Automotive OEMs Restructuring to Achieve A Profitable and Sustainable New Business Model
by Craig Fizgerald & Craig Thornton
Universal Advisor, 2007 Issue No. 1

Please also read the companion piece, "One Client's Perspective: How E&E Manufacturing Has Remained Successful"

Structural changes presently gripping the North American automotive industry represent the greatest period of discontinuous change in U.S. automotive manufacturing since the 1920s. These changes in structure, process, business model, and enterprise strategy will cascade massively into the lower-tier supply chain. This restructuring will provide a necessary cleansing and establish a sound foundation for growing sales and reestablishing profitability for a fatigued supply chain.

The Detroit Three (Chrysler, Ford, and General Motors) are in a high stakes race to quickly transition to new, profitable, and sustainable business models. High- priority changes already underway by various Detroit Three OEMs include rapidly adjusting assembly capacity to customer demand; designing and launching exciting “must have” vehicles in both established and new segments; improving vehicle residuals and vehicle brand equity; and eventually reversing market share declines.

Other signs indicating the Detroit Three are making substantial progress include:

• Hard decisions have already been made relative to aligning assembly capacity with sales demand, with more to come.
• Substantial liquidity has already been secured by Ford and GM to fund their North American restructuring activities.
• There appears to be a significant sense of urgency reflecting a new level of brutal honesty from Detroit Three management teams and boards of directors.
• There are abundant signs of substantial energy going into platform sharing and reuse, part communization, and improved assembly plant flexibility.
• United Auto Workers leadership has demonstrated substantial pragmatism in negotiations with the OEMs and suppliers.
• There’s substantial understanding of the codependence among OEMs and their supply base, recognizing that OEMs don’t compete with OEMs, but supply chains compete with supply chains.

This codependence will be reflected in a cascading effect of the Detroit Three’s restructuring into their lower-tier supply chains. Anticipated impacts associated with the restructuring of the lower-tier supply chain include:

• An approximate 50 percent reduction in the number of North American part suppliers.
• Adoption of five primary supplier models, including systems integrator (e.g., American Axle & Manufacturing, Inc.), mega tier two (e.g., Metaldyne Corporation), product specialist (e.g., Gentex Corporation), assembly specialist (e.g., Penske Corporation), and regional commodity suppliers (e.g., L&W Engineering Co. Incorporated).
• Transferring raw material pricing risk for globally priced raw materials from the supplier to the OEM/consumer.
• Greater private equity and public ownership of automotive supplier firms versus today’s model that still involves substantial ownership by closely held entrepreneurial enterprises.
• An eventual stabilization of components and assemblies procured off shore as sourcing decisions increasingly reflect total and real-value chain economics.
• Restoration of traditional investment levels by suppliers for items such as new property, plant, and equipment, product development, and research and development enabled by sustainable profit levels exceeding 5 percent EBIT.
• Greater geographic scope for many lower tier suppliers.

The pain related to future OEM and supplier restructuring will be substantial and will reverberate through the Midwest economy into the mid term. Rapid execution of this restructuring by both the Detroit Three and their supply chains represents the best opportunity for the North American automotive industry to position itself for substantial revenue and profit growth built around a new and sustainable business model.