Monday, 22 February 2016

Industry Practice – 'Value Stream' Exploitation – Identifying New Possibilities (Part 4)

Corporate Reconstruction -

It is inevitable that the road to the future, although as yet untravelled, for most people is governed by the patterns of the past.

Herein, automotive history provides basic case studies and so lessons over the last century or so. The innate complexity and impact of designing, manufacturing and selling vehicles means that a very broad spectrum of economic, social, commercial and industrial issues must be understood and expediently deployed to the advantage of the firm.

Depending upon time-frame, context and a company's competitive position, the individual and sometimes coalesced operational functions have demonstrated themselves as able to critically 'add-value' to the enterprise.

To demonstrate, investment-auto-motives expands the core graphic shown thus far, so as to illustrate how auto-producers in the distant and recent past have been both reactive and proactive to their surrounding conditions.

Given their early C20th impact inevitably the American Big Three led the way. Initially seeking production efficiencies on basic vehicles, such internal cost savings providing a reduction in ultimate retail price, so as to create an affordable supply-driven marketplace. Once established, able to exploit any robust national economic agenda provided by stable industrialisation, thereafter a mix of both product innovation and increased availability of consumer credit, together with substantial used car market, would created a virtuous circle throughout the economy across company, consumer, sector and government.

This same model, central to Capitalism, replayed around the globe as the 'American Model' took hold; with specific tailoring to the domestic and export needs of the newly developing country.

Thus to create a robust and thriving post-WW2 economy, from a near 'clean sheet' beginning, the Japanese recognised that the substantial 'value-added' needed to fully prosper would require a newly adopted ever-questioning 'improvement mentality'.

To achieve this Japan's leadership knew it must fully adopt and expand upon the American scientific approach to manufacturing, by plying that same attitude across complete internal systems. Though necessarily starting from the production function, each would be examined and re-examined so as to improve internal efficiencies; primarily across design, engineering, manufacturing, distribution.

Here it must be stated that whilst the 1930s 'Deming Approach' undoubtedly did much to assist Japan as part of its own post-WW2 “great leap”, fact is that previous trade relations with the USA in the 1880s for arms had originally illustrated the importance of production efficiency. And between the 1910s and 1940s its close trade links with Germany had engrained a mindset of Teutonic rationality into the Keiretsu when scaling their own industrialisation plans. Both these US and German influences meant that the post-war industrial reconstruction could be re-made along very efficient lines and operated with very advantageous commercial insights.

In the all too real terms of WW2, Japanese companies en mass, and critically their functional innards, had been wholly de-constructed and far more powerfully reconstructed.

Likewise, the acute advantages of this learning saw a very partial trickle-effect throughout parts of SE Asia as America's hard and soft circles of influence grew ever wider.

South Korean, Malaysia and 'Modern' India were able to quite literally enjoy the fruits of Japans achievements in quality improvement during the early phases of their own auto-industry development. This primarily done so through technology transfer agreements for either specific vehicle systems or more often complete ex-generation vehicles.

S.Korea's original Hyundai Pony originally used powertrain from Mitsubishi (also using components from Ford). Malaysia's original Proton Saga was effectively a badge-engineered Mitsuibishi Lancer/Colt, having been put through a 'tear-down' process for lower cost local manufacture as part of Malaysia's first 'National Car' ambition, creating many elements of the complete value-chain. Whilst India's Maruti 800, the first effort as mobilising some of the masses, was a localised Suzuki Fronte/Alto.

This early-phase ability to effectively sit upon the shoulders of the Japanese giant markedly increased local expectations regards the pace of potential change for their own new indigenous auto-sectors; at least for a time, before realising just how long such as catch-up, if at all possible, would take. Even Proton's deep pocket efforts of subsidising its ownership of Group Lotus for its engineering know-how has failed to maintain local and international product competitiveness, even if the vehicle's themselves could be said to be wholly Malaysian.

Importantly, though starting from scratch and understandably leveraging or purchasing external capabilities, these new auto-nations had not (thankfully) had to undertake the same innately long and painful re-learning process Japan had been forced to from the earliest years of the twentieth century. But it had been a mental and physical deconstruction and reconstruction process which ultimately re-honed and restrengthened the then innately solemn and very focused Japanese character, from Board Room to Apprentice.

Unlike Malaysia's nationalistic grand ambition in Proton, India and S.Korea have trodden more viable paths at different rates.

Having piggy-backed donor vehicles through its history, India well recognised that having previously served the likes of TATA, Hindustan, Mahindra and Premier very well over decades with 'surplus profits', ultimately the disadvantages of a protectionist umbrella would ensure national industrial decline. Eventually it opened its doors to allow industrial partners such as Suzuki far more freedoms, thereby able to create its 'Small Car Hub' for export growth and as importantly able to properly evaluate best-in-class engineering solutions via the 'tear-down' of the Toyotas, Hondas, Fords, Chevrolets, Renaults, FIATs etc it allows (in a still acutely managed manner) into the country through reduced tariffs and local assembly incentives. Thus Indian producers continue to learn by standing on the shoulders of others, with the hope of much increased reach to global markets.

Hyundai Motor of S.Korea recognised the immensity and indeed folly of trying to create a wholly indigenous 'auto-nation', at the cost of export potential, before India. However, it took a different route. Even though its chaebol stretches across an integrated vertical and diagonal value chain, to both keep apace of quickly changing best-practice technical developments of the Triad supplier-base, and to create the strength of a worldwide corporate foot-print, it was recognised that the Hyundai should not try to be omnipresent. Instead Hyundai Motor effected a strategy with good timing. S.Korea was for many years effectively a 'National Cars' state with Hyundai, Kia and Samsung brands protected from imports, but with the relative luxury of both quietly improving its mechanical quality by gaining engineering input from its slowly increased foreign footprint. So although still much criticised for its innately 'heavy' and diverse corporate structure and the firm grasp of family ownership, Hyundai Motor has succeeded on the global stage through both a slow and steady approach to quality improvement and equally critically the ability to exploit S.Korea's technical lead in micro-electronics during an era when the ability to cheaply integrate electronic content became vital to a burgeoning VM's business model.

Quite obviously, as the world's #4 auto-maker today in terms of scale, Hyundai's success, as with Toyota's previously, will now serve as the strategic template for those Chinese and Indian auto-makers that which to enter the global stage. And theoretically increasingly likely to do so in due course thanks to the speed of an IT assisted learning curve.

Presently the need for European, American and Japanese firms is to climb ever higher up the 'value-curve' by leading and so moulding consumer perceptions. Here the realm of already present screen-based 'augmented-reality' and that of dream-scape 'hyper-reality' are now apt to converge as 3D virtual reality etc becomes ever more ingrained into everyday alternative experiences, so promoting both desire for 'the real thing', and extended existence in these alternative realities (the realisation of 'Second Life).

With this in mind regards the influential trends of tomorrow, and question mark about a wide realm of potential outcomes, the following web-log instalment provides case-study examples whereby 'added-value' has been obtained to date in the conventional manner. Illustrations from the various individual functional departments which when combined form the building blocks of the archetype automotive company.

It is well understood that more academically minded theoreticians / observers wish to see a wholesale restructuring of the sector, so as to release internal value for investors. Whereby the low-value functions of auto-players are increasingly disposed of, with central specialisation in the high-value activities of customer services and life-cycle.

On paper and simplistically this makes complete sense for the investment community. It would require continued progression of historic precedence, thus arriving at an ever shortened “vertical model”, and new introduction of greatly increased "horizontal integration" amongst the supply base. Thereby seeing today's auto-players effectively become Auto-Brand companies who in turn brief, commission and buy-in their products from a set of 0.5 Tier Integrators who themselves purchase from various horizontally organised and consolidated systems suppliers.

However, such monumental change necessitates a willingness to forego control over critical critical 'core competences'.

This highly unlikely given the origins of auto-companies (in which all-round competence became key to success), the desire fore 'destinational control', and the still massive future potential for global mobility span and depth.

Hence investment-auto-motives call to “deconstruct to reconstruct” current internal mindsets and processes.

This journey starts at the notional “front end” of the process, initially relating to the marketplace and customer. Then passing through individual functions that sit 'behind the scenes'. Returning to the marketplace by way of the “back-end”. However, it should be noted that the beginning of the activity chain and end of the chain are closely linked, and set to be more so as firms increasingly engage in consumer orientated services.

The following provides a guide to the past and present, and the obvious ways in which 'added-value' was captured.

Auto companies themselves must now envisage just how today's increasingly connected, artificially intelligent and immersive IT could create next phase industrial transformations.