Sustainable and profitable growth in the automotive industry Master’s thesis Volume 1 Sustainable growth for VLP in the Automotive Industry Sustainable and profitable growth in the automotive industry “Positioning Van Leeuwen Precision in the automotive industry” In cooperation with Van Leeuwen Precision Deventer, The Netherlands Represented by Drs. MBA J.M. Sassen Under supervision of University of Twente, the Netherlands Faculty Bedrijf, Bestuur en Technology Represented by Prof. Dr. P.B. Boorsma Drs. S.J. Maathuis Author R.A.G Blokvoord Master student Business Administration University of Twente, The Netherlands 2 Sustainable growth for VLP in the Automotive Industry Executive summary Historical background In the 1970's the vehicle manufacturers (OEM’s) relied heavily upon their captive, in-house parts manufacturing operations for as much as 70% of their requirements, but were beginning to buy increasing quantities of products from outside suppliers. Potential suppliers gained “build to print” contracts for an agreed quantity, price and time. During the last thirty years supply chain management grew extremely important. Of course the main reason for this was to control total costs, and hereby increase revenues, in different stages of the supply chain. The OEM’s supply chain then was, and still is, divided into three to four distinct layers. These layers are called tiers. This static tier-model of the automotive supply chain is beginning to be outdated and recently is replaced by a more dynamic supply chain model. Focus is more and more on the integration of the product with other products in the supply chain, described as ‘module’, ‘system’, ‘component’ and ‘raw material’. Some suppliers are willingly taking on the new responsibilities offered to them by the OEMs, transforming themselves into “Tier One-Half systems integrators,” that engineer and build complete modules and assume both product design and development responsibilities and downstream supply chain management functions previously undertaken by the OEMs. Consequently, other firms are choosing not to pursue this new role, consciously deciding to remain in the less demanding tiers. Suppliers already develop and build 65% of the average vehicle; this share is expected to increase to 77% over the next decade. Rough study of segments Because of the time available for this study, a segmentation is needed to construct segments in this automotive industry. Then, these segments are scored according to their potential for VLP based on a quick scan. This quick scan must comprise several criteria that are important to VLP. At forehand, the scores of these criteria most favourable for VLP must be listed. Then, a preferred profile can be constructed for VLP. Scores 1-3 4-7 8-10 Unfavourable Neutral Favourable market growth < 0% 0-5% > 5% market size large small average Criteria: customer relations – contracts < 1 year 1 - 2 years > 2 years number of competitors large average low competitors’ market share division monopoly disproportional proportional market access bad average good geographical situation > 750 km 750 - 250 km < 250 km The segments must be scored and after scoring each segment, the scores can be compared with the most favourable scores for VLP, and conclusions can be drawn on the segments. Criteria market market market number of competitors' duration geographical of growth size access competitors market contracts location total 3 Sustainable growth for VLP in the Automotive Industry shares Segments Passenger 6 6 4 4 4 4 7 35 car Commercial 5 6 4 4 4 4 4 31 vehicle Bus/Coach 6 7 6 7 7 6 5 44 Heavy truck 7 7 8 7 7 6 7 49 Agricultural 5 6 8 6 6 6 5 42 Construction 8 7 8 7 7 7 7 51 equipment In the figure above the scores per segment for all criteria are presented. The Heavy Truck (HT) segment, and the Construction Equipment (CE), are both considered to have the best match with the most favourable profile I have created for VLP. Market growth in both segments is better than in other segments, while market size tends to be more at average. This average market size is assumed to imply that there will be little less OEMs, but that their series manufactured is considerably lower. The smaller the series, the less the willingness of the mill will be to supply accounts directly, and the greater their willingness to supply accounts via Industrial Distributors. In both HT and CE segments VLP has experience with supplying the series demanded, and it is assumed that mills will not supply these series. Market access largely depends in my report on the existence of relevant references for VLP in that segment, assuming those references can be used as a means of presentation of VLP’s ability to cope with new challenges in these segments. For the HT and CE segment both OEM, first-tier and second- tier suppliers are part of VLP’s reference list. Although the number of competing suppliers, and the division of the market shares amongst them, has to be estimated for all segments, for the HT and CE segment they are scored high because of the smaller series. The HT and CE scores on the duration of contracts are based on long term agreements VLP has signed in both segments with OEMs. I assume that the contracts with these OEMs are also used, in terms of duration, by other OEMs. Without doubt the geographical locations of the Passenger car, the HT and the CE segment suit VLP’s European presence best. Other segments simply do not offer such coverage. In the CE segment, and to a lesser extent in the HT segment, all products in the assortment of VLP are used for various applications, more than is the case in the other segments. A considerable amount of material is assumed to be needed to support hydraulics and mechanical engineering parts in the end-products of these segments. 4 Sustainable growth for VLP in the Automotive Industry The Construction Equipment segment Construction Equipment is the industry that manufactures all possible kinds of construction machinery, and sometimes is referred to as ‘Off-Highway’. This industry has centralized itself in Europe in the CECE. CECE is the Committee for the European Construction Equipment Industry. It represents and promotes the interests of this important industry sector on a European level and in close co-operation with its sister associations in North America, Japan and Korea also worldwide. CECE is an international non-profit association according to Belgium law and registered in Brussels. CECE, together with industry players, has categorized the products of construction machinery according to their fields of use into five categories. These five categories are: v crushing and screening v tower cranes v concrete equipment v road equipment v earthmoving equipment Earthmoving equipment (63%) by far is the largest segment in CE in Europe, followed consecutively by road equipment (14%), concrete equipment (11%), crushing and screening (9%), and tower cranes (3%). In CE often another typology of the end products is used, and this typology distinguishes smaller, less heavy equipment from the larger, heavy equipment machinery. Equipment then is defined to be either Compact Equipment or Heavy Equipment. The CE industry worldwide is worth 48 billion US Dollars, and the market shares in CE are held by a great amount of OEMs. To come to a better insight, I have defined an OEM to be a relevant player whenever its market share is larger than 2%. This does not imply that other, smaller OEMs are not potential buying customers for VLP in Europe. A comprehensive list of relevant and non-relevant OEMs has therefore been added to the Annexes of this report. The relevant players in CE are listed in the figure below: Caterpillar Deere Komatsu Hitachi Terex: Volvo Terex CNH: Terex-Atlas Case Terex-Fuchs New Holland Terex-Kaelble Kobelco Terex-Mining Liebherr Terex-Schaeff Ingersoll-Rand (IR): Terex-Genie Ingersoll-Rand JCB Bobcat After distinguishing the relevant players for Europe, I have indicated for all five categories the relation between ‘units produced for European countries’ versus ‘units produced for non-European countries’. For four categories 60%-70% of the units produced find their way to non-European countries, in the Earthmoving Equipment category this is about 75%. This could well indicate that OEMs in time will try to move production to countries outside Europe, in order to be closer to the country of the customer. The relevant payers thereafter have been listed on market shares and geographical location in Europe, and a list of (preferred) suppliers to CE is presented. A list of products supplied by these suppliers is provided as well. 5 Sustainable growth for VLP in the Automotive Industry The Heavy Truck segment The heavy truck (HT) industry, often referred to as “truck industry” or “heavy duty truck industry”, features only two categories. Unlike the divisions based on application in the CE industry, the division in the HT industry is made based on ‘gross vehicle weight’. The gross vehicle weight is the weight of the truck including its cargo. The two categories are “6-15 tons” and “>15 tons”. Remarkably the European HT industry is not organized in one public association. The result is that market shares that are presented come from HT OEMs annual reports and presentations. Worldwide there are only 24 large manufacturers of heavy trucks, as is indicated in the figure below. Although one could expect these manufacturers to be very much global players, they are considerably local-oriented and seem to use brand diversification in different global regions. The brand names, which are very common in North and South America, are very rare (if any is sold) in Europe, and vice versa.