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Metamorphosis in the auto industry

Cathleen Benko and Warren McFarlan

Cathleen Benko is a Deloitte lobally, the automotive industry is transforming itself ± from the design studios of
Consulting partner and Germany to the modular assembly of cars in Brazil to the new relationships with
e-business leader suppliers in Detroit to the factory ¯oors of Japan. Three trends standout:
Warren McFarlan is senior (1) the manufacturer's changing relationship with its customers;
associate dean and professor (2) new partnerships with suppliers; and
of business administration at
Harvard Business School. This (3) the reinvention of the factory ¯oor.
article draws on the research
They represent a convergence of progressive thinking from major players around the globe.
and insights in their new book,
During this period of uncertainty and discontinuity ± in which entirely new ways of doing
Connecting the Dots (Harvard
business are emerging ± it's important to understand the context and nature of the changes
Business School Press, 2003)
that are underway in the industry, and focus some attention to organizing an intelligent
response (see box ``Setting the response agenda'').

Learning from the customer

Perhaps the biggest change in the auto industry is its relationship with its customers.
Increasingly, customers are being given the opportunity to customize their purchases, including
everything from the exterior shape to the interior features. In addition, as manufacturers and
dealers build stronger relationships with their customers and better understand their needs,
they can personalize their interactions with them.
For both the manufacturer and the dealer, this opportunity is substantial. By better under-
standing the customer's needs and preferences, they also begin to understand which
customers create the most value for them. By combining a better understanding of customer
needs with a more precise targeting of their most pro®table customers, manufacturers and
The cost of ``house not in dealers can focus spending on retaining and growing relationships with their most valued
order'' customers. The buying experience is increasingly predicated on a new relationship, in which the
The markets for trucks took off entire value network ± the automaker, its suppliers, the dealer, and the customer ± are
in the early 1990s, but it took collaborating to build each customer his or her own ``perfect car''. ``Behind all this'', says BMW
General Motors until 1998 to chairman Dr. Joachim Milberg, ``is a principle: the customer's desires and speci®cations for the
get enough truck transmissions individual car drive the process, not the vehicle BMW has planned[1]''
to meet demand. GM admits
that this delay cost the Obviously, customers still work within a prescribed set of choices, but growing levels of
company roughly $5 billion in precision and coordination up and down the supply chain continue to expand their choices. As
net earnings[2]. Ralf Hattler, manager of BMW's logistics planning in Munich, put it: ``Our logistics challenge is
to let the customer change their choices right up until the production process starts. If we are

| VOL. 31 NO. 4 2003, pp. 4-8, ã MCB UP Limited, ISSN 1087-8572 DOI 10.1108/10878570310483933
Setting the response agenda
In order for the auto industry to accomplish the fundamentally new approaches recounted in this
article ± such as altering customer relationships, adopting customization technologies, and embracing
collaborative strategies ± the mindsets of its leaders and line managers had to undergo radical change.
As evidence of these new mindsets, our research discovered a pattern of emerging managerial traits
companies as different as GM and BMW are exhibiting as they begin to understand new realities and
implement an effective response to market discontinuity.

Our research has identi®ed four traits ± common across a wide variety of industries ± that exemplify the
radical shift in mindsets needed to effectively respond to such market upheavals.

Although the term ``trait'' may not be part of strategic managers' usual lexicon, no evolving industry is a
stranger to the concepts that lie behind it. Traits are the trend-identifying-and-response activities that
emerge as managers' mindsets adapt to profound change in the environment.

This raises the question, how can CEOs in other industries experiencing rapid evolution effectively lead
and coordinate their organizations' response to new market realities? A promising best practice is to
establish explicit ``trait objectives'' as part of a plan to coordinate an effective response. The set of traits
our research found common to leading edge ®rms taking charge of their transformational process is:
J Eco-driven ± a process of effective collaboration that seeks to convert supply chain and channel
relationships (the ecosystem) into corporate assets.
J Outside-in ± setting the goal of being the best company to do business with.

J Fighting trim ± training to be agile, to be coordinated, and to maintain your options so that the
organization can take advantage of opportunities, respond to a changing environment, and contend
with unpredictability.
J House in order ± developing and maintaining an ef®cient, collaborative intra-enterprise that makes
cross-enterprise cooperation highly effective.

Adopted as a set, traits help managers express, formulate, structure, and measure the effectiveness of
their responses to the exigencies of continual transformation. Managers in a number of evolving
industries are successfully using this set of traits to align their projects with three types of objectives ±
operational, strategic, and transformational. Here's how these traits can be converted into an agenda:
# Alistair Davidson.
J assess how effectively your organization is adopting its own version of these traits in response to
today's uncertainty and discontinuity;
J specify traits as a third, explicit objective (in addition to operational and strategic objectives);

J use trait objectives to articulate and convert the distinctive aspects of the current business context into
tangible initiatives your organization can undertake; and
J gauge progress through measurement.

Cultivating traits as conscious, deliberate intentions of the organization allows managers to produce a
potent, concerted response to the rapidly evolving market conditions they will likely face as the twenty-
®rst century continues to unfold.

successful, the right parts in the combination the customer wants arrive on the right line at the
right time, and the customer never notices the logistics behind it. The key for a global
production network like ours is a standardization process for the supply chain, which we
develop along with our manufacturing plants and our suppliers so that the logistics process is
the same wherever we operate''[1].
Customers are not only looking for customization, they also want speed of delivery. The interval
between when an order is placed to the time the car is delivered ± commonly referred to as
``order to delivery'' ± is steadily shrinking. BMW, for example, currently requires about 12 days.
In the near future, they plan to further reduce order-to-delivery time to ten days[1].
In a sense, the production process is shrinking. And of necessity, so is the design process,
which is compelled to keep up with the velocity of consumer trends. Today, instead of taking

VOL. 31 NO. 4 2003

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Exhibit 1 ``Traits: a checklist for managers'', shows this new paradigm in operation
in the auto industry

Traits: A Manufacturer’s Checklist

• Forge partnerships
with suppliers.
• Joint product design
and assembly on the
factory floor.

• Become more
• Enable buyers to
customize cars.
• Build customer loyalty.

• Modular assembly.
• Rapid factory

• Logistics prepared for

mass customization.
• New standards and
unified systems.

more than four years to design a new model, manufacturers take less than 18 months. GM, for
example, plans to roll out one new model every 27 days. The result is more car choices so
Keeping in touch
customers can buy more of what they like (and manufacturers won't be stuck with inventories of
Subaru has launched a series of
outdoor-oriented Web portals
unwanted cars that can be sold at discounts). In sum, providing customers with the vehicle they
designed to provide Subaru want when they want it is a strategy for greatly increasing pro®ts[3,4].
owners with up-to-date Today there is opportunity for a relationship that extends far beyond the car purchase as cars
information on a host of outdoor evolve into electronic appliances. Currently, Delphi Automotive Systems estimates that 22
activities. The sites also give percent of a car is electronic content. They expect this to increase to 40 percent within ten
drivers the ability to purchase
years. In the near future, via wireless Internet connectivity, the car, its owner, and the
special products and services
manufacturer will be in continuous communication. That is, these electronics will both monitor
from Subaru and its partners,
the car's vital systems and deliver information services to the driver. An example, GM's OnStar
such as L.L. Bean.
service, today has some 2 million subscribers and executes approximately 14 million
transactions a month. The availability of wireless connectivity (or ``telematics'', as the industry
calls it) will only grow. The Japanese Ministry of Posts and Telecommunications estimates that
42 million cars in Japan will be equipped with online navigation systems by 2015 ± up from 5.5
million cars today[5,6].

`` Providing customers with the vehicle they want when

they want it is a strategy for greatly increasing

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Connectivity will shape the form and function of future cars and promote extended relationships
with auto owners. From design and ®nancing to maintenance, manufacturers are building
relationships that foster a customer-centric focus.

Changing supplier relationships

In the past, especially in North America, the relationship between the automaker and its
suppliers were adversarial. In their relentless efforts to increase pro®ts while holding down
prices, traditional manufacturers were heavy-handed, often imposing cost reductions that cut
deeply into suppliers' margins.
Recently ± taking a cue from their Japanese and European competitors ± US automakers are
striving for more cooperative relationships with their suppliers and channel partners. Today,
manufacturers now purchase entire subassemblies, such as doors, power trains, and
electronics from suppliers. The desire to work with partners to outsource subassemblies is
leading to a radically new infrastructure to support the design, procurement, and logistics
Going Modular processes of the manufacturers. Consider the case of General Motors, once the archetypal
When a leading industry adversary of suppliers, now working with them via a private Web portal called GM SupplyPower.
consortium asked what The site is designed to deeply integrate GM with the back ends of suppliers' systems, better
percentage of new compact coordinating procurement and design. By connecting with its suppliers and sharing demand
cars would be fabricated using and forecasting data, GM is improving quality and responsiveness as well as reducing costs.
modular assembly by the year GM now estimates that 68 percent of its direct materials procurement will be done over the
2004, the average supplier Internet by 2004[7].
estimated 45.7 percent[8].
In 2000, in a remarkable example of how far collaboration can extend in the industry, the
traditional ``Big Three'' of Detroit ± along with Renault and Nissan ± together launched a digital
marketplace called Covisint. By building a system based on open standards, the industry is
integrating and eliminating the expensive process of developing proprietary point-to-point
connections. Covisint's members now include representatives of the entire value network. In
2001 alone, one year after the launch of the new system, GM auctioned approximately $100
billion through Covisint[9]. It should be noted that, although it's not clear yet what form Covisint
will ultimately take, the venture does illustrate the direction in which value networks will move to
reduce friction.
As the manufacturers better understand that they can create the most unique value by focusing
their time and attention on key activities ± marketing, sales, and product design ± they are
increasingly leaving the job of production to others.

Out on the shop ¯oor

The new model automotive factory process is called ``modular assembly'': cars are now
designed around common platforms, with component systems (or modules) for each major
subsystem. This means that cars can be con®gured and assembled more quickly and
ef®ciently. It also means that today's factory can be much smaller and, at the same time, far
more productive, ¯exible, and faster than the factories of previous generations. For example, a
study conducted by a major car manufacturer found that modular assembly could cut almost
10 percent off the cost of the vehicle cockpit[8].
Modular assembly is more than simple outsourcing. Whereas outsourcing provides savings
largely through labor costs, modular assembly achieves new levels of ef®ciency, re¯ected in
materials and engineering costs, and new scale economies at the supplier level. In the future,
supplier-partners will take over entire design and engineering processes, in order to further
increase ef®ciency and quality.
In light of these increasingly close relationships with suppliers, the factory is no longer a single
assembly line. Rather, it is an assembly process that allows multiple cars to be assembled on
one line. In this new setting, manufacturers work collaboratively with suppliers to assemble cars
together. Perhaps unexpectedly, the leading edge of modular assembly is found in Brazil.
DaimlerChrysler, Volkswagen, Fiat and Renault, GM, and Ford all have built modular assembly
operations there. And although most modular assembly still assumes an ``arms-length''

VOL. 31 NO. 4 2003

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relationship between manufacturer and supplier, the Volkswagen plant actually has suppliers'
employees on the production line[8].
So, judging from the changes that are already under way, the automobile factory of the future
will be smaller, leaner, and more market-responsive. Instead of being designed to create
750,000 more or less identical cars annually, the new factory will be designed to produce
200,000 vehicles customized to the customers' wishes. These factories will also be able to shift
# Alistair Davidson.
and change at market speed. For example, instead of taking the one or two months traditionally
required to retool an automotive factory, Honda can reorganize and reprogram its entire
operations overnight cutting production downtime to as few as three and a half days ± a 56
percent decrease since 1998[10,11]. With the ability to change production in a matter of hours,
rather than weeks, companies are far better equipped to deal with an increasingly unpredictable
competitive environment.

Photo credit: The photographs of automobiles in this special issue are by Alistair Davison
(; e-mail address,

1. Parker, J., ``Delivering drivers' dreams'', Traf®c World Magazine, 8 October 2001, available at: <http://
=1&s_username=ellee> (accessed: 26 August 2002).
2. Taylor, A., ``Finally GM is looking good'', Fortune, 1 April 2002, available at: <
indexw.jhtml?doc_id=206909&channel=artcol.jhtml> (accessed: 26 August 2002).
3. Konicki, S., ``Time trials'', Information Week, 3 June 2002.
4. Miller, S., ``BMW focuses on top line to boost pro®t: car maker banks on success of its redesigned
7-series'', The Asian Wall Street Journal, 21 March 2002.
5. Deloitte Research, Automobile Digital Loyalty Networks; White, G., ``OnStar renewal rate is 56%, GM's
®nancial chief says'', The Wall Street Journal, 19 March 2002.
6. Butler, D., ``On the road'', paper presented at the CTIA Wireless Conference, Las Vegas, NV, 2002.
7. Deloitte Research and Stanford University Research, ``General Motors: integrating demand and supply
chains ± building a digital loyalty network'', unpublished research, Deloitte Research and Stanford
University Research, New York, NY and Palo Alto, CA, 2002.
8. McAlinden, S.P., Smith, B.C. and Swiecki, B.F., ``Michigan Automotive Partnership, Research
Memorandum No. 1. The Future of Modular Automotive Systems: Where Are the Economic Ef®ciencies
in the Modular Assembly Concept?'', University of Michigan Transportation Research Institute, Ann
Arbor, MI, November 1999.
9. Slater, D., ``GM proves e-business matters'', CIO Magazine, 1 April 2002.

10. The Economist Group, ``Incredible shrinking plants''.

11. Taylor, Alex III, ``Honda goes its own way'', Fortune, 22 July 2002.

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