Lessons the Indian automotive industry can learn from Detroit's experience (2006)

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Date:09/11/2006 URL:
http://www.thehindubusinessline.com/2006/11/09/stories/2006110900510800.htm
Back Bypassing Detroit's bumpy road
ACHAL RAGHAVAN
As the Indian auto industry pushes forward with its aggressive global growth plans, there
are lessons it can pick up from Detroit's current problems. ACHAL RAGHAVAN draws up
some strategic directions for the domestic auto sector.
During the first half of 2006, GM and Ford announced fairly bleak financial results for their US
operations. Still making losses, GM continues to push forward on its turnaround plan, based mainly
on huge structural cost reductions. GM's global market share is down to 13.8 per cent compared to
15.1 per cent last year — though GM attributes this mainly to an employee discount sale it held last
year.
Ford is also in the red, and has announced an accelerated "Way Forward" recovery programme.
Mr Alan Mulally, formerly of Boeing, has taken over as the new CEO at Ford, replacing Mr Bill
Ford, who retains his position as Executive Chairman. DaimlerChrysler, while making profits overall,
is struggling to make progress with its Chrysler Group operations in the US, many years after the
celebrated "merger of equals".
In contrast, Toyota is continuing to make steady gains, while maintaining its healthy bottom-line.
Hyundai is recovering lost ground. Geely, a Chinese manufacturer, has announced plans to launch a
sub-$10,000 car by 2008, introducing thereby a new element to the competitive scenario. Barring a
few die-hard conservatives, the typical American customer is no longer responding to the "Buy
American" appeal. Successful automotive companies are shedding national identities ( "Japanese",
for instance), and becoming truly global.
Turnaround strategies
As the Indian auto industry pushes forward with its aggressive global growth plans, are there some
strategic lessons it can pick up from Detroit's current problems? Let us look at some of the issues,
and the lessons to be learnt.
On September 15, Ford Motor announced an accelerated "Way Forward" turnaround plan. The
key features of this plan are:
Cut operating costs by $5 billion by 2008 — mainly through eliminating 14,000 white-collar jobs,
offering buyout packages (VRS schemes) for all workers, and competitive operating agreements at
30 plants.
Sell/close all Automotive Component Holdings (ACH) plants by 2008. These are plants that Ford
had taken over from component Visteon last year, to bail it out of its own financial difficulties.
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Ironically, Ford had spun Visteon off as an independent entity in 2000 — much like GM's move
with Delphi.
Renew/refresh 70 per cent of Ford's North American product line-up by 2008.
Reduce production capacity by 26 per cent by 2008.
Ford has cited rising gasoline prices, lower truck (pick-up) sales, and increases in cost of inputs
such as steel as the reasons for its current state. There are no surprises in this list. Gasoline prices go
up, sales of gas-guzzlers go down, and there is a scramble to develop and launch more sensible,
fuel-efficient vehicles. A look at the Ford turnaround strategy tells us that all the moves are reactive
— cut costs, close plants, reduce capacity, and "refresh" the product line. GM's own turnaround
strategy is not very different.
The winning strategy
To win in today's highly competitive automotive market, the global player needs to hit upon a game-
plan which is a combination of the following strategies:
Exciting new vehicles, introduced in rapid succession, that draw the customer to the showroom.
A motivated dealer network that makes the purchasing experience a pleasure, and after-sales
service that is world-class.
Consistent on-road performance that ensures the customer's brand loyalty and repeat purchase.
A lifetime `cost versus value' equation that beats every other brand in the market.
Operational excellence of the highest order across all functions in the value chain, which gives the
car manufacturer a definitive cost advantage.
Stated in such simple terms, this does not seem to be an impossible task. After all, this is what all
good companies are expected to do.
But automotive history has shown that very few companies manage to get this combination just right,
and maintain it consistently over a period of time.
The key differentiator
This brings us to new product development, which is really where market leaders such as Toyota
and Honda score over Detroit. They seem to read market shifts and preferences way ahead of
everyone else, and proactively roll out new products that hit the "sweet spot" repeatedly, and bang
on time.
What does this mean for the industry? "Operational excellence" — in terms of JIT, lean
manufacturing, TQM, TPM, zero defect, Six Sigma, et al — now stands deconstructed as a set of
techniques and disciplines that can be learnt (or copied). But really knowing what the customer
wants — that critical core competence — is beginning to look like a fine art.
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The successful auto company uses its engineering and operational expertise to satisfy the customer's
emerging tastes and needs before someone else does.
Given that design and development of a new vehicle platform is still a 12-24 month exercise, reading
the shifts in market tastes well ahead of anybody else becomes critical.
Some strategic directions
The good news is that the players from India are still at a very early stage of their evolution, and can,
therefore, learn from the experience of others.
Based on what has been happening in the US over the last few decades, we can draw up some
clear strategic directions for the domestic auto industry:
Enhance the ability to get close to the customer on a continuous basis, and really understand where
his/her preferences are headed. The key is to spot these shifts in time.
Invest in focussed R&D and engineering capabilities that are fast, flexible and responsive to market
needs for new cars.
For long, Detroit engineers thought that they could tell customers what they really needed.
Learn from that experience.
Continue to work on innovative cross-functional processes to compress the "time-to-market".
Re-examine costs on a continuous basis, and evaluate every fixed/semi-fixed cost carefully.
Legacy costs, as GM and Ford have shown, are virtually impossible to shake off.
Look at white-collar productivity with the same intensity as you would examine the shop-floor.
Partner your component suppliers and treat them as "almost equals", so that they develop a sense
of ownership of your success and go that extra mile for you.
Use their accumulated expertise in cost-effective design. Help them eliminate waste, and take a
share of the resultant cost reductions.
Take a hard look at the strategy of creating wholly-owned components/systems suppliers. Seeing
what has happened to Delphi and Visteon, is it really feasible for such subsidiary companies to
supply anything substantive to their parent's competitors?
Do not take your eyes off the Indian market, as you go on your globalisation drive. Remember how
Ford and GM lost market share in their own home turf — the US.
The customer will go where he gets better value for money, regardless of the perceived nationality
of the car company. "Low cost" is giving way to "best value".
Seek continuous inputs from the customer to understand this "value" — and deliver it ahead of
others.
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(The author is a strategy and business excellence consultant based in Bangalore. He was formerly
Executive Director, Ingersoll-Rand (India). He can be contacted at achalraghavan@yahoo.co.in.)
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