A New Era Automotive Industry 2020

8/2/2019 A New Era Automotive Industry 2020

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A new eraAccelerating toward 2020

An automotive industry transormed


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The transormations to come 1

The restructuring imperative 2

Changing customers, changing demands 8

Technology to reect new sets o demands 15

Getting the right skills 22

The next chapter in industry history 26

Endnotes 28

Contents


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A new era Accelerating toward 2020 an automotive industry transormed 1

The transormationsto come

At least now, the picture is clear

For the past ew years, automotive leaders andobservers have witnessed an industry in peril. Aslowing global economy, coupled with decliningconsumer condence, has translated into dismalnew car sales in most markets.

But the slump has masked many outstanding

industry advancements. Standards o quality andproductivity, or example, have been raised withouta corresponding increase in price. Cars today aresaer, more uel ecient, and more technicallyadvanced than ever. And, the automotive workplacehas evolved rom an image o dark, dirty anddangerous to an environment o high skills,advanced technologies, and dynamic change.

Despite this, competitive and nancial pressureshave led to a number o high-prole bankruptcies.Production utilization in North America, Western

Europe, and Japan has dropped dramatically leading towidespread job losses. Even with discounts and otherpurchase incentives, consumers, wary o an uncertaineconomic uture, have yet to return to the showroomwithout extraordinary government incentives.

So, what will be the shape o the automotiveindustry as the world emerges rom the economicdownturn? In this report, Deloitte Touche Tohmatsussenior automotive leaders oer a perspective on thestructural changes and major customer, technology,and people trends expected to transorm theindustry over the next decade.

A massive shit in the competitive landscape willsee China and India emerge as major players in theindustry. These markets will join Western Europe,Japan, Korea, and the United States as the centerso design and manuacturing or original equipmentmanuacturers (OEMs) and their suppliers.

By 2020, as ew as ten volume OEMs groupsbased in these six major markets will account or90 percent o global sales. To remain competitive,

each will rely on higher volume global platormssupported by networked design centers in keyemerging markets.

An era o conscious consumption will emerge.Customers around the world will be more costconscious, especially in the developing world wheremillions o drivers will make their rst ever car purchase.

Environmental considerations will also weigh heavilyon the industry towards 2020. The erce race todevelop and produce electric vehicles, spurred byboth customer demand and government incentives,will mean that up to a third o all cars purchased indeveloped countries in 2020 will not be propelled byan internal combustion engine.

This technological imperative will escalate an alreadyintense war or talent by 2020. The workorce o theuture will not only need more complex skill sets but

will also need to be fexible so that companies canemploy them most productively. At every level, a moreproactive approach to training will be implemented,as part o a more progressive and comprehensiveapproach to talent management. The challenge toattract highly skilled workers will be especially acutein developed markets. Emerging markets, with theiryounger demographics and plentiul engineering talent,will pick up the slack let by the talent shortage.

What must not be lost in any o this is the increasingrole o government. Governments in all major

markets have become active industry players. Theirinvestments through emergency loans and incentivepackages will have a lasting impact on the industrysdirection. The nature o their continued supportto domestic companies, as well as energy andenvironmental policies, will do much to mold theautomotive sector over the next ten years.

To be sure, there will be no resumption o the statusquo. Automakers and their suppliers will need toreinvent themselves to meet the challenges o adramatically new global automotive landscape.


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2

The restructuringimperative

The current economic crisis has accelerated deep structural change in the automotive industry,

setting the stage or sustainable growth. High-cost exporting countries will see domestic

capacity closed as vehicle production continues to migrate to the new Detroits: Lower-cost

centers dotted across India and China and other locations in the regional trade zones o North

American Free Trade Agreement (NAFTA) and the European Union. High-volume global platorm

architectures will become the norm. And, convergence will drive the emergence o new business

models characterized by alliances with players rom other industries to support new technologies.

A recalibration o the automotive industry valuechain is in motion. The marked decline in salesover the past three years led to excess capacity inplants around the world, including North Americaand the European Union (see Figures 1 and 2).Some o the numbers are startling: Like most o itscompetitors, or example, Honda went rom ullcapacity in February 2008 to utilizing less than halcapacity (48 percent) a year later.1 Protability orOEMs has been hurt and margins or suppliers havesunk below the break-even point, triggering reducedcapacity, resourcing to stronger suppliers, a rash

o bankruptcies, and in some cases, the need orgovernment bailouts.

O course, the crisis will not last orever and short-term sales projections oresee over 70 million unitssold worldwide by 2015 (see Figure 3). Whileopinions dier about the timing o the turnaround,there is no doubt that the structure o theautomotive industry will be deeply transormed.

The decline o Detroit

Once the core o the global automotive industry,Detroits infuence has declined steadily over thepast ew decades. Sales o signature models havebeen slowed by the waning popularity o large carsand Detroits struggle to compete in the small carsegment. Whats more, Detroit has already lost itsleadership in engineering. Most cars manuacturedin 2007, or example, had their primary developmentin Asia and Europe and this trend is expected tocontinue into 2015 (see Figure 4).

100%

80%76%

85%

71%

86%

77%

43%38% 37%

48%44%

41%

48%

Fe

08

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09

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Chrysler Ford GM Honda Nissan Toyota Other

92% 90% 89%

80%

89%

83%

72%

53%

69%64%

57%

70%65%

2 00 7 20 09 2 007 2 00 9 20 07 2 00 9 2 00 7 20 09 2 00 7 2 00 9 2 007 2 00 9 2 00 7 20 09

Germany France Spain UK Italy Czech EU27

Figure 1: NAFTA light vehicle assembly capacity utilization (Feb 2008 vs. Feb 2009)2

Figure 2: European Union light vehicle assembly capacity utilization (2007 vs. 2009)3

Source: Wards Auto, Data Reerence Center

Source: Wards Auto, Data Reerence Center


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70

80

50

60

South America

North America

Japan/ Koreaehicles

illions)

30

40 South Asia

Greater China

Middle East/ AfricaNu

mberofv

produced(m

10

20

Europe

2008 2009 2010 2011 2012 2013 2014 2015

The rise o manuacturing in lower cost

regions

The move to lower cost regions will be driven bytwo orces: Cost and demand. The cost o laborin emerging markets continues to be a raction othat in the developed world (see Figure 5). To takeadvantage o the expanding population in emergingmarkets, OEMs will continue to shit more o their

production to be closer to their biggest source onew customers. For example, Greater China andSouth America will represent more than 50 percento growth in global light vehicle production rom2008 to 20154.

As the volume o cars sold in these emergingmarkets rises, it will be increasingly necessary orOEMs to move closer to the demand centers, saysRC Bhargava, Chairman, Maruti Suzuki India. Thiswill be or competitive reasons, which are strongerthan the lower cost reasons. Engineering or the

local customer is also critical, making it anothermajor driver.5

The expected growth o trading blocks (e.g., NAFTA,European Union, ASEAN, and Mercosur) will drivecontinued development o regional productionsystems, with a migration to lower-cost locationswithin each region. High exchange rate volatilityand rising transportation costs have led OEMs andsuppliers to ocus more on low-cost sourcing withina region. OEMs will increasingly look to balanceproduction and sales ootprints to reduce exposureto adverse exchange rate shits. The overall eecto this shit is that by 2020, there will be ewer carssold as imports rom outside a trade zone (e.g.,Korea to the United States or Japan to the EuropeanUnion). Even those cars with oreign labels will beproduced regionally. For that reason, OEMs welcomethe emergence o broader trade agreements thatsupport greater fexibility.

The new pockets o low cost areas within the regionwill become hubs or OEMs at the expense o highercost exporters such as Spain and Germany (in the

43

50

33

26

33

30

40

lopment

illions)

20

Primarydeve

byregion

(

9

14

1

0

10

Asia Europe Norh America Others

2007 2015

Figure 3: Light vehicle production orecast (millions o units)6

Figure 4: Falling primary development in North America7

Source: CSM Worldwide

Source: CSM Worldwide and Automotive News

$35.0

$40.0

10.0

12.0

$20.0

$25.0

$30.0

6.0

8.0

oflabor($/Hr)

erofvehicles

ced(millio

ns)

$5.0

$10.0

$15.0

2.0

4.0 Cost

Num

prod

$0.00.0

US /Canada

Mexico WesternEurope

EasternEurope

Japan SouthKorea

India China Brazil

Production (2008) Cost of LaborHigh cost

developed marketsLow costemerging markets

Figure 5: Labor cost comparisons ($/Hour)8

Todays high cost o production

Source: Cost o Labor Economic Intelligence Unit, Data Dictionary, Total Production 2008 WardsAutomotive Data Reerence Center


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4

Dongfeng Nissan,

5.5%

FAW-VW, 9.7%

Guangzhou Honda,

5.3%

Shanghai GM, 9.1%

Shanghai VW, 9.4%

Toyota JV, 9.3%Geely, 4.6%

Others, 40.2%

Cherry Auto, 6.8%

Joint venture sales

Chinese company sales

European Union) and the U.S. and Canada (withinNAFTA). This strategy is already unolding. Suzuki,or example, established plants in Hungary to supplythe European Union, while Volkswagen and Nissanmanuacture in Mexico to supply the members oNAFTA.9 Renault is building a ull-scale assembly plantin Morocco that will produce Logan-based cars orglobal export, mainly to Europe, starting in 2010.10

China on the move

Beore a Chinese company establishes itsel as aleading global producer, the industry will undergoa period o deep consolidation. This will reversethe relatively weak global market share positiono Chinese OEMs today (see Figure 6). In the nearterm, the Chinese government plans to consolidatethe top 14 local automotive players into 10 witha domestic market share in excess o 90 percent.Within the top 10, the government directive is ortwo or three to attain annual output o two million

units and our or ve to produce one million unitsannually.11 In most segments, the supply base isexpected to consolidate 30 to 50 percent.12

The government mandate also encouragesautomakers to develop their own brands, with atarget o boosting the share o Chinese domesticbrands to at least 40 percent o the national market.Meanwhile, domestic Chinese manuacturers havebeen charged with exporting up to 10 percent otheir product.13

Chinese OEMs will nd themselves in a erce battle orsupremacy in their own market. Management is highlymotivated to stake their position and prove to Beijingthat they deserve to be among the chosen ew to leadChinas oray into the global automotive market.

Currently, the Chinese industry is also characterizedby a high number o joint ventures with establishedplayers. The arrangement has provided Chinesecompanies with auto-making expertise, while alsoproviding the only way into the Chinese market ortheir partners (see Figure 7). However, most o the

16

30.0

35.0

12

20.0

25.0

OEMs

marketshare

8

10.0

15.0

Num

berof

ulative

global

00.0

5.0Cum

Japan WesternEurope

US China SouthKorea

Market share Number of players

Figure 6: Share o production among top global OEMs producing 50,000 units

in 200714

Source: Automotive News, Data Center

Figure 7: Joint venture sales represent nearly hal o all Chinese automotive sales15

Source: Wards Automotive Data Reerence Center, China Sales by Company


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intellectual property remains in the hands o theoreign joint venture partners.

Important questions remain about the uture o jointventures in China. All eyes are on Beijing as theydecide whether to allow greater oreign ownershipor tighten restrictions to protect the fedglingdomestic producers.

Consolidation and a new global balance

Consolidation is well underway and today 10global OEMs account or over 77 percent oglobal production (see Figure 8). Fiat has takenover Chrysler and Volkswagen has swallowedPorsche. Deals like these increase scale, streamlinedistribution, boost asset eciency, and provideaccess to previously limited markets.

In some cases, companies will make targetedacquisitions to gain access to new markets,

channels, or technologies. In others, companiesmay adopt roll up strategies and make multipleacquisitions to rationalize capacity in a market nicheand develop a dominant position.

A new breed o players will emerge, as well asa new global balance with more competitorsheadquartered in emerging manuacturing hubs,particularly in India and China (see Figure 9). Whenthe dealing is done, the landscape will be dominatedby global OEMs and suppliers based in six majormarkets: Western Europe, Japan, the United States,Korea, China, and India. The Renault-Nissan allianceis likely to be a model or others seeking platormand procurement scale but unwilling to risk thechallenges o ull integration.

Source: International Organization o Motor Vehicle Manuacturers

Rank OEM group HQ location2008 global

production

Global

market

share

Cum

mark

shar

1 Toyota Japan 9,237,780 13.3% 13.3%

2 GM United States 8,282,803 11.9% 25.2%

3 Volkswagen European Union 6,437,414 9.3% 34.4%

4 Nissan-Renault Japan/ European Union 5,812,416 8.4% 42.8%

5 Ford United States 5,407,000 7.8% 50.6%

6 Fiat-Chrysler European Union 4,417,393 6.4% 56.9%

7 Hyundai-Kia Korea 4,126,411 5.9% 62.9%

8 Honda Japan 3,912,700 5.6% 68.5%

9 PSA European Union 3,325,407 4.8% 73.3%

10 Suzuki Japan 2,623,567 3.8% 77.0%

Figure 8: 77 percent o global production is concentrated among 10 companies16

HQ location OEM and current HQ Potential 2020 HQ

European UnionVW, Renault-Nissan (0.5),

Fiat-Chrysler, PSA, Daimler, BMW5.5 3.54

United States GM, Ford 2 1.52

JapanToyota, Nissan-Renault (0.5),

Honda, Suzuki, Mazda, Mitsubishi5.5 2.53

China 0 1.52

India 0 0.51

Korea Hyundai-Kia 1 0.51

Figure 9: The dominant groups (>1 million units) will be headquartered in six

major markets17

Source: Deloitte Touche Tohmatsu analysis. August 2009


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6

China is closer to having product ormature markets than most think.

Matt OLearyDirector, Corporate Strategy, Ford Motor Company

Supplier networks in low-cost centers

As OEMs and suppliers move to regional modelsor both low-cost production and design, they willneed to examine production quality and maturityin the low cost regions and then choose rom theollowing supplier strategies:1. Move existing suppliers, along with the OEM, to

set up regional low-cost acilities.2. Identiy companies in the local marketplace to

replace existing suppliers (but only when localmarkets display sucient maturity).

3. Encourage established suppliers to partner withlocal companies (through joint ventures or othermechanisms) to combine technology know-howwith local, low-cost manuacturing.

Developing these supplier networks will be one othe greatest challenges OEMs will ace over the nextten years. Existing suppliers are strained and otenlack the nancial muscle to add new manuacturingcapacity in new markets. Suppliers are also sensitiveto technology transer to local third parties, rightlyearing the creation o new, lower-cost competitors.

Because o this, and the need to move quickly tocapture growing markets, Ravi Sud, CFO o HeroGroup, believes that increased collaboration amongsuppliers is inevitable. Manuacturers need to beable to cater to ever-changing customer demands inthe shortest possible time. They need to gain accessto technology aster and ensure the technology islaunched aster.18

Dr. Jerome Guillen, Director, Business Innovation,and Dr. Frank Spennemann, Senior Manager,Business Innovation at Daimler AG suggest that,the emergence o new major global suppliersin traditional commodities is doubtul due to thestrong technological oundations o existing players,as well as the degree o investment required tobecome established in developed markets at the

same time, there will certainly also be chances orsmaller, highly innovative pioneers who are ableto respond rapidly to emerging demands in newtechnologies.19 Fords Matt OLeary, Director,Corporate Strategy, also says that technology willcome rom non-traditional places. Alliances will bebroader than what the auto industry has had in thepast.20 OEMs will need to adopt a mix o supplierstrategies to ensure the availability o the necessarycomponents, quality, and technologies as theyexpand their operations in emerging markets.

Higher volume global architecture willbecome the norm

A common challenge or automakers is theineciently low volume o units produced perplatorm. To remain cost competitive, OEMs havestarted to reduce the number o platorms theyproduce and are achieving much greater diversity omodels produced rom each platorm (see Figure 10).Honda, with its fexible common platorm, developedthree dimensionally-distinct versions o the Accord,allowing or market-unique designs where 60 percento the components are common. And Ford CFO

Lewis Booth reports that the company aims to build680,000 vehicles per core global platorm within veyears, up rom current levels o 345,000 units.21

To remain competitive and maintain centralizedquality controls in rapidly-growing emerging markets,regional design centers will have to be globallynetworked. Examples o this emerging trend includeRenault, which established a design studio in Mumbaito create vehicles or India; PSA Peugeot Citroenwhich maintains a technical and styling center inShanghai; and Daimler with one center in Pune, Indiaand plans or a Benz design center in Beijing.22


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190

195

450

500

180

185

300

350

400

tforms

peryear)

e/platform

peryear)

170

175

150

200

250

Numbero

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veragevo

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A New Era Automotive Industry 2020

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