20110902 Supplier OEM Relationship Study Final Presentation to ACMA Updated

Insights Into Supplier – OEM RelationshipsA Benchmarking Study

Presentation of Key FindingsSeptember 6, 2011

Automotive Component Manufacturers Association of India

2© 2011 J.D. Power Asia Pacific, The McGraw-Hill Companies, IncCONFIDENTIAL. No part of this document may be reproduced or copied without prior permission from J.D. Power Asia Pacific..

Foreword

A Challenging Landscape And The Way Forward

With the recent developments in the global automotive industry, new challenges have emerged for the Indian auto component industry. While the growth prospects of the Indian auto component industry remain very promising, there are new challenges as we evolve into a critical part of the global auto eco-system. For Indian suppliers, on one hand there is the need to maintain competitiveness in an inflationary environment and on the other the need to compete with the best in an increasingly uncertain global market. Strong working relationship and world-class capabilities congruent with global standards of excellence are essentials for the fast changing requirements of the customers. Few questions that need to be answered in this context, which are critical for sustainable growth: what is the nature of, and how competent and comfortable are current working relationships between OEMs and suppliers, what needs to be done to make them more engaging and enduring going forward, and what are the key gaps.

To address these questions, the Automotive Component Manufacturers Association (ACMA) commissioned a joint study with M/s JD Power Asia Pacific - ‘Insights Into Supplier – OEM Relationship: a Benchmarking Study’. The study focuses on the relationship between OEM and suppliers in India benchmarking it with the automotive community in developed and other emerging markets.

The benchmarking study indicates that the industry stands to gain from more engagement across the value chain. The cost pressure on suppliers is intensifying around the world. OEMs across the world prefer to engage with suppliers with stable lines of communication, good work culture, effective process orientation, end customer knowledge, who can jointly work with the OEM in developing products and technology to be delivered with a global footprint. OEMs today are consolidating and looking to optimise the points of contact for efficient and effective supplier management and cost savings. Consolidation of supplier base will call for Tier-1 suppliers to manage, continuously upgrade and even handhold the Tier-2 suppliers. This will enhance business opportunities in the future, but will pose challenges, as Tier-1s will have to invest in requisite skills and resources to manage an integrated supply chain.

Further, as in India, in international markets too, both suppliers and OEMs are faced with the challenge of shortage of skilled manpower, which needs to be urgently addressed. However, this has to be jointly addressed by the OEMs and the supplier community, and not wait for Government to step in.

We would like to place on record our appreciation for the efforts of M/s J D Power Asia Pacific for conducting this in-depth study. We are also grateful to our Past Presidents, ACMA member companies, OEMs, IPOs and suppliers in India as well as in US, Germany, Franceand China who have shared a wealth of their knowledge for this study.

We are hopeful that this document will form a basis for all future reference, dialogue and policy formulation for the auto component suppliers and their OEMs.

With best wishes,

Srivats Ram Ashok K TanejaPresident, ACMA Chairman, Economic Affairs,

WTO & KP Committee, ACMADated: September 06, 2011


Structure of the Presentation

Conclusion and Recommendation3

Key Findings2

Objectives & Methodology of the study1


Project Background

Huge growth potential in IndiaVehicle production estimated to grow three-fold by 2020 from 2009. Automotive component industry likely to reach USD 110 billion by 2020

1

Critical to identify gaps and expectation mismatches Benchmarking of current working relationships between Tier-1 suppliers and their OEM clients is an unique opportunity for auto component manufacturers to position themselves on the road to growth and sustainable future.

4

Building strong Supplier - OEM relationship is key to successTo realize the huge growth potential it is imperative for suppliers & OEMs to create a strong working relationship and develop world-class capabilities that are in step with the fast changing requirements of the customer - in India as well as internationally

3

India – Increasingly an important sourcing destinationMore than 30 IPOs have offices in India. Component exports from India likely to grow by six-fold by 2020

2


Objective & Methodology

To understand how Suppliers & OEMs in select markets are building trust and dependability governed by a common purpose of monetaryand commercial gains1

In-depth Interviews with Tier-1 Suppliers & OEMs across marketsStructured questionnaire. Interviews were conducted in India, China, USA and Europe – through Face-to-Face interactions as well as over Telephone.

2

Desk ResearchTo describe and understand the current market situation1

Objective

Methodology


Study Coverage

Total number of Company’s interviewed

• Tier-1 Suppliers: 61 OEMs: 19 Buying scenarios: 244

India

USA

China

Germany

France


Contents


Key Findings2



Key findings – Business Relationship FactorsSuppliers with a footprint in a particular country evaluating their relationship with OEMs in the same country

-25% -15% -5% 5% 15% 25%

India

China

USA

EuropeInnovation Implementation

Trust Issues

Forecasting/ Ordering

Interaction/ Communication

Financial matters

Support provided by OEM

COMMENTSFewer expectation mismatchesGreater expectation mismatches

• Suppliers based in India expect more Support from their OEM clients and assistance on Financial matters

• Suppliers based in India have relatively fewer unmet expectations on Trust & Communication issues – a key essential towards building a stronger working relationship.


Key findings – Business Relationship Attributes Top 5 areas of greater and fewer expectation mismatches for India and comparison with China

-40% -20% 0% 20% 40%

India

China

Extent of support provided to reduce costs

OEMs concern for suppliers viability

Opportunity to earn reasonable return

Willingness to reward beneficial ideas/ supplier innovation

Extent of support provided to improve quality

Willingness to involve suppliers early in the product development process

Courtesy in interpersonal interaction

Willingness to partner

Fulfillment of commitments

Respect for confidentiality

Fewer expectation mismatchesGreater expectation mismatches


Key findings – Business Relationship Attributes Top 5 areas of greater and fewer expectation mismatches for China and comparison with India

-40% -20% 0% 20% 40%

India

China

Willingness to reward beneficial ideas/ supplier innovation

Speed of implementation

Encouragement provided to help you grow your business

Extent of support provided to reduce costs

OEMs concern for suppliers viability

Reasonable time provided to meet order requests

Accuracy of order forecasting

Timeliness of communication

Transparency in OEM's communication

Courtesy in interpersonal interaction

Fewer expectation mismatchesGreater expectation mismatches


The relationship enablers . . .

Foreword:

In the following section we have analyzed the key parameters that play a critical role in the working relationship between Suppliers and OEMs. It presents Suppliers the opportunity to distinguish their performance from other suppliers…


Relationship Enablers

Engagement

Alignment

Global Footprint/ Alliance

Consolidation

Trust

Innovation/ Technology

Flexibility/ Adaptability

Organization/ Manpower

End-Customer know-how

Quality, Cost, Delivery

Critical Pre-requisites

Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose

While Quality, Cost, Delivery remain critical pre-requisites that define the relationship between OEM and their Tier-1 Suppliers, the following key enablers help define a stronger business relationship between them.


Engagement

Alignment


Consolidation

Trust







Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose


Key findings – Greater engagement (1/2) OEMs in India increasingly willing to engage more with their local supply base as they feel there is a tremendous scope of improving operational performance

Innovation/ Intellectual property

Supply risk management and disruption avoidance

Development of Tier 2 & 3 supplier base

Cost Reduction

Emerging customer expectations

Agility/ Flexibility/ Adaptability

Continuous Improvements

COMMENTS

• Suppliers in India are more open to working together with OEMs in their efforts to move up the value chain.

• Primary focus of OEMs in India is to improve Supplier Performance (Quality, Cost, Delivery)

• Unique to India, OEM’s are working closer with their Tier-1 suppliers for development of Tier-2 and Tier-3 supplier base

•…and herein lies probably the next growth story for the Indian automotive component industry

% responding “ somewhat/ very much”

Working together with OEMs to improve

0% 50% 100%

India

China

USA

Europe


Key findings – Greater engagement (2/2)Productivity & quality upgrading of tier-2 and -3 supplier base is critically important to continued growth and success of tier-1’s

Tier Structure of the Auto Component Industry

OEM

T1T1

T2

T1

T2 T2T2T2

T3 T3

T2T2

T3 T3 T3 T3

T1: Tier-1, T2: Tier-2, T3: Tier-3 Supplier

COMMENTS

• Continue to function as “quick-jobbers” to Tier 1 companies. • Manpower quality and bench strength is a big concern. • Lack proper HR policies, professional work environment• Do not have bankable balance sheet and hence cannot avail bank financing• Limited access to technology• There is clearly a greater need for Tier-1’s to play a greater role in professionally managing tier -2 and -3 suppliers.


Engagement

Alignment


Consolidation

Trust







Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose


Key findings – Consolidation of Suppliers (1/2)Consolidation activities will continue to alter the competitive landscape in the Automotive Component Supplier industry

COMMENTS

•In most cases, for non-critical parts OEMs now source from a single tier-1 supplier• Key drivers for consolidation are:

• Better supplier management;• Improvement in cost savings & profitability potential • Ability to better manage continuous improvement initiatives

• In addition the fact that several Tier-1’s now have multiple facilities and have grown larger in size & capacity further increases the complexity for the OEM

700

350250200

350275

200250

200

Future/ TargetPresentPast

No.

of T

ier-

1 Su

pplie

rs


Key findings – Consolidation of Suppliers (2/2)Large Tier-1’s likely to become responsible for a growing number of Tier-2 partners. This is likely to result in opportunities for JV/ M&A activity

Tier-1 being converted to Tier-2

Tier-1

Tier-2

Tier-3

OEM

Some amount of initial handholding may be done by the OEM

• Existing smaller Tier-1 suppliers are increasingly being assigned to other existing larger Tier-1 suppliers. • Result: Critical for large Tier-1’s to manage their growing Tier-2 partners. Would call for additional investment in resources – people, infrastructure, processes. • Organizations would need to align themselves to the new market realities. Significant risk of disruption/ separation if alignment becomes a big challenge.

COMMENTS


Engagement

Alignment


Consolidation

Trust







Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose


Key findings – Flexibility/ Adaptability (1/2)Case of Home-grown companies Vs. MNC Suppliers

Home-Grown Vs. MNC Suppliers - Quotes

• Professional approach to business in case of MNC’s likely to win the game in the long run. • While home grown companies in India are more flexible – and considered “easier to work with”, it also exposes the organization to considerable business risk• Flexibility is often sought owing to lack of proper planning• MNCs abide by strict contractual terms as they protect their business risk exposure across markets worldwide.

COMMENTS“MNC’s are more focused on quality targets, project timelines. Home grown companies are yet to understand and feel like “I am running the show at the client plant”. MNC’s are also more demandingand less flexible. If for example the SOP is delayed; while home grown companies are OK, MNC’s asks for compensation” - OEM India

The MNC’s score better on their responsiveness, in their ability to look through the requirement, understand quality, specifications, bring in valuable insights/ suggestions, make predefined business case, think through the delivery mechanism. The family owned businesses have lesser aspirations. However, the family-owned businesses are easier to work with. They do not argue. You talk to them and the work immediately starts. For MNCs you have to give them LOI, signed contracts, surety of business, before they even make a small investment” – OEM India


Key findings – Flexibility/ Adaptability (2/2)Transforming the organization by bringing in a stronger process orientation is likely to help in business continuity over the long-run for Indian home-grown companies

Process Orientation Vs. Flexibility/ Adaptability

• MNC suppliers in India are indigenizing their processes to suit local working styles prevalent in India. • Indian home-grown companies are also adapting to the western style of management; with second generation entrepreneurs, having acquired professional managerial skills are leading this transformation• The transformation to a more professional set-up would pose significant challenges both internally & externally but essential for future survival.

COMMENTS

◆

Proc

ess

Orie

ntat

ion

Flexibility

Low

Low High

●●●●

Home-grown Suppliers

◆

●

China

◆

●

USA

◆

●

IndiaMNC Suppliers

◆◆◆

High

◆

●

Europe

MNC suppliers are adapting a more balanced approach in India. Indian home-grown companies too need to adapt.


Engagement

Alignment


Consolidation

Trust







Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose


Key findings – Gaps in Alignment (1/2)

• India – The disagreements largely stem from payment of tools, R&D/ developmental expenses, price, production volumes and warranty.• China – Disagreement relatively high on price, quality, testing/ validation, logistics & communication issues

COMMENTSDisagreement between OEMs and Tier-1 suppliers

India

China

Logistics and communications

Business Continuity

Distribution of genuine parts in the aftermarket by your Company

Intellectual property rights

Payment for system/ module/ sub assembly management to Tier-2

Warranty/ Product liability

Production volumes

Price

Payments for R&D activities

Payment for tooling

Higher DisagreementLesser Disagreement


Key findings – Gaps in Alignment (2/2)

• USA – Disagreement mostly on price, IPR and warranty/ product liability. • Europe – Relatively higher disagreements on price, payment, IPR, production, warranty/ product liability.• Product Liability, Recall, Warranty & Part Traceability issues are likely to evolve as new areas of disagreement in India. Suppliers need to be aware of contractual risks.

COMMENTSDisagreement between OEMs and Tier-1 suppliers

Logistics and communications

Business Continuity

Distribution of genuine parts in the aftermarket by your Company

Intellectual property rights

Payment for system/ module/ sub assembly management to Tier-2

Warranty/ Product liability

Production volumes

Price

Payments for R&D activities

Payment for tooling

India

USA

Europe

Higher DisagreementLesser Disagreement


Engagement

Alignment


Consolidation

Trust







Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose


Key findings – Trust Business partners must be clear on their reasons for wanting to build trust, assess risks and the intention and willingness to take risks, and receive feedback on their trustworthiness

• To build trust in a B2B scenario, it is important to manage the dynamics both within and across partner organizations. • While the primary drivers of trust remain Quality, Cost & Delivery performance over time, partners need to clearly state and discuss on their expectations and readiness of meeting them. • The structure in place between the two organizations can foster increased trust. Direct channels of communication, measurement & feedback, grievance redressal escalation mechanism etc. helps in building trust.

COMMENTSThe Bearing of Trust

Account Manager

Forums

Review mechanis

m

Escalation

mechanism

Organization

Structure

Redressal

Measurement

Feedback

Communication

Cost DeliveryQuality

SupplierOEM

Trust building factors

Critical prerequisites


Engagement

Alignment


Consolidation

Trust







Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose


Key findings – Organization/ Manpower Issues (1/2)Increased interactions with various OEM departments may necessitate greater co-ordination (internally) as well as availability of capable manpower at various levels

• In India, as suppliers are moving up the value chain, increasingly they are getting into component design.

• Though marketing still continues to be the front-face of the organization, there is greater interactions between OEM and supplier teams from design and quality departments.

• Quality and Design teams at OEMs now exercise far greater influence in supplier selection and evaluation

COMMENTSEvolving organization structure

P

M

S1 S2 S3

D1 D2 D3

Key account

manager/ Marketing

Sourcing/ Purchasing department

Supplier departments

OEM departments

Build-to-print scenario Design as per boundary conditions provided

P

M

S1 S2 S3

D1 D2 D3

Supplier departments

OEM departments

Key account

manager/ Marketing

Sourcing/ Purchasing department


Key findings – Organization/ Manpower Issues (2/2)Manpower planning and execution of HR policies is increasingly being used to assess Supplier’s aspirations and management outlook

• OEMs consider Human Resource related aspects as well to assess supplier’s management outlook and capability. For example:

• Stable organization structure with clear hierarchies

• Working conditions in plants and offices, workers canteen etc

• Safety practices

• Sustainability initiatives

• Timely payment of salaries, incentives & implementation of basic HR policies

COMMENTSQuotes

“HR Practices and working conditions create a strong first impression whenever I visit a supplier. It not only tells me about the people that work in the supplier but also creates an impression of the kind of quality that I can hope to receive from him” –OEM India

Safety

Canteen

Employee Survey

Sustainability


Engagement

Alignment


Consolidation

Trust







Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose


Key findings – Global Alliance/ FootprintGlobal alliance/ footprint is likely to gain importance as OEMs tap their existing supplier relationships in home country to establish base in newer markets

• At present, supplier selection is not based on global alliance/ footprint. However, it is likely to increase in importance as Indian OEMs design vehicles for the global market.

• The acquisition of global companies are also helping Indian OEMs to leverage their contacts in International markets where they intend to source parts or set up assembly units.

COMMENTS

“Key to selecting suppliers is technology at the right price more than anything else. We go for suppliers who have proven technology and are willing to give us at the right price” – Indian OEM

“We look for global alliance primarily for high-technology items. For new technology items we look for suppliers who have a global alliance. If it is an old technology, then we look for the global subsidiaries of suppliers. We need global technology at Indian prices. We need technology to bridge the global gap” –Indian OEM

“In Country X, we need local assembly with around 30% localization. The component costs in Country X are higher than India. However, using our current supplier’s relationships with suppliers in Country X, we were able to cut down the costs by 30-35%.” – Indian OEM

Quotes:


Engagement

Alignment


Consolidation

Trust







Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose


84%

83%

83%

68%

63%

61%

60%

53%

53%

52%

51%

48%

Want

Key findings – Innovation/ Technology & Design (1/2)Access to technology presents new business opportunities, especially in Electronics and Infotainment, where Indian OEMs are seeking to bridge the global gap

• Cars are increasingly being loaded with features – what was once available in luxury segment is now available in mass volume segment

• Airbags, ABS, Electronic Systems are high on the desire list in the mass volume segment

• Technology. thus is crucial for OEMs when selecting future suppliers, especially in Electronics and Infotainment area

• Cost, however, continues to play a decisive role in the pursuit of technology

COMMENTSExample: Feature Content Requirement: SUV

Cruise Control

Automatic Transmission

Rear Seat Entertainment

Stability/ Traction Control

Navigation System

Automatic Climate Control

Electrically Foldable ORVM

Hands-free Communication

Steering Wheel Mounted Audio Controls

Airbags

Anti-lock Braking System

Height Adjustable Driver's Seat

Source: 2010 India APEAL

38%

66%

54%

38%

18%

40%

22%

9%

15%

9%

23%

1%

Has


Engagement

Alignment


Consolidation

Trust







Key

Ena

bler

s fo

r Con

tinue

d S

ucce

ss

Common Purpose


Key findings – End-Customer know-howThe Trump Card…

COMMENTS

• Manufacturers keen to rely on suppliers who know more about their end customers and can bring in their knowledge to value add in the proposed product plans and businesses. Currently this is a big gap seen in India more so for local home grown companies than for MNCs.

Knowledge about the end-customer helps gain credibility and respect and connect better with your clientele.

End Customer knowledge

OEM

Suppliers

Customers


Challenges/ Pressures . . .


Key findings – Challenges/ Pressures (Near term)MNC automotive suppliers in US and Europe are increasingly looking at China and India as possible LCC sourcing. Likely to scout for capable suppliers.

• India – Suppliers feeling immense pressure to reduce prices, improve productivity, and grappling with sudden volume changes•China – Suppliers scrambling to meet demand. Relatively less affected by other issues.• USA – Innovation in products and processes likely to be a key issue. OEMs are likely to increase thrust on sourcing from low cost countries for cost benefit• Europe - Market conditions in Europe posing immense challenge/ pressures on European suppliers on all parameters.

COMMENTSPerception of near term challenges

Entry of foreign auto component majors

Pressure for investment in logistics and communication support

Pressure to guarantee product liability

Pressure to innovate

Change in demand for vehicles

Pressure to improve quality

Pressure of sudden changes in production volumes

Pressure to increase productivity

Increase in raw material prices

Pressure to reduce price

Greater ChallengesLesser Challenges

India

China

USA

Europe


Contents


Key Findings2



Key Takeaways

Create greater engagement Supplier’s performance directly impacts OEM’s market performance. Supplier’s stand to gain from the knowledge & experience of OEMs. Important for Tier-1’s to engage more professionally with their Tier-2’s & -3’s.

1

Explore joint-development opportunities with OEMsDevelopment of local R&D activities crucial for the industry. OEMs in China are supporting suppliers financially on proprietary research. Opportunities for joint development activities for new technologies should be explored.

4

Create greater process orientationSpecific to home-grown companies. Challenge would be to convince internal as well as external stakeholders. Need to inculcate and develop professional managerial talent.3

Effectively manage transitions during & post consolidationLikely to alter the competitive landscape leading to increase in JV/ M&A activity. Tier-1’s may need to manage growing number of Tier-2 suppliers. Unless managed properly, Tier-1’s may become the weakest link in the supply-chain

2


Key Takeaways

Significantly enhance end-customer know-how OEMs value suppliers with end customer knowledge, who can value add in future product plans and businesses. Currently a big gap seen in India, more so, amongst home grown companies5

Need for greater trustOEMs and Suppliers need to bring in greater transparency in communication, adequate and timely sharing of information and respect for each other’s intellectual property rights. 8

Enhance quality of working conditionsIncreasingly being used by OEMs to assess Supplier’s aspirations and management outlook. Need to ensure proper and safe working conditions for employees on the shop-floor.7

Plan on creating a global footprintFootprint could be in terms of alliances/ JVs/ Technical tie-ups as OEMs increasingly are looking at tapping their existing relationships in one market to establish presence in newer markets.6


The way forward . . .


Maturity of the relationship

R&D for new product developmentOpportunities in new

markets

StrategicTransactional Symbiotic

Conformance to requirements

Exchange of products that are “fit for purpose”. Focus on Cost, Availability, Quality, Delivery, timeliness

Integrated coexistence

Exchange of ideas, best practices, new process and product improvements

Fruitful associationExchange of advantages

on key domains such as

- Product, Service, Know-how, Time-to-market, Price / costs etc

Enablesprofitable Expansion

Enables smooth operations

Enablesoverall development

Achieving excellence in Industry and enhanced cultural fit for both parties

Process driven operations- Performance

measurement, prompt escalation of issues & Troubleshooting etc

Different relationship stage represents different aspects for the suppliers and OEMs


Different factors help achieve different stages of relationship

Strategic

Core Drivers

Transactional

Value addition through end

customer know how

Innovation –Technology /

Design

Symbiotic

Supporting Drivers

Timely Delivery

Product Quality

Cost / profitability

Manpower- Organization Structure- Maintaining skilled force

Trust - Transparency of communication- Proactive approach

Imperative for Suppliers to Move UpThis Value Chain


Thank You!


Thank you for your attention!

Your contact at J.D. Power Asia Pacific:

Shantanu Nandi Majumdar

Senior ManagerJ.D. Power Asia Pacific8 Shenton Way, #44-02/03/04 Singapore 068811

[email protected]: +65 67338980/ 65976136 (direct)Mobile: +65 83225965

Mohit Arora

Executive DirectorJ.D. Power Asia Pacific8 Shenton Way, #44-02/03/04 Singapore 068811

[email protected]: +65 67338980/ 65976111 (direct)Mobile: +65 91773347

Documents

20110902 Supplier OEM Relationship Study Final Presentation to ACMA Updated