Auto Industry Leap Into E-Commerce Brings Savings To Everyone
22 June 2000
Auto Industry Leap Into E-Commerce Brings Savings To Customers, Suppliers, as Well as Manufacturers
NEW YORK - E-commerce will bring important cost benefits to the auto
industry over the next 5 years, which will come not only from purchasing, but
also many other functions such as product development. "Build To Order" won't
be the industry's panacea and manufacturers will evolve from the current "Build
to Dealers' Lots" towards the "Build to Consumer Demand" model. These are some
of the key findings of a study released at an industry seminar today by Roland
Berger Strategy Consultants in conjunction with Deutsche Bank's Global
Automotive Research Team. The study findings, though focused on the automotive
industry, provide insight into the future for many other industries (for example,
consumer products, aerospace and pharmaceuticals) where similar initiatives are
undertaken.
"Many industry forecasts have suggested that the efficiency gains
achievable through electronic commerce will reduce the cost of a car by
several thousand dollars. But estimates of this magnitude understate the
challenges that automakers and suppliers face in implementing the necessary
channel changes," said Michael Heidingsfelder, a Partner at Roland Berger.
"The objective of our study is to cut through the hype by presenting a
realistic assessment of the impact of B2B initiatives on the auto industry.
We have also identified the key factors that will separate the winners from
the losers within the automotive value chain."
Heidingsfelder was speaking from Boston, where the results of the study
were announced to a gathering of industry thought leaders brought together to
discuss how business-to-business e-commerce will evolve in the auto industry
(and other fields) over the next five years. The study itself was built on
interviews with 150 leading players in various elements of the automotive
sector, including manufacturers and suppliers and the technology companies
servicing their initiatives. The study was conducted in the U.S., Europe and
Japan.
According to Heidingsfelder, the firm's research suggests a more modest
level of e-commerce-related cost savings than other expert sources have
predicted -- and the growth will be more of an evolution than revolution. The
survey's estimate of roughly $1,200 in savings per vehicle for the North
American industry within the next 5-years compares with estimates of several
thousand dollars per vehicle in many other industry forecasts. The survey
dollar figure represents 4.9% of the $24,500 average price of a car in North
America.
The estimates are even lower for European and Japanese manufacturers. The
study's "eSave model" projects savings will be approximately $639 per vehicle
for the European auto industry, or 3.4% of the $18,600 average price of a car
there. For Japan the figure is $540, or 3.9% of the $13,750 average vehicle
purchase price.
The savings forecast includes estimates for potential cost reduction at
all levels of the automotive value chain, added Eric Kintz, Associate Partner
and head of Roland Berger's e-commerce practice in the United States. Of the
$1,200 per vehicle that can be cut out of the North American auto industry
cost structure, he explained, only a fraction will be retained at each level
of the supply chain.
"We expect most of the industry's cost savings to be passed downstream
from the supplier to the manufacturer and from the manufacturer to the
consumer," said Heidingsfelder. Out of the $1,200 cost savings, the consumer
will get almost $900. "And we believe the pass through for an automaker is
predicated by industry overcapacity; that is to say, it will be greater for
mass market vehicles and smaller for luxury vehicles. The same factors will
determine the pass through/retention of cost savings for suppliers."
Among the survey's other notable findings:
* Savings will come from unlikely sources. For example, purchased
material cost savings will represent just a small part of the overall story --
about 30%. Instead, Berger research suggests close to 70% of the potential
cost savings will come from reduced product development, inventory,
manufacturing, sales, G&A, transportation, and warranty costs.
* The North American industry's transition toward "build to order"
vehicles (BTO) has been exaggerated and, in light of significant physical,
structural, cultural, and financial limitations, it will not progress as
quickly as many industry observers anticipate. Rather, the traditional
vehicle sales model, which involves the purchase of a vehicle out of a
dealer's inventory, is likely to dominate for the next five years and will
probably still represent more than 50% of the market in 10 years -- especially
in the United States.
* Cost savings from auctions will dissipate over time as business becomes
concentrated among the most cost advantaged suppliers. Reverse auctions for
auto parts have generated dramatic levels of cost reduction over the past six
months, but these levels (10%-40%) are not sustainable as they do not reflect
the true cost of doing business within the industry.
* Tier 1 suppliers will be able to retain more of their cost savings than
lower tier suppliers. The greatest benefits will accrue to companies that
supply engineered, and/or highly differentiated products because they have
relatively lower risk of having to pass all of their cost savings through to
customers. Companies that supply commodity type components -- or products
that are fabricated to specifications determined by the automaker -- are at
greater risk of margin contraction.
* E-commerce tools should help automakers improve their forecasting and
planning and help them better anticipate customer preferences within markets.
This is achieved through real-time communication throughout the supply chain,
as well as integration to B2C portals that supply updated information from
dealers and consumers.
* Cost savings achieved through e-commerce initiatives could protect
automakers' margins in a negative pricing environment. However, automakers
will not necessarily experience significant improvement in margins after price
reductions are passed through to consumers.
Though the Roland Berger/Deutsche Bank study focused on the auto industry,
"it has practical implications for old economy companies in the Internet
world," said Kintz. "Companies could, and should, spin off businesses that do
not provide a competitive advantage because Internet technology takes away
some of the disadvantages of doing this. Also, mergers and acquisitions are
no longer necessary to achieve traditional synergies; instead, strategic
alliances will grow in popularity," adds Heidingsfelder. Furthermore, he
noted, product integration, engineering, technology and knowledge will become
increasingly important over the next few years, and tangible assets will
become less valuable.
Among the other participants in today's seminar in Boston were: Jim
Harbour of Harbour and Associates, who discussed build-to-order issues;
Richard Baker of J.D. Power & Associates, who spoke on the possible extinction
of auto dealers as we know them; Brian Kelley of Ford Motor Company, who
discussed Ford's e-commerce plans; Sam Kinney of Freemarkets.com, who spoke
about an independent procurement exchange; and Jeff Bodenstab of I2, who
discussed supply-chain services in B2B exchanges. Deutsche Bank's Jim Moore
moderated a panel on the challenges of end-to-end integration and the new
value-added services that will shape business models of the future. The panel
participants, Rocky Stewart, CTO of BEA Systems Web Logic, Bob Lewis,
President and COO of Enterworks, Ram Sriram, CEO of Nexprise and Phillip
Merrick, CEO of webMethods provided a "look into the future" of web-enabled
business.
With 30 offices in 21 countries, Roland Berger is the leading management
consulting firm of European origin, providing strategy and implementation
support for clients in the automotive, consumer goods, financial services,
infotech, pharmaceutical and other industries. A world leader in e-commerce
consulting, Roland Berger works with blue chips and start-ups to optimize
their strategy, marketing, technology, operations and management in the
Internet economy.
