Transcript Federal Reserve Bank of Chicago

Federal Reserve Bank of Chicago
Global Automotive Sourcing
An India/China Discussion
Chicago
April 27, 2004
Summary

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
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Motivations for global (low cost country) sourcing
are varied
Revenue
Increase
Vehicles
Objectives
Components
Grow New
Markets
Retain/Gain
Market Share
Compete
Locally
Improve
Profitability
Emerging Markets
Home Markets
Manufacturing
Business
Drivers
Cost
Decrease
Strategic
Sourcing
Vehicles
Components
Manufacturing
IT/Business
Process
Engineering
Services
Services
Impact on Markets
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Manufacturing
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Asian markets are large and growing fast…
Annual New Vehicle Volumes (MM)
Annual New Vehicle Volumes (MM)
25
20
7
CAGR
6
NA 0.6%
5
CAGR
Japan 1%
China 17%
Asia 6.5%
4
Europe 0.9%
3
S. Korea 6%
15
2
1
India 6%
0
10
2001 2002 2003 2004 2005 2006 2007 2008
2001 2002 2003 2004 2005 2006 2007 2008
No automotive manufacturer can ignore emerging Asian economies
Source: J.D. Power LMC; A.T. Kearney analysis
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…and are different from North America … even
different within Asia
Product Segment Mix
Product Segment Mix
70%
70%
60%
60%
50%
Segment Market Share
Segment Market Share
India
40%
30%
20%
Asia
50%
40%
30%
20%
10%
10%
North America
China
0%
0%
Basic
Small
Medium
Large
Luxury
Price Driven Segment
Basic
Small
Medium
Large
Luxury
Price Driven Segment
Emerging Asian markets need location specific strategies
Source: J.D. Power LMC; A.T. Kearney analysis
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Manufacturers forced to follow a “build where
you sell” strategy
Unit Economics – Average Vehicle Price
30,000
~ $25,000
25,000
20,000

Unit economics make exports into
Asian regions difficult

Supply chain and regulatory
constraints driving domestic
emerging market investments
15,000
~ $7,500
10,000
5,000
0
North America
India
Average Retail Price Of new Car
• FDI
• Technical Alliances
Supply Chain/Other Constraints
• Regulatory
— Tariffs
— Local content
— Ownership
structure
• Logistics
— Etc
Note:
1) A.T. Kearney estimates
Source: A.T. Kearney analysis
• Captive units
• JVs
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Hardly any vehicle exports out of India or China
2003 Volumes (MM)
Domestic
Export
4.00
3.7
3.00
•
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
2.00
1.00
0.98
0.9
0.00
0.08
Negligible
Exports
India
China
• Vehicle exports from India primarily to
S.E. Asia, Africa and some to Europe
Source:
Siam India, ACMA, Cris Infac, A.T. Kearney analysis
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Exports of auto components growing rapidly…
albeit from a low base
Auto Component Market (Billions)
Automotive Component Exports
(% or total market in Millions)
44
45
40
3500
36
35
CAGR
30
30
China
25
1,758
1,635
(9%)
(11%)
24%
19
1500
15
15
India 10%
10
5
4.0
4.5
4.8
5.3
5.8
6.4
2000
2001
2002
2003
2004
2005
CAGR
China
41 %
2500
25
20
3,242
(9%)
625
(16%)
578
(13%)
India
17 %
750 1000
(16%) (19%)
500
2000
2001
2002
2003
Note — US automotive material content: $240 Billion;
Asian 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
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Wages in low cost countries is a major
attraction…
Average Manufacturing Industry Annual Wages (US $,2001)
33,595
30,807
3,701
1,180
1,200
China
India
Mexico
Germany
US
(1)
Labour content varies significantly between components — need to consider
capital — labour tradeoffs in addition to other cost elements
Note:
1) Big 3 wages higher
Source: SIAM, ACMA, Cris Infac
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…however, exploiting sourcing opportunities
requires careful study …
Price Not Always Lower(1)
Bolt Example
$3.00
USA
Drivers
$3.00
Korea
$2.00
$2.00
India
USA
•
•
•
•
(2)
Challenges
Shock Absorber
$9.00
Brazil
$9.00
Korea
$8.5
USA
Labor cost
SG & A cost
Burden cost
Other costs
$7.00
$7.00
India
Malaysia
•
•
•
•
•
•
•
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 to
be properly qualified — commodity by commodity
Note:
1) Disguised data based on actual experience
2) Second US supplier
Source: A.T. Kearney analysis
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… allowing for the right tradeoffs
Favorable
Not so favorable
Parameter
India
China
Thailand
Taiwan
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
India leading in engineering driven supply; China leading in cost efficiency
Source: Frost & Sullivan
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Component industry fragmentation very high …
Illustrative Examples
China Case Example
Component-wise Export Value Break-up
(India 2002)
Number of
Producers
Volume Share of the
No.1 Producer (%)
Generator
31
11.9%
Starter
30
16.2%
Radiator
26
14.7%
Shock absorber
23
17.6%
2000
Friction material
26
20%
Engine & engine
parts
23%
Transmission &
steering parts
Suspension &
braking parts
4%
60%
Equipment
7%
2%
4%
Electricals
Others
No clear dominant commodity or supplier strategy for
component sourcing from China/India
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… with supply chain challenges
Major Steps in Asian Supply Chain
Factories
Internal
Local
Transportation
Consolidator
Export
Documentation
Air/
Ocean
Carriers
U.S.
Customs
Clearance
Domestic
U.S.
Transportation
Deconsolidator
• Suppliers?
• Modes?
• Where?
• Brokers?
• Ports?
• Brokers?
• Where?
• Sites?
• Carriers?
• Coordination with
transportation?
• Service levels? • Carriers?
• Control?
• Financial
arrangements?
• Carriers?
• Supply base
management?
• Which
items?
• Service
levels?
• Service
levels?
• Service
levels?
• Modes?
— Cross-dock? • Service
levels?
— Storeready?
Without effective supply chain management, sourcing in India
and China can be challenging and sometimes costly
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Services
(i.e. non-manufacturing)
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A.T. Kearney’s 2004 Offshore Location
Attractiveness Index for services
A.T. Kearney Offshore Location Attractiveness Index 2004
People Score
Environment Score
Financial Score
2.09
1.38
2.02
1.41
1.68
1.19
1.57 1.68
2.63
1.58
1.26 1.08 1.33
3.59
2.64
3.17
3.44
2.99 2.88 2.71
0.64
0.73
2.05
3.65
3.12 3.25 3.06 2.83
2.48
3.25
3.07
1.84
1.66
1.11
South Africa
Costa Rica
Argentina
Mexico
Thailand
New Zealand
Hungary
Poland
Chile
Brazil
1.38 1.39 1.06
1.74
2.13
1
Philippines
Singapore
Czech Republic
Malaysia
China
India
0.89
1.99
1.59
1.47
0.7
0.51
2.24
Canada
3.32 3.09
0.35
1.21
2.48
3.72
0.88
1.12
0.62
Turkey
0.92
1.77
0.94
Israel
0.93
0.74 0.74 0.67
Ireland
1.94
1.31
0.57
0.9
Spain
0.7 0.88
Russia
0.94 0.86
Vietnam
1.36
Portugal
0.73 0.92
Australia
1.36
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
financial benefits, HR needs and risk profile that corporations are considering
Source: A.T. Kearney analysis
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25 countries attractive for services offhshoring
covered in the index
High
Canada
Singapore
Ireland
Australia
Spain
Combined
People &
Environment
Score
New Zealand
Israel
India
Czech
Republic
Portugal
Hungary
Poland
Malaysia
Chile
China
Brazil
South Africa
Mexico
Costa Rica
Argentina
Turkey
Russia
Philippines
Thailand
Vietnam
Low
Source: A.T. Kearney analysis
Financial Score
High
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Variety of services are being offshored
Example
Major Automotive Industry
Applications and Interest –
especially when combined
with component outsourcing
IT Services
Customer Interaction Services
Processing Services
High End Customer and Analytical Services
Design & Engineering Services
High
Software Development
Software Maintenance
& Upgrades
Web-Chat
Customer Service (e.g.
2D-3D
Account Opening)
Call Center
Technical Help
Client Database
Desk
Maintenance
Systems
Integration
CAD
Maturity
of Supply
Market
Low
Embedded Systems
CAE
Level 1
Accounts Receivable/
Payable
Knowledge Based Engineering,
Manufacturing Engineering
Settlements &
Regulatory
Payments
Technical Audit
R&D
Financial Reporting
Credit & Control
Analysis
Level 3
Research
High
Data Entry/Lowend Processing
Client Reporting
& Statements
Complexity of Function
Source: A.T. Kearney client experience & analysis
Reconciliation
Level 2
Low
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Benefits of services offshoring are clear
Total Cost Savings
Realized
Less
Than 10%
Savings
6%
No Savings
0%
Quality of Current Offshore
Initiatives
Greater
Than 50%
Savings
11%
10-30%
Savings
42%
Not As Good As
The Original
Services
11%
Better Than
The Original
Services
14%
None
5%
Other
2%
Additional
Capacity
31%
Prod.
Improve
26%
31-50%
Savings
41%
As Good As the
Original Services
75%
Typical cost savings
range from 30 – 50%
Source:
Additional Benefits
Realized
Quality consistent with
on-shore services
2003 A.T. Kearney Automotive Executive Survey
Expand.
Skills & Caps.
21%
Service
Quality
Improve
15%
Better productivity, quality
& skills as added benefits
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Three factors driving services offshoring
Economic Liberalization
FDI Inflows to India (1985-2001)
($ Millions)
4000
1991 – 2001
CAGR = 46.7%
1985 – 1991
CAGR = -5.9%
3000
2000
1000
0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Connectivity
Telecom Costs
Number of Secure Servers With Strong Encryption
(Thousands)
Source: Netcraft
180
Outside
North America
140
100
60
North America
40
0
1997
1998
1999
2000
2001
2002
Cost for 512 Kbp of International Bandwidth
(US$ Per Annum)
(CAGR: -30%)
67,500
1999/2000
40,300
33,000
2001
2002
Economic liberalization, connectivity and drop in telecom costs
have been key drivers
Source:
A.T. Kearney analysis
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India and China provide a huge technical
resource pool
Undergraduate Engineering Enrollment
Doctoral Degrees in Science and Engineering
~26,000
~1.2MM
(1)
~7,000
~350,000
~5,500
United States
India
N/A
India
China
China
United States
Globalization, so far, has leveraged the undergraduate
engineering resource pool more than the doctoral level
Note:
1) 1999 data
Source: National Science Foundation
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Sizeable industry benefits estimated from offshore
services
U.S. Automotive Industry
U.S. Economy by 2015
Financing Arms
Suppliers
OEMs
$390 Billion
$381 Billion
8
167
10
170
206
210
Operating Costs
"Out of Scope"
Costs
$3 Billion Industry
Savings
Source: A.T. Kearney analysis
$136.4 Billion
2% of
Total Cost
$9 Billion
2
3
4
Potentially
Offshorable
2000 – 2015
CAGR=26.5%
$24.2 Billion
$4.0 Billion
2000
2005
2015
2002 US GDP — 10,500 Billion
Source: Department of Labor, Forester Research
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Thank You!
For More Information Contact
Nagi Palle, Principal
Taj Mahal Hotel, Suite 1001
2000 Town Center, Suite 1600
One Mansingh Road
Southfield, MI 48075
New Delhi 110011
USA
India
Tel: + 1 (248) 354 2226
Tel: + 91 11 2302 6162 Ext 1001
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Additional
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Approximately 60% of all U.S. vehicle content is
imported from outside the U.S.
U.S. Automotive Material Content, in USD Billion
Imported Material Content, by Region
Imported vehicle content
Imported part content
242
Imported
Content =
60%
Asia
26.5%
Canada
26.5%
146
55%
EU
25.8%
Mexico
20.0%
45%
Total Material
Content
Source:
Imported
Material Content
A.T. Kearney analysis
S.
America
1.0%
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