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Good morning. I want to begin by thanking David Cole for inviting me to take part in today's program. Before I turn to the question: are we changing fast enough? We need to look at what's driving the need for change.
The challenges and opportunities of globalization, industry overcapacity, economic and political uncertainties and changing consumer demands all drive change.
Our industry needs to find innovative ways to deliver quality products at prices consumers are willing to pay. And, we need to attract and satisfy consumers who - with instant access to information on prices, models and options from the Internet - are increasingly sophisticated and demanding.
Consumers today can choose from hundreds of cable and satellite television channels, targeted to every taste from cooking to golf. They shop at stores catering to every preference. They are accustom to a never-ending stream of new products in communications, computing and entertainment, offering more benefits at lower costs.
Looking at the automotive industry and at the growing discrimination among buyers, it's obvious that we need to make fundamental changes in the way we do business. "Are We Changing Fast Enough?" It's clear the answer is no.
What's holding us back? There are, in my view, three key barriers to changing fast enough.
- First. OEMs and suppliers worldwide are not cooperating on creating value for consumers. In fact, discussions rarely touch on what would differentiate a vehicle in the marketplace. Why? Well this leads to my second point.
- Discussions between suppliers and OEMs are almost exclusively driven by cost. This helps explain the lack of trust and adversarial nature of OE/supplier relationships.
- And the third barrier is communication. By and large, suppliers don't have access to the information they need and are often not brought in early enough in the development process.
Before looking at these issues, I'll give you a brief overview of Tenneco Automotive, which will help you understand my perspective.
We believe Tenneco Automotive is in a unique position with our strong presence in both original equipment markets and with consumers in our aftermarket. We're involved in the entire product life-cycle - from leaving the factory floor to the vehicle being retired in the junkyard. This gives us a unique point of view.
Tenneco Automotive is a leading supplier of emission control and ride control products. We serve both the Original Equipment and Aftermarket around the world with about 19,000 employees at 90 facilities on six continents.
Our 2002 revenues totaled $3.5 billion. North America accounted for 55 percent of sales, 35 percent came from Europe with the remaining 10 percent distributed through the rest of the world - including China where we are the Number One exhaust supplier.
Emission control products made up 65 percent of sales and ride control accounted for 35 percent. Our Original Equipment business generated 74 percent of total revenues and the Aftermarket 26 percent.
We market our products under widely recognized, leading brand names: Monroe ride control products, Walker and Gillet exhaust products and elastomeric products under the CleviteElastomers brand, as well as Rancho and DNX, two of our most popular niche aftermarket brands.
Based on our experience both in Original Equipment and Aftermarket, I can say, as an industry, we're missing out on the value creation equation.
The primary focus on cost with customers worldwide is blinding all of us to opportunities to add value to vehicles and attract customers who are willing to pay for specific features. Taking a look at the number of vehicle models on the road today, it's obvious that consumers perceive value differently.
When discussions between OEMs and suppliers focus almost exclusively on cost, it pre-empts the opportunity to leverage our combined experience to differentiate vehicles in ways that add value for consumers.
Here's an example. We worked with Volvo and Ohlins Racing to develop the Computerized Electronic Suspension, or CES, for the Volvo S60R and V70R models in Europe. These high-performance vehicles appeal to consumers who value superior handling and ride and are willing to pay for it.
CES is a huge development in terms of design and capability. The combination of an advanced monitoring system and fast-acting continuously variable shock absorbers delivers the feel of a luxury car ride with the handling of a sports car. Bottom-line, CES is a new technology that truly differentiates a vehicle's ride.
Europe has shown very strong interest in CES. Volvo has since included the system on one other model; we're finalizing a contract with another European customer and we have more to come. In contrast, North American car manufacturers show no interest. We know the technology works. We know consumers are willing to pay for it. But technological advances like CES are frequently judged on cost alone and not on the inherent benefits they provide.
We've experienced the same on the exhaust side of our business. We can't get in the door with our North American customers to talk about our semi-active muffler. This product uses new valve technology to balance acoustics and engine performance. The technology allows OEMs to use smaller, lighter weight mufflers without sacrificing high performance. Despite an enthusiastic response in Europe, it has been a challenge to generate interest with our North American customers, again primarily because of cost.
However, the news is not entirely negative. For example, we recently collaborated with General Motors on creating a custom sound for a new version of the classic Pontiac GTO. The sound duplicated the powerful rumble of the 1960's muscle car but on a vehicle that now contains more complex emission control components.
We applied our deep knowledge of acoustics and exhaust operation to achieve sound quality beyond a specification on paper. In the end, together with GM, we achieved the exact sound GM wanted at start-up, idle, acceleration and cruise speeds. That's a win-win and represents how we should be working together.
The second barrier limiting our ability to change fast enough is the industry's focus on cost. Don't get me wrong. Cost reduction is an important goal for all of us and we must continue to drive waste out of the system. But we also need to be smart about these decisions. We need to recognize when costs should be decreased and, conversely, when investment spending delivers value for consumers and greater return for all of us.
Let me give you some examples. In our view, some OEMs are making non-strategic decisions on de-contenting vehicles. In the worst cases, decontenting is happening on vehicles already in production, creating costly havoc. Besides the worse cases, we've had customers achieve relatively small savings by eliminating components that provide big improvements in vehicle handling and ride - and for a price that consumers are willing to pay.
On the other hand, OEMs continue to specify stainless steel mufflers that last up to 20 years. How many consumers place muffler life near the top of the qualities they want in a vehicle? Zero - that's how many. Muffler life doesn't even make the list - particularly when 60 percent of consumers keep a new passenger car for five years or less.
We believe this is an area ripe for letting vehicle buyers drive the de-contenting decision. Tenneco Automotive has developed what we call our Preferred Muffler Program for the cold-end of the exhaust system. The initiative offers a lower cost muffler and a standard equipment muffler that would last at least five years. However, dealers could also offer the option of a muffler with a lifetime guarantee as long as the consumer is willing to pick up the cost of the upgrade.
We believe this is an innovative approach to de-contenting. The money saved by eliminating what we view as an over-engineered muffler could be applied to components that do create value - including a richer vehicle sound or improved vehicle handling.
So, when we look at costs, we need to make decisions based on qualities that attract buyers - as well as those that don't.
A part of the cost paradigm is the waste we generate with redundancies that could be eliminated if the OEM and supplier relationships were more firmly rooted in trust and strong communication. The layers built in by OEMs to check and recheck everything from quality to run rates is slowing the process and building in additional costs.
This leads to the third barrier to faster change, which is the traditional hierarchy that can force suppliers to operate in a vacuum. In addition, communications barriers frequently limit access beyond the traditional purchasing and engineering relationships. Just imagine what a vehicle would look like that only considered cost and was developed with a narrow understanding of the desired end-product.
We decided it would be a perfect square since that would give the most interior volume at the lowest cost; it would have a single door because doors cost a lot of money; flat glass because there's no money in the budget for tooling; black steel wheels and bumpers since those deliver the functional requirements at the lowest cost, as does an AM radio. And, finally, it would only be offered in red, yellow or green at the discretion of purchasing.
Well, I think you get the point.
I'm really talking about communications and organizational barriers that limit our understanding of the overall goals for a vehicle. These barriers can also prevent suppliers from having input in areas that directly impact the products they supply.
The root of the problem is bureaucracy, inflexibility and the traditional hierarchy in both supplier and OEM organizations.
We need greater access and transparency in communicating with our OEM customers. Together, we need to tear down the barriers keeping suppliers isolated from Brand Management, Marketing and other key areas at the OEMs.
For our part, suppliers need to do a better job of making our customers aware of our capabilities and the value of our early involvement in the development process.
Let me give you an example.
About four years ago, we were encouraged by a customer to work with other suppliers to reduce overall vehicle cost. A cooperative effort among suppliers - competitors in some cases - was a radical idea at the time. However, we took a leap of faith and bought into the idea. With three other suppliers, we put together an engineering team to see how we could achieve the best fit in the vehicle for our components and deliver cost savings.
The result: working together, we were able to offer our components at a total savings of more than $300 per vehicle. The solution required price increases for some components, while other suppliers took price reductions in exchange for a better rate of return.
Despite the overall savings, the Purchasing Departments could not make the proposal work. Each component was measured by a different segment of purchasing, and targets would need to be changed, some up and some down.
So in other words, bureaucracy killed this fresh approach that represented progress in terms of supply cooperation and cost effectiveness.
We all must do a better job of sharing knowledge and communicating seamlessly throughout the world - both within our own companies and between suppliers and OEMs. At Tenneco Automotive, we've taken steps to improve our information-sharing and technological expertise among our global engineering centers. As a result, we are improving at transferring technology to meet our customers' global needs.
One example of the need to share knowledge comes from the rapid increase in diesel use in Europe. In Western Europe, the percentage of diesel-powered passenger vehicles sold has risen to more than 40 percent last year. The reason is an almost 30 percent increase in fuel economy with diesels. And, as you may know, today's diesels are nothing like the models on the road in the 1970s. Modern diesel technology delivers high performance, as well as fuel economy.
To address diesel emissions problems, Tenneco Automotive is already supplying new technologies including diesel particulate filters, which virtually eliminate combustion particles without compromising engine performance.
In the United States, we believe diesels could be an answer as OEMs balance the need to meet CAFÉ mandates while satisfying continuing consumer demand for larger vehicles such as SUVs. However, suppliers like Tenneco Automotive must transfer the technology developed for Europe and apply it in North America.
Can we make these changes and make them fast enough to capitalize on trends such as the increase in diesel use? The answer depends on how well we work together. Will OEMs invite us to share our knowledge? Can we successfully communicate our capabilities to customers? That is a challenge for both sides.
There are examples of meeting this challenge - of both sides getting it right. For instance, we worked successfully with Ford's marketing department to understand their goals for the F-150 and F-250 pick-up trucks in terms of off-road capability and feel. Our Rancho brand is recognized as a leader in this category and Ford Marketing recognized the value of this brand reputation. As a result, the F-150 and F-250 off-road trucks launched in 2001 were promoted as containing the Rancho off-road suspension package. Better communications and expanding beyond traditional OE/supplier relationships made this happen.
We believe this is an area that OEMs can leverage. Many suppliers have a valuable reputation with consumers based on their Aftermarket brands. Michelin tires represent safety and quality to consumers. Bose sound systems command a premium because of their reputation for performance and quality. We believe OEMs can leverage brand value by promoting well-known brand name products featured on their vehicles.
That brings us back to the question: are we changing fast enough? The answer is no but I do think there are steps we can take to accelerate this process.
- First, Both suppliers and OEMs need to proactively promote boundary-less communications within their organizations and between suppliers and OEMs. These communications need to become transparent, that is without barriers among departments and functions.
- Second, costs cannot be the only consideration in our decision-making. Instead, we need to pursue joint efforts that create value for consumers and meet budgetary targets.
- And third, as an industry, we need to bust the paradigm that makes suppliers and OEMs adversaries. In place of this conflict-oriented paradigm, we need a collaborative model including joint efforts with Brand Management and Marketing as well as Purchasing and Engineering.
In summary, our challenge, as an industry, is to change to meet the demands of the marketplace. We need to tackle the three main barriers: neglecting value creation, focusing too much on cost and leaving suppliers to operate in a vacuum - said another way, communications. Change, it is said, is never easy. But, I know, OEMs and suppliers can meet these challenges head on. Together we can drive change and win. And most importantly, consumers will win too.
Thank you
CONTACT:
Tenneco Automotive, Media Relations
Jane Ostrander
(1) 847 482 5607
jane.ostrander@tenneco-automotive.com
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