Auto Suppliers Aligning Business, IT Initiatives in Bid to Survive

This just in: The U.S. auto industry has seen better days. Uninspired new models, skyrocketing employee and retiree health care costs, and an overreliance on trucks and sport utility vehicles have pole-axed General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler unit.

In the first nine months of 2005, GM lost $3.8 billion, while Japanese rivals Toyota Motor Corp. and Honda Motor Co. watched market shares rise 5.6% and 6.4%, respectively. Gartner Inc. analyst Martin Piszczalski says one result of the U.S. auto giants' woes is a "stampede [by domestic auto parts manufacturers] toward the Korean and Japanese automakers. But getting a foot in the door there can take years."

Focus On: Auto Parts Manufacturing
Top business challenge: To survive as a supplier to one of the Big Three automakers, which are consolidating.
Solution: To leverage company expertise to diversify into stronger industries.
How IT can help: By implementing product lifecycle management and other systems and by ensuring that the computing infrastructure supports expansion into new industries.

These desultory numbers have midmarket automotive parts manufacturers scrambling to lessen their dependence on domestic automakers. It's a sucker's game to curry favor with a trading partner that is penny-pinching and shrinking. And needless to say, it doesn't give IT much to chew on. "Midmarket automotive companies generally see less than 1% of sales revenue committed to IT," says AMR Research analyst Kevin Mixer. "And since they're often providing components that are commoditized, it's a tough place to be, as revenue generated continues to decline." So what's a midmarket enterprise in the auto industry to do?

"We are diversifying as fast as humanly possible," says Mike Malone, IT director at Cascade Engineering Inc. Ten years ago, the $300-million Grand Rapids, Mich., plastics company derived more than 90% of its revenue from the automotive original equipment manufacturers (OEMs), supplying interior trim pieces, dashboard mats and other parts. Now Malone expresses frustration with the industry. "The OEMs won't give you a price increase for anything," he says. Meanwhile, Cascade has seen big price hikes in the foam and natural gas the company uses. "We're going out of business if we keep going down that path," Malone says. The company has leveraged its plastics expertise and now manufactures components for TV antennas, industrial flooring, waste containers and high-end chair backs.

Modine Manufacturing Co. is also rapidly diversifying. "We're in a state of change," says Butch Harper, CIO at the $1.5-billion Racine, Wis., company, which focuses on thermal management in applications such as auto radiators. Modine has never been a pure auto supplier, but after earnings flattened out in the mid-1990s, the company accelerated its diversification; today, only a third of revenues come from its automotive division, with the rest divided among the heavy equipment, heating/ventilation/air-conditioning (HVAC), electronics and fuel-cell markets. For years, Modine has been a player in heavy equipment and HVAC, but it's gotten into electronics and fuel cells only in the past five years.

With all this diversification, a key challenge for CIOs is anticipating forays into unfamiliar markets and ensuring that the company's technology can keep up. But even a logical expansion into a closely related industry presents new challenges. Cascade recently entered what Malone calls a "big-truck venture" (by expanding into huge haulers rather than mass-produced pickup trucks). For the first time, the company is responsible for a process known as color sequencing, which ensures that parts arriving downstream on an assembly line properly match vehicles. For example, when a truck with a green cab arrives at point X on the line, a signal is sent to the warehouse. A pair of matching green fenders is sent to point Z on the assembly line just in time for assembly.

In auto manufacturing, color sequencing is extremely complex. "The signaling is a little easier in the truck arena," Malone admits, which has fewer options. Nevertheless, it's new to Cascade, and "IT is the group responsible for making sure our business systems can handle it."

This was first published in February 2006

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