A Global Concern

The increasing globalisation of the automotive industry is an indisputable fact. Today’s leading companies, such as Toyota, General Motors, Renault/Nissan, Volkswagen and a handful of others, view expansion into as-yet untapped markets as a means of ensuring the profitable growth that established – and increasingly saturated – markets cannot deliver. A replacement for the masses of two and three wheeled vehicles still serving as family transport in various parts of the world is a well recognised need, and in several emerging markets the race is on to introduce “people’s car” that offers the right blend of modernity, efficiency and price. Exactly who will be first to produce such a widely-accepted car remains to be seen: It may be one of the smaller international manufacturers that seizes the inititave, or perhaps an emerging market company such as India’s Tata or China’s Chery. What is more certain, however, is that the the companies best placed to grow in the future are those that locate their centres of production in the markets where growth is taking place – and this is every bit as true for wheels as it is for the vehicles they are fitted to.

In its 2008 analysis titled “The challenge of globalization – How automotive suppliers can map a holistic strategy”, international management consultancy firm Oliver Wyman notes that management at automotive suppliers identify globalisation as the fourth most significant factor contributing to success by 2015 (behind customer orientation, an entrepreneurial approach and cost position). According to the analysis, these managers view globalisation as necessary for meeting the needs of existing customers who are tapping new markets, for participating in the strong demand growth of emerging markets, and to gain new customers. In addition, European suppliers hope to reduce both costs and currency risk through production and procurement in low-wage countries. Vehicle manufacturers are already doing just this: In 2000, for example, Volkswagen still produced 59 per cent of its vehicles in Western Europe, but by 2015, this share will have declined to 38 per cent. At Toyota, the share of cars built in Japan is expected to drop to 36 per cent from 66 per cent.

This trend is not limited to the vehicle manufacturers themselves. As Oliver Wyman notes, the entire automotive value chain in the emerging markets of Asia, Eastern Europe, and South America was – prior to the onset of the financial crisis – growing by an average of 5 per cent a year, while growth in Western Europe, North America and Japan remained below 2 per cent. European automotive suppliers account for a disproportionately low share of this development; while nearly all of the larger European suppliers now operate in three continents, more than two-thirds of their sales are generated in Europe.

Within the wheel industry, if any company can hold claim to being a truly international player, it is Hayes Lemmerz International. The firm, despite its Chapter 11 bankrupty reorganisation between December 2001 and mid 2003, remains the world’s largest wheel manufacturer. In total, the century-old company currently produces nearly 60 million steel and aluminium car and truck wheels per annum. For Hayes Lemmerz, however, all is not plain sailing: Its huge debt burden is still there – in 2007 the company announced the extension of all significant debt maturities until 2013. Furthermore, Hayes Lemmerz has become a leaner organisation by shedding parts of the company lying outside of its core business (such as its aluminium components and brake components facilities) and focusing upon wheels. This can, on the face of it, be seen as a positive move; however a narrower focus means shifting every egg into a single basket, and a downturn in the wheel business could equal a serious problem for the company.

So how can a dedicated wheel producer such as Hayes Lemmerz best ensure its survival in an increasingly globalised industry? According to Oliver Wyman, there are five steps a company should take to achieve an optimised global market position. The first of these is to develop a deeper understanding of markets, customers and competitors. The major global vehicle manufacturers in Europe and other mature markets place an emphasis upon quality and premium positioning, and do so by offering a wide range of safety, performance, comfort, and entertainment features, including extras such as alloy wheels. Manufacturers from emerging markets, by contrast, emphasise basic mobility at the lowest price. A shining example of this is India’s Tata Nano, to be offered in the Indian market for around 100,000 rupees (₤1,400). The small/micro car segment is the largest and fastest growing in the Indian market, accounting for more than two-thirds of annual vehicle production. Despite this, European and international wheel and component suppliers have scant presence in the market. To win over new customers in emerging markets, says Oliver Wyman, suppliers must develop an in-depth understanding of local customer needs – those of both the automakers and end-users. For the wheel industry in developing markets, this means simple but robust designs. Regardless of whether wheels for this market are made from steel or aluminium, advanced technology such as flow-form casting doesn’t as yet feature high on any list of priorities. At the moment the emphasis is on 14 to 16-inch rim sizes – the sort of wheels that Hayes Lemmerz and other firms were producing around 20 years ago. From these humbler beginnings a desire for further development, such as weight optimisation or design, will also over time increase in these lands.

A second step towards optimising global market position, says the management consultancy firm, is to improve the ratio of profitable to unprofitable customers, a ratio that tends to run 20:80. Insufficient profitability stems from poor bargaining positions, undifferentiated products, inadequate sales processes, or missed service opportunities. Hayes Lemmerz is attempting to do just this by reducing its dependency upon Detroit’s “Big Three” vehicle manufacturers. This also ties in with Oliver Wyman’s third step: defining a company’s global footprint. For Hayes Lemmerz, this means decreasing dependence on its US business in favour of those in emerging markets, and it has been fairly successful in this regard. In 2004, some 45 per cent of its consolidated sales came from the US; this figure is now around 10 per cent. On a wider scale, Hayes Lemmerz International has closed factories in high cost North American and Western European locations and transferred production to lower cost countries such as Turkey, the Czech Republic and Mexico.

The company has thus minimised its dependencies upon individual customers or markets. Its largest customer, Ford, contributes only 17 per cent towards consolidated sales, its second largest, General Motors, 11 per cent. It has also achieved a remarkable balance with its three main product lines, car steel wheels, truck steel wheels, and car aluminium wheels. Each of these three products account for approximately one-third of sales. Loss of business in North America has mostly been at the expense of growth in South America and Eastern Europe.

Step number four, says Oliver Wyman, is to create a global supply chain. Global sourcing should use the differences in various countries’ economic development and capacities to procure goods and services at minimal cost. Often this means adding new components to classic sourcing processes, including customs clearance management, additional currency hedging, intensified quality assurance, or stricter oversight of humane working conditions. Finally, Oliver Wyman notes the importance of improving market access an know-how through mergers and acquisitions. Suppliers must position themselves to use the sales, production, and supply opportunities available in other countries to propel their own growth. This can be accelerated through mergers and acquisitions that allow a supplier to gain market access, market share, know-how and technologies, qualified employees, and local brands. The success of a merger or acquisition will depend, of course, on a solid strategy as well as the right target company, and a careful post-merger integration process that incorporates cultural criteria.