January 2009

It boasts some of the great global brands, and the influence of its innovations is felt worldwide. Lean manufacturing, for example, which is now the process and supply chain mantra for a host of industries, originated in Japanese car plants. Yet the automotive industry was struggling to turn a profit even before the sharp economic downturn in the fourth quarter of 2008 and US automakers went hat in hand to Washington.

Shorter product lifecycles, wider product ranges and soaring raw material costs—by far the biggest component of total automotive costs—are just part of the problem. Carmakers from Japan, the United States and Western Europe, known collectively as the Triad markets and long the heavyweights of the industry, are also grappling with the beginnings of a seismic shift in the sources of competitive advantage.

Americans still buy more cars than anyone else, and the Japanese remain the world’s leading producers. But demand in the Triad markets was faltering even before the economic crisis—sales in those markets fell an estimated 11 percent in 2008—just as it was starting to surge in China, India and Russia, the heavyweights of the emerging economies. To be sure, the fourth quarter saw slower growth in the emerging economies than would have been expected, but demand there is still on the rise.

In many respects, of course, burgeoning demand in these important new markets is a welcome development, and a number of Triad-based carmakers are well positioned to take advantage of it. But so are growing numbers of emerging-market players.

It will be some time before these carmakers achieve the safety and emission standards that would make Indian, Chinese and Russian vehicles a serious threat to Triad producers in their own markets. However, emerging producers are buying brands, design savvy and technology know-how from their developed-market counterparts. They also are investing heavily in R&D and are getting better and better at innovation.

Some Triad carmakers are managing to hold the line. For example, to offset the high costs of developing the environmentally friendly vehicles consumers are demanding, some are forging alliances with traditional rivals: BMW and Daimler, for instance, are in talks that may lead to an agreement for joint purchasing as well as joint development of more efficient and less polluting power-train systems. But because no one really knows which technologies—biofuel, electric or hybrid—will turn out to be the right one for the future, these are risky investments. And it’s a similar story with the Triad carmakers’ efforts to turn the arrival of emerging-market players to their advantage.

Some, to be sure, have struck successful deals. The French carmaker Renault, for example, which in 1998 bought Dacia, the formerly state-owned Romanian producer, is successfully selling the popular Dacia Logan in Eastern Europe—and seems to be steadily increasing sales in Western Europe as well, where demand for smaller, more affordable vehicles is growing.

But some emerging producers have been equally successful interlopers. Consider, for example, the Indian company Tata Motors’ recent purchase of the iconic Jaguar and Land Rover brands—an acquisition designed to leverage distribution networks in the Triad markets as well as to meet rapidly growing Indian demand for premium vehicles. Or consider that Chinese vehicle manufacturers may soon be supplying small cars to Triad players.

When it comes to the first building block of high performance—market focus and position—the performance gap between these leading companies and the rest is clearer still. All the high performers have been far better than their peers at positioning the right product at the right time in the right market—particularly in emerging markets, where capturing the growth opportunity has been key to high performance.

As in other industries Accenture has studied, success in market focus and position depends much more on the quality of strategic decision making than it does on the actual size and scope of the company. Toyota, for example, dwarfs every other carmaker in terms of revenues and plainly derives considerable economies of scale from its huge size. But even more important to the Japanese company’s success is its strategy of offering a wide range of vehicles, each one designed to meet specific customer needs.

Each automotive high performer has chosen to approach the markets best suited to its specific market presence, product lineup and brand positioning in a slightly different way—a choice dependent, to some extent, on its business model.

The successful mass-market players, like South Korea’s Hyundai-Kia Automotive Group, have established a presence in most major markets, but they focus primarily on selling small passenger cars in large emerging markets, where the demand for compact, affordable vehicles is especially strong (see sidebar). Some premium manufacturers, like Germany’s Porsche, have successfully boosted sales not only in the world’s biggest premium market, the United States, but also in emerging markets, where the appetite for luxury vehicles is particularly strong—notably, China and Russia.

We call this distinctive capability “lean enterprise”—a combination of low material costs, flexible and demand-driven manufacturing, and back-office efficiency that together result in the exceptionally high product quality that sets the top performers apart.

All the high performers are masters of material cost management, the route to superior margins for a business that spends 60 percent of total costs on materials. Most, moreover, display outstanding process efficiency: Witness Honda Motor Co.’s reputation for engineering excellence, platform flexibility and effective vertical integration (the company even makes its own robots), or Nissan Motor Co.’s scrupulous pursuit of cost-saving opportunities.

Lean enterprise alone, however, does not guarantee high performance. In such an intensely competitive environment, carmakers also need to capture and keep customer loyalty. And Accenture research reveals that customer-centricity, the second distinctive capability of high performers in this industry, sustains the reputation for swift and superior service as well as an engaging, multi-channel retail experience that is also a hallmark of the leading carmakers. Customer-centricity hinges, moreover, on being able to deliver leading-edge options such as Bluetooth connectivity, sophisticated in-car entertainment systems like flat-screen displays in headrests that keep kids occupied on long journeys, voice-activated controls and other technologies that customers value.

Toyota, for example, pioneered the first mass-produced hybrid car in response to growing demand for fuel-efficient and environmentally friendly vehicles. And Honda’s CR-V or Nissan’s Qashqai are innovative and attractive answers to specific customer demand for so-called crossovers—the smaller, more fuel-efficient versions of once-popular sport utility vehicles, which borrow features like four-wheel drive but are built on car rather than truck frames.

All the high performers execute better than their competitors, a function of their strong, centralized leaderships and exceptional talent management. These qualities are both attributes of performance anatomy, the third building block of high performance, although each high performer projects quite a different version of such a winning mindset.

Today’s high performers will require these skills in abundance in the future, when all players will be challenged to sustain a globally balanced market presence in a multi-polar world. Profitable growth will continue to be driven by selling the right products in the right market at the right time, of course. And being present in key emerging markets like China, India and Russia will be essential. But not all vehicle segments in each of these markets will continue to offer attractive growth opportunities. Small and compact cars remain the strongest growing segments globally, for example, but in the Indian market, demand for micro vehicles is expected to predominate.

Moreover, today’s leading carmakers will have to recognize that the seizure of market share in emerging markets, however successful it was in the past, is largely a one-off exercise, especially as homegrown competitors gather momentum. High-performance businesses will have to evaluate the specific country and segment combinations that best suit their individual product and sales profile even more carefully in the future, and align their portfolios accordingly. Those decisions will vary from business model to business model. But new sources of competition from rapidly emerging carmakers seem certain to complicate the choice.

Sidebar
About the Research

We began with a universe of 82 original equipment manufacturers and eliminated those companies that are not publicly traded, as well as those that did not provide a comparable financial data history for the last seven to 10 years. We also eliminated carmakers that produce fewer than 100,000 units annually, pure truck manufacturers and entirely local players from the set. But we included the carmakers’ financial services divisions because they are directly linked to the core automotive business and thus contribute to financial performance. (The financial services divisions’ impact on revenue was 8 percent on average, and the average share of EBIT was 29 percent. However, the impact on the overall high-performance business rating is marginal.) This gave us a robust and comparable peer set of 16 companies, representing 80 percent to 90 percent of the total global vehicle market.

Accenture uses five business dimensions to measure high performance—longevity, profitability, growth, consistency and future value (which is a measure of investors’ expectations about the value of a company’s future cash flow). There is a negative correlation between profitability and future value for carmakers, as there is for other mature, asset-intensive, cyclical industries. So we concentrated instead on the remaining four dimensions, measuring the relative gap between outcomes to identify the high performers.

Case Study 1
Hyundai: Birth of a Global Brand

South Korea’s biggest carmaker might still sell more vehicles on its home turf than anywhere else. But the Hyundai-Kia Automotive Group is already strikingly global and becoming more so. Hyundai, indeed, is the fifth-largest carmaker in the world in terms of both sales and production. And remarkably, the company has managed to establish a presence in all major markets, without being overly dependent on any one of them. It is, however, Hyundai’s especially robust positioning in the leading emerging markets that explains the magnitude of its success.

The Hyundai group is the third-biggest player in the 3 million-car Russian market, for example, where it holds a 9 percent share. And since the company opened its first manufacturing plant in China in 2000, its presence there has grown dramatically.

A joint venture with Guangzhou Motor Group in 2005 was followed, a year later, by a $1 billion agreement with Beijing Automotive Holdings to open a second manufacturing plant in the Chinese capital. Hyundai now turns out 400,000 vehicles annually in China, nearly four times as many as in 2003. It also plans to make India a globally important manufacturing hub. Forty-five percent of the company’s Indian car production is already earmarked for export to Europe, the Middle East, Latin America and Asia, and that is set to increase.

Hyundai, moreover, is keenly aware of the growth opportunities presented by particular markets and product segments, and not just in the developing world. It launched the Genesis sedan, its first premium vehicle, in the United States in 2008, for example. And the company has responded vigorously to the mounting worldwide demand for hybrid vehicles by significantly boosting its investments in technologies to reduce emissions and improve fuel efficiency.

To be sure, meeting tightening emission standards, especially in Europe, will be expensive. And rising raw material costs pose as much of a threat to Hyundai as they do to other carmakers. But Hyundai has recognized the value of lean enterprise (see story). By working directly with its supplier base to optimize material costs, Hyundai already has realized significant savings, and it expects to maintain similar savings levels through 2010. Meanwhile, strong revenues across all its geographic divisions continue to fuel the company’s growth.

Case Study 2
Porsche: Maintaining the Cachet

There are many reasons for Porsche’s success in creating one of the most prestigious automotive brands in the world. Among the most important, however, must surely be the exceptionally solicitous way the company treats its customers.

All new Porsche owners are offered a free “track day” before they receive their vehicle, for example. There, instructed by professional drivers, they get to drive a variety of Porsche cars on a racetrack that replicates Formula One driving conditions. Porsche also spends more time and effort than other manufacturers explaining the particulars of each new vehicle for its owner—an investment that not only maintains the cachet for which its vehicles are so famous but also builds tremendous customer loyalty.

These practices, indeed, personalize and deepen the customer experience—an essential aspect of the customer-centricity that Accenture research has identified as one of two distinctive capabilities among high performers in the automotive industry (see story). But Porsche is equally good at the other distinctive capability: lean enterprise. In fact, constant optimization of commercial processes, coupled with consistently high levels of customer service, ensure that the German company is in a position to exploit all market opportunities.

Porsche can dispense with the need for vehicle discounts precisely because it’s so good at constantly analyzing individual market developments, shifting production quotas and adjusting manufacturing to prevent inventory from reaching critical levels. These measures, moreover, add still more to product value: Even pre-owned Porsches maintain their value.

As far as Wendelin Wiedeking, the company’s charismatic and hands-on CEO, is concerned, Porsche’s prosperity vindicates his conviction that the customer is king. “When the customer is happy then the worker is happy, too, and so are the suppliers,” he once told an interviewer. Shareholders take something of a backseat in Wiedeking’s view, as they do for many employers in a country where industrial cooperation and consensus are considered the foundations of sound business practice. But for Porsche’s shareholders, at any rate, that poses no problem.

By the Numbers: Bumpy Road
Although the auto industry is currently being pummeled, looking at what was occurring in the industry through 2007 can provide indications of the direction the industry can be expected to take once the current crisis subsides.

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 This Article is Tagged: Automotive.