(Six Trends Impacting Commercial Vehicle Suppliers) If you ask anyone at the “water cooler” of the automotive industry about the future, they will probably recite these top two trends right away: autonomous driving vehicles and advanced manufacturing (a.k.a. Industry 4.0). The experts will possibly add three more changes to take effect in the next 15 to 20 years: electrification of vehicles, connectivity and advanced materials. These five trends are driven by global tendencies, but mainly macro economic ones, such as slowing growth, environmental distress (creating stricter rules), demographic shifts and growing urbanization. While it’s reassuring that everyone shares a similar vision, it’s not exactly clear how these changes are going to impact vehicle OEMs and their auto parts suppliers. More specifically, how they will change the commercial vehicle (CV) manufacturers and their suppliers. And the reason why we should think about the CV industry first, is the high probability that the next autonomous car might be a truck. Trucks have very compelling reasons to receive autonomous driving capabilities before passenger cars do, especially long-haul trucks in US and Europe. The economic benefits of ALHTs (autonomous long-haul trucks) are undisputable: fuel economy, safety, emissions, delivery efficiencies, tackling driver shortage and so on. On top of economic reasons, closed-loop transportation systems will be first to market, since they are easier to maintain control, versus passenger cars. Trucks already have a semi-open architecture for power and drive train systems, using a network of electronic control units (ECUs) over standard data-links. Many of the ALHT’s enabling technologies are in place today and new ones are being tested as we speak. The sensor arrays and number of ECUs continue to grow. Suppliers such as Knorr-Bremse and Wabco offer full stability control systems, lane departure and radar-based anti-collision systems, to mention a few. Trucks were the first adopters of telematics back in the 90’s, becoming a showcase for Qualcomm and for how connectivity can improve overall transportation efficiency. In fact, major suppliers piggyback on telematics to communicate with their products on the go. Many in the industry believe that we are only one or two design cycles away from having convoys of ALHTs going down some highways in US and Europe, in the next 10 to 15 years. Unlike cars, autonomous driving trucks will not require radical changes to their power/drive train technologies to get there. The changes are likely to be less than revolutionary. The modern diesel engine and transmission, for example, are fully capable and very likely to power the ALHTs with some enhancements. Diesel fuel will continue to be cheap for the foreseeable future, even though we might see some electrification as hybrid and power storage technologies develop. So change is coming for the trucking industry and so far all we hear is discussion about product and manufacturing hardware technologies. And although these technologies are important and disruptive, the central question for suppliers is how will these changes impact their business in the next 10 to 15 years. Or how can an existing supplier capitalize on these trends? Based on my observations, I believe there are at least six specific areas that CV suppliers must look at, in order to succeed in a changing CV industry: (1) move up in the supply-chain (tier 0.5 supplier), (2) increase lean and agility, (3) glocalization, (4) new service business model, (5) analytics capability and (6) the millennial generation. Become a Tier 0.5 Supplier Commercial Vehicle OEMs are pressured to meet both the growing need for automation features and cost reductions for competitive and regulatory purposes. The cost of non-compliance is growing bigger every day (remember the recent debacles around International Trucks and VW diesel cars). OEMs are adding new models and features while reducing the number of vehicle architectures and suppliers. This complexity will inevitably influence ALHT’s architecture to become more modular, through more subsystems (modules) designed with interfaces that form similar structures, from which a number of derivative vehicles can be developed, while preserving the identity of each OEM. While OEMs will continue to be the system integrators, Tier 0.5 suppliers will be a step ahead of the Tier Ones in the supply chain, working in close cooperation with OEMs and component suppliers, offering modules with common interfaces and technologies that are aligned with ALHT’s architecture. The design characteristics of the best modules will include simpler interfaces to the truck, energy conservation capabilities, remanufacture ability, data-gathering intelligence, network connectivity, above average reliability and competitive cost. It will take smart and integrative design by the supplier, beyond and above the addition of more ECUs to the product. A module will be more than today’s conventional subsystem assembly, where labor is the main value added to isolated components. Take for example the rear drive axle assembly; composed of an axle, brakes, wheel ends with tires and ABS/EBS controls. Today, these components are sourced separately from different suppliers, by most OEMs, with little integration amongst them. This is the result of an evolutionary design and sourcing mindset created by a multitude of unique interfaces and functionalities, in the absence of modular system architectures for trucks. When you boil down the functionality for this subsystem, the rear end is primarily trying to manage torque between the vehicle and the asphalt, in the most efficient way possible. As the ALHT architecture evolves, it is not difficult to envision that all of these mechanical and electronic components could be optimized to provide higher levels of performance. Smart tires and axle differentials, for example, could share the intelligence embedded in the ABS/EBS controls. Mechanical integration between axle, brake and wheel-end using new materials, could save a lot of weight and cost. Tire pressures could be controlled to optimize tire wear in conjunction with traction and torque control. The rear end module should be capable of adjusting its torque characteristics on the fly, based on road conditions and duty-cycles. It should also be able to ask for help when it senses a problem and requires service, based on usage patterns and prognostics. The possibilities are endless, but I know many people will bring up the commercial barriers for suppliers, to climb up to tier 0.5. And that is true, until the new architecture emerges and the interfaces are better defined for each functional vehicle element. The best example we can relate to is the personal computer. Once the architecture became stable and the interfaces well defined, a whole new industry emerged. Some component suppliers were able to climb up the ladder and evolve into complete subsystem providers, while others were acquired or disappeared altogether in the process. Who is going to be best positioned to supply high-value modules under the new architecture, remains to be seen. There is also the question about how vertically integrated truck OEMs will deal with this change. Are they going to collaborate more with suppliers or are they going to try to become modular suppliers themselves to other OEMs? Would someone like a Google or a Tesla become intelligent modules supplier in the future? Some suppliers are better prepared than others. Eaton, for example, had a good start developing and supplying hybrid power packages to bus truck manufacturers. Cummins did the same in the natural gas space, with engines and fuel systems. They eventually became a supplier of fuel and emissions systems to other engine makers. The important thing is to consider this disruptive change in the horizon and start developing your company’s strategic choices and desired position in the new supply chain. Increase Lean and Agility Lean manufacturing has been around for 50 years now. Still, not every manufacturer has transformed itself with lean. Many have not managed to apply it beyond the shop floor. Suppliers will need one or two more gears, in order to cope with squeezing margins, if they want to grow profitably. Becoming leaner, beyond the shop floor, and increasing agility are imperatives to survive and thrive. And to gain agility, suppliers must reduce internal complexity and keep it under control. It means simplifying supply-chains, de-proliferating product portfolios, optimizing sales and distribution practices and streamlining business processes. Getting leaner beyond the shop floor requires a compelling economic benefit, for most suppliers. Most see the power of lean to eliminate waste in manufacturing, but when it comes to other areas, the enthusiasm is not the same. This is why I believe suppliers need 80/20 or “lean on steroids”. As I’ve written before, lean and 80/20 are “sisters” and they need to work in tandem, if you want to cut waste and become more agile at the same time. Lean is primarily an “inside-out” methodology, while 80/20 is an “outside-in” process. 80/20 starts with the customer and the market. Lean starts with a strategic intent or purpose from within the company and eventually becomes a transformation tool, which impacts the way people think and the way the processes work. Combining lean and 80/20 will increase focus, profitability and reduce complexity. It will sharpen your company’s focus on the market’s sweet spot, simplify your offering and drive complexity out of the critical business processes. It will also create a more decentralized and autonomous organization, capable of faster organic growth. Lean and 80/20 will also lead you to a sensible automation approach for your manufacturing processes, for maximum productiveness and lowest cost, and not just automation and connectivity for the sake of staying in tune with the latest buzzword (Industry 4.0?). Let the market demand drive the need for 3D printers and robots in your high volume production lines and not the other way around. Ease of connectivity on the shop floor is happening anyway! But that is the hardware, while lean and 80/20 represent the software. Adopt Glocalization There are no surprises about the global nature of the CV industry and the need for suppliers to support their OEM customers around the world. But there are different approaches to helping your customers globally. Glocalization can be thought of as another buzzword, but it has a role in our industry. Some times, you must offer different versions of the same product for different markets, but you don’t necessarily need to become more complex and proliferate your product lines to do that. You also have to create product availability close to the customer site, but you don’t necessarily have to own all the means of production yourself. To use another jargon, glocalization means that you think globally (product architecture, supply chain, partnerships) and act locally (product features, cost and service needs). A good example of a company that does this very well is Cummins. While the same mid-range engine platforms (ISB and ISC) are used all over the world, the final products get customized in different markets to meet local competitive requirements and service needs. And production is not carried-on directly by Cummins in every region either. In China, for example, Cummins has a joint venture with OEM customers, such as Foton Trucks. Cummins has “glocalized” production in China, in order to produce the ISB four cylinder engines, with different fuel systems and accessories, which are more adequate for local emissions, cost and service practices. In other markets, Cummins uses a combination of its own plants, JVs and licensees to create availability of “glocalized” products. Normally glocalization happens in two fronts: manufacturing footprint and products. But there is more to it, such as localizing design and maintenance of global product platforms for major developing markets. The growing number of technical centers in India and China are good examples. Engineers work in collaborative manner with their peers in US and Europe, to create new designs and tweak existing platforms. The product design, for a high volume emerging market truck component, should ideally be done in the region. OEMs are quickly learning the lesson and turning more often to suppliers in region, capable of true localization, based on global platforms. Think of BharatBenz in India and Foton Trucks in China, as companies that are adopting a glocalized sourcing strategy. Change the Service Business Model The concepts of vehicle uptime and TCO (total cost of ownership or life-cycle cost) will be top priorities for fleet customers, since they can now operate their transportation system 24 hours a day, seven days a week. Nevertheless, the fact that ALHTs are connected all the time to the network creates a major business opportunity for suppliers willing to innovate on their service business model. Customers will continue to demand a seamless purchase experience for parts and service. They will also want to monitor the health of their vehicles online, using predictors to decide when its time to pull the truck for service, and select strategically located service shops to minimize downtime. Loyalty to the channel (OE or independent) and to the brand of the parts on the box will diminish, as customers pay a lot more attention to TCO and uptime. In fact, end users will care less and less if the parts are new or remanufactured, as long as they get the job done from cost and availability angles. There is a major opportunity in remanufacturing of components, in the broader sense. It is not only more economical but it also makes a lot of sense from an environmental standpoint. And the biggest revolution in remanufacturing has to do with the supplier’s expertise in the areas of electronic salvage technology and reverse logistics. Remanufacturing of electronic components will go way up. The ability to reprogram the hardware with new or upgraded code, and delivering the new software via de network, will be huge differentiators. We are now talking about real-time remanufacturing of products, in some cases. But suppliers will have to dedicate engineering resources to developing new salvage techniques for hardware and software, so they can change fewer parts and have better margins. Develop In-house Analytics Capability The key reasons to be good at analytics are two fold: first, customers will demand that your products and services offer predictive capabilities and two, you will want to use the abundance of information to develop market foresight and optimize your product portfolio. Your products will become a node in the ALHT’s data network. Capturing only miles and hours of operation are OK, but not sufficient to create predictors that you can act upon. Usage and duty-cycle data, operating environment information, product health and performance, maintenance interventions and a host of additional data will become available. Being capable of making sense of the data, to predict the future and to make it happen for you and for the customer will be a huge differentiator in the market. Predictive analytics capability will allow you to get closer to customers and derive usage practices that you can apply for multiple purposes. Predictors will help with early problem detection and service prognostics, which is critical for the operation of ALHTs. No one will want a disabling failure to happen without previous warning, when it comes to autonomous driving. The risk is too high. Suppliers will have to learn these new skills, since most of what they have today is warranty information analysis and service diagnostics, which is only capable of telling “what happened” and “why it did happen”. Current analysis is not geared to point to “what will happen” and “how you can make it happen”. Once these new analytical skills are developed, you will be able to use them to improve performance of your own sales and product portfolio. Suppliers will use analytics to continuously optimize offerings, as product mix will vary even more, for different OEMs and regions. The customer pain points and usage patterns will feed right into the supplier’s product plans and service strategies. There will be less guessing and subjectivity. And without active and objective management of the product portfolio to sustain momentum, suppliers will likely suffer from slow growth and sub-optimal contribution margins. Empower the Millennial Generation Last but not least, CV suppliers need to have their experienced leaders focused on developing and empowering the next generation, before it’s too late. An industry that has traditionally thrived on experience and people’s networking abilities must learn to succeed with tech-savvy and connected people, who don’t necessarily want to stay in the same company for all of their lives. Suppliers will have to adjust to the fact that the Gen Y workers are more inclined to be “employed consultants” who want better flexibility and recognition. The good news is that the new generation is a lot more global and in tune with the trends affecting the commercial vehicle industry. They are likely to see the advent of autonomous vehicles as a natural and needed evolution in the entire transportation matrix. They will want to be challenged and recognized, working in focused business units, with clear KPIs, as opposed to the overly functional global matrix organizations. They will be more like the ALHTs themselves, where the network creates the strength and not any specific node in isolation. Surely there are other things that CV suppliers have to worry about in the next 20 years. And you don’t have to be good at all of these areas to be successful either. But some of these can have a perverse effect, if you don’t pay attention to them. Case in point is the arrival of the millennial generation in the work force. Failure to bridge between baby boomers and the millennials can create disruptive shock waves throughout the culture and distract the organization. Other areas such as glocalization, if poorly executed, can create cost and limit growth in a global CV industry. Lack of innovation to your service business model can cost you a lot of money in customer support and reputation.
Other areas like lean 80/20 and analytics are performance differentiators. The suppliers who excel in these attributes will pull ahead of the pack and make more profits. And Tier 0.5 is the ultimate aspiration and a delighter to customers. If you are able to deliver innovation and value that is aligned with the new truck design architecture, you will have an edge. But only a few of the basic areas are attributes to becoming a Tier 0.5 supplier. Other competencies are required and not all of them are present in our industry today.
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AuthorPedro Ferro Archives
August 2016
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