The State of The Auto Parts Industry

The past ten years can be described as the merger and aquisiton age for the auto industry (Figure 1). This wave is not only affecting auto manufacturers but parts suppliers and even car dealership who are trying to create dealership chains. The most recent deal among auto manufacturers is the proposition of GM and FIAT to aquire the troubled DAEWOO motors. Observers believe that this trend will continue in the future and there will be no more than eight significant manufacturers in the twenty-first century. The key catalysts for this consolidation are manufacturing overcapacity, the pressure to improve shareholders returns and the increasing consumer power [1]. Currently there are about 17 major auto manufacturers in the world who are generating over $915 billion per year in sales. A list of these companies, their sales as of December 31, 1999 and there market share are shown in (Figure 2). The big three (GM, Ford & DaimlerCrysler) accounted for more than 50% of the market size.

As the auto manufacturers grew larger they shifted their supply strategy towards having a single supplier that can supply all their automotive parts. This tendency has put pressure on suppliers and forced them to merge. The year 1999 witnessed many acquisitions in the parts industry as the U.S. firm TRW purchased the largest British supplier, Lucas Varity, for $7 billion. Another global leader, Bosch, has recently purchased the leading Korean parts maker Mando and the Japanese parts maker Zexel. Magneti Marelli the third largest supplier of electric auto parts in Europe was recently purchased by Denso Corp. of Japan.[2]

In an article released by PricewaterhouseCoopers they estimated that in the future the number of Tier 1 suppliers will drop from 800 in 1999 to 30, while the number of Tier 2 suppliers will drop from 10,000 to fewer than 800. Moreover, the role of suppliers will be shifted  towards assembling larger parts in cars while the current vehicle manufacturers (VM) will gear their activities towards co-ordination, sequencing, final assembly and other related issues. Ultimately, these activities will also be performed by suppliers and VMs will play a different role in marketing and customer service[3]. Figure 3 shows the major auto parts suppliers and their global market share. It is evident that U.S. companies have a large presence in the world market and they supply more than 22% of the $600B worth of new auto parts sold globally.

Recently, B2B e-commerce in the automotive industry has been fueled by the fierce competition in this sector.  Manufacturers, suppliers and distributors are looking for ways to leverage their operations with Internet technologies, as they realize that strategic change is a must for the players that want to prosper in the 21st century. Automotive suppliers are under cost containment pressures and increased capital requirements due to the intensified need for global and systems capabilities. The enabling impact of e-commerce is demanding strategic and structural change and is redefining relationships across the entire value chain.[4]

The industry transformation to a  “consumer pull” business model is being enabled by Web technologies and major carmakers and suppliers are driving the required changes through online B2B and B2C initiatives. The potential cost savings of a truly integrated and Web enabled build-to-order system is immense [5]. Goldman Sachs Investment Research, conducted this year, indicates that e-business competency could save $3,500 per vehicle. Back-end supply-chain efficiencies could cut cost as much as $1000, online retail capabilities could save another $1,000, and around $1,500 through Web-enabled build-to-order systems.[6]

Initially, B2B efforts in the automotive industry have been focused on automating the procurement of Maintenance, Repair and Operations materials and the disposition of assets through forward auction capabilities.  These efforts have allowed leading manufacturers to realize significant cost savings without major operations disruption. However, the automotive industry transformation requires value chain reengineering.  Currently, major carmakers are focusing their B2B efforts on creating business processes integration over the Web across the value chain - a task that is technically and culturally complex and will not be achieved overnight. This is a two-fold effort.  On one side the carmaker must integrate distribution channels to gather customer info at every customer “touch-point” and on the other side it must integrate the multi-tiered supply-chain with real-time supply-chain management and design collaboration tools.

New business models are being tested by vehicle manufactures, suppliers, existing dealers and distributors, and new entrants.  It is too early to say which models will succeed in the longer term.  During this transition period the “old economy players” are testing new venues without dismantling existing structures.  This hybrid environment is adding extra layers of cost and complexity to their operations and it may provide an opportunity to new venture backed players, if they posses a combination of a strong management team with the financial power to implement their strategic vision.

Some of the new business models being tested cater different markets of the automotive industry or same markets but in different geographic regions. In the original auto parts industry, an online automotive trading and communication exchange under the name of Covisint is being formed initially by a consortium of General Motors, Ford, and DaimlerChrysler AG, and later included Renault S.A. and Nissan Motor Co. In the aftermarket auto parts several exchanges has emerged such as iStarXchange, a joint venture company formed by Toyota, TMS and i2 Technologies, and eParts owned by Exchange, Inc. (EPX) which was previously part of Universal Automotive Industries (USVL).