The Detroit-based Original Equipment Suppliers Association (OESA) champions the business interests of over 500 member organisations. Since 1998, the association is committed to addressing issues of common concern throughout the supply chain, and advocating on behalf of the automotive supplier community. It has been fostering collaboration throughout the supply chain and help members make critical business decisions. Through industry events, peer group councils, research and analysis, OESA provides relevant, timely and unique information and resources to and for the automotive supplier industry. Charles Chesbrough, Executive Director, Strategy, Research, and Senior Economist, OESA, interacted with T Murrali of AutoParts Asia on diverse issues like skilled manpower, technological innovation, autonomous vehicles, challenges in the aftermarket, and OEM-vendor collaboration. The excerpts:
Q: What are the current issues OESA has to deal with?
A: These days OEs are looking at suppliers to give them a competitive advantage. With new technologies coming in, innovation is really happening among the suppliers. The biggest challenge that suppliers face today is how they will continue to innovate and produce new solutions for OEs while keeping expenses down. As an industry we are facing a strong challenge of not having enough skilled workers even at production lines – engineers, technicians, and software people – anything that calls for technical expertise.
Q: In India, there is nothing exciting for the young engineers to get into manufacturing; they just go into software. What is the issue here in the US?
A: The automotive industry in Detroit was like an old dinosaur and all the new exciting stuff was happening in California, Chicago and not in Detroit. This is now changing, however the industry has not been very successful in communicating to the younger people the innovations it has made. For example, some of GE’s recent advertising on television is to promote what it is doing, to attract talent, and is not focused on selling products. Finding talent has been a great challenge in many industries.
Q: How do your members attract talent?
A: There are more training programmes and visits to the Universities to attract young engineers here as a career option but I wouldn’t say there are any coordinated efforts as yet. These are all relatively new for the automotive industry. Making cars has been done pretty much the same way since Henry Ford’s assembly line. Now, all of a sudden, we have all these new technologies coming in. Youngsters want different things now – flexible timings, work from home – but the industry hadn’t operated that way, so they have to do a little more work to come on track.
Q: Today’s customers define value that a vehicle offers more than performance and price. How is it going to influence the industry?
A: One of the movers in the market over the last few years has been people wanting new technology. Even in the used car market some customers are not willing to consider vehicles made before 2008-09. If there is no socket in the car to plug in your iphone or it doesn’t have blue tooth connectivity, it is a deal breaker. Very soon even for the aftermarket, if the vehicle does not integrate with hands-free capability on the cell phone, buyers will not be interested. Five years from now minimum new technology requirements must be available with the vehicle for consumers to consider a sale.
Q: The shift is happening from driving to commuting with autonomous cars coming in. How are the suppliers taking it?
A: I think the OEs are really looking into it. Every OE that I know of has some sort of a team looking into autonomous vehicles. Ford is no more a vehicle manufacturer, it is a mobility provider – they have changed their mantra. OEs have been told that autonomous will be prevalent by 2030. But nobody really knows what path to take as it is a new territory for everyone. It is not only the vehicle but the business model around it. Will the industry change from ownership to membership as the cost per mile will be very expensive? Households here have two to three cars, but may decide to reduce to one vehicle and take advantage of the services provided by Uber and Ola; then the auto population would fall dramatically.
Q: Will that not affect the supplier community?
A: It will certainly affect them in terms of the volumes of vehicles made but it is too soon to know whether it will be the death of the industry or a different opportunity. For example, taxi service providers would drive two-to-three hundred thousand miles a year compared to car owners driving about 12,000 to 15,000 miles a year. The scrapage rates are going to be higher.
Q: Wouldn’t that spur the activities of the aftermarket in a big way as replenishment of parts and consumables would increase.
A: Yes, and the aftermarket may become much more about seats, as we are essentially moving living rooms.
Q: A new breed of suppliers is coming in like Apple and Google. How do you see the supplier industry evolving with electronics and other non-automotive players getting into it?
A: It is definitely more complementary. I do not see it as a danger to the industry. It may be that they become Tier-2 suppliers to the Tier-1s. For example, somebody may make a chip that would go into another maker’s electric seat. It all comes down to technology and innovation, and how the suppliers can leverage that to their advantage and make their products more valuable to the customers.
Q: If Google becomes an OE for cars, how would OESA deal with them?
A: Probably not very differently; the same way as we would deal with any OE. But my sense is that we are not going to see Google make a commercial vehicle to compete with Ford or GM. I feel they might only fill a specific niche in the market.
Q: How is the employability rate going in the US market, from the suppliers’ point of view? Some industry experts say it is deteriorating in the emerging markets as the graduates passing out are not employable.
A: I think it is more an issue of quantity than quality; there are not enough graduates to be employed. Most engineering schools today teach students to use all their software programmes so when they come out they are familiar with CAD and other tools. There are other industries also looking for trained people, as technical skills are in demand, so automotive is bound to feel the crunch.
Q: In the developed markets like the US, people from OEMs go to component makers. It is considered a good move as it helps develop customised solutions for vehicle manufacturers. Is this trend still in the US?
A: I have heard suppliers complain that OEs sometimes poach their engineers and vice versa; in a short labour market everybody is stealing from somebody.
Q: What can be done to make labour laws more pragmatic so that more people get attracted to this industry?
A: Of course, higher wages will always get you more applicants. If you offer good money, people will come. Companies now offer signed bonuses, extra vacation time and other incentives. There is still difficulty in getting skilled labour.
Hourly employees are generally not the most reliable; they have a high turnover rate – there is no loyalty to stay. Employers are in a difficultsituation of whether to raise wages or not.
Q: When it comes to intellectual property that is assessed in terms of filing patents. The German suppliers are leading in the automotive space, though the US is the largest market for vehicles. Why is that so?
A: I cannot specifically speak on patent applications. I do not have the numbers. German suppliers have historically done more than Americans but I do not know if that is still the case.
Q: What, according to you, can drive innovation which is only sustainable in long-run?
A: My brother, a famous economist, has coined the term ‘Open Innovation’ which is that instead of keeping your innovation secretive you can sometimes accomplish more by making it open. For example, Microsoft kept their code very secretive without sharing with anybody while Apple was more open and allowed developers to create Apps, so when the iphone came out there was a whole bunch of people creating Apps for this technology. Of course patent control will be an issue that you will have to take into account. What is really going to drive innovation is that the suppliers should know what OEs and consumers are really looking for; this would challenge their creativity. This will come into play as young people today are buying less number of vehicles than the older generation. With people preferring to commute rather than drive, it calls for a new way of thinking from the auto industry. Owning a vehicle today is much more expensive than what it was earlier; a driving licence costs over a thousand dollars since you must be insured.
Q: What are the challenges your members face in marketing in the aftermarket?
A: OESA is with the original equipment suppliers but we do have an association for the aftermarket. We do face similar issues here. How do I make a used vehicle have all the modern technology in terms of driving assist features?
Q: In the old days the OE designed something and pushed it down to the supplier. Is that changing now, with suppliers working more closely and collaborating more with OEs?
A: Yes, with models being refreshed often. OEs look now to suppliers to push them with their technologies; they try to figure out solutions together.
Q: How is the relationship between OEMs and vendors here? Is it still transactional or is it moving towards the collaborative?
A: I think it is still a little bit antagonistic; they are still butting heads unlike the Japanese partnership between OEMs and suppliers. Part of it is the aftermath of the 2009 downturn.
Many suppliers were on the edge of bankruptcy and they looked to the OEs to support them while OEs needed suppliers to stay in business – we were all in the same boat together. Now, with good times and strong selling rates, there is a little more pressure on suppliers from OEs to cut costs and take accountability for all the recalls and warranty claims being made. The pressure goes down right from Tier-1s to Tier-3s. Of course there is never a clear-cut picture of who is responsible for what.
Q: Do you think the trend towards directed buys and co-managed buys is going up or is it stable?
A: It depends on the OE. I have heard that some manufacturers are a little heavier on that than others. But I do not think there is an industry trend in that direction.
Q: Tell us about the OESA membership, how many companies are members?
A: We have about 400 members that are actual suppliers who make or contribute to a component that goes on a vehicle. Also, we have 80 or so who are affiliate members like law firms that support the automotive industry, together with information and service providers. In total we have around 500 members.
Q: How many non-members are there, like those who supply to OEMs but are not members of OESA?
A: There are thousands of suppliers; we have only a portion of them. Of the large suppliers, more than 90 percent are members.
Q: Are all your members Tier-1s?
A: No, we have lower tiers as well; Tier-2s and Tier-3s that include die makers and stampers – we do have a variety.
Q: Is there a drive from OESA to get more members?
A: We are always looking out to get more members but there is no driveas such to increase membership. We do lose members every year, partly because of mergers and acquisitions. In general, the activities that we offer our members attract suppliers. We hold about 80 events every year that include buyer-seller meets (we call it Town Hall) for relationship building. The advantage for suppliers is that the OEs will bring their purchasing teams to interact with them.
We also hold special events that are country-specific so that the supplier gets to know everything about foreign trade laws, legal requirements, etc.
We have events on specific topics like cyber security and new technologies. In addition to these we have our regular councils that meet every quarter; we have a CEO council, a CFO council, a purchasing manager’s council, information officers’ council, etc. which include the functional heads as well as external speakers who discuss and share information on the concerned issues and how to address them.
We have 14 different councils that meet on a quarterly basis. We have found that if we can get our members to participate in these councils, they never leave.
Q: The letter from OESA President Julie A Fream says the global market place is a key driver in the new automotive landscape with exceptional growth opportunities; to be a relevant resource on advanced vehicle technology. What does it mean for suppliers and how will they take it forward?
A: The suppliers themselves innovate and bring in technical expertise that the OEs don’t have. This gives them the opportunity to be at the cutting edge of technology. We are focused on the North American supply base where a large number of our members have their business. Of course, this doesn’t mean that they are not global. The other thing we do is to represent the suppliers in Washington DC to keep track of the regulations that come down the line, for example, fuel emission standards. We help to coordinate legislation on all the new technologies coming in, keeping the Congressmen briefed on the activities in the industry.
Q: NAFTA-TPP has come up so many times. What is OESA’s position on those treaties?
A: The official position is that we support fair and free trade and are looking forward to working with the new administration to achieve this.
Q: So OESA thinks it may not happen soon?
A: We have not taken a formal position but some changes to NAFTA are likely. Regarding TPP, this seems unlikely to move forward under the new administration and one-on-one trade agreements will be the direction taken. The US will have to develop economic relationships with countries around China.
Q: Has OESA given any consideration to the insurance and liability concerns for autonomous cars?
A: Well, it is certainly a hot topic as to where the liability would lie. We have not formed a position on it as yet. One of the issues here is that our members who are component makers want it passed but those who are tool & die makers and stampers really do not care. As an industry, I think liability is starting to lean towards the OE itself. In an autonomous car how do you set responsibility on the driver if the auto-pilot is on; that is one of the big issues the industry is going to face. One mitigating factor will be that as we get into more autonomous vehicles and connected cars the number of accidents would diminish significantly, which mean that insurance costs will be much lower than it is today.