Speed & Connectivity: The New Landscape”Joseph M. Magliochetti
Chairman & CEO
Dana Corporation

2001 Automotive News World Congress
January 15, 2001 – Detroit, Michigan

“In the end, it is the understanding and acknowledgement that vehicle development must be a partnership – a mutual pursuit – that will enable both suppliers and vehicle producers to be successful.”

Good evening. It’s a pleasure to be with you tonight.

The topic of this year’s World Congress is “Speed and Connectivity: The New Landscape.” And with all the issues swirling around our industry these days, I can’t think of a more appropriate focus for this gathering.

The pace of change today has been so dramatic, it can make your head spin. And certainly the successful linkage of our supply chain will play an absolutely critical role in the shape and form of our industry’s landscape.

Over the next 20 minutes or so I’ll touch on three issues. I’ll begin by offering a supplier’s perspective on today’s automotive industry landscape.

I’ll follow this with a few thoughts on the importance of connectivity to enhance both communication and efficiency.

And, I’ll wrap things up by sharing some experiences that illustrate what I believe we can all achieve by working together even more closely in this “wired world”.

As we look at the dynamic swirl of our industry landscape, I think it’s fair to say that we’ve seen more fundamental change in the last decade than we did during the entire half-century that preceded it.

Consolidation, globalization, technological innovation, and growth in modularity – all of these industry evolutions have been well chronicled over the past several years.

But I’d also suggest that the dramatic impact of this change on the supply community is perhaps best reflected by another “evolution” that may have gone unnoticed – and I’d call this the platform evolution that has been born out of all this change.

Back in the ’50s and ’60s, vehicle “platforms” changed very little from year to year. Typically, only minor modifications were made to the outer skin of a vehicle between major revamps – perhaps 4 or 5 surface improvements over a 5-year platform life.

Over the past decade or so some estimates suggest that, in our rush to please the ultimate consumer, the typical platform “life” may have been reduced by as much as 18-24 months. That’s a very dramatic evolution when you think about it.

Clearly, this compressed timeframe can impact capital efficiency. Often, it doesn’t even afford the OEs or suppliers a sufficient opportunity to fully recoup their fixed investment. Reduced program life shortens the run-life of our production equipment, and as a result, achieving a reasonable return on this investment has become more challenging for OEs and suppliers alike.

Plus, the entire situation can be further exacerbated by vehicle specialization and market segmentation, which result in diminished economies of scale.

So what do we have today? … consumers demanding unique vehicles, with more conveniences, that are more tailored to their life style, and at a lesser cost.

Can this be accomplished?

Well the jury is still out. But we are beginning to see some positive refinements in the vehicle development process. Through better platform optimization (across multiple product lines in some cases) we’re seeing an interesting dichotomy: fewer platforms, but more product launches.

In North America, for example, industry projections suggest that over the next five years, DaimlerChrysler, Ford, and General Motors will decrease their combined regional platform total from 65 to 57.

And yet, during this very same timeframe, we expect to see a 10-percent increase in the number of distinct models introduced by these vehicle producers.

As I mentioned earlier, the increase in models is largely attributable to consumer demand, which necessitates tailored applications and greater complexity for Tier I suppliers.

"What do we have today? Consumers demanding unique vehicles, with moreconveniences, that are more tailored to their lifestyle, at a lesser cost."

Several of the factors I’ve already mentioned – globalization, systems integration, platform rationalization, and so on – have contributed to an acceleration in the consolidation trend.

And while none of this is exactly “breaking news,” it’s still rather stunning to think that these same three OEMs – DaimlerChrysler, Ford, and GM – are expected to move from an average of more than 2,000 suppliers each in 1999 to an average of 175 each by the year 2005.

In the wake of this shakeout, it is clear that the “Collaborating Suppliers” that remain will need to become more closely aligned with their customers.

One element that will play a critical role in the success of this effort is modularity. Just as it makes good sense to optimize resources by building a number of vehicles off one platform base, it follows that integrated systems and modules can also help achieve greater efficiency.

Many industry experts are predicting that OEMs will build a more strategic relationship with their supply chain – if for no other reason than simple necessity. As this occurs, these suppliers must become increasingly responsible for “design-stage” engineering of complex components and modules to assure a more rapid speed to market.

From the supplier perspective, we believe that modularity offers a tremendous opportunity to enhance value and speed the vehicle development process.

On a more practical level, this concept also enables the OEMs to simplify current assembly methods, and achieve greater efficiency. And it significantly contributes to our collective ability to profitably exploit the growing niche market opportunities.

Surely if we are moving toward a five-day order turn-around, we cannot continue to do things the same old way.

In case Wall Street has not reminded us sufficiently over the past year, it’s not enough to deliver a top-notch component, system – or complete vehicle. We also must deliver performance that delights our shareholders.

The bottom line is in fact, the bottom line!

The whole modular initiative is not a scheme devised to eliminate jobs – union or otherwise. It’s a logical and efficient method of allocating resources to address the needs of these increasingly global vehicle platforms.

I believe that the sooner we truly embrace this modular trend in North America, the sooner our industry will maximize performance – in terms of quality, efficiency and shareholder value.

Now platform optimization and the efficiencies that can be achieved through modularity are exciting, but they place even greater demands on the development and integration of seamless communications within the entire supply chain.

In fact, as vehicle producers and their supply partners become more closely aligned, connectivity may well become the single most important factor for success.

The key to seamless communications – up and down the supply chain – lies in this notion of connectivity. From our perspective, “connectivity” does not simply refer to being “wired” for communication. After all, when you think about it, we’ve had “on-line” communications with our customers for some time.

Electronic Data Interchange,or EDI systems, can be traced as far back as the Sixties. And CAD systems and other production-oriented tools are hardly new developments either.

When we speak about “connectivity,” I think we’re essentially talking about our ability to communicate quickly and clearly in a common language.

Now, everywhere you turn these days, you see references to revolutions taking place in e-business: B2B, B2C, B2E, and so on. But the real development - the true enabler - has been in the advent of the Internet as a more efficient conduit for communication.

The Internet combines real-time functionality and large data capacity with unparalleled accessibility. Each of these is lacking in EDI and CAD technologies, which fall short in data capacity, compatibility, and connectivity.

With the power of the Internet, we can employ B2B as a tool to improve purchasing, product development, and even day-to-day communications such as schedule changes and vehicle modifications.

We can even envision connectivity and modularity converging to produce projects where multiple suppliers work together to design modules that interface within an entire “area” under the hood or under the vehicle.

Connectivity has a very direct and positive correlation to improved efficiency. Meanwhile, B2B for all its hype, is simply another tool – albeit a very promising one – in our arsenal against inefficiency.

In the end, our basic need is a lean delivery system throughout the entire supply chain.

"The sooner we embrace the modular trend in North America, the sooner ourindustry will maximize performance - in terms of quality, efficiency and shareholdervalue."

In general terms, I believe we’re making fair progress on such a system between OEMs and Tier I suppliers. But as we travel down the supply chain, we begin to see broken links in the chain. And as the old saying goes, “a chain is only as strong as its weakest link.”

I think we have all played that party game where you assemble a group of people in a circle and plant a brief story at one end of the chain. By the time it makes its way around the room, the story usually changes dramatically.

I mention this because it illustrates the type of confusion that can arise without a common, accessible, well-connected communication system.

We must remember that communication is a two-way street. And for any system to be robust and effective, all parties must be able to readily access and deliver information.

"Communication is a two-way street. And for any system to be robust and effective, all parties must be able to readily access and deliver information."

As we work to assemble this system, we also need to ask ourselves what it is that we require in the way of technology.

Do we need a system fully loaded with every utility and application the I.T. folks can muster? Or would we do better to adopt a "server” mentality, whereby a “thin client” system makes utilities available to users as needed?

To paraphrase Scott McNealy, chairman of Sun Microsystems, multiple choice may well be the answer, not the question.

There are, of course, a number of trade exchanges currently working to address this need for information delivery and rapid processing.

The most publicized of these in our industry is Covisint, the B2B Internet trade exchange formed by Ford, General Motors and DaimlerChrysler (and joined by Renault, and Nissan).

Covisint and similar exchanges utilize a single global portal to eliminate redundancies and provide a single entry point for suppliers. Covisint’s stated end-goals are: lower costs, more streamlined business practices, and increased efficiencies for the entire industry.

Conceptually, Dana and others would be using Covisint as the primary trade exchange for transactions with these original equipment customers and perhaps many suppliers.

Along with inherently supporting the activities of our customers, we believe our participation in Covisint will also complement our own e-procurement initiatives. If fully realized, Covisint will represent another important tool in our ongoing effort to eliminate duplicate efforts in the purchasing and vehicle development processes.

But, more importantly, it can provide a closer strategic alignment. Specifically, we anticipate that the exchange will offer tremendous opportunities to Dana in the areas of rapid integration and more expedient collaboration – two elements that will be critical to the future of all suppliers.

Of course, there are many other exchanges underway. Some articles are suggesting that there may eventually be as many as 20 or 30 exchanges that we will need to connect to in order to advance product development with our various customers.

Now connectivity is clearly vital to the success of these exchanges. But amid these promising networks and the “whiz-bang” technologies that support them we should also remember that what we are talking about is an exchange.

By definition, an exchange involves providing one item in return for another. So it stands to reason that any worthwhile exchange will need to provide value to all participants – not just its architects.

I believe an exchange will succeed if it can accomplish at least three things:

Reduce cost; Increase our speed-to-market potential;
And accomplish this within a framework that is simple,
but secure; rewarding; and reliable.

Along these same lines, I’m convinced that a true partnership – is the key to delivering innovation to the ultimate consumer and value to our shareholders. It sounds elementary, but we’ve seen it work before.

Any new business process requires careful planning and attention to detail. But it also requires courage. Courage to try something different. Courage to think – and act – outside of the box.

Frankly,there is a tendency among all of us to resist change and stay within our “Comfort Zone.”

And although the reality may be that we are all “independent contractors” to some degree, there is much to be said for what we can achieve by leaving our “comfort zone,” taking a leap of faith, and becoming more closely aligned with our partners to form a “team.”

Dana’s team effort with DaimlerChrysler in Brazil is a good example of this. Three years ago,Chrysler chose Dana as its partner in an ambitious new project – the development of the world’s first Rolling Chassis^ä module for a light truck.

Supporting the Brazilian Dodge Dakota, the Rolling Chassisä module consists of more than 200 components, including the frame, front and rear axles, driveshaft, suspension, steering gear, brakes, fuel tank, fluid lines, and even the wheels and tires (thus the name Rolling Chassis).

"Any new business requires careful planning and attention to detail. But is also requires courage - courage to try something different."

Dana produces roughly 40% of the products on this platform module and manages the provision and assembly of the balance (a task involving some 70 other suppliers). Obviously, this involves a great deal of trust on DaimlerChrysler’s behalf, as well as significant project management and communication challenges on our end.

The benefit of this team approach has been a reduction in DaimlerChrysler’s investments in plant and inventory, as well as fulfillment of local-content requirements.

At approximately 76,000 square feet, the plant is half the size of a standard modular facility; and the capital investment of $14 million was significantly below the original budget planned for this project. The facility operates with fewer than 100 people, only 20 of whom work on the assembly line. And the finished product is a chassis that has been successfully delivered to DaimlerChrysler within 108 minutes of its order. Based on this experience, we now have the ability to expand upon the Rolling Chassisä concept by offering our customers a Rolling Space Frameä module.

The Rolling Space Frameä will combine the best of many break-through innovations. It will incorporate numerous attachment technologies, such as magnetic pulse welding, plus hydroforming, and other traditional forming technologies. And these technologies will be used to join multiple material combinations –including metallic, composite, and plastic solutions – into one contiguous assembly.

In many ways, the Rolling Space Frameä is indicative of the future as we see it – products that are technology driven, innovative, highly differentiated and modular in nature.

Now, in order to be successful in projects like the Rolling Chassisä and Rolling Space Frameä -- without building on old processes and simply replicating the sins of the past – we must practice what we preach with our suppliers and partners.

We are excited about the product innovation taking place at Dana. But it’s still not enough to support the full requirement within a Rolling Chassisä or Rolling Space Frameä. Because of this, we have developed a series of strategic technology partnerships to extend our capabilities.

The template for these strategic collaborations was piloted by our relationship with Eaton. As you might recall, a couple of years ago we acquired Eaton’s heavy axle and brake business and sold them our clutch operations.

Today, we jointly market a Roadrangerä system that combines Eaton transmissions and clutches with our driveshaft, axle, and brake products. This arrangement has been a proven success for both companies.

Building on this approach, we are working with GKN to complement our cardan joint offerings with GKN’s constant-velocity driveshaft products. Our Drive-Tek joint venture has allowed us to enhance our capabilities without the major investment that would have been required in the absence of this partnership.

We’ve also partnered with GETRAG whereby we have acquired a 30% stake in their holding company and a 49% ownership of their North American operations. GETRAG’s expertise is in transaxles, which will further support our efforts to grow Dana’s passenger car capabilities.

And most recently, we formed a strategic alliance with Motorola. Our goal here is to integrate their electronic expertise as we develop advanced technology (smart-logic) for what have traditionally been mechanical components. We see tremendous opportunity to apply this concept within our advanced chassis, drivetrain, and engine systems.

I mention these recent partnerships because they are true departures from the way things were done during much of the first 90 years of our company’s history. But these relationships – and more like them – will play an integral role in our success over the next 90 years.

As we embark on this new era, capital efficiency has become a critical success factor in our industry. We believe this must include fixed capital, working capital, and intellectual capital if we are to meet the needs of the markets that we serve and satisfy the expectations of our shareholders.

Strategic partnerships such as those I’ve just mentioned – and those yet to come – will enable OEs and suppliers to expand their capabilities with a minimal amount of investment to better provide the full scope of services required by our customers.

As we’ve seen, the need for efficiency and fair returns permeates each of the topics I’ve discussed tonight.

Our evolving industry landscape necessitates continued flexibility and change. At the platform level, we are encouraged to see multiple vehicles being built off a common base.

For example, Ford employs this method in sharing the same basic platform to produce the Lincoln LS, the small Jag, and the T-Bird. Longer runs, greater economies of scale, and a better opportunity to maximize the return on invested capital make this a very appealing approach.

Similarly, exchanges geared toward achieving design, production, and purchasing efficiencies depend on enhanced communication and connectivity. But the ultimate success of this lean delivery system will be largely determined by its ability to deliver value to all participants.

And finally, partnerships – whether among customers or peers – clearly must achieve a fair return on the full capital employed – fixed capital, working capital and perhaps most importantly, intellectual capital.

In the end, I think we all know that a successful relationship goes well beyond simply demanding price reductions.

It is the understanding and acknowledgement that vehicle development must be a partnership – a mutual pursuit – that will enable both suppliers and vehicle producers to be successful.

To the extent that we can work more closely with our customers and develop a mutual trust, I am convinced that this new landscape will yield the innovation and real value our ultimate customers and shareholders deserve.

Thank you very much.