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E-Business And Supply Chain Management InThe Automotive Industry: Preliminary Findings

From The Eastern Cape And Kwazulu-Natal

Benchmarking Club Pilot Surveys

Research Report No. 35

Sagren Moodley

Industrial Restructuring ProjectSchool of Development Studies (incorporating CSDS)

University of Natal

February 2001

ISBN No. 1-86840-424-2

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FOREWORD

The Industrial Restructuring Project (IRP) was initiated at the beginning of 1996as the KwaZulu-Natal Industrial Restructuring Project (KZN IRP). The projectinitially focused exclusively on KwaZulu-Natal, but is now aimed at supporting

industrial policy in South Africa at the national, provincial and local levels. It isfacilitated by international experts and is based at the School of DevelopmentStudies, University of Natal, Durban. The project has two important features.Firstly, it focuses on critical issues that are impacting on the competitiveness ofmanufacturing sectors that are under threat from increased internationalcompetition and the liberalisation of the South African trade regime. Secondly, itis action-oriented in design. The findings that have been generated have, forexample, been presented to numerous industry stakeholders, includinggovernment, business associations and trade unions. The project consequentlyhas the support of various regional and national stakeholders.

This particular report has arisen out of both new research and the cumulativeknowledge that has been generated from previous studies. These cover anumber of IRP reports, working papers, journal articles and conference papers.Some of the themes covered include South Africas manufacturingcompetitiveness, the automotive industry, the clothing and textiles sector,footwear, middle-management capacity, human resource development,institutional support for industrial restructuring, and business services formanufacturing competitiveness. Enquiries regarding IRP material should beaddressed to: The Librarian, Centre for Social and Development Studies,University of Natal, Durban, 4041. Tel: (031) 2601031; Fax: (031) 2602359;email: masmith@nu.ac.za.

Prof. Mike MorrisDirector: School of Development Studies

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ACKNOWLEDGEMENTS

The International Development Research Centre (IDRC) of Canada provided thefunding for this study. Their generous financial support is sincerely appreciatedand hereby acknowledged.

I wish to express my sincere appreciation to the members of the Eastern Capeand KwaZulu-Natal Benchmarking Clubs who took valuable time to complete thesurvey questionnaire, and who responded to my email, face-to-face, fax andtelephonic inquiries. I would also like to thank the aforementioned Clubs forallowing me to visit their factories.

I am grateful to my colleague, Justin Barnes, and to Professor Raphie Kaplinskyof the Institute of Development Studies, University of Sussex, for theirconstructive comments on an earlier draft. The remaining errors, omissions andweaknesses are mine alone.

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TABLE OF CONTENTS

Foreword 2Acknowledgements 3List of Figures 6List of Tables 7List of Text Boxes 9

PREAMBLE 10

1. Introduction 142. Key Trends In The Global Automotive Industry 18

2.1 The Move Towards Greater Collaboration2.2 Increased Use Of The Internet2.3 Internet-Based Trading Exchanges2.4 B2B E-Commerce

3. The KZN Benchmarking Club 274. The Eastern Cape Benchmarking Club 305. E-Business And The Automotive Supply Chain 33

5.1 What Is E-Business?5.2 The Importance Of Networks5.3 The Potential Advantages Of E-Business5.4 The Importance Of Supply Chain Integration5.5 Potential Impact Of The Internet On The Value Chain5.6 The South African Context

6. Summary Of Key Findings 56

7. Conclusions 618. Recommendations 679. Some Policy Implications For Government 7210. Future Research Agenda 76

11. Survey Findings 80

11.1 E-Business Strategy11.2 E-Business Goals11.3 IT Audit11.4 Purposes For Which Firms Use E-Business Tools11.5 Key E-Business Drivers

11.6 E-Business Perceptions11.7 How Has The New IT Changed The Way In Which

Enterprises Transact Business?11.8 Use Of E-Business Technologies In Supply Chain

Integration11.9 Digital Exchange Networks11.10 Benefits Of E-Business Tools11.11 Barriers To The Adoption Of E-Business Tools

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11.12 The Impact Of E-Business Technologies On The Firm11.13 Projections Of E-Business Growth

REFERENCES 118

APPENDIX 1: E-BUSINESS QUESTIONNAIRE 122

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LIST OF FIGURES

FIGURE 2.1: A Stylised Version Of A Simple Automotive Supply ChainFIGURE 4.1: Average Number Of Employees (Component Manufacturers)FIGURE 4.2: Average Turnover (Component Manufacturers)

FIGURE 5.1: Interrelated Factors Giving Rise To E-businessFIGURE 5.2: Number Of Days Of Total Inventory: Club Members Versus InternationalCounterparts (1995 To 1999)

FIGURE 5.3: Raw Material Inventory Holding: Club Members Versus InternationalCounterparts (1995 To 1999)

FIGURE 5.4: Work In Progress Levels: Club Members Versus InternationalCounterparts (1995 To 1999)

FIGURE 5.5: Finished Goods Inventory Holding: Club Members Versus InternationalCounterparts (1995 To 1999)

FIGURE 5.6: A Simple Physical Value ChainFIGURE 5.7: A Simple Internet-Enabled Value ChainFIGURE 5.8: An Integrated Value Chain

FIGURE 5.9: A Virtual Value Chain

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LIST OF TABLES

TABLE 2.1: The Rise Of Global B2B E-Commerce (US$ billions)TABLE 11.1: E-Business Corporate StrategyTABLE 11.2: Mapping IT

TABLE 11.3: For What Purposes Does Your Firm Use E-Business Tools?TABLE 11.4: Principal E-Business DriversTABLE 11.5: E-Business PerceptionsTABLE 11.6: E-Business-Enabled Supply Chain ManagementTABLE 11.7: Do Your Suppliers Have Access To Real-Time Information Of Your

Companys Sales And Stock Levels?TABLE 11.8: Are Your Firms Internal Operations Electronically Integrated With That Of

Your Business Partners, Customers And Suppliers?TABLE 11.9: Does Your Company Have The E-Business Capacity To Access Your

Suppliers Production Capacity, Available Inventory, Lead Times AndDelivery Flexibility?

TABLE 11.10: Is The Information Provided Within Your Companys Internal Operations

Electronically Linked?TABLE 11.11: The Extent To Which Your Companys Internal Operating Systems AreIntegrated With External Electronic Networks?

TABLE 11.12: Does Your Company Require Suppliers To Make Use Of E-BusinessTechnologies?

TABLE 11.13: Does Your Company Use E-Business Technology For B2B Trade?TABLE 11.14: Does Your Company Outsource Non-Core Functions?TABLE 11.15: When Awarding Contracts to Small/Micro Firms And Emerging Black

Contractors Does Your Company Consider The E-Business Capacity ofSuch Firms?

TABLE 11.16: Does Your Company Seek External Advice From IT Research AndAdvisory Firms?

TABLE 11.17: Does Your Company Have An In-House IT Department?TABLE 11.18: Are You Aware Of Any Joint Internet Initiative In The Automotive

Industry?TABLE 11.19: Is Your Company Linked To Any Internet Initiative For Supplier

Interactions?TABLE 11.20: Assessment Of The Potential Benefits Of An Internet-Based Integrated

Procurement SystemTABLE 11.21: What Are The Potential Disadvantages Of An Internet-Based Integrated

Procurement System?TABLE 11.22: The Importance Of Openness And Trust In Electronic Trading HubsTABLE 11.23: Advantages Of E-Business ToolsTABLE 11.24: E-Business ObstaclesTABLE 11.25: Effects Of E-Business Technologies On The FirmTABLE 11.26: Degree Of Overall Success In The Implementation Of E-Business

TechnologiesTABLE 11.27: Projections Of E-Business Growth In 2005 (% Of Purchasing Operations

Put On The Internet)TABLE 11.28: Projections Of E-Business Growth In 2005 (% Of Total Business Which

Will Be Web-Based)TABLE 11.29: Projections Of E-Business Growth In 2005 (% Of Supplies Purchased

Through Web-Based Auctions)

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TABLE 11.30: Projections Of E-Business Growth In 2005 (% Of Total Goods & ServicesProcured Through E-Business Technologies)

TABLE 11.31: Projections Of E-Business Growth In 2005 (% Reduction In PaperInvoices)

TABLE 11.32: Projections Of E-Business Growth in 2005 (% Of customers AndSuppliers That Will Have Access To My Companys Real-Time Sales And

Inventory Data)

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LIST OF TEXT BOXES

BOX 5.1 : Types Of E-BusinessBOX 5.2 : The Potential Advantages Of E-Business For The Automotive IndustryBOX 11.1: Corporate Goals

BOX 11.2: Glossary of IT TermsBOX 11.3: How Has The New IT Changed The Way In Which Your Firm DoesBusiness?

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PREAMBLE

This section of the report has a developmental focus, and should be read as aprelude to the main report, which looks at the issue of e-business and supplychain integration in two automotive Benchmarking Clubs, in an upper-middle-

income developing country, viz. South Africa. Here, we contextualise the study ina highly stylised development frame of reference. This is crucial because thelinkages between development themes such as the prospects for knowledge-basedindustrial development; the diffusion of information and communication technologies(ICTs); the potentials and opportunities for spreading the gains of globalisation; andvalue chain analysisin the Third Worldhave recently come under intense academicscrutiny in the inter-disciplinary field of development studies. Moreover, theinternational development agencies are also beginning to pay more carefulattention to these issues in their work. This spate of interest has been sparkedby the new Internet-based IT, which is believed to be an essential tool formanufacturing competitiveness; as it conditions power, knowledge and creativity

in an increasingly networked economy.

IT change has been a hallmark of economic development, especially over thelast three decades. The rapid evolution of the Internet as a global informationand communication medium is an important aspect of that technical changeprocess. The US Department of Commerces (1999) policy document, TheEmerging Digital Economy II, highlights a strong positive correlation between ITand national prosperity. 1 Econometric studies also show a close statisticalrelationship between the diffusion of IT, productivity and competitiveness forindustries and firms (see Dosi et al. 1988; Jorgenson and Stiroh 1995; and Kwon

and Stoneman 1995).2

The Internet is the most visible manifestation of the shift to a networkedeconomy, and has the potential to revolutionise the way in which companiesfunction and compete in both highly industrialised and developing countries. TheInternet is based on an open network system, and offers opportunities, in theory,for developing country manufacturing companies for catch-up and forging aheadtypes of development.3 According to Panagariya (2000: 969):

1 IT is responsible for about one third of real economic growth in the US over the past 5 years (USGovernment Working Group on Electronic Commerce 1999).2

The economic data, however, do not tell an unambiguous story about IT and productivity (see

Brynjolfsson and Yang 1996). A debate has been raging over the so-called productivity paradox whichasks how productivity growth could have slowed during the 1970s and 1980s at a time of phenomenal

technological improvements, price declines, and real growth in computers and related IT equipment(Moulton 1999: 2). Moulton (1999) argues that the productivity paradox may be partially explained bymeasurement problems and poor data quality. But as more reliable datasets are released and new

methodologies are used, some researchers have found positive effects of IT on output and productivity inindustry- and firm-level studies (see Kwon and Stoneman 1995; and Jorgenson and Stiroh 1995). Theparadox may also be due partly to a lag in productive applications of the new IT.3 IT could serve as a unique opportunity for some developing countries to leapfrog whole stages ofindustrial development. Singapore is an excellent example of a developing country which has successfully

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Given the cost savings offered by Internet technology and relative ease with whichit can be provided, they [i.e. developing countries] can now skip several stages of

technological development through which developed countries had to go. Stateddifferently, developing countries are much farther inside the current technological

frontier and, therefore, have larger potential benefits from moving to it.

The new imperative for Third World companies is to connect to global valuechains or face marginalisation, or in extreme cases even be excluded from themainstream of economic development. The policy challenge for developingcountry manufacturers is, therefore, how to leverage, consolidate and deepentheir links with the global economy; and how to take advantage of the potentialsof globalisation. In the era of trade liberalisation and global production systemsthat operate through ICT-dominated cross-border, inter-firm networks4, theconcordant effects of marginalisation and exclusion are likely to be a combinationof: deepening poverty; high unemployment; widening inequality; a weak and

rapidly eroding export base; and low and even negative growth rates.

Incorporation of Third World companies into global-scale value chains is,therefore, of paramount importance to foster rapid economic developmentthrough access to leading-edge technology, business practices and markets.Inclusion in global value chains alone are, however, no guarantee of povertyreduction. For instance, adverse forms of inclusion may produce immiserisinggrowth and increases in poverty (see Kaplinsky 2000). This notwithstanding,industrial development options for less developed countries (LDCs) hingeincreasingly on leveraging ICTs as a means of promoting upgradingwithin global

value chains. In other words, theoretically, the right portfolio of ICTs have thepotential to enable developing country companies to become internationally

competitive in more knowledge-intensive sectors, and simultaneously becomemore fully integrated into the global production system.

In most LDCs, production has taken place in relatively closed import-substitutingmarkets, often characterised by significant supply constraints. The shift towardsan Information Economy and a more open, globalised trading environment hasresulted in many companies experiencing great difficulties in meeting the needsof more demanding domestic customers, and particularly external markets. Thechallenge for developing country companies, therefore, is to harness ICTs foreconomic development, and to exploit the systemic and productivity-enhancingpossibilities inherent in the new ICTs. It may well be that knowledge-based ICTdevelopment could offer a new trajectory for Third World companies to:

access advanced country markets; attain a deeper, visceral integration into global value chains;

exploited the IT revolution through a comprehensive knowledge-led development policy, and has

subsequently leapfrogged entire stages of development.4 A central development concern is: Who is included and excluded in these networks?

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upgrade within global, national and local value chains; create and extract value in the most efficient and effective manner; raise their international competitiveness; and maintain control of their competitive advantages.

In the highly industrialised countries, the new ICTs are transforming the waycompanies manage the supply chain. In the future, it is likely to pervade andshape all aspects of companies supply chain operations and strategies.Developing country companies will, therefore, need to make greater use ofintegrated, networked IT to streamline, integrate and synchronise key supplychain operations (such as procurement, order fulfilment, etc.) if they are to becompetitive in the New Economy. With a flexible and robust IT platform in place,companies in developing countries will be better placed to pursue new ICT-enabled, value-creating business opportunities in an increasingly networkedglobal business world. Only then will developing country companies be in a

position to harness information and knowledge located both inside and outsidethe company to improve supply chain performance. The challenge, then, formanufacturers in developing countries is to use ICTs to get closer to thecompanies employees, suppliers, customers and business partners. This is atough agenda.

At present, the geographic distribution of connections to the Internet and thediffusion of ICTs, heavily favours the highly industrialised countries (see Manselland Wehn 1998). Sometimes, real-time network infrastructure simply does notexist in the developing world, and access to Internet connectivity often remainslimited to simple store-and-forward email facilities. Many LDCs have low PC

penetration rates, and lack the telecommunications infrastructure necessary totake full advantage of the Internet.5 Apart from a poorly developedtelecommunications infrastructure, many LDCs lack the availability ofinexpensive telephone service and regular power supply. Internet access is alsoexpensive and unreliable. Further, access to Internet markets depend on theavailability of a substantial pool of skilled labour capable of working on or nearthe frontier of computer technology (Panagariya 2000: 970). Moreover, thebenefits of business-to-business (B2B) e-commerce depend largely on demandand supply factors in a particular LDC.

Continuing disconnectedness in the poorer LDCs is likely to leave their firms less

competitive in the networked global marketplace. We, however, are cautiouslyoptimistic that as telecommunication networks get rolled out and are improved indeveloping countries, and Internet possibilities become more familiar to

5 E-commerce can, under certain circumstances, grow quite rapidly even in an environment of lowtelephone line density, as the Indian experience of enclave growth in Bangalore illustrates.

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1. Introduction

The automotive industry involves multiple players in long, complex, global supplychains. The relationships within and between automotive supply chains in thepast tended to be fixed, linear and clearly demarcated. Enormous potential,therefore, exists in creating an environment in which relationships between theseplayers can be more direct, cost efficient and interactive. Supply chainmanagement8 encompasses a wide set of interdependent, cross-industrybusiness strategies that can reduce costs, expand revenue and increase marketshare through improved efficiency and effectiveness of the supply chain. Theincreased value is realised by collaboratively balancing all resources, andoptimising the flow of goods, services and information from source to end-customer.

Supply chain integration is now regarded as an indispensable element forsuccess in manufacturing, and it is believed that supply chain superiority will

provide a decisive competitive advantage. And as integration increases, jointresource dedication will follow. In the new information-based economy, firmscompete on the basis of supply chain competitiveness rather than as individualentities. Industrial supply chains that are able to minimise frictions between theparticipants will gain competitiveness through price reduction and speed ofresponse. The ideal being the creation of a dynamic and flexible network ofcustomer/supplier relationships and information flows that is activated bycustomer demand and can respond rapidly and reliably to consumerspreferences.

The impetus for supply chain integration is driven by the new information and

communication technologies (ICTs) based on microelectronics,telecommunications, computers and network-oriented software which haveprovided the infrastructure for the new global Information Economy to operate.9

Network-oriented ICTs through the compression of space, time and knowledgeallow for unprecedented speed and complexity in the management of theautomotive supply chain. Electronic networks comprise the technologicalarchitecture of the new global economy. IT10 convergence between back office(i.e. finance and administration; operations planning and execution; purchasing;product development; research and development; human resources; andinventory/asset management) and front office (i.e. sales, marketing and customerservice applications) systems to produce an integrated supply chain that can

respond rapidly to changes in customer demand is now a reality, thus making itpossible for all of a firms IT to be tightly integrated and architected for theInternet.

8 Supply chain management is concerned with how information can be used to change how and whenproducts are moved in the value chain to increase efficiency.9 It is important to note, though, that supply chain management (SCM) has roots which precede e-business.10 We use the term information technology (IT) to refer to computers, software, telecoms and the Internet.

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It is expected that the Internet will have a fundamental impact on how business isconducted, on firm behaviour and on industry structure.11 It is argued that e-business technologies are a critical source of value creation12 in the InformationEconomy, and thus provides the firm with a distinctive competency in themarketplace. E-corporations have the potential to redefine traditional value

chains and develop complex knowledge-sharing systems that connect pricing,product and design information with suppliers and customers. Theoretically, e-business holds great potential for revamping traditional supply chains to improvedata flow and streamline operations. An e-corporation recognises the power ofstrategic partnerships with its business constituencies. The alliances foster thecomplete transaction loop from product search to shipping confirmation withinventory updates, and assists in connecting to the market.

The e-business revolution in the global automotive industry is being drivenlargely by three of the worlds biggest automakers to consolidate and advancetheir global competitive positions.13 It is these multinational corporations (MNCs)

which have taken the lead in adopting innovative applications of network-basedIT which are at the cutting-edge of e-business. Given the importance andmagnitude of these changes, we at the IRP 14 are particularly keen onunderstanding the impact that e-business has had on the South Africanautomotive industry. This is especially important since, apart from consultancies,e-business developments in the South African automotive industry are largelyundocumented.

This report focuses on the crucial link between e-business and the automotivesupply chain in the Eastern Cape and KwaZulu-Natal (KZN) provinces of South

Africa. We are particularly interested in separating reality from the hype and

intoxicating rhetoric found in the business media. Our objective is to provideinsight into - and an in-depth understanding of - how automotive firms that belongto the Eastern Cape and KZN Benchmarking Clubs are responding to,transforming and gaining value from e-business applications. This is also aprime area for SME focus. Unfortunately, the small sample size used in the pilotphase was not amenable for in-depth research on the feasibility of e-business foremerging black contractors and small and micro enterprises. This limitation inour study will be rectified in the next phase of the research agenda.

This pilot study is guided by the following primary research questions:

What are the key drivers of e-business in the South African automotive industry? How does top management in the automotive industry perceive e-business?

11

See, for example, US Government Working Group on Electronic Commerce (1999).12 Mainly because of the payoff in productivity, speed, supply chain integration, better planning, lowerinventories and more efficient logistics.13 General Motors, Ford and DaimlerChrysler.14 The IRP refers to the Industrial Restructuring Project which is based at the School of DevelopmentStudies (incorporating the Centre for Social and Development Studies), University of Natal, Durban.

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For what purposes do automotive firms use e-business tools? What types of IT has each firm invested in? What kind of impact has e-business had on each company? What are the benefits of e-business for the enterprise?

To what extent is each firm practicing e-business-enabled supply chainmanagement?

What are the barriers or obstacles to the adoption of e-business technologies ineach enterprise?

The empirical data for this study was generated through five different lines of

inquiry:

A questionnaire containing both open and closed-ended questions wasanswered by the IT director or an appropriate senior manager/director ineach firm (see Appendix 1). The questionnaire was pre-tested on a smallsample of firms in Durban, and reviewed by industry experts at the Schoolof Development Studies.

Discussions with key informants who are experts on the automotiveindustry, both in South Africa and internationally.

Factory visits to automotive assemblers and component manufacturers inboth the Eastern Cape and KZN.

Active participation in Benchmarking Club workshops in both the EasternCape and KZN.

A survey of the e-business literature, including the business press,

academic publications and Internet resources.

It is difficult to forecast how the Internet revolution will unfold, as it is very much ablurry, fast-moving target. Further, e-business is still at a very early stage in itsdevelopment, and its outcome is far from certain. The notion that Internetapplication may lead to a sustained higher level of economic efficiency is stillvery much at the level of theory, and will need to be explored in practice.However, a number of international companies such as General Motors, Ford,Cisco Systems, and Dell Computer, which have taken the lead in adoptingInternet-based systems, are beginning to report positive results in two key areas:value creation and cost control. This notwithstanding, rigorous independentresearch is still needed in order to get a clearer picture of the problems and thepotential of e-business. This pilot study contributes to this goal.

The aim of this Report is to provide a preliminary analytical foundation to helpfocus the policy debate, and to prepare the foundation for further research work.

At best, a pilot study can provide a window on broad issues, and it can framequestions and hypotheses. Accordingly, this report does both. The objective ofthis pilot survey was quite modest. The researchers set out primarily to obtain a

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general impression of the uptake of e-business in the Eastern Cape and KZNautomotive industry, and to map the IT architecture in each firm. We plan towrite an extended, more focused research proposal based on the findings of thepilot study. Moreover, the research findings were presented by the researchersto members of the KZN and Eastern Cape Benchmarking Clubs, at workshops

held in Durban and Port Elizabeth respectively.

15

The club members providedvaluable feedback on the findings, which are integrated into this report.

The report is organised as follows:

This, the First Section of the report, introduces the key issues at stake,highlights the reports research focus, and establishes the researchparameters.

Section Two briefly reviews some of the key trends in the globalautomotive industry, especially that which pertains to the Internet and e-business.

Section Three provides a brief description of the KZN BenchmarkingClub, concentrating on its terms of reference and some of the majorchallenges facing its members.

Section Four presents a snapshot of the Eastern Cape BenchmarkingClub, along the lines of Section Three above.

Section Five provides the conceptual foundation for the present study,and presents a consistent theoretical calculus for the analysis of thesurvey findings. In this section we define what is meant by the term e-business; briefly discuss the importance of networks; review potentialbenefits of e-business for the automotive industry; examine the issue of

supply chain integration in the automotive industry; briefly consider thelikely impact of the Internet on value chains; and tentatively look at how e-business has been received by the South African automotive industry.

Section Six presents a synopsis of the main research findings. Section Seven, the conclusion, ties the report together by flagging the

cardinal points emanating from the research.

Section Eight presents a set of recommendations for the club memberswith regard to improving their e-business performance.

Section Nine briefly sketches the policymaking challenge for government. Section Ten identifies several areas where original and fundamental

empirical research is both possible and desirable. Section Eleven comprises the core empirical component of this report; it

presents and analyses the findings in full, in terms of the analyticalframework established in Section Five.

15 The empirical findings were also disseminated through articles in the Eastern Cape and KZNBenchmarking Club Newsletters.

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2. Key Trends In The Global Automotive Industry

2.1 The Move Towards Greater Collaboration

The automotive industry can best be described as a producer-driven supplychain with multi-layered production systems that are organised hierarchically intotiers (Gereffi 1999) (see Figure 2.1 on the next page). The governance structureof the automotive supply chain has changed somewhat during the last twodecades. Previously, subsidiaries of transnational assemblers developed localsupply networks. Today, original equipment manufacturers (OEMs) and 1st tiersuppliers tend to form parallel global networks based on the global leadsourcing/follower supply model (see Kaplinsky 2000: 28-29).

The transnational OEMs are the major players in co-ordinating productionnetworks, including their backward and forward linkages. OEMs are the keyeconomic agents because they have the power to exert control over backwardlinkages with raw material and component suppliers, and forward linkages intodistribution and retailing. Vehicle assemblers are putting immense pressure onthe supply chain, reducing margins to such an extent that it is becoming difficultfor the component manufacturers to sustain their strategic investment levels.

Apart from cost reductions, the assemblers are also making increasing demandsfor enhanced productivity, quicker delivery times and time to market. In order toimprove the overall efficiency of their operations, assemblers are now taking anactive role in specifying the production and quality systems of their suppliers(Humphrey 1999). This has been prompted in no small part by innovations ininternal production flow and quality assurance (such as just-in-time [JIT]production) which necessitate close integration of production schedules, logisticsand quality procedures between OEMs and their suppliers.

Simultaneously, component manufacturers16 are being encouraged by the OEMsto invest in IT to support the assemblers own e-business initiatives. There is aglobal trend towards greater collaboration between vehicle assemblers andcomponent manufacturers in design, research and developing components. Thissignals a move from the sequential and arms-length pattern of relationships thatexisted previously between assemblers and their component suppliers. Forexample, over the last few years, assemblers have shifted more of theresponsibility for product design and production to their 1st tier suppliers. Thesenew sourcing patterns have replaced the traditional supply chains and revampedthe relationships that OEMs have historically had with their suppliers. In many

16 The global automotive component industry is currently facing the threat of shrinking profit margins andlower volumes as a result of slackening demand from the OEMs, a steady rise in raw material prices,excess capacity in highly industrialised countries, and increasing fuel prices. Rapidly shifting industry

trends are forcing automotive component firms to redesign their supply chains and expand their supplychain management initiatives.

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cases, producer-driven value chains are being driven by 0.5 and 1st tier suppliersrather than OEMs (Raphie Kaplinsky, personal communication).

FIGURE 2.1 : A Stylised Version Of A Simple Automotive Supply Chain

Consumers

Dealer Networks

OEMs/Assemblers

0.5 Tier Suppliers17

1st Tier Suppliers

2nd Tier Suppliers

3rd Tier Suppliers

Lower-Tier Sub-Suppliers

There is a very real problem of excess global production capacity in passengervehicle output, especially in the stagnant markets of some highly industrialisedcountries. Concomitantly, the automotive industry has become intenselycompetitive, with the worlds automakers actively seeking ways 18 to improve the

17 During the last two years, the automotive industry has witnessed the emergence of a group of supersuppliers who constitute the 0.5-tier of production. The 0.5-tier (such as Johnson Controls) operate at the

interface between the assemblers and tier-one suppliers. The 0.5-tier suppliers tend to engage with the

assemblers on collaborative projects such as modular design and production. Roughly speaking, they areboth component manufacturers and modular assemblers.18 This includes IT applications. For example, Scott Merlis, speaking at the University of Michigan'sannual automotive conference, estimated that General Motors, Ford and DaimlerChrysler will saveapproximately US$ 18.5 billion during the next five years by shifting design and engineering to the

Internet. It is expectedthat this will cut vehicle-development times to 18 months (from 36 months) withoutsacrificing safety, performance or fuel efficiency (www.theautochannel.com). There are some industryexperts, however, who are skeptical of such lofty claims, and doubt whether the gains are likely to be so

large, and at so little cost. For example, a study by KPMG, the accounting and consultancy firm, theexpected cost savings of e-commerce for the automotive industry have been exaggerated (www.ft.com).

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competitiveness of their products; cut development, production and marketingcosts of all their future models; standardise models and rationalise platforms; andrestructure their operations in order to get new models to the market sooner thantheir competitors.

This, in turn, has had a major impact on those firms who are manufacturingprincipally for OEM supply. For instance, industry analysts have witnessed, inrecent years, a frenetic consolidation (through acquisitions and mergers) in theautomotive component manufacturing business, and a discernible shift towardssource designing and modular production.19 The latter entails greater strategiccollaborative efforts (especially in R&D) between automotive componentmanufacturers and the OEMs.20 Also, 0.5 and 1st tier suppliers increasingly takeon the responsibility of managing the rest of the supply chain. The incentive forthe automotive component manufacturers is the awarding of longer-term globallead sourcing contracts by the OEMs.

Moreover, the role of 1

st

tier suppliers (of modules/sub-assemblies to the OEMs)has shifted from that of being simply automotive component manufacturers tothat of system integrators or network co-ordinators in the supply chain (Barnes1999a). This means that the co-ordination and synchronisation function of the 1st

tier suppliers vis--vis the sourcing of components from a greater number oflower-tier (2nd, 3rd, etc.) component suppliers has become accentuated. In sum,the supply chain pipeline for the OEM/OES (original equipmentmanufacturer/supply) market can be traced from the lower tier suppliers whosupply components to the 1st tier suppliers, who then integrate the product into amodule/sub-assembly, which is then channelled to the OEM on a just-in-time(JIT) basis.

Recently there has also been a significant trend in the global automotive industrytoward increased outsourcingor deverticalisation. Global automotive firms areincreasingly focusing on their core competencies/distinctive capabilities, and tendto outsource low value-added manufacturing activities, peripheral parts of theirbusiness, and particular sets of sub-processes in which they are not specialists.The trend towards outsourcing of non-core functions underscores the importanceof robust and reliable inter-firm links, and the growing importance of inter-dependence between firms in the automotive industry.

19

Modular production refers to the supply of complete units, such as sub-assemblies, rather than individual

components.20 The notion of assemblers developing close relationships with their 0.5 and 1st tier suppliers makes senseconsidering the critical role played by the latter in the making of an automobile. The building of close

relationships does not, however, preclude the exercise of power by the OEMs. Tensions, therefore, doexist.

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2.2 Increased Use Of The Internet

According to a study by KPMG21 and the Economist Intelligence Unit, theautomotive industry is lagging behind financial services, chemicals,pharmaceuticals, electronics, consumer markets and communications in terms of

e-business progress (www.ft.com and www.just-auto.com).22

Nonetheless, themajor players in the global automotive industry are beginning to increasinglyadopt the Internet for car retailing, electronic trade exchanges (Section 2.3) andinter-business e-commerce (Section 2.4). The growing importance of theInternet in the global automotive industry is captured and reflected in thefollowing quote by Jacque Nasser, CEO of Ford:

The Internet is transforming every piece of our company and our industry. Well

push this transformation even further to bring sustainable results to ourcustomers, our suppliers, and our dealers (Business 2.0: An Intelligence

Magazine, 01/01/2001, p.158).

Jack Smith, GMs chairman argues that:

A year ago, everyone was all over us about what we were doing with the Internet.

A lot has changed and reality has set in. One could say that it was overblown andtheres nothing to it, but we dont feel that way. The Internet is a way thecustomer will interact with the dealer...[and] the manufacturer with the dealer.

So we continue to stay very focussed on development of an Internet strategy. Wesee it as a powerful opportunity to take a lot of time and cost out of the equation(www.ft.com).

The leading assemblers are actively using the Internet as a tool to market theirvehicles. This is not altogether surprising, considering that, according to A.T.Kearneys analysts, as much as 50% of vehicle buyers in the US have beeninfluenced by information gained through conducting research on the Internet(www.cartoday.com). General Motors, for instance, has set up an e-commerceunit in 1999, called e-GM. The objective of which is to increase GMs Internetmarketing efforts to rapidly grow online vehicle selling. Ford, however, hasintroduced a novel marketing ploy through its website (www.fordvehicles.com),which is designed to provide online shoppers with comparison tools which listfeatures of Ford vehicles side-by-side with its competitors.

However, the leading assemblers have gone beyond Internet marketing. Anexample of an OEM which is at the forefront of e-business would beDaimlerChrysler. DaimlerChrysler has recently announced the introduction of anInternet-based programme called FastCar. The FastCar project will allowDaimlerChrysler to leverage Internet technology, interconnecting the company's

21 The accounting and consultancy firm.22 E-business progress was measured by advances in technology and the degree senior management wasinvolved in implementation.

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design; engineering; manufacturing; quality; finance; procurement; supply; sales;and marketing activities. FastCar is the e-architecture which it is believed willprovide real-time transparency to the product development process; increase itsspeed (i.e. cut development cycles) and precision (i.e. test parts and assemblyprocesses before they are used for production); reduce waste from the

administrative, supply and logistics processes.; and increase product quality.FastCar also provides the digital tools to communicate throughout the companyand with DaimlerChryslers supplier network. DaimlerChrysler has also recentlyconsolidated its Internet business activities into a new unit called DCX Net toimprove coordination and efficiency in areas ranging from purchasing to sales(www.just-auto.com and www.theautochannel.com).

Nissan North America is in the second phase of a two-year project to use theInternet to integrate customer relationship management (CRM) software with itsmarketing and customer retention systems (www.nissandriver.com). Nissanplans to use the Internet to connect its call centres and fulfillment departments to

its dealerships in North America. The goal is to access customer information,analyse data and demographics, profile buyers, and do data mining via theInternet.

Dana Corporation is one example of a component manufacturer which isoperating at the e-business frontier. Dana is currently implementing a VirtualTime Engineering (VTE) programme, and a web-enabled global e-procurementand supply chain management system to enable the company to more efficientlymanage its US$ 8 billion in annual world-wide purchases (just-auto.com). DanaCorporation is one of the world's largest suppliers to vehicle manufacturers andtheir related aftermarkets. The company operates some 320 major facilities in 32

countries and employs more than 80 000 people. The company reported salesof US$ 13.2 billion in 1999 (www.dana.com).

General Motors, Ford and DaimlerChrysler also plan to exploit web-basedtechnology for business-to-employee (B2E) activities (www.ft.com). Theobjective is to intensify electronic communications with their respectiveworkforces through heavily subsidised Internet access. Thereby, making iteasier to channel corporate communications and information at the coal-face,and enabling employees to access the companys knowledge base(www.cartoday.com).

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2.3 Internet-Based Trading Exchanges

In the global automotive industry there has been a discernible trend towardsInternet-based electronic trading communities which introduce new suppliers andcustomers to each other. B2B online-trading exchanges for supply chain

interactions in open, Internet-based markets are an attempt to transform industrysupply chains that have worked in the same way for decades. Increasingly,global supply chains in the automotive industry are being formed and facilitatedby online exchanges.

Delphi Auto Systems, North Americas largest automotive parts maker, recentlyannounced that it would take an equity stake and join the European onlineautomotive exchange, TecCom. The move will give Delphi access to the US$ 80

billion European automotive spare parts market and help it to find customersoutside its main buyer and former parent, General Motors (Financial Times, 6

September 2000). Similarly, other large suppliers, such as Johnson Controls, the

interiors and seating group, are developing their own e-business platforms(www.ft.com).

Covisint, the giant Detroit-based global automotive virtual marketplace for

procuring supplies, has been developed by General Motors, Ford andDaimlerChrysler, and has been recently joined by Renault-Nissan. Oracle andCommerce One are the main technology providers for the exchange, and haveequity stakes in Covisint. Covisints founding companies plan to move all theirbusiness to the joint electronic exchange with a turnover of US$ 250 billion and60 000 suppliers (The Economist, 23-29 September 2000). The major globalautomotive suppliers have already publicly expressed their support for Covisint.23

It has been estimated that dealing with suppliers online could reduce the cost ofmaking a vehicle by as much as 14% (The Economist, 23-29 September 2000).

Apart from serving as a central marketplace for car components, supplies,services and information procurement, Covisint is aiming to offer integratedsupply chain management, product development, production planning, and isalso negotiating links to other online trading hubs (such as Metalsite.com, e-steel.com and MetalSpectrum). It is envisioned that universal and unified supplychain enterprise networks such as Covisint could provide the basis for a commoncommunications network for the global automotive industry. In a few years time,this concept will supposedly enable companies to reduce the number of low-

value business processes, both upstream and downstream, by having theirbusiness partners perform such operations. This is in line with the growing trendtowards outsourcing in the global automotive industry that was identified inSection 2.1.

23 These companies include: A.K. Steel; ArvinMeritor; Autoliv; BASF; Dana Corporation; DelphiAutomotive; Denso International America; Dura; Ernie Green Corporation; Federal Mogul; Flex-n-Gate;

Freudenberg NOK; Johnson Controls Inc.; Lear Corporation; Magna International; Plastech; TowerAutomotive; Visteon; and Yazaki International.

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The launch of Covisint, however, has been delayed due to regulatory problems(antitrust issues, etc.) in the US and Germany. There was some concern thatdominant virtual exchanges will reduce free competition and lead to theestablishment of cartels. This has raised fears about the possibility of collusion

and price-fixing by the big companies (Financial Times, 11 September 2000). Thecollective buying power of industry giants could theoretically be used to drivedown suppliers prices and squeeze some of them out of the market. However,after careful deliberation, both the US Federal Trade Commission (FTC) and theGerman Bundeskartellamt (cartel authority) decided unanimously not to block

Covisint. The aforementioned regulatory agencies argued that the Covisintventure, i.e. the formation of potentially the world's largest e-business tradingexchange, held great promise for reducing costs and increasing efficiencies in the

automotive industry, even while it increases the power of the assemblers.

GM, Ford and DaimlerChrysler also plan to launch a joint internet portal, called

CollisionLink, which will allow dealers and their wholesale customers, such ascollision and mechanical repair shops, to source original equipment partselectronically (www.ft.com). This is a joint venture with Bell and Howell, whichwill be the lead technology partner. The B2B electronic-based ordering systemfor OEM replacement parts and service will initially be introduced in North

America in early 2001, thereafter it will be rolled out globally. It is envisioned thatthe B2B Internet-based system will eventually support all dealer wholesale partstransactions, and will automate and integrate the supply chain between the OEM,its dealers and collision and mechanical repair workshops. The global market forautomotive parts and services is estimated to be worth US$ 550 billion annually(www.cartoday.com).

CollisionLink aims to cut costs and increase efficiency by speeding up andautomating the ordering and fulfilment processes between parts dealers andrepair shops. General Motors, Ford and DaimlerChrysler aim to control a biggershare of the worlds collision repair business, to increase sales of OEM parts,and to give their franchised dealers a competitive edge over the independentparts manufacturers (www.cartoday.com).

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2.4 B2B E-Commerce

The hype in the media focuses on business-to-consumer (B2C) Internetinteractions along the lines of the retail dot.com companies (e.g. Amazon.com,Musica.co.za, etc.). This is commonly referred to as e-commerce, thereby

creating the misconception that Internet-based e-commerce is primarily aconsumer business. However current trends seem to indicate that e-commerceis likely to be dominated by business-to-business (B2B) e-commerce (typically asupplier, manufacturer or distributor) in the near future, both in terms of volumeand the number of firms affected (see Table 2.1 on the next page).

There is a great deal of variation, however, in the numerous B2B e-commerceestimates of management consultancy and market research firms. The hugevariance is due to differences in how e-commerce is defined and how it ismeasured (see OECD 1999). According to Gartner Group, which is anauthoritative source on measures of the Internet economy, the world-wide B2B

market for all industries and sectors is expected to grow from R870 billion in2000 to R43.7 trillion in 2004, representing 7% of the forecasted R630 trilliontotal global sales transactions (F&TNet 2000: 30). These figures are, however,speculative, and therefore should be viewed cautiously.

Many astute observers believe that B2B e-commerce, linking buyers and sellerselectronically along the supply chain, is set for a rapid take-off in the automotiveworld.24 The longer and the more complicated the supply chain, as is the casewith the automotive industry, the bigger the potential gains from B2B e-commerce are likely to be. Table 2.1 shows that the automotive sector is thesecond largest industry in vertical B2B world markets, and it is growing at a rapid

pace. It is therefore safe to assume that, based on current projections, B2Btrade in the automotive industry is likely to flourish in the years to come.

24 See www.just-auto.com and www.cartoday.com.

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TABLE 2.1: The Rise Of Global B2B E-Commerce (US$ billions)

INDUSTRY 1998 1999 2000 2001 2002 2003

Computing &Electronics

20 50 121 229 319 395

Motor Vehicles 4 9 23 53 114 213

Petrochemicals 5 10 23 48 97 178

Utilities 7 15 32 63 110 170

Paper & OfficeProducts

1 3 6 14 31 65

Shipping &Warehousing

1 3 7 15 33 62

Food & Agriculture 0.3 3 6 13 27 54

Consumer Goods 1 3 6 13 26 52

Pharmaceutical &Medical

0.6 1 4 9 20 44

Aerospace &Defence

3 7 15 26 34 38

Construction 0.4 2 3 7 14 29Heavy Industries 0.1 1 3 5 9 16

Industrial Equipment 0.1 1 2 5 9 16

Total $43bn $108bn $251bn $500bn $842bn $1,332bn

Source: Forrester Research quoted in Intelligence: Business in the Internet Age, May 2000, p.51.

The key trends identified in this section of the report emphasise the centrality ofIT in improving the operational efficiency and overall organisational effectivenessof automotive companies. In particular, there is a heightened need forautomotive companies to:

Maintain flexible internal infrastructures that allow their organisations toadapt quickly and effectively to changing market conditions.

Set up an appropriate (i.e. customised and robust) IT infrastructure inorder to engage in B2B e-commerce, and to participate in Internet tradingexchange networks.

Fully network every aspect of their internal and external businessoperations.

Use the Internet to: move business processes online; connect to suppliers,customers and partners; understand and respond better to theircustomers; and empower their employees with the rapid delivery of

mission-critical business information. Reduce information asymmetries by adopting seamless business-to-

business (B2B) electronic communication. The objective here is toexchange richer and more timely information between trading partners,and to send information deep into the value chain.

Proactively engage in IT-enabled supply chain integration andrationalisation.

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3.The KZN Benchmarking Club

The KwaZulu-Natal Benchmarking Club was initially formed by a group of elevenautomotive firms in November 1997, and has subsequently increased to twelvemembers. The Club has as its prime objective the continuous improvement of itsmembers operational competitiveness through the generation of comparativedomestic and international benchmarks.25

During the time of the e-business survey, the Club consisted of twelve members:eleven automotive component manufacturers (viz. Autoplastic; DCM; Feltex;G.U.D. Filters; Hesto Harnesses; Natal Die-Casting; Ramsay Engineering;Shurlok; Smiths Manufacturing; Venture; and Webroy) and one vehicleassembler (viz. Toyota South Africa). However, one of the componentmanufacturers was unable to participate in the e-business survey because thefirm in question was operating in crisis mode and undergoing a disruptiverestructuring process. The net result of which meant that all benchmarking clubactivities relating to this firm were temporarily suspended during this hecticperiod. Nevertheless, the eleven club members that comprised the sample forthis study are representative of the major players in the KZN automotive industry.The OEM, Toyota SA, is the major assembler in KZN and the ten automotivecomponent manufacturers are the key component manufacturers in the province.

However, it is important to emphasise that club members are firms who areseeking to improve their competitiveness through a learning network. This is afeature which potentially distinguishes them from the provinces other automotivecomponent manufacturers who are not part of the Club. This, however, does notmean that the other component manufacturers are not striving to become world-class manufacturers in their own way.26

The component manufacturing firms that are part of the KZN Benchmarking Clubsupply to Toyota SA (both OEM and OES distribution channels), the other twoKZN OEMs (viz. MAN Trucks and Bell Equipment27), and to OEMs based in theEastern Cape and Gauteng (Barnes 1999b). In addition, the independentaftermarket (operating in relatively stable technology products such as batteries,air filters, etc.) and the export market are also significant markets for clubmembers.

The automotive components manufactured by club members can be brokendown into the following categories: bonnet and gear locks; automotive trim; metal

forming/pressing; electronics; foam/plastic/rubber moulding; engine parts; andheat transfer. Club members firms are located mainly in the Southern Durbanindustrial basin, Pinetown and Pitermaritzburg.

25 The Eastern Cape Benchmarking Club has a similar mandate.26 Again, the same applies to the Eastern Cape Benchmarking Club.27 An articulated dump truck manufacturer.

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The ownership profile of the automotive component manufacturers that are partof the KZN Benchmarking Club comprises mainly of subsidiaries of South Africanowned holding companies, with the exception of three firms: two privately ownedindependent South African companies, and one owned by a US multinational. Inview of the global trends in the automotive industry (such as networking,

consolidation, the design and marketing strength of MNC operators, etc.) andgiven that the South African automotive industry is relatively small, it is highlyunlikely that South African automotive component companies supplying to theOEM/OES market can continue indefinitely as independent 1st tier componentfirms. The prospects of independent 1st tier component firms becoming lockedinto closer relationships with multinational corporations (MNCs), or even beingacquired by MNCs, is therefore quite high.

The Durban-based OEM, Toyota South Africa, is a largely locally owned firm withthe Toyota Motor Corporation (Japan) owning only 27.8% of the company. Itassembles almost exclusively for the domestic market. In 1998, Toyota SA

exported only 1037 passenger cars (down 13.7% on 1997 figures) and 1813commercial vehicles (down 30.3% on 1997 figures) (NAACAM 1999: 12). ToyotaSA is one of two remaining South African owned major vehicle assembles.28

Toyota is generally regarded as the most successful vehicle manufacturer inSouth Africa in terms of both passenger and commercial vehicle sales, in which itis the indisputable market leader (Barnes 2000). Notwithstanding this, ToyotaSA reported a R94.9 million loss from ordinary operations for the first half of2000, 108% higher than for the same period in 1999 (www.cartoday.com).

Toyota SA has rather weak networking links to global value chains. Toyota SAsconnectedness appears to be largely local, primarily because its licensing

agreements prevents it from accessing Toyota Japans global networks. ToyotaSA has not yet been incorporated into Toyota Japans global sourcingoperations. Toyota SAs 1st tier suppliers, for instance, have not forged an equityrelationship with Toyota Japans lead source automotive componentmanufacturers. In addition, Toyota Japan and its global lead source componentsuppliers have not initiated and secured manufacturing operations in South

Africa, unlike the German-owned OEMs. It may well be that in order for ToyotaSA to succeed under the MIDP29 it may need to become a full subsidiary of itssource company and be integrated into global supply and distribution networks(Business Report, 12 September 2000).

Toyota SAs competitors are wholly owned subsidiaries of their overseas parentcompanies and therefore have a direct link to global supply and distribution

28

The other South African majority-owned OEM being Delta Motor Corporation.29 In September 1995 the government launched a Motor Industry Development Programme (MIDP) topromote greaterintegration of the domestic automotive assembly and component industries into the globalautomotive arena. The primary objective of the MIDP was to improve the international competitiveness of

the South African automotive sector, and to grow the assembly and component industries, especiallythrough exports. The MIDP is operational until 2002.

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networks. Unlike VW and BMW30 who have been instrumental in facilitatingcomponent export contracts, Toyota SA does not act as a major conduit forautomotive component exports for its suppliers, many of which are clusteredaround its Prospecton plant in Durban. 31 However, Toyota SA through its officialdealerships controls the replacement market for automotive components. This

provides a channel into the original equipment supply (OES) market for thoseclub members who manufacture replacement parts.

The lack of global exposure will make it increasingly difficult for Toyota SA and itsautomotive component manufacturers to sustain the inevitable waves ofinternational competitiveness pressures that will cascade over them. In the newglobally networked operating environment, component manufacturers who areheavily dependent on Toyota SA will be at a serious competitive disadvantagevis--vis the more outwardly-oriented automotive component manufacturersbased in KZN, Eastern Cape and Gauteng. Inclusion in the global automotivesupply network is critical for survival.32 However, the KZN automotive

components industry as a whole is not locked exclusively into the domesticautomotive market. On the contrary, Barnes (1999b) shows that export volumeshave increased significantly over the last few years. The recently promulgated

African Growth and Opportunity Act (AGOA) in the US should enable the SouthAfrican automotive industry to strengthen exports to the United States. AproposAGOA, South African produced vehicles will, subject to certain conditions, qualifyfor duty free and quota free access into the US from January 2001 to December2008.

30

BMW plans to export approximately 37 000 units of the 3-series in 2001 to various international markets(mainly the UK, US and Japan). It is estimated that about 400 South African supplier companies will

benefit from BMWs export venture (www.cartoday.com).31 Many of the latter are also club members, and hence respondents in this IRP e-business survey.32 Only then will suppliers be able to compete for business from other assemblers, develop strategic

alliances to gain broader geographical coverage, and gain access to technology and designs that areessential for winning contracts.

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4.The Eastern Cape Benchmarking Club

The Eastern Cape Benchmarking Club was formed in 1999, and consists ofseven members: one OEM (viz. Delta Motor Corporation) and six automotivecomponent manufacturers (viz. Gemtec; Spicer Axle; the two Shatterprufe

plants33; Guestro Automotive Products; and Guestro Forge).34 One automotivecomponent manufacturer was unable to participate in the IRP e-business survey.The two Shatterprufe plants completed one questionnaire as they have a similarIT infrastructure and similar IT management systems. Similarly, the IT director atGuestro Automotive Products (GAP) filled out one questionnaire for both GAPand Guestro Forge.

The seven club members are concentrated in the Port Elizabeth-Uitenhageautomotive industrial zone. The automotive components manufactured by clubmembers can be broken down into the following categories: laminatedwindscreens and toughened door and rear glasses; rear driving axles; front and

rear hubs and spindles; propshafts; suspension products; steering gearassemblies and components; closed die hot forgings; axle shafts; CV joints; towhooks; cylinder heads; and intake manifolds. The component manufacturerssupply to the OE, domestic, P&A, and export markets. The ownership profile ofthe component manufacturers is as follows: one is a subsidiary of a foreigncompany, and the others are subsidiaries of domestic companies.

In recent years Delta Motor Corporation has experienced a growth in directsourcing from foreign suppliers. The Eastern Cape OEMs supplier base can besummarised as follows: 42.7% of Deltas raw material and component suppliersare international firms, 29.7% of suppliers are local (i.e. located in the Eastern

Cape), and 27.6% of suppliers are national (i.e. located in South Africa butoutside the Eastern Cape). Of Deltas five major component suppliers, three areforeign-based35 and the remaining two are located in the Eastern Cape36. Fourof Deltas five major domestic component suppliers are located in the EasternCape (viz. Port Elizabeth, Queenstown and Uitenhage), with the other located inGauteng (viz. Johannesburg). Collaboration and consultation with domestic

suppliers usually takes the form of workshops, joint ventures and supplierdevelopment programmes.37

Delta Motor Corporation is a South African majority-owned OEM38 producingpassenger cars and commercial vehicles primarily for the South African market.

33 Struandale and Neave Township, Port Elizabeth, respectively.34

Guestro Automotive Products and Guestro Forge are part of the Dorbyl Automotive Technologies Group,the largest automotive component manufacturer in Southern Africa.35 Japan (Isuzu Motor Ltd.), Germany (Adam Opel AG) and Brazil (General Motors of Brazil) respectively.36 Lear Corporation (Port Elizabeth) and Spicer Axle (Uitenhage) respectively.37 Supplier development programmes tend to focus on domestic suppliers with quality and/or supply

problems, as well as suppliers with export potential.38 Present ownership of Delta: 51% local management and 49% General Motors.

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For example, in 1998 Delta exported only 350 passenger cars (down 44.7% on1997 figures) and 1600 commercial vehicles (down 16.1% on 1997 figures)(NAACAM 1999: 12). Delta has a technical agreement with the Detroit-basedGeneral motors (GM). Within the scope of the technical agreement, Delta hassubstantial independence from GM vis--vis sourcing components. Delta,

however, is crafting a closer relationship with General Motors (GM), an OEMwhich is at the forefront of the e-business revolution. The impact of thisrelationship on Delta are likely to be:

Joint supply negotiations. Greater export opportunities. Realignment of the organisation to core business processes. Consolidation of material supplies. Greater participation in business-to-business (B2B) trade. Electronic dissemination of supplier quality procedures. Business-to-customer (B2C) transactions by allowing online ordering of

vehicles and stock visibility in P&A.

More stress on global sourcing and integration with GMs World-widePurchasing Group. This could lead to re-sourcing.

Figure 4.1 (on the next page) provides an indication of how important theautomotive component manufacturers are as a source of employment in bothKZN and the Eastern Cape. Figure 4.1 includes the average employment figuresfor thirteen (out of a total of nineteen) 39 club members only, all of whom areautomotive component manufacturers. The average employment figures would

be boosted considerably if we were able to get accurate employment figures forthe 2 OEMs (viz. Delta and Toyota SA). Figure 4.1 shows that averageemployment levels peaked in 1996 (455.00 for the Eastern Cape and 263.50 forKZN). Thereafter it has steadily declined, reaching a low of 216.04 in KZN and335.0 for the Eastern Cape.

39 12 KZN club members and 7 Eastern Cape club members.

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FIGURE 4.1

Average Number of Employees (Component Manufacturers)

0.00

100.00

200.00

300.00

400.00

500.00

1994 1995 1996 1997 1998 1999

NoofEmploy

ees

Eastern Cape (N=5)

KZN (N=8)

Source: IRP Database

Figure 4.2 below illustrates the average turnover figures for the club members,and hints at the potential contribution that the component manufacturers in theBenchmarking Clubs make to the regional and national economy. It is important

to bear in mind that Figure 4.2 does not include the turnover figures for 6component manufacturers and the 2 OEMs.40 According to Figure 4.2, averageturnover figures for the Eastern Cape Benchmarking Club peaked in 1997 (R 99737 000), and thereafter it has steadily deteriorated. By contrast, averageturnover figures for the KZN Benchmarking Club has improved between 1996 (R47 345 922) and 1999 (R 60 779 499).

FIGURE 4.2

Average Turnover (Component Manufacturers)

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

1995 1996 1997 1998 1999

Rands

Eastern Cape (N=3)

KZN (N=8)

Source: IRP Database

40 Some club members regard turnover figures as strictly confidential within the Club (and not to be

publicly divulged), while others are reluctant to reveal their turnover figures to the IRP researchers. Hence,the missing cases.

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5.E-Business And The Automotive Supply Chain

5.1 What Is E-Business?

E-business is electronic business, and, as such, it is not a new invention.41

Whatis relatively new, however, is the application of Internet technology to open up aworld of low-cost online opportunities for companies of all sizes. The Internetcreates the possibility for a new era of networked economic activity with its own,unique set of competitive dynamics, and digitally-based economic arrangements.Today, the focus is on networks that use open, non-proprietary Internet protocolsand the Internets key infrastructure applications (i.e. email, the World Wide Web,HTML, and the browser). This differs from earlier forms of e-businesstechnologies such as EDI which required pre-existing relationships, expensiveand complex custom software, and dedicated communication links In manycases, the system required strictly compatible equipment (OECD 1999: 28).

E-Business is essentially an Internet application. The Internet is an ubiquitous,interactive system based on a multipurpose digital computing platform whichallows the simultaneous exchange of information in digital form among an infinitenumber of nodes, each with its own computing power (Kenney and Curry 2000).The Internet is a prime example of a radical disruptive technology 42 that has thepotential to induce structural transformation, and disrupt and change the waybusiness is done. This is in contrast to a sustaining technology which offers thecompany predictable improvements.

The new e-business technology refers to the IT of the Internet revolution a

common foundation, standards-based tools, platform-independent browsers, andnetwork-facilitated communication and collaboration. E-business entails a neweconomic morphology, organised around tele-communicated networks ofcomputers which are at the heart of information systems and communicationprocesses. At the core of the connectivity of the global economy, and of theflexibility of informational production there is a new form of business organisationbased upon networks and tooled by IT: the e-corporation. An e-corporation is a

flexible, adaptive organisation, able to evolve with its environment.

E-business is believed to be in full coherence with the productive, creative logicembedded in the digital Information Economy. An e-corporation recognises thepower of strategic partnerships with its business constituencies. 43 The alliancesfoster the complete transaction loop from product search to shipping confirmation

41

For example, large corporations in South Africa have, for many years, been using electronic datainterchange (EDI) supplied by value-added networks (VAN) operated over leased telephone lines.42 Examples of disruptive technologies include: the steam engine; electricity; internal combustion engine;the transistor; telegraph; railroad; automobile; airplane; and telephone.43 Brown (1996: 27) lists the following types of strategic alliances: licensing agreements; joint ventures;

buyer-seller relationships (such as JIT production); R&D alliances; marketing agreements/dual marketing;franchising; consortia between companies; and joint access to technology and markets.

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with inventory updates. An e-corporation is essentially an enterprise which isdesigned for success in the Information Economy. 44 E-business brings into playan organisations resources and partners in new and innovative ways to clearstrategic advantage. However, the potentialof e-business goes far beyond newtechnologies. It has the potential to impact and engage all aspects of a business

(strategy, process, organisation and systems) to extend the business beyond itscurrent boundaries. In this sense, e-business is a source of significant strategicadvantage.

Although the precursor of the Internet appeared in the late 1960s, e-business isprimarily a product of six significant transformations in the economy (see Figure5.1): the globalisation of markets; shift towards an economy based on knowledgeand information; the growing prominence of ICTs in the economy; innovations inbusiness organisation and practice (viz. JIT, TQM, Knowledge Management,outsourcing, strategic alliances, etc.); the liberalisation of the telecommunicationssector in OECD countries; and technological innovations such as email, the

World Wide Web, Internet browsers, and the expansion in the volume andcapacity of communication networks (viz. optic fibre, digital subscriber line

technologies, and satellites). These six factors are yoked together, and areclosely linked to the emergence of e-business.

FIGURE 5.1 : Interrelated Factors Giving Rise to E-Business

E-BUSINESS

GlobalisationOf Markets

Shift TowardsAn Economy

Based OnKnowledge

AndInformation

The GrowingProminence Of

ICTs In TheEconomy

Innovations InBusiness

OrganisationAnd Practice

Technological

Innovation

Telecom

RegulatoryReform

44

The New Economy is global and it is based on business networks. Information and knowledge form the

building blocks of the New Economy, and it is IT which provides the technological architecture whichamplifies and focuses brain power (rather than muscle power, as was the case in the Industrial Revolution)through rapidly proliferating information-rich connections.

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A consistent definition of e-business is presently lacking in the literature. Thefollowing definition is provided to help focus the policy debate. E-business refersto a suite of information and communication technologies, software, protocolsand standards for networking between computers, which is embedded withinbusiness processes. Simply put, e-business is thus any business process

performed via a computer-mediated network (see Box 5.1 for the different typesof e-business). Business refers to all activity that generates value both within afirm (internally) and with suppliers and customers (externally). Economic value45

is added to internal and external business processes through the use of flexible,multi-interface connections emerging through digital, electronic networks. E-business is thus not, as media hype would have it, only about buying and sellingover the Internet, but improving business performance through networkconnectivity to improve service and reduce costs, open new channels, transform competitive landscapes (Fortune, 25 October 1999), and identify newvalue streams.

BOX 5.1: Types Of E-Business

There are at least six different types of e-business, viz.:

business-to-business (B2B) business-to-customer (B2C) business-to-employee (B2E) business-to-government (B2G) customer-to-customer (C2C) (i.e. consumers auctions as epitomised by the auction site

eBay.com)

consumer-to-business (C2B) (i.e. reverse auction sites such as Priceline.com)

B2G, C2C and C2B e-commerce are outside the scope of this study, and will not beexplored further in this report.

E-business and e-commerce tend to be used interchangeably in the literature.The two terms often get conflated into an amorphous textual reading. Thisconceptual confusion often leads to policy incoherence. We argue that e-business transcends e-commerce. E-commerce refers to business transactionson the Web, and is seen primarily as a way to increase external revenues andbusiness. E-business, on the other hand, refers to the full range of business

transformations brought about by the use of electronic networks. E-business thus hasa much more ambitious goal, which goes far beyond buying and selling over theInternet, or e-commerce, and deep into the processes and culture of anenterprise. It involves every aspect of a companys business, and it is expectedto create a much more interactive business environment to improve businessperformance.

45 Value is measured in terms of prospective capital growth rather than profit rates.

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While the business media tend to focus on the retail business-to-consumersegment of e-commerce (i.e. Amazon.com, Borders.com, etc.), it is reallybusiness-to-business (B2B) e-commerce which dominates the market, and it isgrowing rapidly, albeit from a small base. Inter-business e-commerce can bedivided into two categories: open marketplace-based trade anddirect trade between

partners. The former takes place at various Internet-based auctions or exchangesites, whilst the latter occurs either through a firms website which has an onlinepurchasing function or an EDI-type network. Presently, much of the B2B e-commerce transactions are US based. But this will change over time. B2B e-commerce is likely to spread globally and grow rapidly because of its potentiallysignificant impact on business costs (associated with inventories, sales execution,procurement, and distribution), and its assumed increase inproductivity gains.

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5.2 The Importance Of Networks

In his magnum opus devoted to the analysis of economy and society in theInformation Age, Manuel Castells (1996, 1997 and 1998) lucidly documents therise of the network society and the culture of virtuality. 46 Castells, adopting a

maximalist approach, correctly states that the information mode of development isthe current phase of capitalist development. It is this information mode thattransforms production and gives rise to a society fundamentally based uponnetworks of information exchange. And the Internet, as a global matrix ofinterconnected computer networks, is emblematic of the power of informationflows, and intra- and inter-firm linkages in knowledge-intensive industrialdevelopment.

In the Information Age, the critical organisational form in the automotive industryis networking. A network is a dynamic nexus of inter-dependent units (Castells

1996, 1997 and 1998). In a network it is IT which provides the fundamental basis

for organising instrumentality. And it is the ubiquitous Internet, with its open-ended structure, which provides the technological medium that enables globalproduction networks to function in business. As highlighted in Section 5.1, e-business technologies are a critical source of value creation in the InformationEconomy. The most critical distinction for a firm in this organisational logic is tobeornot to be in the network. Firms that are not anchored in the networking logic

are at a serious competitive disadvantage, and at risk of being bypassed oreliminated from the mainstream of economic development. In sum, a firms fatedepends on its positioning in the network.

The bedrock of e-business is, therefore, the network, which is the physical

interconnection of IT devices to enable seamless information transfer and accesswithin the enterprise, and be extensible across the entire supply chain. Thisensures maximum benefits to applications in the supply chain process. The e-business network should be seen as an evolutionary, complex web ofconnections between firms which are online. It is argued that the value of beingnetworked increases exponentially with the number of connections, while thecosts only increase linearly.47

Gereffi (1999) views the co-ordinationof the entire value chain as a key source ofcompetitive advantage that requires using networks as a strategic asset.

Improving competitiveness requires both intra- and inter-firm restructuring which

places strong emphasis on the linkages between firms, i.e. to the value chainsand clusters within which enterprises are embedded. There is thus a shift awayfrom primarily firm-centred activity to a network-centric focus (see Castells1996), in which companies will have to conceive of themselves as located within

46 The culture of virtuality refers to the culture that is embodied within the network society.47 This proposition is attributed to Bob Metcalfe, founder of the networking vendor, 3Com (FinancialTimes, 18 October 2000).

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a shifting network of suppliers, competitors and customers their boundaries willaccordingly be highly fluid.

E-corporations believe that they have discovered a competitive advantage inmaking information and knowledge available to their networked partners. Such

networks enable trading, sharing and enhancing knowledge to build value formutual benefit. Firms work in a strategy of shifting alliances and partnerships,specific to a given product, process, time and space. Moreover, these co-operations are based increasingly on sharing of information. New ICTs based onmicroelectronics, telecommunications, computers, and network-oriented softwarehave provided the digital nervous system for this New Economy to operate, and

have moved computer networks to the centre of the international economicinfrastructure.

Network-oriented ICTs through the compression of space, time and knowledgeallow for unprecedented speed and complexity in the management of the

automotive supply chain. Interconnected digital networks enable firms (theinsiders) to weave the constituent elements of the supply chain into competitiveproduction systems. The flexibility of the Information Economy, for example,makes it possible for OEMs to source their components anywhere in the world, inan endlessly variable geometry of value searching. This implies avoidingeconomically valueless, and circumventing devalued, territories or firms. Thus thesystem is exclusionary.

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5.3 The Potential Advantages Of E-Business

Finding the most valued uses for the Internet in business will probably take sometime. The forces and issues in play are only beginning, and the final outcome onbusiness models and market structure is still uncertain. Hence, it is difficult to

forecast how the specific applications of the Internet will unfold, and to predict theultimate magnitude of the changes set in motion. Nonetheless, some salient,theoretical advantages of e-business for the automotive industry are discussedbelow, while for the sake of brevity, a fuller list ofpotentialbenefits of e-businessfor the automotive supply chain is to be found in Box 5.2. The discussion whichfollows is based on the possibilities of the Internet for supply chain integration, asput forth by IT specialists, industry experts and advocates of the Internet in thebusiness literature.

It is envisioned by proponents of the Internet that much of the benefits of e-business are likely to be derived from the new possibilities that the Internet offers

for communication and distributing information in real-time. The benefits of e-business can be categorised into two key areas: viz. the potential for valuecreation and cost control. An important caveat is that e-business does not offer afriction-free mode of exchange devoid of transaction costs. The emergence ofintermediaries, and the costs associated with establishing trust and reducingrisks inherent in Internet trade, alone scuppers Bill Gates vision of the Internet asa tool for friction-free capitalism.

Inprinciple e-business tools have the potential to lower operational costs through

automated order and fulfilment processes, provide the ability to transact businessand access information in real-time, and connect to new and existing markets.

The potential for reduction in supply chain costs through online purchasingrepresents a significant profit opportunity across the value chain. Since real-timeinformation on forecasts, selling and inventory levels travel immediately throughthe supply chain, companies are more likely to maintain lower inventory levelswithout increasing the risk of part shortages. Stockpiles of inventory within thesupply chain for just-in-case events are, therefore, minimised because demandinformation is directly available to the entire supply chain.

The links between internal primary data repositories and business applications,and those of a firms partner have the potential to allow faster productdevelopment and distribution with higher product quality. It is claimed that

engineering change orders will update the bill of materials database which feedscustomer configuration and manufacturing systems. These systems,theoretically, will be shared with key suppliers in real-time, allowing co-ordinatedaction and faster time to volume. Enhanced customer satisfaction is likely toaccrue since customers have access through the Internet to independentlybrowse and price products, order and configure them, view shipment schedules,monitor delivery and receive copies of invoices.

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The potential system-wide gains in efficiency to be reaped when firms are linkedacross the automotive industry is substantial. Furthermore, significant reductionin costs associated with inventories, sales execution, procurement, anddistribution are expected. Achieving these efficiency gains is contingent on anumber of factors, however, such as: access to e-business systems and the

needed skills, a firms path dependencies, and firms willingness to open up theirinternal systems to suppliers and customers. The latter raises policy issuesconcerning security and potential anti-competitive effects as firms integrate theiroperations more closely (OECD 1999: 75-76).

The Internet has the potential to bring about substantial savings in inventorycarrying costs, primarily through forecasting demand more accurately. Eachstage of the automotive value-added chain, for example, holds considerableinventories. Ford, for example, has deployed an Intranet48 which connects 120000 workstations at offices and factories around the world. It is believed that theIntranet has contributed to reducing the time needed to get new models into full

production from 36 to 24 months (OECD 1999: 63). Plans are already afoot toextend the Internet system in order to significantly reduce inventories and fixedcosts. The ultimate objective is to tighten the supply chain, and manufacture ondemand.

While most of the evidence supporting e-business-enabled supply chainintegration is anecdotal, speculative and theoretical, hard empirical evidence,particularly from the US, is slowly beginning to surface. Pilot tests of an EDIsystem extended across the Internet to a large number of suppliers and OEMs bythe US Automotive Industry Automation Group (AIAG) and the Manufacturing

Assembly Pilot (MAP) programme, would seem to support the merits of digital

supply chain integration:

The pilot generated a 58 per cent reduction in lead times, a 24 per cent improvementin inventory levels, and a 75 per cent reduction in error rates. When deployed more

widely in 2000, it is expected to save the US automotive industry an estimated $1billion a year(OECD 1999: 63).

Improved demand forecasting and replenishment of stocks via the Internet isestimated to lead to a reduction in overall inventories of US$250-$350 billion, orabout a 20 to 25% reduction in current US inventory levels. While this estimateis probably optimistic, pilot studies on the US auto market obtained a 20%savings, and even a 5% reduction would have a significant economic impact(OECD 1999: 13-14).

48 Internet-based network for company-use only.

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BOX 5.2: The Potential Advantages Of E-Business For The Automotive Industry

Improves supply chain management. Boosts revenues.

Cuts production cycle times. Improves customer service. Broadens market share. Creates interactive relationships with customers and suppliers. Delivers new products and services faster and better. And at a lower cost. Improves market transparency. Improves communication between trading partners (i.e. inter-company relationships),

and within the enterprise itself (i.e. intra-firm relationships).

Allows businesses to move beyond exchanging orders into more complexcollaboration in design, fulfilment and co-ordination.

Enormous cost savings are expected from areas such as standardisation andprocess efficiencies.

Increased value is realised by collaboratively balancing all resources and optimisingthe flow of goods, services and information from source to end customer.

Drives supply chain harmonisation. Allows closer synchronisation of the supply chain with the aim of reducing inventory

and shortening cycle times.

Increases value with preferred suppliers. Online e-commerce allows for more efficient supply chain management by cutting

out layers of middlemen.

Allows