Thefuture belongsto elec tricve hicles. · car ownership. Following financing, leasing and all-inclusive packages, customers will increasingly pay for only their own vehicle use (see

The futurebelongs toelectric vehicles.

automotivemanager I /2010

TRENDS, OPPORTUN I T I ES AND SOLUT IONS FOR THE DECIS ION MAKERS IN THE AUTOMOT I VE I N DUSTRY

Customer R&D Procurement /Suppliers Production Sales Services

But mobility solutionsare the key toreaching customersand profitability.*

*See page 7 for more details

A time for team spirit

3automotivemanager I/2010

Dear Reader,

The year 2010 is the year of sports. Soccer fans from around the world are on theedge of their seats this summer as they watch their teams compete at the World Cupin South Africa. Billions of people are caught up in the emotion, excitement andfascination of the games. Fair play, combined with the art of attack and the joyof the game, will once again turn a collection of national players into a team ofworld champions. But before this team can emerge as the victor, it must systematicallyprepare for the tournament, develop the right strategy and then flawlessly execute it.

As the excitement grows for this major sporting event, you notice one thing – the crisishas slipped back into the shadows, even if it may not have completely disappeared.The initial positive signs of economic recovery are intensifying. The IWF, for instance,has forecasted that the world economy will grow by 4 percent in 2010. By 2011,the world market should be back at the record level it set in 2007. The automotivemarket will pick up speed again as well. For this reason, now is the time to seizeopportunities that will lead to profitable growth and to invest in a flourishing future.

The agenda for profitable growth can be broken down into a few action areas:turn emerging markets (China, Russia, India and Brazil) into the core business with specificproduct and market strategies; make better use of the market opportunities still availablein the volume markets of Europe and North America through innovative product andservice packages as well as more professional market development; tap the efficiencypotential lurking within product costs along the entire value chain; and, not least,revive fascination in cars through market-relevant innovations and creative brandmanagement particularly among young people even in these times of media saturation.

Meeting car customers’ mobility needs is a central element in the effort to besuccessful in the competitive marketplace both today and tomorrow. And the answerto this challenge will not be electric cars alone. Rather, the response will be a full rangeof customer-relevant mobility solutions that include conventional vehicles poweredby engines that optimally burn fuel.

Those who recognize the opportunities now and tackle the task with team spirit will bethe ones who will actively shape the future. We would like to offer you some foodfor thought and help you optimally exploit your opportunities. Let yourself be inspired byour publication. Get in touch with us! We look forward to beginning a dialogue with you!

Best regards,

August JoasHead of Oliver Wyman Automotive Practice

Editorial

17

07

10

12

14

15

4

Manufacturing in»high-cost« regions

Generating profit.

By Ron Harbourand Stephen Weisenstein

Electric mobility: Power play to reach profit zonesand establish long-term access to customers

From technology to the customer.

By Christian Kleinhans and Stephen Weisenstein

Back to profit

Returning to profitable growth.

By Peter Bosch and SvenWandres

Product-related costs –the management perspective

Costs under control?

By John Lucci and Lars Stolz

Cost pressureor value boost?

Thinking strategically.

By Lars Stolzand Stephen Weisenstein

Focusing onsupplier risk

Acting atan early stage.

By Christian Heissand Lars Stolz

Electric mobility

R&DCustomerProcurement/Suppliers Production

Table ofcontents

18

20

22

23

25

27

32

31

30

29

automotivemanager I/2010 5

The market: the heart of sales success

Strategies for regions.

By Matthias Bentenrieder and Julia McGillis

The huge potential of remarketing

More profitable residual-value management.

By Matthias Bentenrieder and August Joas

Emerging markets take center stage

More than unit numbers.

By Peter Bosch and Shin Moonsup

The brand is dead –long live the brand!

Commentary by Jan Dannenberg,Partner and supplier expert atOliver Wyman

»Surprising solutions«

Interview by Claus-Peter Köth,»Automobil Industrie«,BMW Group, Member of theBoard of Management of BMWAG,Production

Diversity as the formulafor success

Portrait of Rémi Cornubert,Partner and Head ofthe Automotive Practiceat Oliver Wyman in France

Sales Services Commentary PublicationsPortrait

Keeping it simple

Lean variety.

By Roland Bubik and August Joas

Profit potential in spare parts

Getting the price right.

By Fabian Brandt and SvenWandres

Mobility services in 2030

Strategy and success factorsfor new markets.

By Matthias Bentenriederand Stephen Weisenstein

E-Mobility 2025 –Power Play withElectric Cars

EuropeanTruck Customer 2010

OEM Business Designsof the Future

Supplier RiskManagement

Value Enhancementor Cost Cutting

Commodity Hedging –the Adventof a New Paradigm

Mobility Services 2030

From technologyto the customer

Electric mobility: Power play toreach profit zones and establishlong-term access to customers


As the discussion about the technical issues related to electric mobilitycontinues, the question about marketing the new drive system is movingto the forefront. One point is already crystal clear: Technology alonewill not be the only factor determining the fate of electric vehiclesin the marketplace. A new understanding of future customer prioritiesas well as the related product and, above all, service ranges will playa major role, too. Technological advances achieved in high-voltagebatteries, power electronics and e-equipment as well as their systemintegration are indeed important issues. On their own, though, theseadvances will not be enough to achieve successful market penetration.

New business designs among carmakers,automotive suppliers as well as establishedand new service providers, including energycompanies, will compete against one anotherfor future profit zones and long-term cus-tomer relationships. The Oliver Wyman study»Electric Mobility 2025« shows the valueshifts which will occur along the entire valuechain. This research provides decision-mak-ers with the thought-provoking ideas theyneed to turn today’s largely technology-cen-tric electric perspective into a comprehensivenew understanding of mobility. As a result,the customer, with his or her own individual

mobility needs, mobility budget and purchas-ing willingness, will become the focal point ofstrategic considerations.

Winning the game »downstream«Two-thirds of the approximately €9 billion inprofits (2025) to be generated by electric mo-bility will be produced »downstream,« that is,by the sales and, in particular, vehicle opera-tion. Automakers will be forced to tap theseprofit zones if they want to efficiently offerelectric cars in the years ahead. This includesboth leasing and financing programs as wellas services tailored to individual customer

Christian Kleinhans,Stephen Weisenstein

Customer R&D Procurement/Suppliers Production Sales Services

8

needs.A key profit driver will be the operationof electric vehicles – also arising from newbusiness designs covering all facets of cus-tomers’ mobility needs, including leasing con-cepts and car sharing.

Profitable mobility offerings, tailor-madeThe high additional costs generated initiallyby electric vehicles can be offset by the cus-tomer only within the context of the vehicles’entire service life and operational perform-ance. A sustainable TCO benefit (TCO: totalcost of ownership) for the electric vehicle canonly be achieved over the long term. Depend-ing on the sales market and mobility needs,the TCO will be higher or lower than vehicleswith traditional drive systems in the yearsahead. Accordingly, successful market-intro-duction strategies will concentrate on differ-entiated market and customer segmentation.The initial focus should, in particular, beplaced on private fleets (including deliverycompanies, tradeworkers and auto-rentalcompanies) andpublic-sector fleets (includingmunicipal operations). In this manner, themarket introduction can be accelerated, prof-itable customer segments created and broadexperience gained. In this new environment,residual-value management and remarket-ing – particularly for the key component ofhigh-voltage batteries – will play a criticalrole for profitable leasing and mobility offers.

Securing long-term access to customersIn addition to the central challenge of design-ing a profitable business, ensuring access tocustomers will prove to be a key consideration.Electric mobility will allow established andnew players such as auto rental companiesand energy providers to compete for custo-mers as mobility providers – it’s a whole new

ballgame! Full-service offerings can be adapt-ed in a more individual manner to meet spe-cific mobility needs and customer priorities.The vehicle itself and the purchase of it willincreasingly be given a lower priority. If auto-makers do not establish a long-term accessto customers, they will face increasing pres-sure from consumers when regional andnational mobility providers take control ofvehicle and mobility operations in the future.

Living with more »mobility«and less »electric«Electric mobility provides both individualautomotive brands and companies as well asestablished and emerging car nations with anexcellent opportunity to play a major role inthe global power play and to use the techno-logical momentum as a driving force for thesustainable expansion of their own competi-tive position. But new business designs andmarketing concepts are needed, and theseconcepts should be fueled less by technologyand more by mobility. Packages combiningservice and mobility components will becomea top priority: ranging from high-voltage bat-teries, allotments of electricity, smart recharg-ing boxes, private recharging infrastructure(including installation), maintenance andrepairs to such value-added services as user-friendly total packages offered at monthlyservice or mobility flat rates.

Creating individualized mobility servicesDiverse mobility needs and those that changeover time can be addressed. Scalable batteryconcepts extending all the way to upgradesmake various vehicle ranges possible. Forinstance, differentiated electricity offeringswill be designed to address individual vehicleranges and recharging times. For this purpose,

The TCO perspective does not offer a cost advantage forBattery Electric Vehicles in 2015, but declining depreciation changesthe case for 2025

1 Usage: Four years, 15,000km driving distance per year2 Fix costs (inclusive tax / insurance), service and repair, car care

Source: Oliver Wyman »TCO model«

22,100

40,800

Sales priceIn €,inclusive tax

Total Cost of Ownership (TCO):Internal Combustion Engine (ICE) versus Battery Electric Vehicle (BEV)In €, by average car1

+ 10,800

12,800 6,300 9,000ICE 28,100

2015

26,500 4,300 8,100 38,900BEV

Depreciation Fuel / Electricity costs Other2

22,000

27,200

- 2,600

14,300 9,000 11,300ICE 34,600

2025

15,000 7,000 10,000 32,000BEV


energy providers are already offering »smartmeters« that ensure individual price and loadmanagement.

Stepping on the gas in marketing and salesFor automakers, the time has come to set thedirection of marketing and sales in terms oftheir brand and market presence in the elec-tric age. Rising fuel prices, limited mobilitybudgets, and altered customer priorities willheighten the awareness of automotive endcustomers about drivenmilesormiles-related

costs. Obvious changes in product design,new vehicle features and innovative servicescovering all aspects of vehicle use will makeit possible to create competitive advantages.Marketing and sales will be called on to playa much more active role in the design of cor-responding products and services. This willrequire a much broader and more complexrange of products and services. It will alsorequire a deeper understanding of the cus-tomer in terms of mobility needs and budgetsthan before.

Actively employing new business designsThe offering of mobility packages will requirea significantly broader spectrum of expertiseand services in marketing and sales. For thisreason, both exclusive and cooperative busi-ness designs that bring together such groupsas automakers, mobility providers and energy

producers are taking shape today. From themanufacturers’ point of view,thediversebusi-ness designs are to be designed as alternativescenarios in order to take a market-specificapproach that responds to local needs. Prices,service range, sales channels and partners aswell as brand and market communicationform the load-bearing pillars of the electricmobility strategy of each individual auto-maker. These pillars will be used to create asustainably profitable range of solutions forelectric mobility.

Successfullymoving electricmobility forwardMarketing, technology, sales, and communica-tions of electric mobility: New complex tasksand interrelationships that extend acrosscompanies must be addressed. In the future,cooperative alliances and partnerships in thedownstream area will also be essential tosecure profitability and access to customers.More intense coordination by all players andnew organizational approaches will be re-quired to master the increasing complexityand to secure integrative solutions. This willbe the only way to rally all forces in order tosuccessfully take off in the electric age.

The E-Mobility profit zones: Where to make money with the Battery Electric Vehicle?

»Innovative technology is the basis – but the betterbusiness design will be the critical factor of success.«

25%

20%

15%

10%

5%

0%

BEV profit along the E-Mobility value chain: ∑ €9 billion (2025)Global, light vehicles, only Battery Electric Vehicles

Averageprofitability

Value creation by value chain step

Batterycell

Batterymodule

Conventionalmodules

Vehiclesales

Vehicle /fleet

financing& leasing

Electricity ValueaddedservicesOther new

modulesVehicle

integrationCharging

infrastructureMaintenance& repair

Mobilityservices

New profit zones Traditional profit zones

Note: w/o sales taxSource: Oliver Wyman»Value Creation Model 2025«,»TCO model«,and further analyses

Returningto profitablegrowth

10

Only a sector’s best companies manage to continuously increase salesand profits. That is especially true for a mature sector like the automotiveindustry, which still has a number of fundamental problems to tackle inthe wake of the crisis. With global overcapacity hovering above 30 percent,price competition remaining fierce, opportunities for product differentia-tion limited and investment requirements becoming ever stricter, it is hardfor automotive companies to increase profits. The pressing question is:Which OEMs will be successful and how will they achieve their success?

Back to profit

Two different types of companies will enjoysuccess:megagroupsand independent cham-pions. Mega groups manufacture at leastfive million units per year, develop their ownkey technologies, platforms and modules,and benefit from a global manufacturing net-work. These companies are competitive ineach area in which they do business. Clearlydefined processes, structures and expertiseare critical formanagingthesecomplex enter-prises.

The other successful business design com-prises the independent champions. These aresmaller OEMs that are lean and decisive andhave a competitive edge in at least one spe-cific area by, for example, having a strongbrand or a lead in a unique technology. Inaddressing issues unrelated to brand identityor being costly, these OEMs form alliances

with other companies. The success of inde-pendent champions hinges on their ability tochannel resources and employees to areasthat give them a competitive edge, althoughstrategic networks are becoming increasinglyimportant, too. To be successful, independentchampions require an open corporate culturethat promotes cooperation among partnersand clearly defines areas of responsibility andexpertise. In addition, top management mustclearly formulate its goals.

Recognize new paradigms and respondBoth mega groups and independent champi-ons must continually adjust their strategy toensure that their business designs remainprofitable in the long term.The very best com-panies can recognize and respond to para-digm shifts along the entire automotive valuechain. In the area of electric mobility, for

Peter Bosch,Sven Wandres


»After the crisis, companies can only achieve 10 percentprofit margin and 25 percent return on capital if they followthe right business design. Those who stick to the oldparadigms won’t be profitable.«

…

instance, mega groups must be capable ofadjusting their modular-based technology toproduce an alternative drive system thatmeets all technological standards. They mustbe capable of accomplishing this for all brandsand vehicle lines as well as in all regions ofthe world. Independent champions, for theirpart, need to seek out OEMs that can supplydrive systems as well as make decisionsabout strategic suppliers. Automotive com-panies should expect novel usage models togain importance, at the very latest with elec-tric vehicles. This is part of the trend againstcar ownership. Following financing, leasingand all-inclusive packages, customers willincreasingly pay for only their own vehicleuse (see page 7). Mega groups can influencethe market by pushing through new mobilityconcepts. Independent champions can do soas well through deals with rental companies,intermediaries and other OEMs.

Operative focus on costs and revenuesIn addition to focusing on strategy, top man-agement cannot afford to neglect the opti-mization potential of costs and revenues atthe operative level. After all, this is the onlyway to generate sufficient free cash flow forupcoming strategic investments. Managersneed to keep as much revenue as possibleavailable to finance innovative products andnew plants and factories, to influence market


Path to profitable growth: mega groupTypical measures to increase EBIT margin

positioning and, not least, to reward share-holders. Companies that have to shoulderhigh costs from the beginning will have trou-ble generating profitable growth.

Oliver Wyman’s experience has shown thatEBIT margin can be increased from a currentaverage of 2 percent to 3 percent to 8 percentto 10 percent if all levers are activated. Im-proving material costs and manufacturingwages account for several percentage pointshere. Improved cost transparency and man-agement inR&Dcanalsobringpositive effects.At first glance, volume growth appears to bethe ideal solution because of the improvedrelationship between cost and revenues. Yetvolume growth can lead to a decline if ineffi-cient processes remain in place. In terms ofrevenues, potential lies not just in growth ofsales volume. Controlling prices and subsi-dies with innovative methods is much moreeffective, making noticeable margin increasesachievable.

Corporate programs that spread a new spiritof optimism often manage to successfullyintegrate strategic direction and economiesof scale. Employees are primed for profitablegrowthandchange their behavior accordingly.

Successful OEM archetypes

EBIT marginprecrisis

EBIT margin2009

Market volumeeffects

Manufacturingcosts

Marketing andadministrative

costs

Sales andmargingrowth

NewEBIT margin

5%

0%

approx. 2%

3-4%1-2%

2-3% 8-10%

Type 1:Mega groups (> 5 million units)

Type 2:Independent champions

Own- Platforms- Engines- Innovations



Selective partnerships in the areas of- Platforms- Drivetrains- Components

- Electronics- Suppliercontracts

- Plants- Procurement- Electric mobility

Source: Oliver Wyman analysis

Source: Annual reports, Oliver Wyman analysis

Costsundercontrol?

The product-related costs of a car – think here of development,production-material, manufacturing and marketing costs – are anautomotive manufacturer’s largest cost block, accounting for 80 percentof entire costs. Put into monetary terms, this means that the product-related costs of a typical mid-sized vehicle amount to about €15,000and can rise to €30,000 in the luxury segment. Lowering costs by3 percent to 5 percent increases profit in the value chain, by hundredsof millions over the entire unit count.

Product-related costs truly start becomingthe focus of a company’s optimization effortswhen the profit situation is tense, productrequirements expand and the availability ofcapital becomes limited. Effectively planningand controlling these costs over a vehicle’sentire life cycle and functions– from develop-ment to sales – is a prerequisite for sustainedprofitability. But in many cases, product-related costs are negatively impacted in allphases of the product life cycle, and man-agers cannot do anything about it.

Product life cycle disturbancesA whole series of disturbances, starting withinitial planning and continuing through toseries production and vehicle sale, can causeadditional unplanned costs. Poor design orquality issues often require technical adjust-ments to be made to the originally assessed

target product. Changing requirements stem-ming from new customer priorities or theactivities of competitors lead to delays andincreased product customization,which driveup costs. When the product reaches seriesproduction, insufficient volume planning,higher-than-expected marketing and subsidycosts as well as high losses of residual valuedrive up production expenditures. Costlyproduct appreciation in the form of extensivemodel upgrading, which seems necessarybecause ofcompetitivepressure,pushes prod-uct-related costs even higher. Managing thesecosts should be a central task that spansacross the whole company for the entire prod-uct life cycle.

Controlling costsUnfortunately, the processes and systems inplace at many companies are inadequate for

12

John Lucci,Lars Stolz

Product-related costs –the management perspective


managing product-related costs and thegrowing challenges. Five main areas receiveinsufficient attention today. Companies cantake the following action:

Best practices: Focus on productsand processesBest-practice companies that excel in man-aging product-related costs know that cost-impacting processes, and not necessarily theproducts themselves,shouldbecomethe focalpoint of their work. That is why successful


companies tend to follow two lines of attacksimultaneously. They continuously work onensuring that product-related costs are com-petitive before the start of production, duringthe launch and throughout series produc-tion. But at the same time they expand thecross-functional processes and structuresthat support a product life cycle during costplanning and steering. This second line ofattack has only recently come into focus.

Permanent initiatives focus largely on themodular matrixes in terms of design to valueand design for manufacturing and assembly.They also address reducing material costs inseries production. In these areas, sales depart-ments make a critical contribution when theyintegrate processes that enable marketingand subsidy funds to be allocated more effec-tively. Important processes include targetcosting,modular design management,changemanagement in series development andsupervision,and residual value management.These processes should be embedded in acomprehensive risk-management system forproduct-related costs. Such a holistic under-standing of product-related costs will becomea supporting pillar of cost managementamong successful automotive manufacturers.

Product-related costs per vehicle over the product life cycle

Product costper vehicle

Start of production (SOP) Facelift Special edition End of production (EOP)

Marketing costs

Manufacturing costs

Production material costs

Production supervision costs

Production development costs

Market launchYear

»Lowering product-relatedcosts has entered the nextround. Only those companiesthat manage to createeffective companywidemanagement processeswill be successful.«

Source: Oliver Wyman

1 Introduce a change of perspectiveDuring the initial phase, top-down validation takesplace using reference models only and insufficientbottom-up validation is planned into the process.

2 Show more discipline in the processExcessive product alterations during productcreation and series production lead to unjustifiableadditional costs along the entire value chain.

3 Lay a systematic-process foundationIn many places, a systematic-process foundation islacking that would allow permanent initiatives thatreduce product-related costs to be implementedeffectively and efficiently.

4 Actively manage with a forward-looking out-lookInstead of an overarching program andrisk management, reactive incremental measuresremain in place.

5 Organize cost managementFinally, organizations that do not pay strictattention to product-related costs everywhere arefrequently the most prevalent. They don’t havethe necessary resources, target systems or controlof functions.

Thinkingstrategically

»Only a handful of suppliers can expect to grow with innovativesegments. For the rest, long-term survival will be assured onlyby focusing on costs.«

1 Understand segment dynamics: Developa deep understanding of the competitive dynamicswithin segments and be able to differentiatebetween declining and growing areas.

2 Aim for clear cost leadership: Continuouslywork to permanently bring costs below thoseof competitors.

3 Address the entire value chain:Take into account the entire value chain –from suppliers through own manufacturingto own overhead.

4 Integrate innovations while reducing costs:Together with OEMs, take early steps to identifyand integrate necessary innovations that clearlyfocus on cost reductions.

5 Plan increases in value in innovative areas:Develop innovation-management processes,reduce costs and adopt different strategies.

Five strategic recommendationsfor suppliers

Cost pressure or value boost?The divide in the supplier segment is widen-ing.While relentless cost pressure is hurtingmany suppliers, the value of other suppliersis increasing thanks to functional upgradingand innovations.The comingyearswill showhow pronounced this trend will become.One thing is already clear: Suppliers increas-ingly find themselves in a dilemma. Theyare being worn down as they deal with con-solidation coupledwith rising cost pressure.They also face demands arising from newcustomer requirements, car concepts, drivesystems and innovations. It is not enoughfor suppliers to understand the logic under-pinning their own segment. They also haveto adapt themselves to the new world orderat a strategic and operational level.

Vehicle requirements change continuouslybecause of technical advances, shifting cus-tomer needs or changing legal conditions. Atthe same time, customers are less willing topay more for cars. As a result, the entire sup-ply chain – from OEMs to suppliers – facespressure to be innovative yet cost effective.

Suppliers lack strategiesIn stark contrast to OEMs, suppliers differwidely in how consistently and seriously theyimplement necessary cost reductions andinnovations. Although most suppliers attachgreat importance to reducing costs, the num-ber of suppliers that actually implement cost-reduction programs in a systematic manner issmall. For many suppliers, there is still plentyof room for improvement when it comes toinnovation and technology development, too.Innovations that clearly reduce costs or meetfuture customer needs are rarely identified,developed and made ready for mass produc-tion. Ultimately, a clear strategic direction isfrequently lacking.As a result, only a few sup-pliers strive to reach a cost-leadership posi-tion, whereas most consider their own busi-ness segments as growth fields.

How segments developA clear picture emerges when forecasting howthe entire sector will develop over the next

few years. Only about 10 percent of all vehi-cle parts show promising growth in terms ofvalue. Some 20 percent will be able to keeptheir current value level or experience rela-tively low value decrease. Yet for the averageprice level to remain constant, considerablecontent upgrading will be required. Prices willplummet for the remaining 70 percent of vehi-cle parts. Because upgrading will not be ableto offset this, these parts will lose value. Forthe majority of suppliers, real growth canresult only by increasing volume in the vehi-cle market or by capturing market sharefrom competitors. For a supplier to be capa-ble of operating successfully in this environ-ment, the right strategy must be followed.

Only a few suppliers will be able to rely oninnovations. The rest must get costs undercontrol. Companies in the automotive sectorwill be able to generate profits for a long timeto come, but only when the right strategyis applied.

Lars Stolz,Stephen Weisenstein

14


Acting at an early stage


During the crisis, supplier bankruptcies have evolved from unusualevents to a near daily occurrence. Although companies have learnedto take a more composed approach to the potential effect that the lossof a supplier could have, the impact on their own profitability can bedevastating. Suppliers who have put off restructuring programs areespecially vulnerable. As a result of this situation, automotive com-panies are doing more than ever before to professionally managesupplier risks. Ideally, long before the worst-case scenario becomesa hard everyday reality.

Focusing on supplier risk

The aftermath of a supplier bankruptcy canbe devastating. To ward off the loss of a sup-plier and the risk of breaking the supply chain,a company must reach deeply into its pockets.Typical costs extend from price increases formaterials and support payments to movingcosts – not to mention the company’s ownencumbered human-resources capacity. Theshare of possibly affected procurement vol-ume also climbs. After all, many manufac-turers have chosen in recent years to takecost-cutting steps associated with increasedsupplier risks. The real net output ratio wasreduced, development work was turned overto suppliers, the supply chain and workingcapital were streamlined,and purchasing vol-ume was concentrated in low-wage countries.

As a result of its volume benefits, »singlesourcing« is also widely used despite the asso-ciated high switching barriers. The risk ofbeing hurt by the loss of a supplier is high. Itis not just sales and costs that bear the bruntof the blow. The company’s very reputation isput at stake as well.

Rising risksMany managers in Europe and the UnitedStates are well acquainted with the risksrelated to ineffective risk management in pro-curement. In a reflection of this, respondentsto a survey that Oliver Wyman conductedamong 150 executives said they expected thatfinancial, strategic and operating risks wouldbecome increasingly important in the future.

Christian Heiss,Lars Stolz


But 70 percent of the surveyed managersdescribed their own company’s risk manage-ment and their estimation of supplier risk as»unstructured« or »reactive«.

The shortcomings of companies’ approachesto procurement risks usually stem from thefact that many companies do not have a suf-ficiently clear view of the individual risk pro-file of their suppliers. In those areas whererisks are recognized, assessments of risks andtheir probability of occurrence usually arecarried out on the basis of an informal and

somewhat intuitive logic. If companies do em-ploy institutionalized risk management, pro-curement as the core interface with suppliersis frequently not integrated into the process.Accordingly, risk management has a lowerpriority in many procurement departments.

Identify the shaky candidatesCompanies should set up a professional sys-tem of supplier-risk management as quicklyas possible in order to uncover the most crit-ical risk drivers. External risks lurk in thesuppliers’ financial situation and customerportfolio, in technically related disruptions ofthe supply chain and in an unfavorable con-solidation of the supplier base. Internal risksare created through problems in logistics, alackofprocurementexpertiseandweaknessesin controlling.

These drivers must be qualitatively and quan-titatively evaluated – and for each supplier, ifnecessary. The key element of this evaluation

is to prioritize suppliers by using such meth-ods as »earnings at risk«. This calculationprovides an estimate about which customerrevenue and which internal costs are beingjeopardized. This can be combined with theprobability of risk occurrence and such cri-teria as ratings or strategic significance todevelop a supplier risk profile.

In»heat maps«,systematicmonitoringof eachsupplier can be created by using an intelligentbalance between pragmatism and particular-ization. The particularly »hot« candidates are

then scheduled for a detailed supplier review.Using this information as a basis, a companycan sit down with the supplier and considerways to lower the risks.

Gaining market shareTo ensure that risk management works, vari-ous sectors within the company itself mustmesh together: procurement, engineering,production, logistics, finance, controlling, andsales. Professionally performed supplier-riskmanagement can work only if it is cross-func-tional. As a result, procurement risks will beavoided, and competitive advantages will becreated by having stable, innovative suppli-ers that have a competitive cost structure.Such suppliers can help expand the businessof customer companies that, in turn, needstable suppliers. And the success associatedwith the effort to stave off additional costs of10 percent to 15 percent on parts prices thatcan result from a bankruptcy justify the workto introduce and use the system.

16

The »heat map« allows a systematical monitoring

10 20 30 40 50 60

250

200

150

100

50

0

»Identifying and minimizing supplier risks is a jobfor the entire company.«

Net revenue inflow(€ millions)

Annual procurement volume(€ millions)


High risk (>10%)

Financial risk of losing a supplier on an annual basis

Medium risk (1-10%)

Low risk (<1%)

The »heat map« …

… facilitates continuous monitoring of supplier risks

… provides a clear picture of the monetary riskfaced by a company in relation to a supplier’s loss

… improves the overview of risks andthe monitoring of the current supplier base

… supports the development of the futuresupplier strategy

Generating profit



Manufacturingin »high-cost« regionsThere is a general belief that, due to the highunit cost of labor,OEMs either cannot or willsoon be unable to competitively build vehi-cles in the United States, Canada,WesternEurope, and Japan. It is certainly correctthat the high wage rates typically cannot beoffset by higher productivity (measured asHours Per Vehicle) realized in these coun-tries. However, when the full cost of deliver-ing parts, manufacturing, and deliveringvehicles is considered, it is frequently morecost effective to »build where you sell«whenit comes to mass-market vehicles in thedeveloped markets.

Understanding the complete cost impact ofsourcing to low-cost countriesA misperception exists largely because wagerates are the easiest of the input variables tocompare across regions. The other elementsof the cost structure tend to be less visible andharder to understand. You may be familiarwith the differential in wage rates, but whatabout utility rates? And the downtime costincurred due to less reliable utility service?The expenses for logistics and the tariffs toimport parts and then export the vehiclesagain may seem somewhat straightforward,but how about all the costs associated withsuch a long and cumbersome supply chain?Many other additional costs also contributeto the high overall cost of off-shoring to »low-cost« regions. A common result is that theinitial business plan shows a cost benefit, butthe actual total cost impact turns out to be apenalty.

For example, in a specific case of an OEMtransferring production from the UnitedStates to Mexico, once all expenses were fullyunderstood, the OEM actually incurred a costpenalty of between $90-100 for each vehicleexported back to the United States. It isimportant to note that this example does notautomatically apply to all cases. Sourcing toa productive plant in a low-cost region typi-cally compares favorably with an inefficientplant in a high-cost region even after thevehicle is exported and all the additionalcharges are taken into account.

Ron Harbour,Stephen Weisenstein

1 Adhere to a capacity model that is based uponfully utilized and fully flexible facilities. Higherlabor rates not only impact vehicle assembly costs,but also the cost of capacity.

2 Minimize the impact of the higher labor ratesby adopting and maintaining world-class laborproductivity practices. This includes optimizingthe mix of labor and automation and continuallyrefining processes to eliminate waste.

3 Unionized facilities must have a labor agreementthat is not hindered by legacy costs and out-datedwork rules and classifications that would put themat a cost disadvantage compared with non-unionfacilities. This applies in all regions, but it is ofcritical importance in regions with high labor rates.

4 Optimize sourcing. Making intelligent useof in-sourcing, local outsourcing, and low-costcountry sourcing has a significant impact onoverall cost compared with blindly following onesourcing strategy.

Four critical elements to competitivelybuild in high-cost regions

»The key point is that when manufacturing operationsare enabled and set up to run in the most productive manner,it is typically cheaper to build where you sell when it comesto the large developed markets.«

Strategies for regions

18

An automaker’s sales volume is the sum total of its businesses in allparticular regional markets. But strategy development frequently doesnot extend beyond the central organization. Especially in times of crisis,when the focus on cost-cutting and the operating business intensifies,work on decentral strategies should be pressed forward in order toidentify and increase local growth and earnings potential. Our researchreveals that this approach can expand the market share of the new-vehicle business by at least 10 percent as well as enhance the penetrationrate for leasing, financing and service contracts by at least 20 percent.

The market: the heartof sales success

Automakers achieve more than 85 percent oftheir sales volume through regional salesorganizations that partner with local dealer-ships. Their untapped sales-volume and prof-itability potential can be boosted only if thesetwo factors are clearly identified and decen-tral investment volumes and regional opera-tions are aligned. One way to achieve this isfor corporate headquarters and the sales-organization management to jointly promotethe development of regional strategies. Theobjective is to prepare a multiyear strategicframework for each region.The first step takesan outside-in view that begins with the mar-ket and customer and identifies growth aswell as earning potentials. It is then brokendown into (micro-)segments for determiningmarket shares, growth rates, and overall

profitability. This forms the basis for derivingstrategic approaches,which are then assignedaction areas along the entire value chain.

Regional strategies as structuredSalesmarketsdiffer significantly in size.Whencomparing car sales, for instance, 12 times asmany vehicles are sold in Germany as in Swe-den. Nonetheless, regional strategies shouldbe pursued in a structured process that isessentially the same for all regions. Such astructured approach includes a defined pro-cess that precisely spells out the develop-ment of the strategy, project objectives, thetime frame and results. The strength of thisapproach is its cross-regional comparabilityand, as a result, the improved opportunity todiscuss best practices. A structured approach

Matthias Bentenrieder,Julia McGillis



also accelerates strategic implementation.Businesses in the regions are highly complexbecause this is where all vehicle and serviceoperations are bundled. Clear process guide-lines help ensure that the various managersare motivated to work together. In addition,regional sales organizations often have limit-ed staffing levels, meaning that a structuredapproach is essential to avoid logjams inday-to-dayoperations.Despiteclear process guide-lines, however, the objective of the regionalstrategy must be to address the distinctivefeatures of the market.

Ideal balance between central and localIn regional strategies, the central and localorganizations’ viewpoints should be balancedagainst each other. Expertise about a specificmarket is largely held only by the employeeslocated there. For this reason, a regional stra-tegy must always ensure that local knowl-edge is fully exploited even if the processesare centrally defined. Project teams shouldalways be composed of a mix of individuals,with the clear majority of them coming fromthe regions. Overall responsibility must beassigned to the region because this is whereoperational decisions are made as well aswhere the strategy is implemented. This is akey driver of acceptance of regionalstrategies.

After all, if strategy projects are perceivedas being imposed by the central organization,a large number of conflict-related efficiencylosses will result. In contrast, when theregions feel responsible for the strategy, amajor commitment to its implementationwill be unleashed.

Only the implementation countsAlthough strategy projects can have timeframes that extend over several years, theconclusions drawn from them must be gearedtoward action. A regional strategy results inboth the identification of growth potential inthe market and the specific steps to tap it.This may sound trivial. But, in practice, it isnot. Too often, steps that ultimately cannotbe implemented are devised for strategicprojects. The reasons for this are insufficientcoordination at the top-management level,inadequate follow-through in tracking theimplementation or a lack of detail. Regionalstrategies should end in concrete actions.This is the only way to significantly improvethe motivation of sales employees along withidentifying growth and earning potential.

Identification of regional growth and earnings potentialsRegion A in millions of units

Customer segments

Product segments

»Untapped potential for sales volume and earningsin the sales organization can be boosted only in the markets.Successful regional strategies link local market expertiseand company strategies.«

City cars Subcompact cars Compact cars Midsized cars Largermidsized cars

Luxury-class cars

Sportscars

< 0

Profit marginsin €

0-500

501-1,000

1,001-2,000

2,001-4,000

> 4,000

Identification of growthpotential per segmenton the basis of

- market growth- market share- activities of competitors- penetration rates(financing, leasing,service contract)- overall profitability

Rental cars

Company cars

Large fleets(> 100)

Small fleets(< 100)

Privateconsumers


…

…%

More profitableresidual-valuemanagement

The negative trends in residual value have recently turned the leasingbusiness into a money-losing operation for many manufacturers anddealers. A high number of returns from closed buybacks must be soldat prices considerably below the estimated residual value. As a resultof today’s low prices for used cars and increased numbers of returnedvehicles, the top priority is to obtain satisfactory resale prices.For this reason, a holistic remarketing plan becomes a critical elementin the effort to steer the used-car business in a long-term profitabledirection and to secure it. Experience shows that this approach can liftthe resale level by more than 5 percent.

The huge potentialof remarketing

Depending on the vehicle segment, the levelof residual value fell by more than 10 percentin Germany during 2009. The plunge in valueis being fueled by rebate wars on the new-carmarket and the continuously rising tide ofbarely driven used cars. The premium seg-ment, in particular, has been shaken by thistrend. At the same time, used cars are goingthrough the same downsizing that new-carmarkets experienced, a development thatexerts even more pressure on price levels. Foran extended time now, many manufacturershave been investing in programs designed to

bring professionalism to the used-car busi-ness. But the potential to increasingly useremarketing as a revenue driver, even underthese difficult conditions, is immense.

Controlling the channel mixThe key job of remarketing is to find a suitablecustomer for every vehicle.To accomplish thisgoal, a sufficiently wide range of channelsmust be created. These channels extend froma company’s own used-car center and used-car dealers to Internet auctions. In addition,international marketing should be intensively

Matthias Bentenrieder,August Joas

20


performed. The critical task is not so muchtheuse of the channels, but, rather, their man-agement and monitoring. The used-car busi-ness must be given the same attention andprofessionalism at a company that the new-car division gets. This is the only way thatmulti-channeling can become a critically im-portant profitability factor. Professional chan-nel management includes the bundled mon-itoring of all channels as well as the provisionof tools for the national coordination of vehi-cle streams and inventory management,including dealer inventories, discount man-agement and sales-campaign management.Furthermore, the used-car business must becorrectly anchored in the dealer network.Thisincludes the definition of standards as wellas the qualification and training of dealers.Particularly in the premium segment, a com-pany’s own used-car brands provide orienta-tion and a better image from the customer’spoint of view.They also play a role in the inter-nal positioning and standardization of theused-car business.

Making vehicles attractiveThe wide range of services offered by vehiclemakers is an important competitive factorthat should be intensively exploited. In areflection of this, used-car financing can beused much more extensively than it has beento spur sales. This is also true for extendedwarranties and service contracts that havebeen used only marginally up to now. Justlike the new-car business, the aim here is forthese tools to fuel sales without spoiling theprice level. At the same time, customer loyal-ty can be significantly improved through theincreased frequency of contact and the

exchange of customer data.The used car itselfcan be made even more attractive for buyersas well.The professional reconditioning of thevehicle before the sale is a powerful lever thatcan be applied to improve the remarketingprice level. Here, too, the vehicle maker hasan extensive toolbox at its disposal, includingthe high level of the service departments andthe introduction of standard quality steps.

More strongly influencing returnsCoordination between new-car channels thatproduce returns and the used-car businesscan be increased. The configuration of vehi-cles from fleet sales and automakers’ ownreturned vehicles must be more intenselysteered through used-car management. Ifreturns are not channeled, they will over-whelm the markets and used-car manage-ment. If, on the other hand, the vehicle model,features and the time of the return can beinfluenced to a minimal extent, this will havea major impact on the vehicle’s marketabilityand price. To make this possible, a company

must create coordination mechanisms thatmonitor the entire value chain. This includesgranting a bigger say to used-car management.For this reason, business decisions should bemade on the basis of total profitability of thevehicles throughout the life cycle.


»The biggest challenge faced by remarketing is simplein theory: finding the appropriate channel and, in the end,the right customer.«

Analysis of remarketing performance

Average time on the lotin calendar daysEnd of contract to sales date

25-2828-32>32

33%42%

25%

Formats Mix of offers,auctions, physical formats

Only offers

82%

18%

Sales units IndividualPackages

Both 40%27%

33%

International share >50%20-50%<20%

38%23%

39%

Source: Oliver Wyman project examples

More thanunit numbers

22

Emerging markets takecenter stageThe geographic focal point for growth in theauto industry is shifting to growth markets.The business design must respond.

Emerging markets have become a top priorityin the automotive industry – at least in termsof unit-sales growth. The sales of cars andlight commercial vehicles in BRIC and othergrowth markets will climb from 10 millionvehicles in 2007 to nearly 50 million units in2025. At the beginning, of course, the goodnews about rising unit sales had been thelead story in each of these markets. But aftera few years of whirlwind, hardly controlledgrowth, companies frequently realize thatcontrol becomes more and more difficult andspecial competitive and location advantagesare not utilized.

Sales is not the sole success factorThe center of attention at the start is gener-ally new-vehicle sales. Here, the foundationmust be laid at an early stage for gradual net-work planning and for after-sales service thatis capable of functioning amid the growingmarket. Many established markets have suf-fered from years of uncontrolled growth thatwas allowed to take hold right after the mar-ket had been tapped. To create a real globalsales network, similar structures must be setup in the country subsidiaries. These organi-zations should have congruent tasks, respon-sibilities, structures and key performanceindicators. This is the only way to make mar-kets comparable, personnel exchangeable,and interfaces between headquarters andthe market effective. The critical factor is theability to control brand positioning, pricingand volume as well as the clear arrangementof the entire sales system.

In addition to new-car sales, market-specificopportunities in the areas of financial ser-vices, parts and used cars must be understoodand systematically addressed.Region-specificproducts are essential for market success,particularly in volume segments. The »worldcar« will be replaced by the »world tool kit«.

For Brazil, a compact hatchback with auto-matic transmission,or for China,a sedan witha long wheelbase, distinct styling and the lat-est technology must be developed with fewcompromises and at market-relevant costs.In the years to come, a regionalized approachto electric mobility in terms of products,sales concepts and value creation will play amajor role.

The right way to localizeThe critical step in creating a truly market-related business system is localization alongthe entire value chain, including R&D, pro-curement and production. Software develop-ment in India, procurement in China andvehicle assembly in Russia are fixed compo-nents of an emerging-market strategy andshould be drawn up for each country as partof a company’s sales-planning process. In thiswork, the degree of involvement by the com-pany must be defined. Many jobs can be donemore effectively and more quickly by a localpartner. Given the future significance ofgrowth markets and the present division ofOEM plants and equipment between the »old«and »new« worlds, it is clear that the strategyalso must include long-range investmentplanning that extends across markets andfunctions. The transfer of appropriate bestpractices to the individual growth marketshas proven to be beneficial. To achieve this,anchoring support for emerging-market activ-ities within the central organization wouldbe helpful.

Master plan for emerging marketsTo evolve into successful global players capa-ble of growing with the world market, OEMsmust establish systematic strategies andplanning processes that consider the distinc-tive features of the market and pave the wayto leveraging them. The result is an imple-mentation-driven, market-specific masterplan applicable to all growth markets (includ-ing the Asian Tigers) that addresses the mostcritical phases of the value chain as well asfuture developments.

Peter Bosch,Shin Moonsup


Lean varietyLocated at the interface between automotive and financial services,automakers’ banking units have been deeply bruised by the crisis.The result is steep drops in revenue, increased risk costs throughresidual-value losses and bankruptcies and rising operational costs.Many of these financial-services operations have taken top-downcost-cutting steps in response to their woes. To achieve sustainableprofitable growth, though, structural programs must be introduced:The complexity that reigns in business and operating modelsmust be systematically replaced by a leaner, more profitable format.

Keeping it simple

In the wake of the turbulence triggered by thefinancial crisis, automakers’ financial-servicesoperations are being confronted by the needto rethink their business and operating mod-els. What are and will be their value-creatingproducts and services in the future? Wherecan costs be cut without hurting the business?How can unnecessary complexity in opera-tions and IT be reduced? All of these ques-tions are aimed at the business design of»lean growth« – profitable growth achieved bystreamlining the business and focusing onthe operation’s value drivers. Project experi-ence shows that operating costs can be low-ered by up to 25 percent and IT costs by up to40 percent if complexity is systematically

reduced along the value chain. Furthermore,less complexity frequently results in in-creased revenue because a simplified prod-uct portfolio tailored to customer needs iseasier to communicate to sales departmentsand provides momentum to both marketingand sales activities.

The optimal complexity level: »sweet spot«Years of product and service diversification aswell as geographic and operational expansion,frequently backed up by an array of hetero-geneous IT systems, have resulted in highlycomplicated business designs that are nolonger proportionate to the added value theygenerate. The first step in the »lean-growth«

Roland Bubik,August Joas



I

II

III

IV

V

Degree of complexity

model involves determining the appropriatelevel of complexity, or the »sweet spot« – thatis, the point where the incremental benefitsand costs of the complexity diverge the most.In this work, the fundamental complexitydrivers must be determined in order toaddress them when the business design isredefined.

Identifying the complexity driversComplexity can have many faces: a productportfolio that is overly diversified or has insuf-ficient modular features; highly individual-ized fee and commission models; manual,fragmented or isolated business processes;fuzzy guidelines; or a system landscape thathas been sprouting for years and is difficult tomaintain. Complexity has a cumulative effecton each of these levels. In the past, automak-ers’ financial-services units have frequentlydeveloped a completely new product and, asa result, generated a more mature process inwhichonly suchproductparameters as repay-ment conditions or the mobility packages hadto be modified. From sales’ point of view, theexcessive range of products arising from thisprocess hinders efficient and effective cus-tomer interaction.To the back office, it meansadditional complexity arising from the varietyof business processes. This, in turn, producesfurther implementation requirements for IT.

The lack of process automation and standard-ization (extendingacrosscustomer groups, forinstance) frequently hampers the provisionof the products and services being offered.The drivers of complexity and thus costs inIT are old, inflexible systems as well as thesystem architecture itself. As a reflection ofthis, overlapping or redundant applications,

interfaces revealing a variety of unsynchro-nized systems originating from various soft-ware providers or competing standards arefound. A further aspect of complexity lies inthe organizational structure: The structuresthat have developed over time frequentlyenable »autonomous« areas of responsibilityor ineffective governance models to arise,

including country subsidiaries that havehad central business areas and functionaldepartments folded into them. This develop-ment not only complicates the planning andbudget process, but also creates redundan-cies in processes. Jobs are duplicated, are notcoordinated with each other or do not fit intothe company’s overall strategy.

Boosting efficiency and effectiveness overthe long termThe successful development of a lean, value-creation business design must be carried outin four steps along the value chain (front toback):

1 Benchmark against relevant competitors2 Identify the fundamental complexity drivers3 Define the objectives4 Implement actions and monitor continuously

Front-to-back reduction of complexity fre-quently requires high initial investmentsbecause the entire value chain, including IT,must be addressed. Experience shows, how-ever, that project costs are recovered abouttwo years after implementation – a long-range payoff that cannot be achieved throughtactical cost-cutting programs can then begenerated.

»Reducing complexity ensures flexibility as well as significantlylower costs. As a result, it forms the basis for creatinga sustainable competitive edge.«

Finding the »sweet spot«

low high

Costthrough

complexity

I Business-model risks resultingfrom insufficient diversificationoffset low complexity costs

II Diversification increases benefitsthrough a broader range of products

III Maximum diversification benefit

IV Overly diverse range of productsreduces the benefits due toadditional complexity

V A high level of complexity destroysthe benefits of diversification

low

high

Benefitofcomplexity

low

high

Trade-off: diversification versus complexity Key:

Costs from complexity

Diversification benefit fromcomplexity

24



Profit potentialin spare partsThe parts business generates up to 40 percent of earnings for automakersand at least 30 percent for dealers. During today’s economic crisis, it isalso a business that serves as a source of business-preserving revenues.But this business is coming under intensified pressure, exerted by theincreasing competition from independent parts dealers and suppliersas well as by the eroding purchasing loyalty of the automakers’ ownauthorized dealerships. New price-setting strategies are the only wayto sustainably safeguard this business.

The pricing systems employed today by mostcarmakers were developed at a time whenlarge portions of the product range consistedof monopoly parts, and both customers andauthorized dealers had few alternatives tooriginal parts. Following the initial differenti-ated price-setting phase, the entire partsrange is then adjusted during across-the-board pricing rounds. In the process, no con-sideration is given to the market viability ofthe individual prices. But the market hasmoved on. Today, competition exists in nearlyall parts categories. Independent parts deal-ers have consolidated and strengthened theirlogistics performance. In addition, the auto-motive-supplier industry has increasingly dis-covered the appealing aftermarket business

and is directly supplying this market – with-out bothering to work with OEMs.

Traditional pricing practices are outmodedThe result is crystal clear: While manyautomakers have completely priced them-selves out of the market and virtually theentire business – even that of their ownauthorized dealership partners – passes themby, they fail to sufficiently exploit the price-raising potential in many other areas. At thesame time, the very excessive price positionin a few parts categories creates a generallynegative price image for OEM parts amongthe public. This also reduces customer satis-faction and drives these customers into thearms of independent garages.

Fabian Brandt,Sven Wandres


Getting theprice right

26

Differentiated pricingThe key to boosting earnings is fundamentallydifferentiated, market-oriented pricing poli-cies. Oliver Wyman considers the followingfive factors to be critical:

Up to 5 percent earnings growthWhile it may appear possible to implementthese principles for a manageable basket ofparts, the challenge for the auto industry liesin its gigantic range of parts with their hun-dreds of thousands of items. This requires an»industrialized approach« to pricing thatemploys a high degree of automation andrule-based processes. Thanks to its decades-long, cross-industry pricing experience,Oliver Wyman has developed the tools andmethods needed to employ such systems.Practical project examples show that totalearnings can be increased by up to 5 percentby applying this approach. This increase isgenerated by a combination of selective priceincreases and significantly expanded marketexploitation resulting from targeted pricereductions. In many cases, completely »lost«parts categories have been recaptured fromindependent dealers.

Differentiated, market-focused pricing formsthe basis for reinforcing the parts businessover the long term. The use of professionaltools and implementation methods can en-sure that the parts business remains a stableearnings pillar for the automotive businessin the future.

Future paradigms in parts pricing

Today’s general approach The model for success in the future


1 Market-oriented pricingThe focal point is the sale to the end customer.This must be the compass used for aligning pricingstrategies. Instead of applying markup pricingacross several sales steps, planning must be doneon an »outside-in« basis.

2 Understanding of the marketsThe manufacturers must have a comprehensiveunderstanding of the price and demand situationin all markets and parts categories. This alsoincludes information about the price elasticityof demand on the dealer level.

3 Differentiated pricingEvery part has its price, and every price must bebased on the features of a specific market.A distinction must also be made among partsgroup, customer segment, geography, vehicle ageand the reason for the purchase.

4 Continuous pricingMarkets change, and prices change with them.For this reason, the prices of all categories must beregularly reviewed and adjusted to meet the currentmarket situation.

5 A focus on price imageThe customer frequently makes a decision about thefairness of a price based on emotion. This emotionalpurchasing decision must be generated throughadequate pricing in the decisive parts categories.

»Automakers must adddifferentiation to their pricingpolicies. The market will runaway from them if they do not.«

Well-grounded, up-to-date and systematicmarket knowledge as the basis for pricing decisions

Inside-out pricing without a substantialunderstanding of the price reality in the markets

Optimal exploitation of price potential alongthe entire value chain

Unchecked growth through uncoordinatedpricing policies of OEMs, wholesale and dealers

Globalization of pricing in order to makeadjustments to regional market needs

Home markets as the fundamental guidefor prices

Differentiated tapping of specific price potential(segments, parts groups)

Regular across-the-board price adjustments of largeassortment parts, frequently only price increases

Market realities and potential as the basisfor optimal pricing

Historically developed price structures(primarily trade terms with importers)


Strategy and successfactors for new marketsIn 20 years, new mobility concepts in cities will make it necessary

to create integrated mobility options. With an integrated mobility ticket,a person will be able to take the subway to work in the morning, ride amotor scooter through clogged streets to a lunch appointment and drivea car-sharing vehicle home in the evening. OEMs must decide how theywill position themselves in these new markets. Independent competitorssuch as some car-sharing providers are already tapping this marketpotential. In 2009, the car-sharing market in Europe had already reachedthe €220 million level – and it is generating double-digit growth annually.

Mobility services in 2030

For years now, value in the car business hasbeen moving away from the simple sale ofnew cars toward service activities such asleasing, financing and after sales. Mobilityservices have given life to a new growth fieldin recent years, and this field offers newopportunities to OEMs, including in the crea-tion of other profitable business segments. Atthe same time, however, this developmentalso shows that the traditional vehicle marketcontinues to weaken and that OEMs will haveto work hard to avoid losing critically impor-tant customer-contact points.The car-sharingservices of another OEM or the mobility ticketoffered by a private bank could easily cause acustomer to look in another direction.

New competitors become establishedAs a result of the value shift from traditionalcar sales to the mobility market and the re-sulting increaseduse of electricdrive systems,established automakers could potentiallyface future competition from new service pro-viders in the auto market. These new com-petitors could include travel and tourismcompanies, energy providers, auto-rentalcompanies, infrastructure providers and serv-ice brokers. New companies such as BetterPlace are emerging and are securing impor-tant market segments with and without OEMpartnerships. To systematically initiate part-nerships or enter target markets, a mobility-service strategy must be developed.

Matthias Bentenrieder,Stephen Weisenstein


28

The strategy for 2030The mobility markets of the future must beexamined from a total-strategy perspective.Which markets have the potential for futuremobility services? This applies not only tomature, established markets in Europe andthe United States, but also to rapidly growingmarkets, including the BRIC countries. Cus-tomer priorities differ broadly from country tocountry. In some markets, car ownership willcontinue to play an important role. In otherregions, car usage provided by intelligentmobility concepts will be the critical issue.Once customer segments have been exam-ined and future customer priorities in regions,

metropolitan areas and rural locations havebeen analyzed, a variety of mobility conceptsas well as new services or completely differ-ent business designs will be developed toreflect the OEMs’ own capabilities and re-sources. If the aim is to become an integratedmobility provider, partnerships with othermobility service providers should be initiated.

Success factors in car sharingIn a study and in various projects, OliverWyman has examined the success factors ofcar-sharing business designs as a sub-segmentof the mobility-services market. The criticalsuccess factors can be broken down into threecategories: In the first category – the profitmodel – the critical factor is the combinationof rapid growth of users and public-sectorsupport, including parking places. The secondfundamental category is the systematic selec-tion of locations. Big cities, where a dominantposition can be achieved quickly throughrapid growth, are promising. Good interfaceswith public transportation and availableparking places are critically important.

The third success factor is for the product toclearly focusonselected target groups. Studiesshould closely examine customer needs. Acombination of normal car sharing (the driverreturns the vehicle to the place where he orsheobtained it) and one-way car sharing is themost promising approach. The car-sharingservices must be attractively priced as well.Geographic factors will decide which pricemodel is the most successful.Generally speak-ing, noncommitment options are more suc-cessful. At the moment, business designs inselected cities have been set up primarily forprivate customers. Similar options for busi-ness customers are conceivable for the future.

There is extensive potential for profitablegrowth in both car sharing and the overallmobility-service market. OEMs must tap thispotential at an early stage and establish asustainable position in this market.

»Automakers must ener-getically and systematicallyconquer the new mobilitymarkets in order to sustain-ably reinforce their currentcustomer relationships.«

Value migration car businessCustomer expenses 1950-2030

1950 2030


Mobility Services

Operating costs

Vehicle

Intregratedservice offers

Vehicle usage fee

Vehicle leasing/ financing

Vehicle purchase

Vehicle operation and maintenance(e.g. after-sales, fuel, insurance)

Rémi Cornubert is a partner at OliverWymanin France,where he is the head of the Frenchautomotive unit. As an expert in strategydevelopment and cost efficiency, he advisesautomotive suppliers and manufacturersworldwide on how best to initiate and imple-ment corporate strategies.Particularly,hehasspecialized in effectiveness and efficiency inthe areas of research and development.

Cornubert describes his relationship with hiscustomers as a combination of mutual trust,an innovative streak – and the courage to sayno once a while: »Trust lays the groundworkfor mutual progress: it’s the foundation forsubsequent innovations. Often, necessarymodernizations mean sweeping changes tothe company’s corporate culture. However, agood consultant must also know when andwhere to draw the line.«

Cornubert, who has a doctorate in physics,studied at the Ecole Normale Supérieure andalso has an MBA from the Institut Européend’Administration des Affaires (INSEAD). Be-fore joining Oliver Wyman, he held key posi-tions in the engineering and technology sec-tors. In 1996, he took up the position of SeniorManager at Mercer Management Consulting.The company has operated as Oliver Wymansince 2007. Job roles from 1998 to 2000included Senior Manager of the automotiveunit of a major global corporate consultancyand head of the Strategy and DevelopmentDepartment of a new automotive ventureoperating in downstream, which was latersold to a car manufacturer. In 2001, Cornu-bert returned to Mercer as a Principal andhas managed the Paris-based automotiveunit at Oliver Wyman since he was electedPartner in 2003.

The automotive expert can look back on a con-sultancy career spanning more than 12 yearsand draw on profound reserves of methodicaland industry-specific expertise. He advisesOEMs and suppliers to the automotive, trans-port and air freight industries around theworld on re-organization and the restructur-ing of both core and support businesses. His

clients include companies from Europe, theUnited States and Asia, and his competenciescover not only strategy, marketing and R&D,but also cost efficiency and purchasing –diversity is Cornubert’s trademark.

The 45-year-old’s most significant careermilestone to date involved the successfulanalysis and restructuring of the purchasingprocess for a leading international car maker:»In this project, we had to work really hard topersuade the customer. And I am very proudthat we succeeded in doing so, and that thesix-month project managed to achieve a sig-nificant impact for the customer.« Know-howplus an open mind – able to factor in bothcultural and geographical differences – makeup Cornubert’s formula for a successful topconsultant.

Currently, Cornubert believes that the carsector faces its greatest challenges in Europe,arguing for the necessity of a liberalization ofthe European car market. Faced with intensi-fying competition from developing countries,his advice for key decision-makers in theautomotive industry in the (post-)crisis year2010 is to avoid the kind of short-term plan-ning seen in 2009, or even before, and prepareinstead to meet the future head on.

And what does the enthusiastic fan of»Bollywood« and father-of-two daughters findfascinating about the automotive industry?»On the one hand, the scientific element –this continual quest for technological inno-vation. On the other hand, it’s the diversityfound in the combination of styles and con-cepts that, in my opinion, makes each carinto an individual work of art,« he replies.Unsurprisingly, he finds it hard to be satisfiedwith just one car: while a vintage Porsche ishis everyday vehicle, he much prefers tospend his weekends motoring around in his1969 Alfa Romeo. He confesses a »Coup deCoeur« for the new Peugeot RCZ because ofits Zagato-like styling. And whether it’s ope-ras or world music pouring out of the caraudio system, is irrelevant – diversity is alsothe key to Cornubert’s musical tastes.

Rémi Cornubert

Diversity as the formula for success

Rémi Cornubert,Partner and Head of theAutomotive Practice atOliver Wyman in France

Portrait


The full interviewwas first printed in:»Automobil Industrie« 10/2009,pages 28-30.

Frank-Peter ArndtInterview

»Surprising solutions«

Frank-Peter Arndt, BMW Group, Member ofthe Board of Management of BMW AG, Pro-duction, talks about the opportunities ofsmall-car production in Germany, the les-sons of the sales crisis and project i.

Mr. Arndt, will car production in Germanyever return to the record level set in 2007?

I am certain that this level will be reachedagain. The question is: How long will it takeand which OEM has which concepts to offer?In any case, BMW is exceptionally well-posi-tioned with its new products. We could nothave picked a better time for the marketintroduction of the X1, for instance.

What production lessons have you learnedfrom the sales crisis?

We saw our unit sales plunge by 19.5 percentin the first half of 2009 compared with thefirst half of 2008. We immediately adjustedthe production numbers and preventedinventories from building up. We were ableto deal with this reduction in production rel-atively easily. Not too many OEMs have sucha »breathing capacity.«

Which instruments worked particularly well?

One area that should be mentioned is factoryorganization. At BMW, we systematically pro-duce at least one world and one split modelin a factory.This enables us to react extremelywell to swings in demand. Another goal is tocreate a good balance of flexible temporaryemployees and the full-time workforce.

Could BMW efficiently produce a small carbelow the 1 series in Germany?

As far as efficiency goes, we continue to be inreally good shape. Since 2005, we have boostedproductivity in production at the BMW Groupby about 30 percent. In the same period, aver-age production costs per unit have fallenabout 20 percent.Between June 2008 and June2009, we were able to cut the production timeper unit by an additional 7 percent – in spiteof the lower volume.

Experts maintain that engineered costs inGermany are too high. This would have aparticular impact on small-car production.

In the past, engineered hours per vehicle werefrequently a resulting value. In our projectsaimed at the future, including project i, thiskey performance indicator is a target. That is,we determine fixed levels about how highsuch an indicator should be.

Speaking of project i:What does Mr.Reithofermean when he says that BMWwants to rev-olutionize automaking with the help of thisproject?

Until now, electric drive systems have beenadapted to current vehicle concepts. In ourproject i, we are thinking about completelynew vehicle concepts that have been opti-mized in terms of the application as electricvehicles. These concepts will look much dif-ferent from what you see on the streets rightnow. Sure, our mega-city vehicles will proba-bly have four wheels. But in terms of thepackage and overall concept, you can expectto see a few surprises.

With that in mind, are electric cars a newbusiness design for contract manufacturers?

With such innovative, forward-looking prod-ucts, OEMs are well advised to keep theirknow-how to themselves for now.

On the whole, Germany offers good opportu-nities for the production of electric vehicles.

It certainly makes sense at the beginning toproduce innovative products close to wherethey are developed. In general, however, wesupport the viewpoint that production mustfollow the market.

The interview was conducted by Claus-Peter Köth.

Frank-Peter Arndt,BMW Group, Member ofthe Board of Management ofBMW AG, Production

30

High beam

Commentary

The brand is dead – long live the brand!

When rainwater had soaked the floorboardof his super sports car for the fifth time,his thoughts drifted nostalgically backto that day when he picked up the vehicle:the lounge music whispering in the background,the bouquet of flowers waiting for his wifeand the showroom looking like somethingstraight out of Architectural Digest. And, then,this dream car! Actually, everything was donejust right – but don’t you have the right toexpect to have a dry interior after shelling out€150,000 for a vehicle?

Brand management is the ultimate testin automaking. Every detail must be perfectlyorchestrated – every single one! And still,the rising number of recent recalls demonstratesthat automakers still encounter difficultieshandling the core job of their business:solid product quality, good customer serviceand honest sales representatives –this is the essence of brand management.Is the customer demanding too much?

Instead, OEMs get caught in every sort ofhype that comes along and end up tappingthe »segment of one« – a »crossover model«for single mothers living out in the boondocksor a special model for the »young urbanprofessional« without a college degree.Or they ask themselves: Do we have the rightdealers in Tuvalu (editor’s note: an islandcountry in the Pacific Ocean with 12,000citizens scattered across nine islands)?A brand-devouring threat is conjured upevery time an opportunity is missed, and thetrend of the month, no matter how outlandish,is hunted down. The minor matters becomethe major concerns. Brand substance vanishes.

There is another way to do things. Citroën,the terminally ill patient of the 1990s(the author was one of the consultingspecialists who provided the diagnosis), hassurprisingly sprung back to life and is a modelof good health today. With appealing,fresh products, sales doubled in 15 years.Which established European volume brandhas been able to pull that off? Of course,things can go in the opposite direction as well,as GM has shown us for years. Somethingfor everyone, the right vehicle for no one.

Jan Dannenberg

31

The result: Oldsmobile – »the legacy will liveon« – disappears. Saab goes into bankruptcyand is sold to a Dutch sports-car maker.Pontiac and Saturn are »phased out« – thesocially romantic, sugar-coated American wayof saying »buried.« Hummer is sold – or not.Daewoo – it is now also called Chevrolet.The brands are dead! The times of »badgebranding« are finally over and done with.

At the same time, you can take satisfactionin knowing that Volkswagen has done(just about) everything right. The bouquetof brands made up of VW, Audi, Seat, Skoda,Bugatti, Bentley, Lamborghini, Porsche, VWcommercial vehicles and Scania is beingcomplemented by Suzuki. Cars, trucks and,finally, motorcycles – everything under one roof.Systematically exploiting shared qualities,accentuating individual features. The modulartransverse matrix and the modular longitudinalmatrix are keeping costs down, using proventechnology or introducing innovations intoall vehicle segments, models and Group brands.Every Volkswagen brand remains unique andbecomes a leader among its peers. Complexitybecomes manageable and does not turn intoan automotive hydra. Long live the brand!

It is just that simple: problem seen, problemsolved – this is the issue at stake. No stickingaccelerator or elk in front of the hood candestroy good brand substance when the brandpromise is constantly kept. Toyota will remainthe be all and end all in product quality.And the German star – »Oh Lord, won’t youbuy me a Mercedes-Benz« (Janis Joplin) –,the »heavenly« brand will shine forever.

And what do we do about the swampthat pools up in the sports car? Fix the leak!All sins are forgiven once the speedometerhits 280km/h anyway.

automotivemanager I/2010

»High Beam« highlights currentdevelopments in the automotiveindustry by looking beyond day-to-day business – at times critically,at other times enthusiastically,but always incisively – to fuel thedebate among industry players asthey compete for the most success-ful strategy. While not everythingshould be taken seriously, it shouldprovide entertaining food forthought. The author looks forwardto receiving readers’ suggestionsand comments.

Customer

Publications

32

Supplier Risk Management

Bankruptcies of small and mid-sizedsuppliers dominated the automotive industryin 2009/10. These bankruptcies can disruptproduction and pose significant financialand strategic risks for all involved. The study»Supplier Risk Management« shows howcompanies that have an intact systemof supplier-risk management can effectivelyprotect themselves from negative effectsand create competitive advantagesfor themselves and their suppliers forthe coming economic upswing.

Christian Heiss, + 49 89 939 49 [email protected]

Tobias Sitte, + 49 89 939 49 [email protected]

E-Mobility 2025 –Power Play with Electric Cars

In the next 15 years, electric vehicles will gaina market share of just 6 percent. Enormousextra costs and limited range stand in the wayof mass sales. From a long-term perspective,though, there is no way to get around electricdrive systems – after all, electric vehicleswill play the critical role in the long-rangesurvival of the automotive industry. Thisis the conclusion drawn by the study titled»E-Mobility 2025,« which provides anoverview of the most important trends andchallenges in this segment of the future.

Matthias Bentenrieder, + 49 89 939 49 [email protected]

Christian Kleinhans, + 49 89 939 49 [email protected]

European Truck Customer 2010

How satisfied are fleet operators, shippingcompanies and drivers with their vehicles andrelated services? Which criteria are used toselect vehicles, trailers and services? And whatsort of products would they like OEMs toprovide in the future? These issues and otherquestions related to purchasing behaviorand customer satisfaction are addressed bythe survey »European Truck Customer 2010.«The results of the study will be released duringthe 63rd IAA Commercial Vehicles in Hanover.

Romed Kelp, + 49 89 939 49 [email protected]

Sven Wandres, + 49 89 939 49 [email protected]

OEM Business Designsof the Future

Making cars and earning money –how will this be accomplished afterthe crisis? The Oliver Wyman study»OEM Business Designs of the Future«explores the most important valuelevers related to both costs andrevenues, and shows which typesof companies will succeed. Premiumvehicles and electric mobility areclosely examined.

Peter Bosch, + 49 89 939 49 [email protected]

R&DProcurement/Suppliers Production

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Value Enhancementor Cost Cutting

Suppliers are being subjected to moreand more pressure to be both costeffective and innovative. The study»Value Enhancement or Cost Cutting«clearly shows that very few in the suppliersegment can profit from innovations aloneand that the focus on costs will assurelong-term survival for the rest. Forthis reason, it is vital to not only graspthe logic of a company’s own segment,but also to design strategic andoperational approaches according to it.

Jan Dannenberg, + 49 89 939 49 [email protected]

Lars Stolz, + 49 89 939 49 [email protected]


Commodity Hedging –the Advent of a New Paradigm

The study »Commodity Hedging –the Advent of a New Paradigm« sets offthe business case for improved risk-returnbased decision-making in the field ofcommodity hedging. It provides anoverview of the analytical solutions anddecision-making governance requiredto ensure that hedging programs meetthe organization’s hedge objectivesand generate value. The study also showshow organizations are applying theseapproaches to the hedging as well asphysical sourcing of commodities.

Hans-Kristian Bryn, + 44 20 7 852 [email protected]

Mark Robson, +1 416 868 [email protected]

E-Mobility Services 2030

Which mobility services will be offeredin the future? What is the connectionto E-Mobility? How does this impactautomakers’ business? The study »E-MobilityServices 2030« explores business designsand opportunities along the emergingvalue chain and discusses initial strategicaction areas for automakers.

Matthias Bentenrieder, + 49 89 939 49 [email protected]

Sven Wandres, + 49 89 939 49 [email protected]

Sales Services

06Jan Dannenberg+49 89 939 49 [email protected]

- Automotive suppliers- Innovation and technology strategies- Brand management

07Ron Harbour+1 248 906 79 [email protected]

- Production increase and optimization- Production strategies and processes, redesignand cost optimization- Benchmark analyses, product teardown,operational due diligence support

08Christian Heiss+49 89 939 49 [email protected]

- Product cost optimization in developmentand procurement- Performance increase in production- Efficiency in development

09August Joas+49 89 939 49 [email protected]

- Growth strategies, business designs- Organization, change- Performance improvement, efficiency

01Matthias Bentenrieder+49 89 939 49 [email protected]

- Sales and downstream strategies- Mobility scenarios and e-mobility- Rollout programs

02Peter Bosch+49 89 939 49 [email protected]

- Suppliers in transaction situations- Research & development, sales and downstream- Strategy development and implementation

03Fabian Brandt+49 89 939 49 [email protected]

- Sales and after-sales- Quality management- Commercial vehicles

04Roland Bubik+49 69 97173 [email protected]

- Financial Services: Retail and business banking- Strategic IT and operations- Efficiency and effectiveness improvement

05Rémi Cornubert+33 1 45 02 33 [email protected]

- Strategy development and implementation- Effectiveness and efficiency research & development- Performance-improvement and cost-reduction programs

Our experts

34

Oliver Wyman authors in this issue

01 02 03 04 05 06 07 08

10Christian Kleinhans+49 89 939 49 [email protected]

- Brand, product and technology strategies- Growth strategies and business design innovation- Product cost optimization and engineering excellence

11John Lucci+1 248 649 55 [email protected]

- Manufacturing strategy development & deployment- Operational due diligence- Shop floor transformation

12Julia McGillis+1 416 868 28 [email protected]

- Value-driven business design development- Customer insight and marketing design- Organizational alignment and development

13Shin Moonsup+82 2 399 [email protected]

- Market entry and growth strategies- New business management- Research&development, operational excellence

14Lars Stolz+49 89 939 49 [email protected]

- Product developement- Suppliers- Automotive downstream

35

Publisher’s information

PublisherOliver WymanMarstallstrasse 11, 80539 Munich, Germanywww.oliverwyman.com

Editorial staffPatrizia Mascolo / [email protected] Wandres / [email protected]

Concept and layoutVogt, Sedlmeir, Reise.GmbH, Munich, Germany

PhotographyFabian Helmich, Munich, Germany

ResponsibleErdmann Kilian+49 89 939 49 447 / [email protected] Bosch+49 89 939 49 764 / [email protected]

CopyrightOliver Wyman Consulting GmbH


15Sven Wandres+49 89 939 49 [email protected]

- Growth strategies and international rollout- Mobility, sales and after sales- Passenger cars and commercial vehicles

16Stephen Weisenstein+1 248 906 79 [email protected]

- Mergers and acquisitions, post merger integration- Growth strategies, market entry strategies- Performance improvement, operational efficiency

09 10 11 12 13 14 15 16

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With more than 2,900 professionals in over 40 cities around the globe, Oliver Wyman is an international managementconsulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, riskmanagement, organizational transformation, and leadership development. The firm helps clients optimize their businesses,improve their operations and risk profile, and accelerate their organizational performance to seize the most attractiveopportunities. Oliver Wyman is part of Marsh & McLennan Companies [NYSE: MMC].

For more information, visit www.oliverwyman.com

E100/12/10

Oliver Wyman’s automotive experts have broad industryexperience and a commanding track record of successfulconsulting projects for leading automotive OEMs andsuppliers in Europe, America and Asia. We offer consultingservices along the entire value chain of the auto industry:R&D, purchasing, manufacturing, sales and channelmanagement, after-sales and financial services.

Oliver Wyman’s global Automotive Practice supportsclients with strategic topics like brandmanagement, customerorientation, corporate and business strategies, market,competitive, and technology analyses, product development,innovation management, sales strategies and after-salesprograms. Operational optimization includes purchasing,production optimization, efficiency improvement programs,reengineering, turnaround management and restructuring.In addition, Oliver Wyman offers the whole range ofmergers & acquisitions consulting services, from partnersearch to evaluation, transaction support, and post-mergerintegration.

© 2010 Oliver Wyman. All rights reserved.

Get to know our Automotive Practice.We look forward to your call or to your e-mail.

ContactOliver Wyman [email protected]

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Documents

Thefuture belongsto elec tricve hicles. · car ownership. Following financing, leasing and all-inclusive packages, customers will increasingly pay for only their own vehicle use (see