Global Automotive Sourcing An India/China Discussion Chicago April 27, 2004 Federal Reserve Bank of...
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Global Automotive SourcingGlobal Automotive Sourcing
An India/China Discussion
Chicago
April 27, 2004
Federal Reserve Bank Federal Reserve Bank ofof Chicago ChicagoFederal Reserve Bank Federal Reserve Bank ofof Chicago Chicago
A.T. Kearney 82/7041 2
SummarySummary
Motivations for global sourcing are varied – they need to be analysed in the context of business drivers (revenues, costs) and market impact (away vs. home)
Nature of emerging Asian markets strongly differ from mature markets such as North America• Manufacturers need to follow a “build where you sell” strategy• Majority of Asian activity by manufacturers is for local market consumption
Two segments of global automotive sourcing – manufacturing and services• Manufacturing based exports (vehicles, components) from China/India growing rapidly but
from a small base• Exploiting export opportunities requires careful study – to address supply chain, regulatory and
economic factors• Services based exports very strong and growing – significant future growth expected
India appears to lead in engineering driven outsourcing; China competes on scale and cost• However, the automotive industry base in these countries is very fragmented and can be tough
to navigate
A. T. Kearney’s 2004 Offshore Location Index ranks India and China are the top two destinations for services offshoring
Economic liberalization, improved connectivity, reduced cost of telecom in addition to large available pools of technical talent are driving outsourcing of services
Motivations for global sourcing are varied – they need to be analysed in the context of business drivers (revenues, costs) and market impact (away vs. home)
Nature of emerging Asian markets strongly differ from mature markets such as North America• Manufacturers need to follow a “build where you sell” strategy• Majority of Asian activity by manufacturers is for local market consumption
Two segments of global automotive sourcing – manufacturing and services• Manufacturing based exports (vehicles, components) from China/India growing rapidly but
from a small base• Exploiting export opportunities requires careful study – to address supply chain, regulatory and
economic factors• Services based exports very strong and growing – significant future growth expected
India appears to lead in engineering driven outsourcing; China competes on scale and cost• However, the automotive industry base in these countries is very fragmented and can be tough
to navigate
A. T. Kearney’s 2004 Offshore Location Index ranks India and China are the top two destinations for services offshoring
Economic liberalization, improved connectivity, reduced cost of telecom in addition to large available pools of technical talent are driving outsourcing of services
A.T. Kearney 82/7041 3
Motivations for global (low cost country) sourcing are variedMotivations for global (low cost country) sourcing are varied
Revenue Revenue IncreaseIncrease
Business Business DriversDrivers
VehiclesVehicles ComponentsComponents
Cost Cost DecreaseDecrease
Strategic Strategic SourcingSourcing
Components IT/Business Process
Engineering ServicesVehicles
Grow New Grow New MarketsMarkets
Retain/Gain Retain/Gain Market ShareMarket Share
Improve Improve ProfitabilityProfitability
Compete Compete LocallyLocally
Emerging Markets Home Markets
Impact on MarketsManufacturing Services
Objectives
Manufacturing
A.T. Kearney 82/7041 4
ManufacturingManufacturing
A.T. Kearney 82/7041 5
Asian markets are large and growing fast…Asian markets are large and growing fast…
Source: J.D. Power LMC; A.T. Kearney analysis
No automotive manufacturer can ignore emerging Asian economiesNo automotive manufacturer can ignore emerging Asian economies
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008
NA
Asia
Europe
0
1
2
3
4
5
6
7
2001 2002 2003 2004 2005 2006 2007 2008
Japan
China
India
S. Korea
CAGR
0.6%
6.5%
0.9%
CAGR1%
17%
6%
6%
Annual New Vehicle Volumes (MM)Annual New Vehicle Volumes (MM) Annual New Vehicle Volumes (MM)Annual New Vehicle Volumes (MM)
A.T. Kearney 82/7041 6
Emerging Asian markets need location specific strategiesEmerging Asian markets need location specific strategies
0%
10%
20%
30%
40%
50%
60%
70%
Basic Small Medium Large Luxury
Price Driven Segment
Seg
men
t M
ark
et S
har
e
North America
Asia
0%
10%
20%
30%
40%
50%
60%
70%
Basic Small Medium Large Luxury
China
India
Price Driven Segment
Seg
men
t M
ark
et S
har
e
Source: J.D. Power LMC; A.T. Kearney analysis
…and are different from North America … even different within Asia…and are different from North America … even different within AsiaProduct Segment MixProduct Segment Mix Product Segment MixProduct Segment Mix
A.T. Kearney 82/7041 7
Manufacturers forced to follow a “build where you sell” strategyManufacturers forced to follow a “build where you sell” strategy
Unit Economics – Average Vehicle PriceUnit Economics – Average Vehicle Price
Supply Chain/Other ConstraintsSupply Chain/Other Constraints• Regulatory
— Tariffs— Local content— Ownership
structure
• Logistics— Etc
~ $7,500
~ $25,000
0
5,000
10,000
15,000
20,000
25,000
30,000
North America India
Unit economics make exports into Asian regions difficult
Supply chain and regulatory constraints driving domestic emerging market investments
• FDI
• Technical Alliances
• Captive units
• JVs
Average Retail Price Of new Car
Note: 1) A.T. Kearney estimates
Source: A.T. Kearney analysis
A.T. Kearney 82/7041 8
Hardly any vehicle exports out of India or ChinaHardly any vehicle exports out of India or China
• Vehicle exports from India primarily to S.E. Asia, Africa and some to Europe
0.00
1.00
2.00
3.00
4.00
India China
Negligible Exports
3.7
0.08
0.9
DomesticExport
0.98
• Capacity investments of U.S vehicle manufacturers in Asia primarily to exploit domestic markets
• We are not aware of any OEMs planning to source vehicles out of emerging markets in Asia for the US market
2003 Volumes (MM)2003 Volumes (MM)
Source: Siam India, ACMA, Cris Infac, A.T. Kearney analysis
A.T. Kearney 82/7041 9
Note — US automotive material content: $240 Billion;Note — US automotive material content: $240 Billion;Asian exports expected to grow at 15% – 20% per annumAsian exports expected to grow at 15% – 20% per annum
Source: Siam India, Automotive News, China automotive Industry yearbooks, National Bureau of Statistics, A.T. Kearney analysis
2000 2001 2002 2003 2004 2005 2000 2001 2002 2003
China 24%
India 10%15
19
25
30
36
44
10
20
30
45
40
35
25
15
5 4.0 4.5 4.8 5.3 5.8 6.4
China 41 %
India 17 %
625(16%)
578(13%)
750(16%)
1,6351,758(9%)
3,242(9%)
(11%)
500
1500
2500
3500
Exports of auto components growing rapidly…albeit from a low baseExports of auto components growing rapidly…albeit from a low base
1000(19%)
Auto Component Market (Billions)Auto Component Market (Billions) Automotive Component Exports Automotive Component Exports (% or total market in Millions)(% or total market in Millions)
CAGR
CAGR
A.T. Kearney 82/7041 10
3,701
33,59530,807
1,2001,180
China India Mexico Germany US
Wages in low cost countries is a major attraction…Wages in low cost countries is a major attraction…
(1)
?
Labour content varies significantly between components — need to consider Labour content varies significantly between components — need to consider capital — labour tradeoffs in addition to other cost elementscapital — labour tradeoffs in addition to other cost elements
Average Manufacturing Industry Annual Wages (US $,2001)Average Manufacturing Industry Annual Wages (US $,2001)
Note: 1) Big 3 wages higher
Source: SIAM, ACMA, Cris Infac
A.T. Kearney 82/7041 11
…however, exploiting sourcing opportunities requires careful study ……however, exploiting sourcing opportunities requires careful study …
Bolt ExampleBolt Example DriversDrivers
• Labor cost• SG & A cost• Burden cost• Other costs
ChallengesChallenges
• Capacity constraints• Supplier scale• Engineering change lead time• Logistics costs• Rust during shipping (metal parts)• Supplier qualification• Cultural issues
Sourcing opportunities are real. Actual opportunities need toSourcing opportunities are real. Actual opportunities need tobe properly qualified — commodity by commoditybe properly qualified — commodity by commodity
Note: 1) Disguised data based on actual experience 2) Second US supplier
Source: A.T. Kearney analysis
$2.00$2.00
$3.00$3.00
USA Korea India USA
Shock AbsorberShock Absorber
$7.00$7.00$8.5$9.00$9.00
Brazil Korea USA India Malaysia
(2)
Price Not Always LowerPrice Not Always Lower(1)(1)
A.T. Kearney 82/7041 12
… allowing for the right tradeoffs… allowing for the right tradeoffs
ParameterParameter IndiaIndia ChinaChina ThailandThailand TaiwanTaiwan
Quality of supply 1 4 2 3
Ability to supply consistent quality
3 4 2 1
Price competitiveness 4 1 3 2
Design & engineering capability 1 4 3 2
Customer/Aftersales support 3 4 1 2
Maturity of auto components industry
1 4 3 2
Government regulations 4 3 1 2
Attractiveness of domestic market
2 1 3 4
Compliance and transparency 2 4 3 1
Source: Frost & Sullivan
FavorableNot so favorable
India leading in engineering driven supply; China leading in cost efficiencyIndia leading in engineering driven supply; China leading in cost efficiency
A.T. Kearney 82/7041 13
Component industry fragmentation very high …Component industry fragmentation very high …
Illustrative Examples
China Case ExampleChina Case Example Component-wise Export Value Break-upComponent-wise Export Value Break-up (India 2002)(India 2002)
No clear dominant commodity or supplier strategy forNo clear dominant commodity or supplier strategy forcomponent sourcing from China/Indiacomponent sourcing from China/India
20002000Number of Number of ProducersProducers
Volume Share of the Volume Share of the No.1 Producer (%)No.1 Producer (%)
Generator 31 11.9%
Starter 30 16.2%
Radiator 26 14.7%
Shock absorber 23 17.6%
Friction material 26 20%
23%
4%
7%
2%
4%
60%
Engine & engineparts
Transmission &steering parts
Suspension &braking parts
Equipment
Electricals
Others
A.T. Kearney 82/7041 14
FactoriesFactoriesInternal Internal
Local Local TransportationTransportation
ConsolidatorConsolidatorAir/Air/
Ocean Ocean CarriersCarriers
De-De-consolidatorconsolidator
Domestic Domestic U.S.U.S.
TransportationTransportation
Export Export DocumentationDocumentation
U.S. U.S. Customs Customs ClearanceClearance
• Modes?
• Carriers?
• Control?
• Where?
• Which items?
• Service levels?
• Brokers?
• Financial arrange-ments?
• Service levels?
• Ports?
• Carriers?
• Service levels?
• Brokers?
• Coordina-tion with transport-ation?
• Where?
• Service levels?
— Cross-dock?
— Store-ready?
• Suppliers?
• Sites?
• Supply base manage-ment?
• Modes?
• Carriers?
• Service levels?
Without effective supply chain management, sourcing in India and China can be challenging and sometimes costly
Major Steps in Asian Supply ChainMajor Steps in Asian Supply Chain
… with supply chain challenges… with supply chain challenges
A.T. Kearney 82/7041 15
Services(i.e. non-manufacturing)Services(i.e. non-manufacturing)
A.T. Kearney 82/7041 16
A.T. Kearney’s 2004 Offshore Location Attractiveness Index for servicesA.T. Kearney’s 2004 Offshore Location Attractiveness Index for services
3.723.32 3.09
2.64
1.47
3.593.17
1
2.99 2.88 2.71
1.59
3.44 3.12 3.25 3.06 2.83
1.111.84
3.653.25
1.120.62
1.66
3.07
1.31
0.931.77
2.02
2.63
0.921.41
2.48
1.68 1.57 1.68
2.24
1.191.26 1.08 1.33
1.21
2.13
1.99
0.7
0.51
2.052.48
1.74
0.73
2.09
1.360.73 0.92
1.360.94 0.86
1.94
0.7 0.88 0.91.38
0.57 0.74 0.74 0.670.94
1.580.88
0.350.89
1.38 1.39 1.060.64
Ind
ia
Ch
ina
Mal
aysi
a
Cze
ch R
epu
bli
c
Sin
gap
ore
Ph
ilip
pin
es
Bra
zil
Can
ada
Ch
ile
Pol
and
Hu
nga
ry
New
Zea
lan
d
Th
aila
nd
Mex
ico
Arg
enti
na
Cos
ta R
ica
Sou
th A
fric
a
Au
stra
lia
Por
tuga
l
Vie
tnam
Ru
ssia
Sp
ain
Irel
and
Isra
el
Tu
rkey
People ScoreEnvironment ScoreFinancial Score
A.T. Kearney Offshore Location Attractiveness Index 2004
While India, the Philippines and other popular locations continue to score highly, While India, the Philippines and other popular locations continue to score highly, the Index suggests that a number of locations may be attractive, depending on the specific the Index suggests that a number of locations may be attractive, depending on the specific
financial benefits, HR needs and risk profile that corporations are consideringfinancial benefits, HR needs and risk profile that corporations are considering
Source: A.T. Kearney analysis
A.T. Kearney 82/7041 17
25 countries attractive for services offhshoring covered in the index25 countries attractive for services offhshoring covered in the index
Low HighFinancial Score
Combined People &
Environment Score
High
Czech Republic
Philippines
Malaysia
Singapore
India
New Zealand
ChinaChile
Canada
Thailand
IrelandAustralia
Vietnam
Spain
Turkey
Argentina
PortugalIsrael
Russia
Poland
South Africa
Costa RicaMexico
Hungary
Brazil
Source: A.T. Kearney analysis
A.T. Kearney 82/7041 18
Example
Complexity of Function LowHigh
Low
Maturity of Supply
Market
HighData Entry/Low-end Processing
Web-Chat
Technical Help Desk
Customer Service (e.g. Account Opening) Call Center
Client Database Maintenance
Software Development
Systems Integration
Software Maintenance & Upgrades
Settlements & Payments
Client Reporting & Statements
Accounts Receivable/ Payable
Reconciliation
Research
Regulatory Audit
Financial Reporting & ControlCredit
Analysis
Level 1
Level 2
Level 3
Variety of services are being offshoredVariety of services are being offshored
CAD
2D-3D
Knowledge Based Engineering, Manufacturing Engineering
CAE
Technical R&D
IT ServicesCustomer Interaction ServicesProcessing ServicesHigh End Customer and Analytical ServicesDesign & Engineering Services
Embedded Systems
Major Automotive Industry Applications and Interest – especially when combined
with component outsourcing
Source: A.T. Kearney client experience & analysis
A.T. Kearney 82/7041 19
Total Cost SavingsTotal Cost SavingsRealizedRealized
Benefits of services offshoring are clearBenefits of services offshoring are clear
No Savings0%
GreaterThan 50%
Savings11%
31-50%Savings
41%
10-30%Savings
42%
LessThan 10%
Savings6%
Quality of Current Offshore Quality of Current Offshore InitiativesInitiatives
Additional BenefitsAdditional BenefitsRealizedRealized
As Good As the Original Services
75%
Better ThanThe Original
Services14%
Not As Good As The Original
Services11%
Other2%
Prod.Improve
26%
ServiceQualityImprove
15%Expand.
Skills & Caps.21%
AdditionalCapacity
31%
None5%
Typical cost savings Typical cost savings range from 30 – 50%range from 30 – 50%
Quality consistent with Quality consistent with on-shore serviceson-shore services
Better productivity, quality Better productivity, quality & skills as added benefits& skills as added benefits
Source: 2003 A.T. Kearney Automotive Executive Survey
A.T. Kearney 82/7041 20
Three factors driving services offshoringThree factors driving services offshoringEconomic LiberalizationEconomic Liberalization
FDI Inflows to India (1985-2001)FDI Inflows to India (1985-2001)
0
1000
2000
3000
4000
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
($ Millions)
1985 – 1991 1985 – 1991 CAGR = -5.9%CAGR = -5.9%
1991 – 2001 1991 – 2001 CAGR = 46.7%CAGR = 46.7%
ConnectivityConnectivity
Number of Secure Servers With Strong Encryption Number of Secure Servers With Strong Encryption (Thousands)(Thousands)Source: Netcraft
1997 1998 1999 2000 2001 2002
North America
Outside North America
040
180140100
60
Telecom CostsTelecom Costs
Cost for 512 Kbp of International BandwidthCost for 512 Kbp of International Bandwidth(US$ Per Annum)(US$ Per Annum)
67,500
40,300 33,000
1999/2000 2001 2002
(CAGR: -30%)
Economic liberalization, connectivity and drop in telecom costs Economic liberalization, connectivity and drop in telecom costs have been key drivershave been key drivers
Source: A.T. Kearney analysis
A.T. Kearney 82/7041 21
~1.2MM
India China United States
India and China provide a huge technical resource poolIndia and China provide a huge technical resource pool
N/A
Globalization, so far, has leveraged the undergraduate Globalization, so far, has leveraged the undergraduate engineering resource pool more than the doctoral levelengineering resource pool more than the doctoral level
~7,000
~5,500
~26,000
India China United States
~350,000
Undergraduate Engineering EnrollmentUndergraduate Engineering Enrollment Doctoral Degrees in Science and EngineeringDoctoral Degrees in Science and Engineering
Note: 1) 1999 dataSource: National Science
Foundation
(1)
A.T. Kearney 82/7041 22
Sizeable industry benefits estimated from offshore servicesSizeable industry benefits estimated from offshore services
U.S. Automotive IndustryU.S. Automotive Industry
Source: A.T. Kearney analysis
Operating Costs "Out of Scope"Costs
PotentiallyOffshorable
210
170
10
206
1678
234
$9 Billion
$381 Billion$390 Billion
2% of Total Cost
$3 Billion Industry$3 Billion IndustrySavingsSavings
U.S. Economy by 2015U.S. Economy by 2015
Source: Department of Labor, Forester Research
2000 2005 2015
$24.2 Billion
$4.0 Billion
$136.4 Billion
2000 – 2015CAGR=26.5%
2002 US GDP — 10,500 Billion2002 US GDP — 10,500 Billion
OEMs
Suppliers
Financing Arms
A.T. Kearney 82/7041 23
For More Information ContactNagi Palle, Principal
2000 Town Center, Suite 1600
Southfield, MI 48075
USA
Tel: + 1 (248) 354 2226
Taj Mahal Hotel, Suite 1001
One Mansingh Road
New Delhi 110011
India
Tel: + 91 11 2302 6162 Ext 1001
Thank You!Thank You!
A.T. Kearney 82/7041 24
AdditionalAdditional
A.T. Kearney 82/7041 25
Approximately 60% of all U.S. vehicle content is imported from outside the U.S.Approximately 60% of all U.S. vehicle content is imported from outside the U.S.
Imported Material Content
Total Material Content
Asia26.5%
Canada 26.5%
S. America
1.0%
EU 25.8%
146
242
55%
45%
Mexico 20.0%
Imported Content =
60%
Imported vehicle contentImported part content
Source: A.T. Kearney analysis
U.S. Automotive Material Content, in USD BillionU.S. Automotive Material Content, in USD Billion Imported Material Content, by RegionImported Material Content, by Region