Press

The only uncertainties in today’s global economy are how fast and to what extent globalization will continue. And those uncertainties become clearer every day.

Last month Ford Motor Co. sold luxury-vehicle icons Jaguar and Land Rover to India-based auto manufacturer Tata Motors Ltd. Manufacturing of the two nameplates, at least for now, will remain in Britain, and Ford will continue to supply engines, transmissions and other components for up to nine years.

Volvo Trucks reported January deliveries increased in all regions except North America, which had a year-over-year decline of 15%. Conversely, Volvo said deliveries grew in Asia by 47%, Europe by 32% and South America by 23%.

Navistar International Corp. recently entered into a joint-venture agreement with Mahindra & Mahindra Ltd. to produce diesel engines for medium- and heavy-duty commercial trucks and buses in India. The engines produced by the company formed in the new joint venture – Mahindra International Engines Ltd. – will power vehicles produced under a 2005 joint venture between the two companies. The announcement went on to say that, “Engine components will be sourced locally…due to the strong availability of quality parts and materials from Indian suppliers.”

“The global economy is changing rapidly,” said Deepak Kapur, president of the truck group for Navistar International at this year’s Heavy Duty Dialogue. “It’s important for our industry and our country to be on a level playing field. As expectations grow in developing countries, so do opportunities for global partnerships.”

The economic downturn in the U.S. means that truck and component manufacturers must spread their assets and risks throughout global markets, keeping an international portfolio to remain profitable. Companies can better weather domestic downturns when business overseas is profitable, smoothing out the industry’s economic cycles.

Domestic Demand, International Supply
Developing low-cost countries like China and India have long been places for manufacturers to source materials and generate products at great savings. These countries also are becoming competitors with the domestic supply chain, as some manufacturers based in these countries export directly to North American distributors and other customers. And in the aftermarket where some distributors look for any available perceived bargain and pennies on the dollar can make or break a sale, some suppliers are left in a cost-benefit dilemma.

“If you accept the fact that cost levels are being driven down by offshore competition, you have to do one of two things,” says Tim Kraus, president and chief operating officer, Heavy Duty Manufacturers Association. “You either have to reduce your overall operating costs by cutting down on training and other extraneous expenses, hoping that your business holds up, even if you’re selling at a lower price. Or, you continue all of those programs and still provide strong support, but to fund that, you go into a lower cost country to produce a product and make it work.”

Growing roots in international soil also can mean establishing production for use in that local market.

“If you consider China, for example, Dongfeng and First Auto Works (FAW) are two of the top five commercial vehicle manufacturers in the world,” says Kraus. “If a company wants that market, it really cannot manufacture stuff here, put it in a container and ship it over there and complete that process effectively.

“If a market is large enough, it might warrant putting brick and mortar manufacturing equipment in the area. That’s being done by the component manufacturers and in some cases, the vehicle manufacturers,” Kraus continues.

China, for instance, is investing heavily in its infrastructure. This creates demand for construction machinery and trucks, and results in a more usable network of roads for passenger cars and on-highway delivery vehicles. It’s simply too big a market for many manufacturers to ignore, especially with a weakened U.S. economy to contend with.

Dr. Thomas P.M. Barnett, author and forecaster of global conflict, spoke at Heavy Duty Aftermarket Week in January. He predicts that by 2020, China will have the equivalent of the U.S.’s interstate system. It’s a fertile prospect for suppliers and manufacturers and it’s often more efficient and affordable to put factories near the customers. Getting into a developing country on the ground floor can be pay dirt for a manufacturer.

Another strategy is producing products in a low cost country and then bringing them into the U.S. under their brand names. These companies have done research that shows that as long as they back their respected brand with product quality and customer support, the country of production is largely negligible.

“Globalization is much more than just cheap Chinese imports. Low cost countries can and do produce a quality product,” says Don Reimondo, senior vice president, customer relationship management, Affinia Group. “The parts business is global. The old paradigm was that ‘made in America’ mattered. In the new paradigm, country of origin doesn’t matter. Quality parts can come from anywhere.”

Delicate Balances
Now that manufacturers have expanded their global footprint, the needs of the North American market have to be balanced against the needs of foreign markets. For some manufacturers, this means making hard decisions about their product portfolios. Manufacturers want to optimize research and development, testing, tooling and product support by having components fit the needs of as many applications and markets as possible. On the plus side, this means product innovations can be shared worldwide. On the down side, product offerings may be slimmed down resulting in fewer customer choices.

“Globalization increases the vehicle applications engineering work,” says Kurt Burmeister, general sales manager, North American Field Operations, Commercial Vehicle Systems, ArvinMeritor, Inc. “As a supplier, we still must fine-tune the specifications for the local market. While we might try to take one product to serve multiple markets, the truth is that depending on duty cycle, terrain and operating conditions, the vehicles’ specs can and do change.”

“The many options that customers have felt they needed has created a challenge for all the OEMs in keeping those parts available,” says Chris Gossler, national parts sales director, Mack and Volvo Trucks. “Less deviation for manufacturers gives us a better opportunity to have all those parts available.”

“And also, it offers a synergistic benefit for us,” adds Todd Shelton, director, parts marketing, Mack and Volvo Trucks. “Rather than trying to stock so many different product lines and part numbers, anywhere we can accomplish some streamlining, it’s a good thing.”

Customer-driven specing of trucks is a largely North American occurrence. In Asia and Europe, customers are given fewer choices. The prevailing wisdom is that the engineers know better than the customers; they design trucks with certain components that they believe will give an end-user the lowest cost per mile and best return on their investment.

“You have to consider the overall, higher-level issue of North American OEMs and their acceptance of specifications – even pull-through marketing efforts by major drivetrain and braking system suppliers – versus the European/Asian OEMs who are basically vertically integrated with virtually no specifications by the end user,” says Burmeister. “ArvinMeritor continues, in North America, to target standard specifications at an OEM, plus pull-through specifications. Often, we convince a fleet to look at one of our more favorable OEM partners in order to equip them with Meritor components.”

“It’s very much a pull-through market here,” says Kraus. “The truck fleets are the ones who have to deal with the geography and topography in this country and the various vocations of the trucks. The maintenance directors spend an enormous amount of time looking at their businesses to understand what’s required of their vehicles and what’s going to cost them the least amount of downtime. That’s how they make their decisions.”

U.S. OEMs may look at the deproliferation of parts as a cost-saving necessity, but the reality, at least for now, is that it can cost an OEM much more to lose a valued fleet customer to a competitor because it can’t manufacture a truck to the desired specs.

Among the upsides of globalization is the cost savings gained from less research and development expenses. Technology such as selective catalytic reduction (SCR) and air disc brakes have been commonplace in Europe for years.

“Globalization benefits our customers in that with today’s technological and regulatory hurdles, it gives us an opportunity to offer proven technology to our market rather than developing everything in one location and having all the risk placed in that one country,” says Shelton.

Making Commitments
Some predict that globalization could bring about stronger business relationships between manufacturers and distributors and repairers. A manufacturer will hesitate to invest in a customer’s training, product literature and other supporting resources if it thinks that particular customer will not make a reciprocal commitment and throw loyalty by the wayside on their next purchase.

This has led some manufacturers and suppliers to withhold training and other resources until they form an agreement with their distribution sources that they will stock and sell that manufacturer’s parts, often exclusively.

“There are certain manufacturers now who are on record as saying that unless you are a full-line distributor of our product line and you don’t carry competing brands, we are not going to provide you with training and installation information for free,” says Kraus. “They’re looking for a partnership.”

Distributors that are not willing to enter into such an exclusive relationship, may take the option of going global themselves and evaluate their own offshore sourcing. It is a phenomenon often called disorigination.

“Disorigination is derived from the 1990’s Internet term ‘disintermediate,’ meaning to take steps out of the middle of the supply chain,” says Reimondo. “WDs can go around the traditional originator of the product, the manufacturer, and purchase it directly from a low cost country source. In the disorigination model, the WD must assume some of the services traditionally provided by the supplier.”

Moving toward disorigination can increase profit margins for a distributor, but they must also assume additional liability for the function and servicing of that part. Traditionally, suppliers have provided services like product management and cataloging. If a distributor circumvents a manufacturer, it must be ready to take on these tasks. If a distributor also assumes the role of importer, it can be held liable if a product fails. These additional costs associated with importing quickly can erase profits if a distributor hasn’t done his due diligence.

For both manufacturers and distributors, there are risks and rewards when branching into the global market. But there is no turning back now. Business as usual will be challenged constantly through more vertical integration, parts deproliferation and an OEM push to gain more captive work, such as is the case with diesel engines. These changes may be accompanied by growing pains, but in the end, globalization and emerging markets could stimulate industry growth at home and add stability.

“The global economy has never been bigger, stronger or faster growing than it is today,” said Barnett. And that should be exciting news for North American manufacturers and distributors alike. The heavy-duty aftermarket always has been adaptable. Keeping abreast of the global changes affecting manufacturers will help aftermarket companies stay competitive.

“The world is getting smaller and companies are not contained by a lot of things that constrained them in the past,” says Kraus. “Remember that one man’s obstacles are another’s opportunities.”