Can Contract Manufacturing help automobile companies?
Automobiles companies are faced with the challenge of retaining market share by introducing new models and same time optimize cost to remain profitable. Companies have to think different, and contract manufacturing can possibly be the way to go.
Around 45% of the cost in an automobile company is raw material cost, companies are sourcing globally or looking at alternative material to reduce the material cost, but this may not be adequate. Companies have to look at ways of converting fixed cost to variable and look at ways to reduce time to market. Companies will have to look at their SG&A cost, Capex, Maintenance costs and convert them to variable cost and contract manufacturing is the way to go.
Many automobile companies are sourcing aggregates and restricted manufacturing operations to assembly and painting, the next step is to out source the entire production. Contract Manufacturing is successful in some industries like electronics, consumer durables (white goods), but it is yet not popular in auto as this is still considered to be core function. There are some good examples to show that this can work in automobiles too - Magna Steyr is manufacturing for 6 automakers and manufacture models like BMW X3 and BMW Mini.
Contract manufacturing can be an excellent option when capacities are a constraint or companies want to reduce time to market or reduce risk while introducing a new model by keeping capex low. It is not as easy as it sounds, there are risks in this too, the contract manufacturer would expect min commitment of volumes and IP protection can be a potential concern. Having said this, these are issue that can be managed and automobiles companies can then focus on core functions i.e. Product development (IP creation) and Brand, the 2 core functions that creates differentiation.
If this happens in a big way, then China and India stand to gain where the cost structures are low, but India stands to gain over china as India had better credibility when it come to IP protection.
Comments
The line of thought mentioned is indeed the next step Indian Automotive industry should consider. Contract Manufacturing for vehicle assemblies (as mentioned citing Magna Steyr's example) would take sometime before the opportunities are realized wherein a prime requirement would be a strong synergy (systems, processes, culture etc) between OEM and the Contract Manufacturer (as evident from Magna’s example). This typically indicates that the opportunities can be capitalized on by existing major Tier I suppliers by scaling up or implementing a new entry strategy. Of course, it does not limit other players from entering into this segment but there would be preferences on the part of the OEM. OEMs with lower volumes can definitely take steps towards evaluating this type of manufacturing.
Posted by: sachin kadam | May 26, 2008 12:58 PM
Dell was able to cut its notebook prices heavily since its Chennai plant became operational. Similar strategies should work for Automobile companies.
Posted by: Shrinidhi Hande | June 17, 2008 08:55 AM