Commercial Vehicle Components in Europe: A Metamorphosis in Progress?
Commercial Vehicle Components in Europe: A Metamorphosis in Progress? The European commercial vehicle market is taking on the symptoms of its cross Atlantic counterpart, the American market. Although not as severe, it is significant, considering the fact that Europe is the third largest market for commercial vehicles and some of the world's biggest commercial vehicle manufacturers are of European origin - DaimlerChrysler, Volvo, MAN, and Scania. With an average 1,100 suppliers catering to the requirements of a single European commercial vehicle manufacturer, the slowdown in demand is bound to have a domino effect. The timing is even more significant when considering the fact that the auto component industry, the world over, is undergoing a metamorphosis in response to the changing needs of the commercial vehicle manufacturers and end-users. Anil Valsan ( http://transportation.frost.com) looks at the situation. A Mature Market The demand for commercial vehicle components is generated from OEMs as well as the replacement market. However, the nature of demand as well as the structure of these markets is quite different. While the OEMs require complete systems or modules from the suppliers, the aftermarket looks at individual components rather than systems. Demand from the OEMs to the component suppliers is organized into a three-tier structure. While the Tier 1 suppliers assemble and supply complete systems like ABS, steering, and seating, Tier 2 and 3 suppliers provide the components required for assembling these systems. Quite differently, the aftermarket finds Tier 1, 2, and 3 vendors participating through the vehicle manufacturers, wholesalers, or retailers. The component market for commercial vehicles consist of three distinct segments, fast, intermediate, and slow moving components. The fast-moving market is made up of components that require frequent replacement such as tires, exhaust systems, brake friction materials, oil and air filters, and other components. Fast-moving components dominate the commercial vehicle component market with an estimated value of around $9 billion. The golden goose in today's component market is the price rather than volume, owing to the longer life and complexity of these products. With increasing component life, suppliers also face threat from reduced replacement rates. Commercial Vehicle Market: The Action Commercial vehicle manufacturers are taking lessons from the passenger car industry. The number of commercial vehicle manufacturers is falling dramatically, in sharp contrast to the growing size of top companies in the market, resulting from mergers and acquisitions rife in this industry. The result - an industry with companies that have large capacities, a wide range of platforms, and therefore, diverse requirements. In order to benefit from synergies and economies of scale, manufacturers are pursuing a strategy to standardize the vehicle platforms. For instance, the high profit margins of Scania (currently a part of Volkswagen) are attributed to its successful development and application of common platforms worldwide. DaimlerChrysler, which is currently saddled with multiple platforms accumulated from the spate of mergers and acquisitions, is looking at standardizing about 60 to 70 percent of the components it uses. Component Market: The Reaction As the vehicle manufacturers rationalize their supplier base in the name of partnership, an increasing number of suppliers are being pushed into the second and third tier of the supply chain. While maintaining their focus on vehicle manufacturing, commercial vehicle manufacturers are expecting Tier 1 manufacturers to be capable of designing, developing, and producing advanced vehicular systems. In its attempt to withstand these pressures, the component industry is also witnessing a different form of consolidation as suppliers merge or acquire to either grow in size or diversify into related components or systems. For instance, Faurecia SA bought competitor Sommer Alliber to strengthen its position in the vehicle interiors market. On the other hand, Continental AG (a supplier of tires, brake systems, and chassis components) acquired Temic GmbH (from DaimlerChrysler AG), in order to interlink all the electronic products in a vehicle into a holistic system, thereby creating new opportunities. Similarly, Valeo has successively acquired ITT Electrical Systems in the U.S. and Germany, Mando Starters and Alternators in South Korea, and a stake in Ichikoh in Japan. Another instance is ArvinMeritor's acquisition of Volvo AB's heavy truck axle manufacturing business, making it the primary supplier of heavy-duty axles for Volvo's truck operations. The Metamorphosis While commercial vehicle manufacturers are not in a position to provide volumes, there is the demand for price cuts. Add to that the increasing costs of raw materials and energy prevalent in Europe. Top it with the burden of increased fixed investments and labor, and the component manufacturers have a critical situation on their hands. While the pressure forced some competitors (for instance Pirelli put its truck tire division on sale) to exit the market, others are implementing restructuring measures to endure the current slowdown. A point to note is that tire manufacturers are at the forefront of the action, since tires contribute to over 50 percent of the fast moving components market. Companies like Michelin, Continental, and Goodyear are the largest companies in the aftermarket for fast moving commercial vehicle components in Europe. Another option that suppliers are exercising is shifting their manufacturing base to more cost-effective locations. For instance, Valeo SA plans to close around 12 plants by the end of 2001, including two each in France and the UK. Valeo has already taken up a program to reshape its operations, in particular to shift many labor-intensive operations from Western Europe to Central and Eastern Europe, as part of a broader restructuring effort. As commercial vehicle manufacturers take up standardization of platforms, the potential benefits for component manufacturers are enormous, since it reduces the level of inventory required to be maintained and also reduces the lead-time to respond to just-in-time requirements. Component manufacturers are also adopting the concept of 'platforms'. For instance, Continental has developed a production system, which enables it to manufacture a blank casing which it calls, the tire platform. The casing is shipped to a satellite plant, where the tread, sidewall, and belt packaging are added to distinguish the final tire products. In all, the brunt of the slowdown in the European commercial vehicle market is actually being borne by the component industry. While the aftermarket is not likely to witness any major changes, the OE market will probably see a further narrowing of demand and supply. A possible trend will be partnerships between the Tier 1 and the Tier 2 and 3 suppliers as there will be increasing 'expectations' from the commercial vehicle manufacturers. While the metamorphosis is likely to create a more efficient commercial vehicle component market, it is not likely to end with the slowdown. http://transportation.frost.com is Frost & Sullivan's new innovative and interactive homepage aimed at the global automotive and transportation industries. Bringing together the experience of our team of analysts positioned around the world, transportation.frost.com offers unrivalled market analysis of all sectors of the automotive and transportation industries.