH, Munich, Germany

PhotographyFabian Helmich, Munich, GermanyThe pictures on pages 19 and 32 were generously providedby Auto & Service P IA GmbH, Munich

ResponsiblePierre Deraëd+49 89 939 49 599/[email protected] Bosch+49 89 939 49 764/[email protected]

CopyrightOliver Wyman Consulting GmbH


12 13 14 15 16 17 18 19 20 21

E3500

/01/09

With more than 3,300 professionals in over 40 cities around the globe, Oliver Wyman is an international managementconsulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, riskmanagement, organizational transformation, and leadership development. The firm helps clients optimize their businesses,improve their operations and risk profile, and accelerate their organizational performance to seize the most attractiveopportunities. Oliver Wyman is part of Marsh & McLennan Companies [NYSE: MMC].

For more information, visit www.oliverwyman.com

Contact

Oliver Wyman AutomotiveMarstallstr. 1180539 MunichGermany+49 89 939 49 491+49 89 939 49 503 [email protected]

Oliver Wyman's automotive experts have broad industryexperience and a commanding track record of successfulconsulting projects for leading automotive OEMs andsuppliers in Europe, America and Asia. We offer consultingservices along the entire value chain of the auto industry:R&D, purchasing, manufacturing, sales and channelmanagement, after-sales and financial services.

Oliver Wyman's global Automotive Practice supportsclients with strategic topics like brandmanagement, customerorientation, corporate and business strategies, market,competitive, and technology analyses, product development,innovation management, sales strategies and after-salesprograms. Operational optimization includes purchasing,production optimization, efficiency improvement programs,reengineering, turnaround management and restructuring.In addition, Oliver Wyman offers the whole range ofmergers & acquisitions consulting services, from partnersearch to evaluation, transaction support, and post-mergerintegration.

© 2009 Oliver Wyman. All rights reserved.

Get to know our Automotive Practice.We look forward to your call or to your e-mail.

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