There was little holiday cheer in Detroit this year as US manufacturers announced significant layoffs in response to intensifying competition. As I discussed in an earlier posting, the most depressing aspect of this drama (or, more appropriately, tragedy) is that the US manufacturers show limited understanding of the real obstacles to competitive success in a globalizing economy. These companies have made some improvements, but they have been unable to break out of continuing pressure on market share and market capitalization performance.
The McKinsey Global Institute has just published an in-depth report on "Increasing Global Competition and Labor Productivity: Lessons from the US Automotive Industry"(Executive Summary pdf). Although the report only covers trends in the auto industry up to 2002, it yields some interesting insight into the drivers of competitive performance. In particular, it highlights the role of process innovation in driving labor productivity in the US auto industry. It turns out, on this dimension, US auto manufacturers have done quite well, at least relative to the rest of US business and even relative to "transplants" - non-US auto companies with US manufacturing operations. Over the period 1987-2002, labor productivity for US auto companies grew more than 50% faster than the rest of the non-farm business sector in the US.
This productivity growth stemmed from a number of factors, but the most significant one by far was process innovation – specifically, the adoption and deployment of lean manufacturing techniques pioneered by Japanese car companies. The report is clear that process innovation alone is not sufficient – capability building is the key to significant productivity improvement:
. . . we show that far more important to overall sector productivity than the innovations themselves are companies’ capabilities in rolling out process innovations company wide and product innovations into the market. It is the widespread diffusion of innovations that drives significant improvements in industry productivity rather than innovation itself.
US auto companies differed significantly in their pace of capability building, in part shaped by their perception of threat:
The weaker the company’s financial position at the outset, the more keenly it felt the competitive threat, and the faster and more comprehensive its response. Ford’s serious financial troubles after the 1981-82 recession had prompted it to focus on lean production before 1987, while the more financially comfortable GM did not see the need for process transformation until 1992, when the Gulf War recession hit its performance.
One problem with the MGI report is that it tends to focus on process innovations within the enterprise rather than across enterprises, especially in the supplier networks. It is in this area that US auto companies still fall very short relative to their Japanese competitors.
This challenge was particularly highlighted in an article on “Building Deep Supplier Relationships” (purchase required) by Jeffrey Liker and Thomas Choi in the December 2004 issue of Harvard Business Review. The authors draw a compelling contrast between the way US auto manufacturers continue to treat their suppliers with the way Toyota and Honda build long-term supplier relationships. These Japanese manufacturers have successfully transported this approach to relationship building to their US manufacturing plants dealing with US suppliers, refuting the view that differences in these relationships are culturally determined.
In short, US auto manufacturers continue to squeeze their suppliers for short-term cost-savings, generating an adversarial relationship that effectively precludes mutual understanding, collaborative innovation and shared learning. In contrast, Toyota and Honda take a long-term perspective on relationship building, emphasizing the opportunity for all parties to get better faster by working together:
To be successful, an extended lean enterprise must have leadership from the manufacturer, partnerships between the manufacturer and suppliers, a culture of continuous improvement, and joint learning among the companies in the supplier network. That’s what Toyota and Honda are ultimately trying to achieve through their remade-in-America keiretsu.
US auto manufacturers still have a lot to learn from the Japanese in managing supply networks, but that alone is not sufficient. These companies should be striving to achieve competitive advantage, not just struggling to reach competitive parity. So, what else can they do?
They could start by exploring more radical ways to restructure their firms. An interesting article in Forbes on “The Fabless Car Company” (purchase required) suggests one option:
. . . another idea gaining speed would transform the industry more radically: give smaller contract manufacturers responsibility to build entire vehicles, like the Solstice. The big automakers, under this model, would do less automaking and more designing, engineering and marketing.
To some extent, this process has already been playing out within the auto industry as car manufacturers have handed off more and more of the sub-system manufacturing and assembly operations to their suppliers. But take this to its extreme: shed all manufacturing. To use the terms of my broader perspective on unbundling the enterprise, get rid of the infrastructure management business.
This alone would not do the job, but it would force US auto executives to focus more tightly on potential sources of competitive advantage in design and marketing. Once they do this, they might look to China and the evolution of its motorcycle industry for inspiration on how to organize broad networks of specialized suppliers to quickly come up with innovative product designs. Chinese motorcycle assemblers are rapidly taking global share from Japanese motorcycle companies. It is only a matter of time before these design process networks begin to emerge in the automotive industry.
Look, I know this is a stretch, but what’s the alternative? Death by a thousand cuts? A desperate race to achieve competitive parity - made difficult, if not impossible, by a significant wage and benefits disadvantage? Maybe it is time to break the mold and come up with a new wave of process innovations that go well beyond the boundaries of a single enterprise.