Automotive Industry and Markets

Medium-sized businesses

Close collaboration in the value creation chain plays a decisive role in the common success of OEMs and suppliers. The greater part of value creation of the end product – some 75 percent – takes place in preliminary and intermediate stages.

Supplier industry and medium-sized companies

Many German companies lay the foundations for a successful growth strategy with a commitment on the ground. A branch or production plant of one’s own abroad affords considerable advantages in opening up new markets, especially as accessing them via exports is often made more difficult by protectionist measures. Because of such restrictions, many companies have also invested in localization. The dynamism of this upheaval is readily apparent from German motor manufacturers’ production figures. Since 2010, they have been producing more vehicles abroad than they do domestically. This year it will be almost ten million cars.

Against this backdrop the consequences of further regulatory measures imposing additional costs in Germany should be weighed very carefully. This must pay particular attention to the fact that – notwithstanding a number of major corporations – the German automotive industry predominantly comprises small and medium-sized enterprises. Many of these companies have long since expanded beyond the German and European market and have become “hidden champions,” world market leaders, on the back of their expertise. Their importance for the industry’s competitiveness should under no circumstances be underestimated. A forward-looking policy boosting Germany’s credentials as an industrial location must aim to strengthen the environment for small and medium-sized industrial enterprises.

Recently, the VDA arranged for the status quo and the challenges facing Germany as an industrial location to be investigated by the consulting company, EY (Ernst and Young). The study has been published as Volume 49 of the VDA series “Materialien zur Automobilindustrie” [“Automotive Industry Materials”].

Additional production capacity in the USA, Mexico, China and other emerging markets will come on stream in the next few years. The motor manufacturers are depending here on support from their Tier 1 suppliers, who can further reinforce their business relationship by expanding global parts supplies.

What for larger suppliers seems almost self-evident is far from normality for their smaller brethren. Because executing such a project often requires a major financial and manpower commitment, which places a considerable strain on available resources. That is why these companies should also investigate whether it makes sense to venture abroad in collaboration with other companies. Without an international posture, smaller companies as well will be unable to sustain their competitive position. Even in the upstream links of the value chain, the skill of being able to produce and deliver worldwide will assume greater importance.

The VDA is gaining valuable experience in supporting the development of the supply cluster in Russia. Twenty suppliers from the most diverse product segments have banded together to invest and localize jointly in Russia (www.vda-kooperationsportal.de/de/ru_pkw). The knowledge gained in developing this cluster can subsequently be applied to other projects.

Even if after careful investigation and initial successes the localization decision seems positive, there are certain risks of a project such as this that cannot be entirely eliminated, as can be seen from the current difficult development of the Russian market. However, the long-term market opportunities should not, and must not, be overlooked.

The VDA supports the globalization course

The VDA sees itself as a communication platform where corporate, political and economic information converges and is played back to interested companies. In developing its own Representative Office in Beijing, the VDA aims to do more for its members in China, and since the end of 2014 has been ramping up its activities in the largest overseas market. The self-imposed quality aspiration is for information to be bang up to date. With its newly constituted team headed by Klaus Billetter, the Representative Office in Beijing is initially concentrating on standardization, the aftermarket, logistics and supporting the supplier round table. Under the Round Table umbrella, since 2011 the VDA has been organizing regular meetings in Beijing and Shanghai for the CEOs of the suppliers with an active presence in China. The focus is on marketing and production conditions in China, the dialog with motor manufacturers as well as topical value chain issues.

The keen interest in the Round Table in China and the response from the suppliers’ ranks encourage the VDA to investigate networking possibilities in other regions. Similarly, a round table in Mexico is currently getting underway. The German automotive industry has invested heavily here in recent years. Suppliers have also been given a high level of representation.

A further opportunity to raise awareness of one’s own company and make and intensify contacts in foreign markets is afforded by joint trade fair appearances. The joint stands that the VDA is offering as part of the foreign trade fair program, namely with the financial and organizational support of the Federal Ministry for Economic Affairs, give small and medium-sized enterprises the opportunity of participating on favorable terms and benefiting from shared organizational arrangements. At present, combined stands of this type are being offered at trade shows in Moscow, Shanghai, Seoul, New Delhi as well as, now, in Bangkok and Yokohama.

Collaboration in the regions: The VDA dialog with the federal states

Networking abroad often functions better if companies are also integrated in networks in their home market. The most important supplier network in Germany is the VDA. Many smaller firms are also involved in regional structures. This is often the first step in testing collaborative opportunities for one’s own projects. The VDA maintains close contact with supplier clusters from the individual federal states of Germany; it supports them through cooperation in advisory boards, joint events and at the IAA. The cluster managers from the regions and the responsible representatives of the federal states’ ministries of economics regularly participate in the exchange of information with the VDA (“VDA regional dialog”). The common goal is to promote the automotive industry in the regions and beyond.

The VDA supports the suppliers’ visibility beyond federal state borders with its freely available database www.auto-world.org. Listed companies can be found bilingually, worldwide, in a search by federal state, place, name and manufactured parts. The database supplements the company directory of VDA member companies of the supplier industry (www.vda-herstellernachweis.de).

Collaboration in Europe: CLEPA

In addition to the VDA office in Brussels, which represents the interests of the German automotive industry on the ground there, the VDA collaborates closely with CLEPA (Comité de Liaison Européen des fabricants d’Équipements et de Pièces Automobiles) to protect suppliers’ interests. CLEPA enjoys a high reputation among European institutions and operates in partnership with ACEA, the European Automobile Manufacturers’ Association. Organized by focal areas, dedicated working groups within CLEPA deal with selected topic areas such as technical regulation, warranties or research and innovation. In regard to the latter, CLEPA also provides information, for example, on European funding programs and how to access them. Companies interested in funding can request information via the VDA department for the supplier industry and small and medium-sized enterprises.

Company financing: Model for the small and medium-sized enterprise sector

Building new production capacity abroad often requires heavy investment that cannot be financed from equity, or not fully so. In the past, this financing gap was usually plugged with bank assistance. The loan financing situation for companies in Germany has eased significantly in recent years. Solid companies in all sizes and all sectors currently stand to benefit from favorable financing conditions. However, for smaller SME suppliers venturing abroad and looking for financing solutions for the target country, investment finance is fraught with problems. As a result of the European financial crisis, regulatory changes are in the pipeline leading to fears that there will be bottlenecks in long-term financing in the future. The regulation of banking activities – the introduction of Basel III – plays an important role here.

The Finance Working Group of HG III (Manufacturer Group III) to which the CFOs of larger suppliers belong, has been dealing with this topic for some time now, and is in dialog with various banks and the federation that represents them. In the meantime, a financing solution has been worked out with the DEG (German Entrepreneurial Development Corporation) for developing and emerging markets, which can offer a real alternative for small and medium-sized enterprises. The model was unveiled at the 15th VDA small and medium-sized company convention in May 2015 and sounded out as to its practicability.

Pension management and retaining skilled employees

The German labor market is booming: more than 43 million people were gainfully employed at the end of 2014. Companies no longer find it as easy as they once did to fill vacancies with qualified employees. Consequently, tools for retaining skilled employees, such as an occupational pension scheme, are becoming increasingly important. A company pension scheme tailored to the requirements of SMEs gives them good opportunities to attract and retain workers in the face of more attractive offers from larger enterprises. The VDA pension management scheme is an innovative industry occupational pension solution available exclusively to VDA members. It includes health-care components (prevention models), various types of basic provision as well as models for flexibly designing comp time and lifetime working time accounts, thereby catering for the most important welfare provision areas. As an industry solution, the VDA pension management scheme also offers optimal benefits and terms via a group contract. Detailed information on the VDA pension management scheme can be downloaded from www.vda-vorsorgemanagement.de.

Success factor: Collaboration within the value chain

The automotive industry is typically characterized by the bulk of the end product added value being generated in the preliminary and intermediate stages. In terms of the value of gross production, more than three quarters of the added value in vehicle manufacturing is already generated in the primary stages.

To the same extent as motor manufacturers are reducing their vertical range of manufacture, they are transferring responsibility and trust to their suppliers. The pressure thereby increases on managing an ever-more complex supplier network, the processes of which have to be precisely coordinated at all times. Supplier selection and the underlying business conditions thus acquire critical importance for the reliability of the entire value chain.

Fair business agreements between manufacturers and suppliers are an important cornerstone for a sustainable and successful partnership. From the supplier’s perspective, opportunities and risks are not always equally shared – and friction within the value chain results in lost efficiency. In the best case, the resolution to a disputed topic can be found through dialog between the business partners, although it frequently depends on the extent to which the parties involved are prepared to reach a compromise.

In its committees and at its events, the VDA fosters discussion on the issues of collaboration between manufacturers and suppliers and on the upstream links in the value chain. Antitrust concerns are expressly and rigorously observed in the process. This is also in the industry’s interest: Optimal results can only be achieved in open competition.

Development service providers with growth potential

In the past decade, development service providers, who belong in the VDA’s suppliers’ Manufacturer Group (HG III), have experienced particularly dynamic growth. Involved for the first time in vehicle development at the beginning of the 1970s, their disproportionate growth symbolizes, as it were, a structural transformation, creating further efficiency increases by optimizing the division of labor. The 25 largest development service providers alone now employ 127,000 people, and in 2013 achieved sales amounting to 5.7 billion euros*. German companies are at the forefront in this segment as well.

In a manner of speaking, the development service providers are taking over development tasks that were previously the domain of the motor manufacturers themselves and are making a critical contribution to improving the efficiency of the entire value chain. Most development service providers’ area of operation encompasses the development of vehicle components, modules and systems. The development service providers’ business model requires a high degree of flexibility and efficiency. The optimal use of human resources in particular is a central success factor. What this means for the companies is that existing laws and regulations must provide the necessary planning certainty. A stable environment is essential to their competitiveness as regards the possibilities for staff deployment. The current discussion in particular regarding regulation of the use of service contracts is causing major uncertainty among companies. Limiting flexibility in the use of labor, whether in production or in research and development, will push structural change further in the direction of globalization – at the expense of Germany as an industrial location.

*Source: Automotive Development Service – Germany as an Industrial Location for the Future, VDA Automotive industry Materials, Volume 48

Helmut Weirich
Helmut Weirich Head of Department Automotive supply industry and medium-sized businesses

Tel: +49 30 897842-400 Fax: +49 30 897842-600
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