Success in limbo dancing requires flexibility, balance and quickness. Those three qualities also apply to the automotive industry today.

Automakers are scrambling to stay nimble and do more with less. By combining the benefits of standardized vehicle architectures and flexible assembly plants, they're attempting to squeeze production costs and improve operating efficiency. Many manufacturers are retooling their assembly plants to produce smaller volumes of more models built on the same line.

At the same time, the number of nameplates in the U.S. marketplace is proliferating-there are twice as many today as 30 years ago. In fact, the auto industry has never been so competitive. There are more niche segments and platforms than ever. An estimated 316 models will be for sale by 2008, up from 216 in 1993, according to J.D. Power and Associates (Westlake Village, CA). However, those new models will come from 12 fewer brands than there were in 1980.

David Cole, chairman of the Center for Automotive Research (CAR, Ann Arbor, MI), compares today's business climate to The Perfect Storm. The popular book and movie were based on an unusual set of meteorological events that came together to create an immense and treacherous storm off the coast of New England. "In a sense, that is what is occurring today in the auto industry-an unusual confluence of factors that is creating an extraordinarily turbulent and dangerous period," says Cole. "The magnitude of the storm is hard to grasp."

Numerous forces are converging on automakers and their suppliers. For example, there is intense competition at all levels of the industry sparked by rapid global expansion. "Speed continues to be critical, and in fact, the velocity of change is accelerating," warns Cole. "New and very competent tool sets are arriving, ranging from the Internet and collaborative software to product development and manufacturing simulations."

Meanwhile, skyrocketing external costs, such as health care insurance and litigation, are diverting company resources. Low-cost countries, such as China and India, that present opportunities as well as threats are also affecting the strategic direction of the auto industry.

"Like it or not, Detroit is in the crosshair of world automotive competition," says Richard Dauch, CEO of American Axle & Manufacturing Inc. (Detroit). In 1997, Detroit's Big Three automakers had a combined 73 percent of the U.S. car and truck market. Today, that market share has fallen to 60 percent, claims Dauch, who also serves as chairman of the National Association of Manufacturers (Washington, DC).

"Never before in my nearly 40-year automotive career have I seen General Motors, Ford and Chrysler all losing market share at the same time," says Dauch, who recently delivered a landmark speech at the Detroit Economic Club. "In the past 6 years, Japanese automakers have increased their share by 17 percent, the Europeans by 52 percent and the Koreans by a whopping 72 percent."

In the past 3 years alone, the U.S. automotive industry has lost nearly 190,000 jobs. According to Dauch, 30 percent of those jobs were from OEMs and 70 percent of them were lost by automotive suppliers.

"This is not a cyclical change," warns Dauch. "It is a harsh and real structural change. And it has been occurring quietly, right before our eyes, over the last 20 years."

During that timeframe, Dauch says U.S. automakers and suppliers have proven that they can compete on four key issues previously considered shortcomings: Quality, productivity, design and technology. "Today, Detroit is facing a new No. 1 enemy: cost competitiveness on a global scale," argues Dauch. "If not dealt with immediately, it could be the fatal blow to our proud industry."

Manufacturing Takes Spotlight

For many years, the Big Three have often been run by individuals with accounting, finance and marketing backgrounds. But, manufacturing engineers are in the spotlight today. Indeed, three former engineers have recently assumed high-profile positions in the U.S. auto industry:

• Gary Cowger, group vice president of General Motors Corp. (GM, Detroit) and president of GM North America, spent many years in manufacturing at several GM plants and divisions before assuming his current duties 3 years ago.
• Tom LaSorda, chief operating officer for Chrysler Group at DaimlerChrysler (Auburn Hills, MI), previously held many manufacturing and production titles at Chrysler and General Motors, before being promoted earlier this year.
• Jim Padilla, chief operating officer at Ford Motor Co. (Dearborn, MI), spent most of his earlier career in product engineering and manufacturing. He was promoted to his current position 4 months ago.

"[This indicates that] manufacturing is now cool and good people do it," says Cole. "Manufacturing is where auto companies spend most of their money and the failure to execute gives them major problems. All of these people are both competent manufacturing people as well as very good executives. I believe we will continue to see more technically trained people near the top of auto companies in the United States, just like Europe and Japan."

Despite their impressive backgrounds, Cowger, LaSorda and Padilla have their hands full. "Competitive pressures brought on by overcapacity, increased customer demands, expanding product requirements and falling international trade barriers have led to a business climate that has never been seen before," warns Cole. "Automakers are under intense pressure to retool their business strategies."

According to Cole, two distinct strategies are emerging:

• Reducing costs in all areas of business development, labor and capital investment.
• Technology innovation for both product development and manufacturing.

For some manufacturers, rapidly advancing product and process technologies afford a competitive advantage. For example, Cole says laser welding, high speed machining, advanced forming technologies and advanced lightweight material processing are undergoing significant advancements for high-volume manufacturing that cannot be readily duplicated in developing businesses. "Companies capable of rapidly developing and implementing these new technologies will be able to more effectively compete domestically and abroad," claims Cole.

Global Mindset

As North America becomes more competitive and less profitable for established OEMs, automakers will continue to look abroad for expansion opportunities in new markets, such as China, India and Eastern Europe. The size of those markets, the speed at which they are opening and the scale of the auto industry's investments eclipse anything seen before. By the end of this decade, many experts predict that the global manufacturing balance of the auto industry will shift from West to East.

"Global platforms are increasingly a fact of life," says Michael Robinet, vice president of global vehicle forecasts at CSM Worldwide (Farmington Hills, MI). "Automakers that have been slow in ramping up global platforms and rationalizing these on a global scale are now considered lagging. Lower tariffs and the expansion of the World Trade Organization, combined with global competition, have driven OEMs to seek increased economies of scale through platform consolidation on a global scale."

Automakers are trying to develop common global architectures and build at least three different vehicles off each platform. The goal is to use a handful of architectures that share common under-the-hood components to cut product development costs, gain economies of scale and speed time to market. For instance, Nissan Motor Co. (Tokyo) has five core platforms that have spawned pickups, sport utility vehicles and sedans. General Motors has developed seven global architectures that it will use for future platform sharing efforts.

Exposure to low-cost production locations will be increasingly vital by the end of this decade. Robinet says OEMs such as DaimlerChrysler and Ford will have less than 30 percent of their production in low-cost locations by 2009. On the other hand, Hyundai Corp. (Seoul, South Korea) will have 90 percent of its production capacity in Central Europe, China, India and other low-cost Asian locations.

To address this trend, Robinet says some OEMs are working with affiliates to increase their product reach and gain access to low-cost production locations. For instance, GM is working closely with manufacturers such as Fiat S.p.A. (Turin, Italy) and Suzuki Motor Corp. (Hamamatsu, Japan).

Many automotive suppliers are also being forced to expand their overseas production capacity to serve their customers. "As globalization of the manufacturing base remains a hot-button issue, suppliers are facing increased pressures to resist investments outside of the United States," says Robinet. "But, to continue to remain viable, suppliers must look to global platforms as a mechanism to expand their geographical footprint and limit financial risks."

The increasing standardization of auto parts, assembly tools and production processes is setting the stage for a new era of global products. Roland Berger Strategy Consultants (Troy, MI) recently conducted a major study of auto suppliers in which 50 percent of respondents said moving to low-labor cost countries would be a top priority in the near future. "Manufacturing efficiency and a competitive cost structure are matters of survival for automotive suppliers," says Wim van Acker, managing partner. "Suppliers are being forced to identify and tap the sometimes significant cost advantages in low-cost emerging countries by sourcing or assembling parts outside their traditional regions."

While most attention is being focused on strategic opportunities in China and other Asian nations, van Acker believes many suppliers should turn their attention to Eastern Europe. Countries such as the Czech Republic, Poland and Slovakia already have an established auto industry. And, by the end of the decade, Estonia, Latvia and Lithuania should also provide an attractive combination of infrastructure and low-cost labor.

According to CSM Worldwide, European production volume will hit 21.8 million vehicles by 2009, up from 18.8 million in 2003. Capacity investment will be centered in Central and Eastern Europe. "Capacity utilization in Central Europe will grow from 63 percent in 2001 to 95 percent in 2009," predicts Robinet, "while production volumes will grow from 2.6 million to 4.5 million units during the same period."

The China Syndrome

The auto industry is booming in China, where new vehicle sales are growing 30 percent a year. China is already the world's third largest car market, surpassing Germany, and many forecasts predict that it will eventually overtake Japan, and possibly the United States.

According to Automotive Resources Asia Ltd. (Bangkok, Thailand), sales of passenger cars soared from 750,000 units in 2001 to 1.2 million in 2002 and then nearly doubled to 2.1 million in 2003. Passenger car sales may rise to 18 million units a year by 2020, which is the same size as the U.S. market now.

Automakers with a big presence in China, such as GM and Volkswagen AG (Wolfsburg, Germany), are raking in profits and building brand loyalty. For instance, GM sold 259,653 vehicles in the first 6 months of 2004. This represents an increase of 58 percent from the first half of the previous year.

American, European and Japanese automakers have already poured billions of dollars into joint ventures with Chinese partners in the hopes of securing a long-term foothold in the world's most populous nation. And, there appears to be no end in sight. Automakers have earmarked $12 billion for new production facilities in China.

Volkswagen, the biggest foreign automaker in China, with 30 percent of the market, plans to open three new assembly plants as part of a $7.2 billion expansion effort. It recently began building a $240 million facility near Shanghai that will produce up to 150,000 vehicles a year. It also plans to construct two new engine factories to keep up with demand. Volkswagen expects its sales to increase 18 percent to 823,000 units this year, up from 697,000 units in 2003.

General Motors plans to invest more than $3 billion in China over the next 3 years. The company currently employs more than 11,000 in China and holds 8 percent of the market. General Motors operates six joint ventures and two wholly owned foreign enterprises. It has been marketing Buicks in China since 1997, and recently launched its Cadillac brand there.

The company plans to unveil nearly 20 completely new and upgraded products over the next 3 years, most of which will be locally manufactured. In order to support that aggressive product plan, GM expects to more than double its vehicle assembly capacity in China from 530,000 units today to 1.3 million units by 2007.

In addition, GM is in the process of relocating its Asia Pacific regional headquarters from Singapore to Shanghai. And, GM and its partner, Shanghai Automotive Industry Corp., recently announced plans to build several world-class R&D facilities, including the largest professional proving ground in China.

Ford recently announced that it plans to invest $1 billion in China. It is building a second assembly plant that is expected to begin production in 2006 with an annual capacity of 200,000 units. The company also plans to build an engine assembly plant with an annual capacity of 500,000 units.

"To compete globally, Detroit's Big Three are making a massive shift in sourcing," says American Axle's Dauch. "General Motors has publicly stated that it expects its annual Chinese parts purchases to rise to $10 billion by 2009, up from under $3 billion last year. Some projections show Ford spending up to $6 billion by 2010. Other projections show Chrysler resourcing $6 billion in the next 5 years to China and Korea."

Many Tier One suppliers, such as Delphi Corp. (Troy, MI), Visteon Corp. (Dearborn, MI) and Robert Bosch Corp. (Broadview, IL), have already built assembly plants in or around Shanghai. Delphi, the world's largest auto parts maker, achieved a 50 percent increase in its Chinese sales last year. Now, some firms are setting up R&D centers in China to tap into engineering talent that is paid much less than their counterparts in North America and Europe.

Flexible Future

Traditionally, the Big Three automakers have lagged behind their Japanese counterparts in flexibility. DaimlerChrysler, Ford and GM have made strides to close the gap, but they still have a lot of catching up to do. For example, fewer than 40 percent of Chrysler and Ford vehicles are built on flexible assembly lines, compared to more than 80 percent of Nissan and Toyota vehicles.

"In North America, capacity utilization continues to be a point of differentiation between the traditional Big Three and the New Domestic automakers," says Lindsay Brooke, senior manager of market assessment at CSM Worldwide. "By 2009, the New Domestics will be running at an average of 94 percent utilization while the Big Three will average 86 percent."

However, improvements in manufacturing flexibility are expected to drive increases in capacity utilization. Assembly plants that are flexible generally have higher capacity utilization. Higher capacity utilization is a critical element of generating higher earnings and reducing production costs.

The goal of flexible manufacturing is to configure assembly lines to accommodate a wide variety of products, such as front-wheel drive, rear-wheel drive, unitized body and body-on-frame vehicles. Flexible systems use robots, conveyors, fixtures and other production equipment that can be reprogrammed to build vehicles with different designs, such as a four-door sedan, a two-seat sportscar, a minivan, a pickup truck and a sports utility vehicle. It allows automakers to rapidly change their mix of products and produce a greater variety of vehicles on the same assembly line.

Many automakers are taking advantage of new car and truck introductions to upgrade their assembly plants with the latest systems and technologies, such as DC electric fastening tools, skillet conveyors, and sequencing and line-side delivery of parts and subassemblies. The upgrades are increasing manufacturing flexibility and cutting costs, while improving product quality and productivity.

In addition to building a state-of-the-art plant in Lansing, MI, that can assemble three different vehicle architectures, GM has made major refinements to its assembly plants in Fairfax, KS; Oklahoma City; and Shreveport, LA. It is currently spending $800 million to upgrade its plants in Lordstown, OH, and Orion, MI.

"As we put new products in our plants, we're taking advantage of the opportunity to invest in our facilities and ensure our manufacturing competitiveness for years to come," says Guy Briggs, vice president and general manager of GM manufacturing and labor relations.

With each plant conversion, GM is increasing its ability to build different vehicles on the same assembly line. A key element of that strategy is C-Flex, a programmable body shop tooling system that is replacing body style-specific tooling. According to Briggs, C-Flex allows multiple body panels, such as floor pans, deck lids, hoods and engine compartments, to be welded with the same set of programmable tools and robots. Model-specific tooling is not required.

With C-Flex, GM is reducing the size of its body shops by as much as 150,000 square feet. Its plants can build a higher variety of differentiated products at much lower costs. "C-Flex, along with other recent manufacturing improvements, will reduce GM's cost of introducing new products into a body shop by approximately $100 million," claims Briggs.

Ford has spent millions to improve flexibility at its new state-of-the-art Dearborn Truck Plant, which is capable of interchanging three vehicle platforms and producing nine different models in the same facility. The company's Norfolk, VA, plant was the first Ford facility in the United States to adopt flexible manufacturing several years ago. And, after revamping its Kansas City plant, Ford is currently upgrading plants in Chicago and Flat Rock, MI. Ford expects to save up to $2 billion over the next decade because its flexible production system costs 10 percent to 15 percent less than traditional, nonflexible systems, with an added 50 percent savings in changeover costs.

Chrysler's model for flexible efficiency is its 3-year-old Toledo North plant. But, unlike other facilities, that plant only builds one model, the Jeep Liberty, which keeps processes simple. Earlier this year, Chrysler retooled its Brampton and Windsor, ON, plants to increase manufacturing flexibility for front-wheel-drive minivans and rear-wheel-drive sedans. And, the company is in the process of adding flexibility to its St. Louis South assembly plant, which assembles several varieties of minivans.

But, the Big Three will have to strive to be even more flexibile, because Japanese automakers continue to raise the bar. Honda Motor Co. (Tokyo) and Toyota Motor Corp. (Tokyo) boast of having plants that can build up to six different platforms. However, GM is currently building a new plant that will be capable of assembling up to 10 body styles on six architectures. The $800 million Delta Township plant near Lansing, MI, is scheduled to open in 2006.

Powertrain Debate

Several years ago, many experts were predicting that the internal combustion engine would soon go the way of the rumble seat and the running board. They expected fuel cells and other new technology to become widespread by the end of this decade.

But, now some observers say the good old gasoline-powered engine will be propelling vehicles for at least another 20 years. Others see diesel and hybrid technology gaining ground, due to extensive R&D efforts by European and Japanese automakers.

"Without question, the internal combustion engine will, in some form, continue to absolutely dominate the global powertrain market for vehicle generations to come," claims Kurt Liedtke, president and CEO of Robert Bosch. "Fuel cell technology offers remarkable potential to the industry and consumers in the area of emissions and foreign oil dependency. But, fuel cells won't be affordable and won't likely gain mass consumer acceptance, or even be ready for mass consumption, for at least 20 years.

"Hybrids are another example worthy of our industry's focus," adds Liedtke. "Between now and 2025, hybrid vehicles will achieve steady gains in popularity, especially in congested inner-city traffic. But in reality, hybrid technology could certainly be considered another measure to improve the efficiency of the internal combustion engine. This means that what is good for the internal combustion engine is also good for the hybrid."

According to a recent report conducted by CAR, the internal combustion engine will be the dominant power source for all passenger and light vehicles on every single continent until at least 2025. At the current rate of vehicle development, that time span will cover more than seven vehicle design cycles.

Some observers believe diesel engines could gain a significant market share in the United States over the next decade. Due to skyrocketing gasoline prices, diesels are suddenly becoming popular with consumers who believe higher fuel economy outweighs any drawbacks. Diesel fuel averages about 30 cents per gallon cheaper than gasoline. And, diesel engines typically yield 25 percent to 30 percent better fuel economy than comparable gasoline engines in urban and highway driving.

Behind much of the improvements in fuel efficiency, emissions, power and noise in modern diesel technology is an under-the-hood fuel-delivery system known as common rail. "The newest common rail system reduces emissions by up to 20 percent," claims Liedtke. "It increases power. It improves fuel economy. And at the same time, it lowers engine combustion noise."

Liedtke attributes these improvements to an inline injector with piezoelectric technology. It delivers significant weight advantages-up to 30 percent less than competing injectors-and greater engine design flexibility. "Diesels are a beast of a powertrain," claims Liedtke. "Punch the pedal and you leave others in your wake.

"They offer up to 50 percent more torque, which means drivers have better acceleration and more power," adds Liedtke. "The improved torque also allows consumers to tow heavier loads while maintaining diesels' superior performance."

Diesel-powered cars have always been more popular in Europe, where gas prices average $5 per gallon. But, Liedtke says diesels are more popular than ever. "In 1997, when common rail for diesels was first introduced, gasoline passenger vehicles dominated 80 percent of the market," he points out. "Just 3 years later, in 2000, diesels took over more than 30 percent."

Today, gasoline powertrains account for roughly 56 percent of new car sales in Europe, while diesels represent 44 percent. Diesels make up nearly 70 percent of new premium luxury sales in Europe. "By 2010, Europe will see an even, 50/50 split between diesel and gasoline powertrains," predicts Liedtke.

However, in the United States, diesels currently account for just 3 percent of total vehicle sales and only 1 percent of new light vehicle sales. But, that may be about to change. According to J.D. Power and Associates, sales of diesel-powered light vehicles will increase globally from 12.5 million this year to 27 million by 2015, with 60 percent of the growth coming from outside Europe. The Automotive Technology Research Group (Thousand Oaks, CA) predicts U.S. diesel sales will triple to 1.4 million units by 2007 and reach 2 million by 2009.

"[There will be] much greater parity between gasoline and diesel powertrain choices," says Liedtke. "By 2015, 94 percent of all vehicles sold in North America will be internal combustion, and diesels will make up 25 percent of the market. By 2025, 84 percent will be internal combustion. Diesel will earn 30 percent of this market, gasoline 54 percent. Obviously, the internal combustion engine is here to stay."

According to J.D. Power and Associates, 1.5 million diesel-powered passenger vehicles will be on the road in the United States in 2009, nearly four times the number of hybrid-electric-powered vehicles it expects by then. However, hybrids have been heavily hyped and at least 15 new-vehicle introductions are expected during the next three model years.

Hybrid vehicles, which combine the beneficial attributes of an internal combustion engine and a battery pack, have overcome the numerous roadblocks confronting electric- and fuel cell-powered vehicles. Japanese automakers have been investing heavily in hybrid technology and are promoting its mainstream commercialization.

"Hybrid-electric vehicles use a unique regenerative braking feature, which captures the energy lost during braking and returns it to the battery, thereby eliminating the need for frequent charging," explains Rajesh Kannan, a research analyst at Frost & Sullivan Inc. (San Antonio). "Hybrids also provide better mileage, smoother acceleration at lower speeds, and superior driving experience when compared to gasoline vehicles."

However, there are numerous obstacles to widespread acceptance of hybrids in the United States. Long considered purely environment-friendly, hybrids have failed to convince consumers of their true benefits and performance quality. "Removing negative perceptions such as frequent charging may be the first step in achieving commercial acceptance," says Kannan.

Hybrid offerings also come attached with high price tags-30 to 40 percent more than that for conventional vehicles. Most hybrids are currently marketed as alternatives to conventionally powered vehicles. According to CSM Worldwide's Brooke, it will be difficult to sell these vehicles in volume without a significant, sustained fuel price increase or major purchase incentive such as a tax rebate.

"There will be many more hybrid vehicle choices, but if the OEMs build them, will customers come? The price of fuel, the price of the hybrid-electric option, and a healthy degree of public skepticism about the real-world benefits and reliability of this new technology are issues that will need to be overcome," says Brooke. "Retail prices of motor fuel are expected to remain relatively low on an average yearly basis compared with Europe and Japan, which means that, unlike those regions, there is still not a strong enough fuel-cost driver to push consumers toward hybrids or other fuel-efficient alternatives."

In order to gain wide acceptance in North America, Brooke believes hybrids will have to prove themselves robust and reliable. In addition, automakers will have to better educate their customers on the real-world performance of hybrids, which deliver their best fuel efficiency in stop-and-go driving-a fact that some early hybrid owners didn't realize at time of purchase.