Achieving Scale for Success
Much has been written about the need for scale in our industry. While not a new concept by any means, the need to increase volume and reduce fixed costs per unit are paramount to keeping pace with the pack. Recent moves by various OEMs to jointly develop platforms or align procurement organizations have scale at their root. Others are seeking acquisitions to consolidate future platforms and spread development costs across more offerings.
Compared to the past, the drivers behind the search for scale have extended beyond pure economic reasons. Building greater volumes on a vehicle platform basis or engine/transmission design has inherent benefits beyond increased volume and lower per-unit fixed costs. The adage that “less is more” certainly applies to increasing scale. When all platforms over 50,000 units per year are considered (no matter which segment), the average scale will have risen 55% from 2010 to 2020, to 611,000 units per year, with marked expansion occurring since 2005, when most high-volume OEMs found economic religion.
Speed to market is a major contributor towards shifting to lower platform counts in core segments. Since the 1980s, Japanese OEMs and Volkswagen have been utilizing global structures to derive their high-volume nameplates in the B, C and D segment space. As these OEMs expanded their production footprint beyond home markets, modifying existing platforms to effectively homologate into new markets reduced costs and complexity. Training a new workforce to work on an existing platform and build process increased the learning curve and allowed colleagues from other markets to assist in the launch process. Other positives include lower tooling complexity, increased scale for suppliers, lower supplier support costs per vehicle, and the ability to proliferate new technologies across the fleet more quickly than had previously been achievable.
The swift integration of technologies to meet legislative emissions mandates in the U.S., European Union and Japan also shifts the pendulum towards global platform solutions. OEMs cannot bankroll different structures to meet increasingly converging regulations. Instead opting for slightly over-engineering some vehicles for select markets to meet the regulations for a majority of others is the alternative approach. In most instances, annual volumes for the platforms for most major OEMs can eclipse 2.0 million units. In select cases where “right-sizing” the technology portfolio for a host of emerging markets makes economic sense, OEMs can profitably diverge from global structures to regional efforts. Toyota’s IMV multi-purpose light truck structure made in South-East Asia or later versions of VW’s PQ24 B-car sourced in South America are examples of these regional efforts with appreciable scale.
Many OEM associations have emerged in the name of reduced costs with a focus on raising joint volumes. Examples include Daimler and Nissan (platforms and procurement), Toyota and Mazda (technical development and procurement), General Motors and Ford (joint transmission development), and a host of volume-related joint manufacturing efforts in Europe and Thailand. OEMs understand that the days of going it alone in every instance is both cost prohibitive and too risky.
There is a lesson for suppliers, as well. Swift program cadence, technology turnover and the need to follow OEMs to many markets to support global platforms points toward more affiliations. These include those required to cover a geographic presence, jointly develop a new technology or reach a new customer/segment. In every case, risk reduction and diversifying demand is the root of these affiliations.
Scale economies driven by more flexible global platforms and suppliers willing to expand through affiliations will have an advantage in the swiftly moving global industry. Though it is outside the comfort zone for many, success will demand a wider view for the future.
Michael Robinet has been a managing director of IHS Automotive since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade flow/sourcing strategies, and OEM footprint/logistics trends.