Global Automotive Sourcing

1
Federal Reserve Bank of Chicago

• Global Automotive Sourcing

An India/China Discussion
Chicago April 27, 2004
2
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. Kearneys 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

3
Motivations for global (low cost country)
sourcing are varied
Objectives
Revenue Increase
Grow New Markets
Retain/Gain Market Share
Vehicles
Components
Manufacturing
Business Drivers
Cost Decrease
Improve Profitability
Compete Locally
Strategic Sourcing
Components
IT/Business Process
Engineering Services
Vehicles
Emerging Markets
Home Markets
Manufacturing
Services
Impact on Markets
4
Manufacturing
5
Asian markets are large and growing fast

• Annual New Vehicle Volumes (MM)

Annual New Vehicle Volumes (MM)
CAGR
Japan
1
CAGR
China
17
NA
0.6
Asia
6.5
0.9
Europe
S. Korea
6
India
6
No automotive manufacturer can ignore emerging
Asian economies
Source J.D. Power LMC A.T. Kearney analysis
6
and are different from North America even
different within Asia

• Product Segment Mix

Product Segment Mix
India
Segment Market Share
Segment Market Share
Asia
China
North America
Price Driven Segment
Price Driven Segment
Emerging Asian markets need location specific
strategies
Source J.D. Power LMC A.T. Kearney analysis
7
Manufacturers forced to follow a build where you
sell strategy

• 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
8
Hardly any vehicle exports out of India or China

• 2003 Volumes (MM)

3.7

• 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

0.98
0.9
Negligible Exports
0.08

• Vehicle exports from India primarily to S.E.
  Asia, Africa and some to Europe

Source Siam India, ACMA, Cris Infac, A.T.
Kearney analysis
9
Exports of auto components growing
rapidlyalbeit from a low base

• Auto Component Market (Billions)

Automotive Component Exports ( or total market
in Millions)
44
3500
CAGR
3,242(9)
36
China 41
CAGR
30
2500
1,758(9)
China 24
25
1,635
(11)
India 17
19
1500
15
1000(19)
750(16)
India 10
625(16)
578(13)
6.4
5.8
5.3
4.8
4.5
4.0
500
Note US automotive material content 240
BillionAsian 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
10
Wages in low cost countries is a major attraction

• Average Manufacturing Industry Annual Wages (US
  ,2001)

?
(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
11
however, exploiting sourcing opportunities
requires careful study

• Price Not Always Lower(1)

Bolt Example
(2)
Shock Absorber
Sourcing opportunities are real. Actual
opportunities need tobe properly qualified
commodity by commodity
Note 1) Disguised data based on actual
experience 2) Second US supplier Source A.T.
Kearney analysis
12
allowing for the right tradeoffs
India leading in engineering driven supply China
leading in cost efficiency
Source Frost Sullivan
13
Component industry fragmentation very high
Illustrative Examples

• China Case Example

Component-wise Export Value Break-up (India 2002)
No clear dominant commodity or supplier strategy
forcomponent sourcing from China/India
14
with supply chain challenges

• Major Steps in Asian Supply Chain

Factories
Internal Local Transportation
Consolidator
Air/Ocean Carriers
De-consolidator
Domestic U.S.Transportation
Export Documentation
U.S. Customs Clearance

• 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
15
Services(i.e. non-manufacturing)
16
A.T. Kearneys 2004 Offshore Location
Attractiveness Index for services
A.T. Kearney Offshore Location Attractiveness
Index 2004
People Score Environment Score Financial Score
India
Chile
Spain
Israel
China
Brazil
Russia
Poland
Mexico
Ireland
Turkey
Canada
Portugal
Vietnam
Malaysia
Hungary
Thailand
Australia
Singapore
Argentina
Philippines
Costa Rica
South Africa
New Zealand
Czech Republic
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
17
25 countries attractive for services offhshoring
covered in the index
High
Canada
Singapore
Ireland
Australia
New Zealand
Spain
India
Czech Republic
Combined People Environment Score
Portugal
Israel
Hungary
Malaysia
Poland
Chile
China
Brazil
South Africa
Mexico
Costa Rica
Philippines
Argentina
Thailand
Russia
Turkey
Vietnam
Low
High
Financial Score
Source A.T. Kearney analysis
18
Variety of services are being offshored
Example
Major Automotive Industry Applications and
Interest especially when combined with
component outsourcing
High
Software Development
Data Entry/Low-end Processing
Software Maintenance Upgrades
Web-Chat
Customer Service (e.g. Account Opening)
Systems Integration
2D-3D
Call Center
Technical Help Desk
Client Database Maintenance
CAD
Maturity of Supply Market
Embedded Systems
Level 1
CAE
Accounts Receivable/ Payable
Knowledge Based Engineering, Manufacturing
Engineering
Settlements Payments
Client Reporting Statements
Reconciliation
Regulatory Audit
Technical RD
Financial Reporting Control
Credit Analysis
Level 2
Level 3
Low
Research
Low
High
Complexity of Function
Source A.T. Kearney client experience analysis
19
Benefits of services offshoring are clear
LessThan 10Savings 6
Better ThanThe Original Services14
Not As Good As The Original Services11
Other2
No Savings0
GreaterThan 50 Savings 11
None5
AdditionalCapacity31
Prod.Improve26
10-30Savings 42
31-50Savings 41
ServiceQualityImprove15
Expand.Skills Caps.21
As Good As the Original Services75
Better productivity, quality skills as added
benefits
Typical cost savings range from 30 50
Quality consistent with on-shore services
Source 2003 A.T. Kearney Automotive Executive
Survey
20
Three factors driving services offshoring
( Millions)
1991 2001 CAGR 46.7
1985 1991 CAGR -5.9
(CAGR -30)
180
Outside North America
140
100
60
North America
40
0
Economic liberalization, connectivity and drop in
telecom costs have been key drivers
Source A.T. Kearney analysis
21
India and China provide a huge technical resource
pool
Undergraduate Engineering Enrollment
Doctoral Degrees in Science and Engineering
(1)
350,000
N/A
Globalization, so far, has leveraged the
undergraduate engineering resource pool more than
the doctoral level
Note 1) 1999 data Source National Science
Foundation
22
Sizeable industry benefits estimated from
offshore services
Financing Arms
Suppliers
OEMs
381 Billion
390 Billion
136.4 Billion
8
2 of Total Cost
10
2000 2015CAGR26.5
167
170
206
9 Billion
2
210
24.2 Billion
3
4
4.0 Billion
3 Billion IndustrySavings
2002 US GDP 10,500 Billion
23
Thank You!
For More Information Contact Nagi Palle, Principal
2000 Town Center, Suite 1600 Southfield, MI
48075 USA Tel [phone]
Taj Mahal Hotel, Suite 1001 One Mansingh Road New
Delhi 110011 India Tel [phone] Ext
1001
24
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 Content 60
242
Canada 26.5
Asia26.5
146
Mexico 20.0
EU 25.8
55
45
Imported Material Content
Total Material Content
S. America 1.0
Source A.T. Kearney analysis