European suppliers seem reluctant to invest heavily in the process of globalization and systems integration.
Many observers fear that in some segments of the supplier business the Europeans may fall behind the much more aggressive Americans.
For its future investments Rieter has the following strategic options: more systems integration, more globalization, or a combination of both.
The least risky approach is geographical expansion. That is, to globalize our existing systems.
The second option is to extend the range of product groups in existing markets.
The most demanding, and therefore riskiest, alternative is simultaneously to move into new locations and broaden the product range.
In the US the interior trim business is largely dominated by huge suppliers, but in Europe most competitors are medium-sized companies, with sales of DM500 million-DM2.5 billion.
Are these medium-sized European groups capable of developing competitive business strategies? The winners will be those companies which have the best strategic approach regarding systems integration and globalization.
How OEMs select suppliers
Most OEMs agree that quality and price are the two crucial elements for selecting a supplier. Systems integration and global presence are still considered less important.
The huge suppliers believe that quality will remain the essential selection criteria. But they also believe that systems integration and global presence will grow in importance - beating price. So their strategy already focuses more on these two issues.
From a European perspective this is a very surprising prediction, but it is essentially about one fact. If there are only a few giant suppliers left worldwide, OEMs will have less power in discussing prices with them because of the reduced competition and because of the more complex systems being sold to them. Whether the OEMs will act this way remains to be seen.
How many systems may be added in such a way that design, engineering and/or assembly costs can be cut even more? In the interior trim sector proposals anticipate that in the future the whole interior will be pre-assembled into an interior capsule, which can then be easily mounted onto the platform.
Another factor is the company's ability to integrate the supplier function fully into the OEM's own design, engineering and manufacturing activities.
A third factor is the ability to provide systems on a global basis. If integration is to be a reality, suppliers and OEMs will be so interdependent that it will only be possible to change suppliers when car designs are renewed.
A fourth factor, cost efficiency, will be one of the most critical. Price and cost efficiency still are at the top of the OEM's agenda.
Financial stability may not rank with these factors at the moment, but it could suddenly emerge as a concern if the present business cycle turns.
These factors suggest that larger companies with sufficient financial strength seem to be better positioned to cope with OEMs' demands and expectations.
Medium-sized companies may conclude they need to team up with other companies to provide missing managerial and technical know-how, and to spread financial risks.
A growth strategy offers the chance to gain more volume per platform, and more content per vehicle. But this also calls for heavier investments, and it reduces the opportunity to spread risks over more models and OEMs.
This increases vulnerability.
Furthermore, the pace of technological change may render existing investments obsolete before they are fully paid for.
Finally, the increasing number of car plants outside the traditional locations raises the cost of transferring the necessary know-how. Medium-sized groups have less room for error in their decision making than larger competitors. They also still need to learn how to integrate their own sub-suppliers into their business systems.
Medium-sized companies often have an edge in innovation and flexibility as well as in developing strong relationships. This can enable them to build a strong systems capability either on their own, or by teaming up with similar groups, perhaps through joint ventures.
Ultimately each supplier has to determine on which tier of the supplier structure there are the most promising business opportunities. No supplier, regardless of size or origin has the resources to offer everything to every OEM.
Some OEMs' purchasing initiatives now include regions and competitors once considered unqualified to supply the automotive industry. Suppliers from Europe and the US now face increasing competition from Asia, Latin America and eastern Europe.
As a result, suppliers have begun to build the capability to operate on a worldwide scale. However, the number of truly global suppliers is still small.
The new investment opportunities are in countries or regions which are more risky. And OEMs are not always prepared to compensate for these additional risks by improved margins.
From a supplier's point of view Asia, excluding Japan, offers excellent long-term prospects. But the Asian car market is still fragmented due to its underdeveloped infrastructure and high import tariffs.
By contrast billions of dollars are earmarked for investment in Latin America. But has the political and economic environment there really changed? North American suppliers seem more advanced in Latin America than the Europeans.
European suppliers have concentrated more on eastern Europe.
Carmakers cannot demand that large investments be made at such new locations without allowing adequate margins. But they will try. It is imperative for suppliers to limit the size of their investments. Wherever possible they prefer to work in joint ventures and with licensees.
It is very risky to operate without local support. In many locations only close local contacts allow an operation to become successful.
The transfer of technical know-how will only succeed if local skills are developed alongside.
I believe that European companies, which already operate in a multicultural environment, have a very good chance to be successful at new locations worldwide.
Those suppliers and OEMs who are already used to working in teams across borders and across functions and technologies will do the best. The team approach must also extend across companies, even if they are competitors.
As suppliers spread their activities across the world and into new systems and product groups, management structures must be adapted. Cultural openness may become a decisive factor in building system integrators on a global base. Flexibility is also critical.
Suppliers who adapt will be the winners. And often this is not a question of size, but of speed.