Hybrid Technology Decision
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GLOBAL EXECUTIVE PHD TRACK DEPARTMENT OF INDUSTRIAL & MANUFACTURING ENGINEERING COHORT 2008‐# REV: DECEMBER 4, 2009 DARRELL WILLIAMS Hybrid Technology Decision Michigan Motors Corp (MMC) is a large US automaker employing about 65,000 people worldwide. They have been in business for over seventy five years and have a rich history as one of the original ‘Big 4’ US automakers. While MMC has seen many changes in the auto industry over the years, the pressure it has experienced in the last decade is unlike anything they have seen before. Most notably, rapidly eroding market share to international competitors (from Europe and Asia), sporadic profits, and a rapidly shrinking work force (cut by over 50% in the past 10 years alone). Over the past decade there has been a continued opening of transplant facilities1 by international competitors which is not only increasing the number of vehicle choices to consumers (e.g. total models in the US increased by 30% from 1996 to 2006, to roughly 265 models) but also blurring the line of the so called “made in the US” image that historically garnered strong consumer loyalty for the “domestic” automakers. In the twenty year period between 1986 and 2006 the US market share of the “Big 42” fell from 90% down to about 60% (Exhibit 4). During the same time period the quality of competitive products and their introduction of advanced and innovative technologies have been steadily increasing. Significant shifts in development / production cost have occurred as traditional mechanical systems/sub-systems have been replaced by electro-mechanical systems like traction control and direct fuel injection. High tech electronics and software such as satellite navigation systems, hands-free entertainment systems, and on- line call centers have been integrated into vehicle systems. In the midst of all this, international competitors have also accelerated their product development cycle times which has impacted consumer expectations. Product development lead-times for totally reengineered / new products have decreased from 60 months or so in the late 1990s, to 36 months or less for many competitors. As consumers are bombarded with so many new products each year from so many competitors, new vehicle models have not been able to sustain sales volumes beyond the first 18-24 months of their introduction. Competitive vehicles that previously received simple “freshening” of exterior sheet metal and interiors every three years are now undergoing major redesign within two years and total replacement in some cases within four years. For these reasons and reasons beyond (e.g., not matching PD, manufacturing, and marketing/sales effectiveness and efficiencies of global competitors, misguided acquisition of small/niche foreign automakers without seeking/harnessing synergies), the end result for domestic automakers has been reduced consumer confidence in the quality, reliability, and durability of its products (Exhibit 4), high 1 Transplants refer to manufacturing facilities located outside their home market in order to produce products in the same country as they will be purchased or consumed. Examples are European or Asian manufacturing plants located in the US. Transplants provide many benefits including reduced tariffs and taxes, improved logistics, etc. 2 The Big 4 auto companies include the US-based manufacturers of: GM, Ford, Chrysler and Michigan Motors. ____________________________________________________________________________________________________________________ Darrell Williams prepared this case under the supervision of Dr. Ratna Chinnam for the Global Executive PhD Track in Industrial Engineering at Wayne State University. Wayne State University GET cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective engineering / management. Copyright © 2009 Wayne State University. To order copies or request permission to reproduce materials, go to http://www.ime.wayne.edu/execphd. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Wayne State University. Hybrid Technology Decision Williams, D. D. dealership/customer incentives to protect volumes, excessive PD/manufacturing costs and “legacy” health-care/retiree costs3, and mounting losses. In late 2007, representatives from key distributors met with MMC’s top management to voice their opinion that the automaker needed to implement a new product launch campaign—in response to the market pressure. They insisted that MMC needed to re-capture the attention of the market because customers had become disinterested in their products. Only 2 ½ years earlier the automaker had executed a major “product offensive” with nine all-new vehicles in the same year (Exhibit 2) including 4 new SUVs, 2 new trucks, 2 large cars and a compact vehicle), achieving an impressive 35% product replacement between 2005 and 2006; it was an expensive endeavor in terms of capital and tooling cost. Six of the nine new products were trucks and SUVs which were selling reasonably well at the time. While the feat made major headlines and set a record in the industry for quantity of new vehicles launched in a single year, only 30 months later, sales had nearly dropped to the levels they were before the undertaking. Despite the challenges, a bright spot for the dealers had been the all new ‘Latitude’, a low-cost, compact car that boasted an impressive 30+ miles per gallon on the highway. With the rising cost of gasoline the dealers couldn’t keep the vehicles on their lots. Customers continued to ask for more small cars, as the market was becoming more concerned with fuel economy (Exhibit 3). Unfortunately, the existing product portfolio at MMC could not support this growing trend. Failed Partnership While the domestic competitors had been forced to downsize their organizations in recent years to control costs, MMC’s situation had been even more severe. In 2007 the automaker came out of a failed partnership with a premium-branded automaker that attempted to position the MMC nameplate as a “budget” brand. The partnership ended after five difficult years and left MMC with a reputation as a low- cost, poor quality automaker that was struggling to remain profitable. Of particular concern after the break-up was the financial situation at MMC. Only a few years earlier they had leveraged a significant amount of resources to execute their famed “product offensive”. The new products were generally considered high margin vehicles that were targeted at lower price points–part of the strategy to position MMC brands as affordable and good value. Despite the large investment in PD, MMC was not able to achieve their sales goals. In the months that followed, it was apparent that the merger with the premium automaker was a mistake, and steps were taken to dissolve the partnership. The failed relationship left many at MMC with negative feelings about “corporate collaboration” and “business partnerships”. There was a strong desire to focus inward in order to maintain their newfound independence, and to establish their own strategy going forward. Shortly after the merger was terminated, MMC was purchased by a large venture capitalist (VC) firm called Unlimited Holdings. Unlimited Holdings saw potential in the struggling automaker and believed they could make MMC profitable again. By developing more “globally acceptable” products and improving PD/manufacturing efficiencies, they felt they could turn the company around. Currently MMC had very little presence internationally, so any vehicle that could be marketed successfully outside the US was viewed very positively. The acquisition cost was over $6B and included all brands, facilities, and assets. Although the transaction was considered fair and reasonable by the market analysts, Unlimited 3 Legacy costs are expenses that have been incured in prior years but still must be accounted for in the cost structure. Examples include healthcase costs, retirement, pensions, etc. _____________________________________________________________________________________________________________________ 2 Hybrid Technology Decision Williams, D. D. Holdings was nervous. With the automotive industry and MMC facing so many challenges, it was unclear how quickly the operations could be turned around. Unexpected softening of the global economy and overall auto-market put Unlimited Holdings management under immediate pressure to deliver positive financial results. The reaction from MMC employees about the acquisition had been mixed, but generally included excitement. After years of being relegated to ‘budget brand’ status, MMC employees were beginning to feel empowered to chart their own course for the future. They were optimistic about how this would impact their products, brands, and reputation. As expected, one of the first requests of the Unlimited Holding management team was to have MMC analyze their portfolio to determine how it could be updated to compete globally and ensure their success going forward. Product Portfolio In 2006, MMC sold over 1.6 million vehicles, with less than 200,000 units (or 12%) sold internationally. The remaining 1.4 million vehicles sold domestically accounted for 15% of the US market share. Despite the decline in US sales overall, MMC was able to maintain a about 12% of the US market share