Hybrid engines in the fast lane - Roland Berger Strategy Consultants

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Hybrid engines in the fast lane - Roland Berger Strategy Consultants

AUTOMOTIVE

Automotive Competence Center customer magazine No. 01 _ June 2005

> Hybrid engines in the fast lane – Unleashing the power of brands –

A view of the markets in the US, China and Japan


Editorial

Dear reader,

Developing, producing, selling and servicing automotive vehicles was a challenge

from the very beginning 100 years ago and it continues to be challenging. Vehicle

manufacturers and suppliers have to meet ever-more demanding customer

requirements, legislative and environmental standards, cope with raw material

shortages, and successfully perform in a broad set of countries and cultures.

Outstanding performance in the past is worth little beyond the financial buffer it

generates. Every day, every year, the jury – customers – are out to choose the

winners again. And these may differ from last years' winners.

To succeed in this complex and challenging battle, information is critical. Working

for leading automotive players in all regions of the world, the Automotive

Competence Center of Roland Berger Strategy Consultants has a wealth of

information at its disposal. Insights on the latest trends help us provide valuable

solutions to our clients' key challenges. Aiming to serve our customers even better

in the future, we decided to publish some of our knowledge in a new periodical

called "Roland Berger Automotive Insights". It will be distributed by mail to all

decision makers, experts and friends of the extended Roland Berger automotive

family. In this first issue we highlight and comment on the latest trends in hybrid

vehicles. Dr. Karl-Thomas Neumann, CEO and Member of the Executive Board at

Continental Aktiengesellschaft, shares his thoughts on the success of hybrid

vehicles from a supplier's perspective. You will also find some ideas about how to

improve the positioning of brands as well as updates on the latest trends in the

US, Japan and China.

I wish you insightful reading and welcome any feedback that further improves our

services for you.

Sincerely yours,

Dr. Thomas Sedran

Partner at Roland Berger Strategy Consultants, Munich

If you have any suggestions or questions, please do not hesitate to contact us:

automotive_insights@rolandberger.com

Impressum

Published by:

Roland Berger Strategy Consultants GmbH

Arabellastr. 33, 81925 München

Responsible:

Ralf Kalmbach

Editors:

Susanne Tebartz

Dr. Gabriele Blod

Dr. Heidi Sylvester

Photographs:

Cover: Axel Wierdemann

Agency etc.

Layout:

DesignTeam Roland Berger

Printed by:

Girodruck, Hamburg

Circulation: 2,500

Published three times a year

No reprints without prior permission of the publisher


3 | Automotive Insights

Automotive inSIGHTS | 3

Hybrid engines in the fast lane

Challenges for established manufacturers

The hype surrounding hybrid vehicles has taken the automotive

world by surprise. Their market success illustrates the importance

of customer-oriented technology management. European and

American manufacturers have taken note.

Hybrid engines in the fast lane

With oil prices at a record high, global warming and depleting

fossil fuel stocks, calls for efficient, environmentally

friendly cars are becoming more frequent. Contrary to

Japanese hybrid pioneers, European manufacturers have

continued to depend on diesel technology and, in addition,

have focused their research on fuel cell and hydrogen

technologies. These technologies will not be ready for use

until sometime between 2010 and 2020, at the earliest.

Manufacturers and experts are having technical debates

on the strengths and weaknesses of diesel and hybrid

technologies. As a result, consumers have become more

confused and have not been encouraged to embrace

environmentally-friendly technologies. While the strength

of diesel lies in long-distance journeys, hybrid engines are

more efficient in cities, on short trips with a high rate of

stop-and-go. The air pollution debate in Europe and the

success of hybrid cars in the US and Japan could put the

hybrid engine on the fast track to success here at home.

In the US, diesel technology has always faced challenges

because of strict emissions laws. Driven by the discussions

on reducing emissions and public programs, over 80,000

hybrid vehicles were sold in 2004. More than 50,000 of

these were Toyota Prius.

In 2003, the Toyota hybrid gained visibility when environmentally-conscious

celebrities Cameron Diaz and Harrison

Ford drove up to the red carpet at the Oscars in their Prius.

Market research suggests that sales will more than double

this year, and has forecast that over 200,000 hybrids will

be sold. Over 100,000 of these are expected to be

Toyotas. By 2010, a market volume of 800,000 hybrid

vehicles is expected.

A challenge for European and American manufacturers

Toyota, which has thus far been world leader in terms of

growth, quality, and profit, is now taking advantage of the

opportunity to become a technology leader and to develop

an emotional image, particularly for its Lexus brand. The

strategic move toward hybrid engines is a cornerstone of

Toyota's strategy to become market leader by 2010. The

company has continuously developed hybrid technology

and is therefore years ahead of the competition. Toyota's

future plans include offering the hybrid option for all of its

vehicles. The company will therefore build up its production

capacity and strengthen its development activities.

Toyota's plans have made European manufacturers

nervous, as it could soon erode their market positions,

such as the idea that "exciting and innovative cars come

from Europe".

European and American automotive manufacturers have

long hesitated in addressing the hybrid issue. For years,

companies argued that two engines would be too expensive

and too heavy. When the Prius's hybrid engine was

introduced in 2000, manufacturers did not see it as a

challenge because of a design that resembled a science

project and insufficient driving dynamics. However, they

began to take the hybrid more seriously when the Lexus

RX400h was presented. AUTO BILD, a German automobile

magazine, gave the RX400h rave reviews: "Runs smoothly,


4 | Automotive Insights

is great fun and even calms your environmental

conscience." This statement precisely summarizes

customers' expectations of hybrid vehicles.

To make up for lost time, American and European automotive

manufacturers have undertaken impressive efforts

to catch up. They have announced the arrival of several

new car models for the near future. Ford, for example,

introduced a hybrid version of its Escape model at the

end of last year. Since demand for the car far exceeded

expectations, four more Ford hybrid models will hit the

market within the next three years. Honda plans to

introduce an over 240 horse power hybrid version of the

Accord, the highest selling model in the USA. General

Motors and DaimlerChrysler, who were long opposed to

the hybrid concept, are cooperating to develop an even

more efficient technology that they plan to present in

2007. Nissan is aiming for an annual output of 50,000

hybrid units of its Altima model, using Toyota electrical

components. VW has developed a hybrid prototype based

on the Touran. Audi is working intensively on a hybrid

engine for its new Q7 SUV. Even Porsche is considering

a hybrid version of its Cayenne SUV.

Customer-oriented technology management to ensure

successful market positioning

The example of hybrid engines shows that integrating

customer-oriented technology management into a

company's overall strategy is decisive. Already, the topic

of safety brought on surprises when the Euro NCAP Crash

test was introduced. While underestimated automotive

manufacturers shone with five stars, one premium

manufacturer had to accept a four star result for its new

product line. Now, the topic of the environment shows that

innovative engine technology alone does not sell cars.

Customers are looking for a complete package that

includes driving pleasure, performance, image, design,

safety and environmental friendliness.

If manufacturers continue their efforts to differentiate

themselves with high technology without considering the

value for their customers, they will not be successful.

Various technological developments such as by-wire

technologies and telematics illustrate this. The competition

between the technologies increased complexity and cost

pressure. In the face of negative customer reactions, many

companies are going to change their philosophies. They

are now moving away from the "technology creates need"

approach and toward the notion of "technology creates

value for customers". Companies who want to put this

approach into practice need a technological positioning

strategy that identifies new trends early and actively

pursues technological change. Technological value

creation at every level has to be consistently geared

toward brand positioning and target customer needs.

Hybrid vehicles will continue to move into the fast lane,

especially in the US and Japan. European manufacturers

must prepare for hybrid technology, which will compete

with diesel engines within the next few years. Companies

who want to maintain or improve their market position will

have to ensure that their technology management can deal

with the challenges of the future.

Silvio Schindler,

Partner at Roland Berger

Strategy Consultants, Zurich


5 | Automotive Insights

Hybrid engines from a supplier's perspective

Hybrid vehicles may only be a temporary solution on the way to environmentally

friendly cars. Nonetheless, suppliers will have to react to the growing trend efficiently

and flexibly in coming years.

Hybrid engines are being established as an addition to

conventional engines. Current worldwide sales figures

illustrate this trend and suggest that the hybrid market will

grow strongly in coming years. However, forecasts of actual

market volumes vary significantly, predicting sales of one

to eight million hybrid vehicles by 2012. Based on our

project experience, we believe that two million is a realistic

figure.

In the long term, hybrid vehicles will be a temporary

solution on the way to electric cars, which will use new

energy sources such as fuel cells. In 2004, Toyota, Honda,

Ford and GM sold more than 100,000 hybrid vehicles

worldwide. Hybrid technology has been most successful

in Japan and the US, but is also likely to gain popularity

in Europe.

Hybrid systems can basically be divided into two different

forms: mild and full hybrid. The difference lies in the

performance of the electric motor. With the mild hybrid

system, the electric motor can provide support of up to

15 kilowatts (approx. 20 horse power), and is used

primarily to start or to accelerate with low engine speeds.

The full hybrid system, on the other hand, has a much

stronger electric engine of 25 to 50 kilowatts (35 to 70

horse power) and can function at high engine speeds.

For short periods of time, the electric engine can be used

without the conventional motor.

Three factors will drive hybrid market development

worldwide. First, European (ACEA), Korean (KAMA) and

Japanese (JAMA) automotive manufacturers are working

toward emission reduction. This is the result of voluntary

commitments as well as current and future emissions laws

(especially with regard to CO2 emissions).

Secondly, further environmental protection issues, such

as the current discussion on particle emissions, will play

an increasingly important role.

Finally, the added value that hybrid vehicles can offer,

namely improved driving dynamics without increased

energy consumption, is a decisive factor. Higher fuel

prices will also help hybrid vehicles achieve a higher

market share.

Regenerative braking substantially helps reduce emissions

and fuel consumption. If the mild hybrid system is applied,

consumption can be reduced by five to seven percent. The

full hybrid system, combined with a modified brake, leads

to an even greater potential for reduction. When braking,

an intelligent steering system distributes the braking

energy between the conventional brake and the hybrid

engine. In this way, as much electric energy as possible is

recovered, which can be used to power the hybrid system.

This leads to increased driving comfort and dynamics,

without increased fuel consumption.

On a modular basis, Continental offers mild and full hybrid

systems, as well as the appropriate braking systems. This

enables the company to react to market requirements in

a flexible and cost efficient manner. With our mild hybrid

system in GM’s Silverado and Sierra SUVs, we are one of

the first suppliers to deliver hybrid systems for vehicles in

series production.

Dr. Karl-Thomas Neumann,

Chief Executive Officer and

Member of the Executive Board

at Continental Aktiengesellschaft


6 | Automotive Insights

Unleashing the power of brands

Targeting the right 'archetypes' in China: a case for holistic brand management

from the people's view in the car industry

In the highly competitive Chinese car market, brands

have become key for turning the tide for car makers.

Knowing the eight 'archetypes' of Chinese consumers

and the tricks of 'delimiter marketing' might provide

the decisive edge.

'If you've got a good product, you've got a good brand' is

no longer a valid adage. The times when cars sold themselves

have become a faint memory. This is especially true

in China. Overly optimistic prognoses after years of incredible

growth led to excess capacity and subsequently to

fierce price wars and free-falling margins. The employment

of brand forces here is key for reversing the fortunes of

many a car maker.

The 'brand experience' from the people's perspective

is not the experience of a product viewed in isolation,

which is the way engineers tend to see products. People

experience and perceive a brand in a broader, sociopsychological

context of 'worlds of values'. Knowingly or

unknowingly, people hold on dearly to their beliefs and

orientations and communicate these through their symbols.

We are all extremely adept at sensing the meaning

behind symbols and determining whether or not we wish to

be associated with the values of that symbol's user group.

People are actually highly selective when it comes to

expressing solidarity with the values of a particular group.

The more a consumer's value system matches a brand's

perceived values, the more likely – and the more frequently

– a decision will be made to consume this particular

brand: People holding traditional values buy traditional

brands and hedonistic people purchase hedonistic brands.

This correlation is overwhelmingly demonstrated by Roland

Berger Strategy Consultants in an extensive long-term

study of over 100,000 consumers worldwide.

The power of symbols becomes especially evident in

China. The Chinese change all names that are too difficult

to pronounce in their own language. BMW has simply

become 'Bao-ma', which means 'precious horse' and

Mercedes-Benz is known only as 'Ben-chi', meaning 'run

very fast'. When Chinese luxury car drivers are asked what

they want in a car, it often becomes clear that they have an

'unclear' brand perception. Drivers who would opt for a

BMW have often been seduced by the dynamic 'run very

fast' Mercedes nickname, while Mercedes types who like

the idea of a 'precious horse' have been drawn to BMW.

Roland Berger has found a way to reveal the individual

value system of people and to group people with similar

orientations regardless of socio-demographic brackets.

Eight of these so-called value-demographic archetypes

exist in China. The largest are the 'self-centered' archetype,

with a share of about 21 percent in the metropolitan

population, followed by the 'traditional maximalist'

archetype and the 'hedonist' archetype. Those falling

into the 'self-centered' category have both progressive

performance and progressive hedonist orientations and

reject the entire traditional value set. Although traditionalists

only score 10 percent they are in the majority in

rural areas, where they challenge the predominance of

the self-centered group. This forms a source of tension

across the entire Chinese population.

The key to a brand's market success – or a carline for

that matter – can be found in its 'delimiters'. So-called

'delimiters' are composed of the protagonists and antagonists

of a brand and represent the beginning and the end

of the brand's specific value spectrum. These two user

groups have such strong emotional attachments to the

brand (either positive or negative) that they influence their

social environment or archetype peers, swaying them

either for or against the brand. Delimiters provide


orientation for the majority of less emotionally attached

people in the 'indifferent middle', and thus influence the

ultimate success of the brand in no small part.

Good brands have a very high user share within their peer

group of protagonists and at the same time a considerably

less brand user share within their peer group of antagonists.

Good brands are strongly polarized as a result.

Weak brands are more 'democratic' in that they have

succeeded in acquiring a representative cross-section of

the population. Although this might seem favorable at first

glance it means that none of the value segments are over

or under-represented in the brand's consumer base. These

brands therefore have no strength, no weakness, no identity

and no real proponents – and are expendable as a

result.

In the worst case, a brand simultaneously addresses

incompatible archetypes. What results is a double loss of

market share since opposite value segments eventually

will withdraw their loyalties and stop consuming the brand.

Many studies by Roland Berger have compellingly shown

that brands with strongly polarized 'delimiters' achieve

above-average market share and above-average profitability.

The correct polarization generates powerful 'pull-forces'

for the brand. Without this polarization and without these

pull-forces, the brand must resort to buying market share

with a much more costly 'push-force'. In the Chinese car

market, this has occurred at the expense of profitability.

The secret of strong brands is that their pull force is less

expensive than pushing the consumer.

Strategic brand management must therefore focus on the

following questions:

> What values does your brand symbolize from the

people's perspective, what does your brand stand for?

> What is the optimal 'delimiter' polarization to bring your

brand in a favorable position within the competitive

environment and market dynamics?

> What are the competitors' anticipated moves and which

strategic traps can be laid to keep them off your target

position?

The overall marketing mix must be effectively geared

toward the right strategic protagonists to attract more than

half of them to the consumer base. The difficulty lies in

simultaneously delimiting the brand from the right antagonists.

In extreme cases, it may even be necessary to

actively remove the antagonists from the consumer base

through anti-marketing. If successfully executed, the

remaining value segments will then automatically align

themselves to the advantage of the brand.

Delimiter marketing, although it might appear somewhat

counterintuitive, ultimately results in the more efficient and

effective use of dollars spent for managing the entire

marketing mix. Delimiter marketing and its implementation

requires precise strategic considerations, foresight, total

commitment and management's full courage.

Tom Ramoser,

Partner at Roland Berger

Strategy Consultants, Beijing


8 | Automotive Insights

My car is my castle

After the initial gold rush, the car market in China is getting more complicated.

Wei Zhu, Partner at Roland Berger Strategy Consultants, talks about the major

challenges facing companies that are active in the automotive sector.

What cars are Chinese buyers currently interested in?

This is not an easy question to answer. Over the last few

years, almost every international car brand has come to

China, either via joint ventures with local manufacturers or

via exports. You can now see almost every model out on

the streets. So what customers want first and foremost is

more choice. The days when buyers were happy to get hold

of any car no matter how outdated it was, are gone. Now

suppliers have to provide state-of-the-art cars with all the

extras. And they have to bring their latest models to China

as soon as they go on the market in western countries.

Do you expect a truly Chinese taste to emerge?

I think it would be overly simplistic to speak of a single

taste. There are some considerable geographical differences.

In the northern parts of the country, for example,

customers are more focused on sporty and powerful cars.

In eastern regions, people tend to place greater value on

the size of a car. Generally speaking, you could say that the

Chinese taste is closer to American than to European

tastes. People in China want a really big car.

What is the outlook for the Chinese car market?

There will clearly be much more competition. All major

players are active in China and they all are committed to

investing considerable amounts. In addition, growth in the

domestic car market is beginning to slowdown slightly.

As in mature western markets, car sellers will now have

to cope with a buyer's market. As well as market consolidation,

competition in terms of quality and price will

become much fiercer.

Some domestic Chinese car manufacturers are fighting

to retain their share of the market. Can they survive in

such a competitive market?

They are currently competitive in low-end segments due

to capital and technical constraints. But companies like

Cherry are trying very hard and are strongly supported by

their local governments through tax breaks and public

investment in infrastructure. Given that an increasing proportion

of the Chinese population now has the purchasing

power to buy their own cars, new opportunities are arising.

In the long-term, it is very likely that a Chinese car manufacturer

that uses the potential of the domestic market to

grow will become successful on a global scale.

But this will not happen without using foreign expertise.

No, and it is no surprise that Chinese investors are

showing a strong interest in European brands. The general

feeling is that China has to have its own brand. This can be

achieved in three ways: first, by using the expertise derived

from cooperation with global players and then developing

their own range like Cherry and Jily are doing at present.

Second, by combining car parts from abroad like China

Brilliance's Zhonghau brand, where the design comes

from Italy, the chassis from Germany and the engine from

Japan's Mitsubishi. Third, by taking over an internationally

known brand and using it to gain an international reputation.

SAIC was attempting to take this approach by bidding

for the British car manufacturer MG Rover. The bid, however,

failed.

Wei Zhu,

Partner at Roland Berger

Strategy Consultants, Shanghai


9 | Automotive Insights

New policy reshapes the Chinese automotive landscape

China's government has long aspired to create global car champions. It's revised

automotive industry policy might just do the trick. With local automotive companies

gaining clout, global OEMs have their work cut out for them.

The Chinese government's revised automotive policy, which

aims to catapult local players into the global OEM league,

encourages consolidation within this fragmented industry.

Under the revised policy, which was published in April

2005, an OEM has the right to decide upon joint ventures

and new product plans if it gains control of 15 percent of

the market. Local automotive OEMs have been given a

strong incentive to build up scale fast.

Domestic OEMs have reacted quickly. Not surprisingly, it

was well-positioned, top-tier companies that spearheaded

M&A activity. China's top 5 automotive companies, which

between them control 67 percent of the market, have

either already completed M&As or are in merger talks.

Recent M&A activity includes Shanghai Automotive

Industry Corporation's acquisition of China National

Automotive Industry Corporation, Changan's purchase of

Jiangling, and NAIC's merger with Zhenyu. Ongoing merger

discussions are taking place between Hafei and Changhe;

Chery and First Automotive Works-Yangzi are in serious

talks and Beijing Automotive Industry Holding Company

is discussing a possible deal with JAC.

End of the road for small companies, global OEMs also

face risks

The revised policy marks a radical about-turn for the Chinese

government. Over the past 15 years, it has tried to

push consolidation within the industry by strictly controlling

joint ventures. Its success in creating a consolidated

market, in which local players could compete with global

OEMs, was limited.

Companies that depend on local protection and local

political struggles for their existence continue to be

commonplace in almost every province. Their small scale,

low efficiency and lack of experience make them inferior

competitors to international OEMs, which have the upper

hand in product development, branding, cost control as

well as sales and distribution management. These companies

will become fodder for competitive local OEMS trying

to build up their market share.

Further M&A activity among local Chinese OEMs is inevitable.

This consolidation process will likely leave only four

or five automotive giants in China. Yet it will also mean the

end of the road for hundreds of small companies.

Global OEMs should be concerned about the government's

revised policy. They need to consider three aspects.

1. Global OEMs should carefully reconsider their overall

China strategy and honestly answer the following

questions. What are our overall objectives for China?

Where do we want to compete? Do we want to treat

China as a market only, or are we trying to leverage

China as a local cost production for global business?

2. Global OEMs need to reevaluate their partnerships in

China. Companies need to determine whether the

partner and partnership can survive and thrive under

the new policy. OEMs need to decide whether they need

to invest in new partnerships or smoothly phase out

existing ones.

3. Global OEMs need to act quickly. In coming years, room

to maneuver will decrease as Chinese companies take

advantage of the new policy. Local OEMs will get larger,

become more powerful and will have control over their

own strategic development.

Vivian Zheng,

Partner at Roland Berger

Strategy Consultants, Shanghai


10 | Automotive Insights

As OEMs in the US drift apart, a new world order may emerge

When it comes to sales growth, OEMs in the U.S. automotive market experienced

mixed fortunes this past year. If the rates of change continue unabated, Toyota

may soon knock Detroit's automotive icons from their pole positions.

Sales of passenger cars and light trucks in the U.S. market

amounted to 3.9 million units in the first quarter of 2005.

That was a contraction of 0.4 percent against the yearearlier

period. In short: the U.S. automotive market stagnated.

Yet what appears on first glance to be a rather

insignificant fall in vehicle sales may actually conceal a

seismic transformation taking place within the U.S.

automotive market.

Of the seven major players three grew considerably:

Nissan, Toyota and DaimlerChrysler

Growth rate Q1 2005 versus Q1 2004 plotted against

Q1 2005 sales volume

respectively. During the same period, three major players

saw growth shrink considerably: Volkswagen, General

Motors and Ford. These vehicle manufacturers saw growth

shrink by 9.7 percent, 5.2 percent and 5.2 percent

respectively.

Honda performed in between these two groups, but fared

a little worse than the market. Product cycle differences

between Honda and the other Japanese OEMs may have

been the reason for that. Honda's Accord and Civic lineup

is aging, whereas Toyota and Infiniti have already

modernized and extended their product line up.

Growth rate Q1

2005 vs. Q1 2004

15

10

5

0

-5

-10

VW

Nissan

Honda

"Average size"

500,000

Toyota

-15

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000

Q1 2005 sales volume

The blanket -0.4 percent figure covers over an array of divergent

change figures These represent the changing fates

for most of the major automotive OEMs. In the U.S. market

at least, major OEMs are increasingly drifting apart from

one another. Some suppliers, especially those with strong

ties to selected OEMs, are moving in step with the OEMs.

Several vehicle manufacturers as well as parts suppliers

have announced changes at top-management level.

DCX

Ford

GM

"Market average"

-0.4%

Continually high crude oil prices and

the resulting upward pressure on fuel

prices is starting to have an impact

on customer preferences. Although

not everyone agrees, many experts

believe that consumers are shying

away from traditional SUVs and light

trucks toward either mid-sized versions

or different propulsion systems

such as diesel powered engines for

full sized trucks.

In order to illustrate just how quickly

the major OEMs are currently drifting apart in the U.S.

market, we just have to imagine what would happen if the

rates of change displayed from Q1 2005 vs. Q1 2004

remain constant for the next few years. If that rate of

change continues, Toyota would sell more cars in the

United States than Ford in only three years, it would

outsell DaimlerChrysler in four years and sell more cars

than General Motors in 5 years.

Of the seven major players, three grew considerably:

Nissan, Toyota and DaimlerChrysler. They booked growth

rates of 11.5 percent, 9.5 percent and 4.2 percent,

Wim van Acker,

Partner at Roland Berger

Strategy Consultants, Detroit


11 | Automotive Insights

From the Keiretsu pyramid to a global network

OEMs are changing the rules by which they select suppliers. With their traditional

ties to carmakers disintegrating, Japanese automotive suppliers must reposition

themselves to survive.

Japan's automotive industry from its inception was shaped

by Keiretsu, those business groups that have long bound

banks, trading houses and industrial firms into loosely knit

conglomerates. Sticking together by holding shares in each

other and buying each others' wares, foreign companies

were largely prevented from gaining a foothold in this market.

While the pyramidal tier structure has long dominated

the relationship between carmakers and parts suppliers

throughout the world, the Keiretsu system kept Japanese

suppliers especially bound to OEMs because of cross

shareholdings.

Long-term purchasing relationships, intense collaboration

and the frequent exchange of personnel and technology

between OEMs and select suppliers characterized Japan's

Keiretsu automotive sector. Parts suppliers were guaranteed

business in turn for devoting their best technologies

and resources to one OEM.

But then Carlos Ghosn arrived at Nissan Motor in 1999

and refused to play by the traditional Japanese rules.

Under Ghosn's tutelage, Nissan dissolved the Keiretsu

relationship it had with hundreds of suppliers, keeping

only four major parts makers on board. Once Nissan

questioned the received business practice, its local rivals

followed suit. It wasn't long before Mazda and Mitsubishi

Motors started to shed their ties with shareholder

suppliers and began to embrace an open supplier

selection policy.

Japanese suppliers – from a protected King's castle

to the level playing field

The withering of Keiretsu obligations means competition

among suppliers has increased. Japanese suppliers now

have to compete with local and foreign companies.

In addition to the traditional supplier selection criteria for

Japanese OEMs – quality, testing capability in Japan, and

co-development capability – OEMs are placing increasing

emphasis on the outsourcing of systems or modules to

improve efficiency. More and more RFQs are also being

sent to foreign global suppliers. A network structure based

on an open supplier selection policy is emerging from the

collapse of the Keiretsu pyramid structure.

No longer guaranteed business from within the Keiretsu

and unable to survive on their own because of suboptimal

scale and limited technology investment, Japanese

suppliers need to seek out new collaboration opportunities.

They also urgently need to define a clear long-term

strategy. Like their global rivals, Japanese suppliers must

choose between three roles: system integrator, technology

satellite or process satellite.

Japanese OEMs – pace of entering global network

structure not uniform

The shift from Keiretsu to a global network based on open

supplier selection is gathering speed. Yet some Japanese

OEMs still lack a clear strategy. Mazda, Nissan and Mitsubishi

are rapidly reforming their supplier selection models.

Nissan clearly promotes a 'project partnership' policy

when it comes to open supplier selection. Honda however

is wavering. Toyota, long considered the quintessential

Keiretsu OEM, still favors Toyota Group suppliers despite

attempts to reform its business model.

Akio Okamura,

Partner at Roland Berger

Strategy Consultants, Tokyo


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