Auto Parts Manufacturing Case Analysis

Motor Vehicle Parts Manufacturing – key operational criteria that define survivors

Demand for the auto parts supplier’s (APSs’) industry is primarily driven by demand from the automobile manufacturing industry (also known as Original Component Manufacturers or OEM’s) with the remainder coming from the replacement market. Although the list could be exhaustive, automobile demand depends on consumer spending et al. which is influenced by fuel prices, GDP growth, interest rates, unemployment amongst others. Factors such as lower utility costs, location of production plants vis-à-vis markets, efficient purchase and use of raw material, lower import or export duties, investing in R&D, ability to secure new relationships etc. go a long way in deciding

For example, in 2008, steel, hit record levels thereby increasing the cost of each vehicle by approximately U.S. $500. APSs, thus, need to manage the volatility in cost of these commodity prices efficiently as this goes a long way in determining their productivity and profitability. Another area that needs to be handled well is the continued currency fluctuation. As a Tier 1 supplier to OEMs, companies enter into long-term contracts, thereby necessitating a gradual reduction in prices as demanded by OEMs and lesser flexibility for renegotiation in a scenario of currency

By using benchmarks of quality measured by parameters like defective parts per million, companies can ensure that they constantly improve their products and processes. Significant number of auto component manufacturers are getting recognized with quality certifications by focusing on more global best practices like TQM, Kaizen, 5-S, 6 Sigma, TPM etc. and in the process more companies are.

Intellectual property and patents also pose as a significant cost for this industry. Auto parts are mostly customized to meet the specific requirements of a customer. Thus, it is important to protect ownership rights of the invention/design. Other major costs incurred by APSs include R&D as stricter regulations imposed on the automobile industry push for more efficient systems. On the R&D front, Michelin invested about $764 million or 3.25% of revenue in the year 2015 whereas Bridgestone spent about $660 million or 2.51% of its revenue. Rapid technology adoption, increased introduction of new and revised models, platform consolidations is the new automotive industry norm. Regulations on fuel efficiency, safety and emission reductions will determine demand from OEMs for auto parts that meet these requirements. For example, by the year 2021, all vehicles in the US are mandated to have a sales weighted average fuel economy of 45mpg. Similarly, in the EU region, vehicles produced are not to emit carbon dioxide in