The past few years have been relatively good ones for the world’s leading automotive suppliers. Thanks to an industry recovery from the global financial crisis of 2008 and 2009 and successful cost-cutting initiatives, earnings and return on capital for the ten largest automotive suppliers are approaching their highs of about a decade ago. Global auto sales remain strong, powered by robust growth in emerging markets.
A new financial squeeze is on the way, however. Suppliers’ key customers—the world’s biggest automakers—are preparing to demand some of the deepest cost reductions in years. At the same time, automakers are increasingly pressuring their suppliers to locate more production facilities and R&D in fast-growing emerging markets so that they will be closer to their assembly plants. For most suppliers, expanding their manufacturing footprints in emerging markets—where wages are rising fast and skilled talent is becoming scarce—will add both cost and complexity to global operations.
We call the dilemma over how to balance these conflicting demands—for both cost reduction and manufacturing close to the customer—the proximity paradox. It is one of the most serious management challenges that the global automotive-supply industry will face over the next few years. Pressure to cut prices is unlikely to relent, and avoiding emerging markets is not an option because they are critical to growth. Indeed, China surpassed the U.S. in 2009 as the world’s biggest automotive market and is emerging as the engine of global growth for the industry.
To understand the challenges that companies are facing and to assess how well they are prepared to confront them, The Boston Consulting Group in partnership with the Fraunhofer Institute for Manufacturing Engineering and Automation surveyed 42 automotive suppliers from around the world. This sample comprised one-quarter of the world’s 100 biggest players and a selection of midsize companies. We also interviewed dozens of auto supply executives and industry experts.
Our research confirmed that suppliers are struggling with the twin burdens of lowering costs and locating production closer to their customers and are taking action to find an optimal balance between these two demands. But we also found evidence that most companies can better prepare to succeed in the increasingly difficult environment. Some of the key findings of this research are as follows:
- The cost pressures are real. An overwhelming majority of respondents—86 percent—said that they are under increased cost pressure from their automotive customers. Industry experts told us that major automakers are rolling out multibillion-dollar programs.
- The pressures to localize production are real as well. The second most important factor driving manufacturing-location decisions is proximity to the customer’s manufacturing plants. Suppliers surveyed expect to increase the number of their global manufacturing sites by an average of 9 percent over the next five years.
- The balance in manufacturing capacity is shifting. Nearly 60 percent of surveyed auto suppliers’ total production sites—including many core manufacturing operations for certain products—is expected to be located in emerging markets some five years from now, compared with only 45 percent five years ago. The automotive-supply industry in Germany alone is projected to lose 35,000 jobs, including highly skilled blue- and white-collar workers.
- Efforts to address the challenge are insufficient. Every supplier surveyed agreed that it is important that it adjust its manufacturing network, but our research found that most suppliers lack the organizational capabilities, business processes, and tools to achieve an optimal manufacturing footprint.
To keep—and increase—their market share, automotive suppliers must be able to skillfully balance cost and proximity considerations throughout their entire value chains when deciding where to locate manufacturing. More than ever, suppliers need to have a process in place to reconcile conflicting customer demands—and to decide where to make trade-offs—as they seek to define the ideal configuration of their manufacturing networks.
Network optimization requires a comprehensive and holistic approach, one that encompasses a clear understanding of performance and the right capabilities, methods, and implementation process to achieve results. To be really successful, these programs must be ongoing so that suppliers have the flexibility to adjust their manufacturing footprints in response to shifts in global cost, market demand, and technology trends. For many suppliers, this will require at least some transformation of their organization.