Global Automotive SourcingGlobal Automotive Sourcing

An India/China Discussion

Chicago

April 27, 2004

Federal Reserve Bank Federal Reserve Bank ofof Chicago ChicagoFederal Reserve Bank Federal Reserve Bank ofof Chicago Chicago

A.T. Kearney 82/7041 2

SummarySummary

Motivations for global sourcing are varied – they need to be analysed in the context of business drivers (revenues, costs) and market impact (away vs. home)

Nature of emerging Asian markets strongly differ from mature markets such as North America• Manufacturers need to follow a “build where you sell” strategy• Majority of Asian activity by manufacturers is for local market consumption

Two segments of global automotive sourcing – manufacturing and services• Manufacturing based exports (vehicles, components) from China/India growing rapidly but

from a small base• Exploiting export opportunities requires careful study – to address supply chain, regulatory and

economic factors• Services based exports very strong and growing – significant future growth expected

India appears to lead in engineering driven outsourcing; China competes on scale and cost• However, the automotive industry base in these countries is very fragmented and can be tough

to navigate

A. T. Kearney’s 2004 Offshore Location Index ranks India and China are the top two destinations for services offshoring

Economic liberalization, improved connectivity, reduced cost of telecom in addition to large available pools of technical talent are driving outsourcing of services

Motivations for global sourcing are varied – they need to be analysed in the context of business drivers (revenues, costs) and market impact (away vs. home)

Nature of emerging Asian markets strongly differ from mature markets such as North America• Manufacturers need to follow a “build where you sell” strategy• Majority of Asian activity by manufacturers is for local market consumption

Two segments of global automotive sourcing – manufacturing and services• Manufacturing based exports (vehicles, components) from China/India growing rapidly but

from a small base• Exploiting export opportunities requires careful study – to address supply chain, regulatory and

economic factors• Services based exports very strong and growing – significant future growth expected

India appears to lead in engineering driven outsourcing; China competes on scale and cost• However, the automotive industry base in these countries is very fragmented and can be tough

to navigate

A. T. Kearney’s 2004 Offshore Location Index ranks India and China are the top two destinations for services offshoring

Economic liberalization, improved connectivity, reduced cost of telecom in addition to large available pools of technical talent are driving outsourcing of services

A.T. Kearney 82/7041 3

Motivations for global (low cost country) sourcing are variedMotivations for global (low cost country) sourcing are varied

Revenue Revenue IncreaseIncrease

Business Business DriversDrivers

VehiclesVehicles ComponentsComponents

Cost Cost DecreaseDecrease

Strategic Strategic SourcingSourcing

Components IT/Business Process

Engineering ServicesVehicles

Grow New Grow New MarketsMarkets

Retain/Gain Retain/Gain Market ShareMarket Share

Improve Improve ProfitabilityProfitability

Compete Compete LocallyLocally

Emerging Markets Home Markets

Impact on MarketsManufacturing Services

Objectives

Manufacturing

A.T. Kearney 82/7041 4

ManufacturingManufacturing

A.T. Kearney 82/7041 5

Asian markets are large and growing fast…Asian markets are large and growing fast…

Source: J.D. Power LMC; A.T. Kearney analysis

No automotive manufacturer can ignore emerging Asian economiesNo automotive manufacturer can ignore emerging Asian economies

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008

NA

Asia

Europe

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005 2006 2007 2008

Japan

China

India

S. Korea

CAGR

0.6%

6.5%

0.9%

CAGR1%

17%

6%

6%

Annual New Vehicle Volumes (MM)Annual New Vehicle Volumes (MM) Annual New Vehicle Volumes (MM)Annual New Vehicle Volumes (MM)

A.T. Kearney 82/7041 6

Emerging Asian markets need location specific strategiesEmerging Asian markets need location specific strategies

0%

10%

20%

30%

40%

50%

60%

70%

Basic Small Medium Large Luxury

Price Driven Segment

Seg

men

t M

ark

et S

har

e

North America

Asia

0%

10%

20%

30%

40%

50%

60%

70%

Basic Small Medium Large Luxury

China

India

Price Driven Segment

Seg

men

t M

ark

et S

har

e

Source: J.D. Power LMC; A.T. Kearney analysis

…and are different from North America … even different within Asia…and are different from North America … even different within AsiaProduct Segment MixProduct Segment Mix Product Segment MixProduct Segment Mix

A.T. Kearney 82/7041 7

Manufacturers forced to follow a “build where you sell” strategyManufacturers forced to follow a “build where you sell” strategy

Unit Economics – Average Vehicle PriceUnit Economics – Average Vehicle Price

Supply Chain/Other ConstraintsSupply Chain/Other Constraints• Regulatory

— Tariffs— Local content— Ownership

structure

• Logistics— Etc

~ $7,500

~ $25,000

0

5,000

10,000

15,000

20,000

25,000

30,000

North America India

Unit economics make exports into Asian regions difficult

Supply chain and regulatory constraints driving domestic emerging market investments

• FDI

• Technical Alliances

• Captive units

• JVs

Average Retail Price Of new Car

Note: 1) A.T. Kearney estimates

Source: A.T. Kearney analysis

A.T. Kearney 82/7041 8

Hardly any vehicle exports out of India or ChinaHardly any vehicle exports out of India or China

• Vehicle exports from India primarily to S.E. Asia, Africa and some to Europe

0.00

1.00

2.00

3.00

4.00

India China

Negligible Exports

3.7

0.08

0.9

DomesticExport

0.98

• Capacity investments of U.S vehicle manufacturers in Asia primarily to exploit domestic markets

• We are not aware of any OEMs planning to source vehicles out of emerging markets in Asia for the US market

2003 Volumes (MM)2003 Volumes (MM)

Source: Siam India, ACMA, Cris Infac, A.T. Kearney analysis

A.T. Kearney 82/7041 9

Note — US automotive material content: $240 Billion;Note — US automotive material content: $240 Billion;Asian exports expected to grow at 15% – 20% per annumAsian exports expected to grow at 15% – 20% per annum

Source: Siam India, Automotive News, China automotive Industry yearbooks, National Bureau of Statistics, A.T. Kearney analysis

2000 2001 2002 2003 2004 2005 2000 2001 2002 2003

China 24%

India 10%15

19

25

30

36

44

10

20

30

45

40

35

25

15

5 4.0 4.5 4.8 5.3 5.8 6.4

China 41 %

India 17 %

625(16%)

578(13%)

750(16%)

1,6351,758(9%)

3,242(9%)

(11%)

500

1500

2500

3500

Exports of auto components growing rapidly…albeit from a low baseExports of auto components growing rapidly…albeit from a low base

1000(19%)

Auto Component Market (Billions)Auto Component Market (Billions) Automotive Component Exports Automotive Component Exports (% or total market in Millions)(% or total market in Millions)

CAGR

CAGR

A.T. Kearney 82/7041 10

3,701

33,59530,807

1,2001,180

China India Mexico Germany US

Wages in low cost countries is a major attraction…Wages in low cost countries is a major attraction…

(1)

?

Labour content varies significantly between components — need to consider Labour content varies significantly between components — need to consider capital — labour tradeoffs in addition to other cost elementscapital — labour tradeoffs in addition to other cost elements

Average Manufacturing Industry Annual Wages (US $,2001)Average Manufacturing Industry Annual Wages (US $,2001)

Note: 1) Big 3 wages higher

Source: SIAM, ACMA, Cris Infac

A.T. Kearney 82/7041 11

…however, exploiting sourcing opportunities requires careful study ……however, exploiting sourcing opportunities requires careful study …

Bolt ExampleBolt Example DriversDrivers

• Labor cost• SG & A cost• Burden cost• Other costs

ChallengesChallenges

• Capacity constraints• Supplier scale• Engineering change lead time• Logistics costs• Rust during shipping (metal parts)• Supplier qualification• Cultural issues

Sourcing opportunities are real. Actual opportunities need toSourcing opportunities are real. Actual opportunities need tobe properly qualified — commodity by commoditybe properly qualified — commodity by commodity

Note: 1) Disguised data based on actual experience 2) Second US supplier

Source: A.T. Kearney analysis

$2.00$2.00

$3.00$3.00

USA Korea India USA

Shock AbsorberShock Absorber

$7.00$7.00$8.5$9.00$9.00

Brazil Korea USA India Malaysia

(2)

Price Not Always LowerPrice Not Always Lower(1)(1)

A.T. Kearney 82/7041 12

… allowing for the right tradeoffs… allowing for the right tradeoffs

ParameterParameter IndiaIndia ChinaChina ThailandThailand TaiwanTaiwan

Quality of supply 1 4 2 3

Ability to supply consistent quality

3 4 2 1

Price competitiveness 4 1 3 2

Design & engineering capability 1 4 3 2

Customer/Aftersales support 3 4 1 2

Maturity of auto components industry

1 4 3 2

Government regulations 4 3 1 2

Attractiveness of domestic market

2 1 3 4

Compliance and transparency 2 4 3 1

Source: Frost & Sullivan

FavorableNot so favorable

India leading in engineering driven supply; China leading in cost efficiencyIndia leading in engineering driven supply; China leading in cost efficiency

A.T. Kearney 82/7041 13

Component industry fragmentation very high …Component industry fragmentation very high …

Illustrative Examples

China Case ExampleChina Case Example Component-wise Export Value Break-upComponent-wise Export Value Break-up (India 2002)(India 2002)

No clear dominant commodity or supplier strategy forNo clear dominant commodity or supplier strategy forcomponent sourcing from China/Indiacomponent sourcing from China/India

20002000Number of Number of ProducersProducers

Volume Share of the Volume Share of the No.1 Producer (%)No.1 Producer (%)

Generator 31 11.9%

Starter 30 16.2%

Radiator 26 14.7%

Shock absorber 23 17.6%

Friction material 26 20%

23%

4%

7%

2%

4%

60%

Engine & engineparts

Transmission &steering parts

Suspension &braking parts

Equipment

Electricals

Others

A.T. Kearney 82/7041 14

FactoriesFactoriesInternal Internal

Local Local TransportationTransportation

ConsolidatorConsolidatorAir/Air/

Ocean Ocean CarriersCarriers

De-De-consolidatorconsolidator

Domestic Domestic U.S.U.S.

TransportationTransportation

Export Export DocumentationDocumentation

U.S. U.S. Customs Customs ClearanceClearance

• Modes?

• Carriers?

• Control?

• Where?

• Which items?

• Service levels?

• Brokers?

• Financial arrange-ments?

• Service levels?

• Ports?

• Carriers?

• Service levels?

• Brokers?

• Coordina-tion with transport-ation?

• Where?

• Service levels?

— Cross-dock?

— Store-ready?

• Suppliers?

• Sites?

• Supply base manage-ment?

• Modes?

• Carriers?

• Service levels?

Without effective supply chain management, sourcing in India and China can be challenging and sometimes costly

Major Steps in Asian Supply ChainMajor Steps in Asian Supply Chain

… with supply chain challenges… with supply chain challenges

A.T. Kearney 82/7041 15

Services(i.e. non-manufacturing)Services(i.e. non-manufacturing)

A.T. Kearney 82/7041 16

A.T. Kearney’s 2004 Offshore Location Attractiveness Index for servicesA.T. Kearney’s 2004 Offshore Location Attractiveness Index for services

3.723.32 3.09

2.64

1.47

3.593.17

1

2.99 2.88 2.71

1.59

3.44 3.12 3.25 3.06 2.83

1.111.84

3.653.25

1.120.62

1.66

3.07

1.31

0.931.77

2.02

2.63

0.921.41

2.48

1.68 1.57 1.68

2.24

1.191.26 1.08 1.33

1.21

2.13

1.99

0.7

0.51

2.052.48

1.74

0.73

2.09

1.360.73 0.92

1.360.94 0.86

1.94

0.7 0.88 0.91.38

0.57 0.74 0.74 0.670.94

1.580.88

0.350.89

1.38 1.39 1.060.64

Ind

ia

Ch

ina

Mal

aysi

a

Cze

ch R

epu

bli

c

Sin

gap

ore

Ph

ilip

pin

es

Bra

zil

Can

ada

Ch

ile

Pol

and

Hu

nga

ry

New

Zea

lan

d

Th

aila

nd

Mex

ico

Arg

enti

na

Cos

ta R

ica

Sou

th A

fric

a

Au

stra

lia

Por

tuga

l

Vie

tnam

Ru

ssia

Sp

ain

Irel

and

Isra

el

Tu

rkey

People ScoreEnvironment ScoreFinancial Score

A.T. Kearney Offshore Location Attractiveness Index 2004

While India, the Philippines and other popular locations continue to score highly, While India, the Philippines and other popular locations continue to score highly, the Index suggests that a number of locations may be attractive, depending on the specific the Index suggests that a number of locations may be attractive, depending on the specific

financial benefits, HR needs and risk profile that corporations are consideringfinancial benefits, HR needs and risk profile that corporations are considering

Source: A.T. Kearney analysis

A.T. Kearney 82/7041 17

25 countries attractive for services offhshoring covered in the index25 countries attractive for services offhshoring covered in the index

Low HighFinancial Score

Combined People &

Environment Score

High

Czech Republic

Philippines

Malaysia

Singapore

India

New Zealand

ChinaChile

Canada

Thailand

IrelandAustralia

Vietnam

Spain

Turkey

Argentina

PortugalIsrael

Russia

Poland

South Africa

Costa RicaMexico

Hungary

Brazil

Source: A.T. Kearney analysis

A.T. Kearney 82/7041 18

Example

Complexity of Function LowHigh

Low

Maturity of Supply

Market

HighData Entry/Low-end Processing

Web-Chat

Technical Help Desk

Customer Service (e.g. Account Opening) Call Center

Client Database Maintenance

Software Development

Systems Integration

Software Maintenance & Upgrades

Settlements & Payments

Client Reporting & Statements

Accounts Receivable/ Payable

Reconciliation

Research

Regulatory Audit

Financial Reporting & ControlCredit

Analysis

Level 1

Level 2

Level 3

Variety of services are being offshoredVariety of services are being offshored

CAD

2D-3D

Knowledge Based Engineering, Manufacturing Engineering

CAE

Technical R&D

IT ServicesCustomer Interaction ServicesProcessing ServicesHigh End Customer and Analytical ServicesDesign & Engineering Services

Embedded Systems

Major Automotive Industry Applications and Interest – especially when combined

with component outsourcing

Source: A.T. Kearney client experience & analysis

A.T. Kearney 82/7041 19

Total Cost SavingsTotal Cost SavingsRealizedRealized

Benefits of services offshoring are clearBenefits of services offshoring are clear

No Savings0%

GreaterThan 50%

Savings11%

31-50%Savings

41%

10-30%Savings

42%

LessThan 10%

Savings6%

Quality of Current Offshore Quality of Current Offshore InitiativesInitiatives

Additional BenefitsAdditional BenefitsRealizedRealized

As Good As the Original Services

75%

Better ThanThe Original

Services14%

Not As Good As The Original

Services11%

Other2%

Prod.Improve

26%

ServiceQualityImprove

15%Expand.

Skills & Caps.21%

AdditionalCapacity

31%

None5%

Typical cost savings Typical cost savings range from 30 – 50%range from 30 – 50%

Quality consistent with Quality consistent with on-shore serviceson-shore services

Better productivity, quality Better productivity, quality & skills as added benefits& skills as added benefits

Source: 2003 A.T. Kearney Automotive Executive Survey

A.T. Kearney 82/7041 20

Three factors driving services offshoringThree factors driving services offshoringEconomic LiberalizationEconomic Liberalization

FDI Inflows to India (1985-2001)FDI Inflows to India (1985-2001)

0

1000

2000

3000

4000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

($ Millions)

1985 – 1991 1985 – 1991 CAGR = -5.9%CAGR = -5.9%

1991 – 2001 1991 – 2001 CAGR = 46.7%CAGR = 46.7%

ConnectivityConnectivity

Number of Secure Servers With Strong Encryption Number of Secure Servers With Strong Encryption (Thousands)(Thousands)Source: Netcraft

1997 1998 1999 2000 2001 2002

North America

Outside North America

040

180140100

60

Telecom CostsTelecom Costs

Cost for 512 Kbp of International BandwidthCost for 512 Kbp of International Bandwidth(US$ Per Annum)(US$ Per Annum)

67,500

40,300 33,000

1999/2000 2001 2002

(CAGR: -30%)

Economic liberalization, connectivity and drop in telecom costs Economic liberalization, connectivity and drop in telecom costs have been key drivershave been key drivers

Source: A.T. Kearney analysis

A.T. Kearney 82/7041 21

~1.2MM

India China United States

India and China provide a huge technical resource poolIndia and China provide a huge technical resource pool

N/A

Globalization, so far, has leveraged the undergraduate Globalization, so far, has leveraged the undergraduate engineering resource pool more than the doctoral levelengineering resource pool more than the doctoral level

~7,000

~5,500

~26,000

India China United States

~350,000

Undergraduate Engineering EnrollmentUndergraduate Engineering Enrollment Doctoral Degrees in Science and EngineeringDoctoral Degrees in Science and Engineering

Note: 1) 1999 dataSource: National Science

Foundation

(1)

A.T. Kearney 82/7041 22

Sizeable industry benefits estimated from offshore servicesSizeable industry benefits estimated from offshore services

U.S. Automotive IndustryU.S. Automotive Industry

Source: A.T. Kearney analysis

Operating Costs "Out of Scope"Costs

PotentiallyOffshorable

210

170

10

206

1678

234

$9 Billion

$381 Billion$390 Billion

2% of Total Cost

$3 Billion Industry$3 Billion IndustrySavingsSavings

U.S. Economy by 2015U.S. Economy by 2015

Source: Department of Labor, Forester Research

2000 2005 2015

$24.2 Billion

$4.0 Billion

$136.4 Billion

2000 – 2015CAGR=26.5%

2002 US GDP — 10,500 Billion2002 US GDP — 10,500 Billion

OEMs

Suppliers

Financing Arms

A.T. Kearney 82/7041 23

For More Information ContactNagi Palle, Principal

2000 Town Center, Suite 1600

Southfield, MI 48075

USA

Tel: + 1 (248) 354 2226

Taj Mahal Hotel, Suite 1001

One Mansingh Road

New Delhi 110011

India

Tel: + 91 11 2302 6162 Ext 1001

Thank You!Thank You!

A.T. Kearney 82/7041 24

AdditionalAdditional

A.T. Kearney 82/7041 25

Approximately 60% of all U.S. vehicle content is imported from outside the U.S.Approximately 60% of all U.S. vehicle content is imported from outside the U.S.

Imported Material Content

Total Material Content

Asia26.5%

Canada 26.5%

S. America

1.0%

EU 25.8%

146

242

55%

45%

Mexico 20.0%

Imported Content =

60%

Imported vehicle contentImported part content

Source: A.T. Kearney analysis

U.S. Automotive Material Content, in USD BillionU.S. Automotive Material Content, in USD Billion Imported Material Content, by RegionImported Material Content, by Region