"Modern Manufacturing: Evolution or Revolution?"
Woody Morcott
Chairman, Dana Corporation

Good morning. I'm very glad to be here with you today.

I've been given plenty of time to talk with you this morning about the changing face of manufacturing, but I'd like to keep my comments brief to give us time to hear your opinions, questions and comments. So, I'll only talk for about 20 minutes or so, and then open up the discussion to listen to your thoughts and answer your questions.

Modern manufacturing is a crucially important topic for industry leaders to discuss in a forum such as this. In my 37 years at Dana, I've seen monumental changes to how we approach manufacturing and the impact these changes have had on our business. The automotive industry has seen sweeping changes recently – and I've been asked if this is just the natural evolution of this particular industry, or rather, do these changes indicate a revolution in manufacturing across the board? This is an important question, and I'd like to address it here with you today. To do this, first, I'd like to talk more specifically about some of the changes in the automotive industry. Second, I feel it is necessary to discuss the role consolidation has played in driving this change. Finally, I believe that technology is the key to surviving and prospering in any industry, and I'd like to make a few remarks about how this is helping manufacturing-based industries to evolve – including Dana.

Truth is, when I began at Dana in the 1950s, most automotive suppliers weren't overly concerned with what was happening in Europe or South America – the focus was on "the big three," and Detroit was the place to be. Times have definitely changed. While Dana has been in places like Brazil, Argentina and Venezuela for 30 and 40 years, we have opened ourselves up to entirely new markets in the last decade. This is because for Tier I multi-national suppliers like Dana, being global has become an absolute necessity. And, as the global marketplace continues to grow and evolve our industry, Dana has been there for our customers, literally, anywhere in the world.

Because of our global presence, we are sometimes asked by our customers and partners to assist them with site selection and other aspects of doing business in a new country. However, globalization is more than just gaining entry in new markets – although that should not be discounted. It can also provide a counter-balancing effect against national and regional economic swings, just as product diversification helps to offset cyclical swings in certain market segments. Often globalization can create opportunities for consolidation – a point I'll address further in a few moments.

A second trend developing as global automakers become more responsive to new markets and customer demands is a much greater emphasis on speed to market. Where once it took three years on average to get a new vehicle into production, some OEMs are now looking at a timeframe of 14 months. We've even heard talk about the "five-day car" in the very near future.

And, it's no wonder automakers are in a race to see who can push their car to the finish line first. Today more and more people are beginning to buy their cars over the Internet. In fact, while less than one percent of cars were sold this way in 1998, it's anticipated that nearly 30 percent of cars sold in 2010 will be purchased on-line. Can you imagine? That's nearly a third of all cars sold – by simply pointing and clicking. And, those who buy a car on-line want it customized to a particular style and, most importantly, they want it fast. Why else would they use the expediency of the Internet? Automakers, and their suppliers, are being forced to respond quickly to meet this new demand.

The effects of this time compression are manifest in the way carmakers have come to rely more and more on the expertise of their major suppliers. This leads me to the other trend I would like to mention, the rise of modular manufacturing and systems integration – a true change in the way those in the auto industry are doing business.

A few years ago, modular manufacturing was not much more than a conceptual dream. Today it is the talk of the industry, as the entire supply chain is streamlining to increase speed and efficiency.

Once vehicle manufacturers realized that it was to their advantage to have suppliers deliver fully dressed axle modules, wiper systems, dashboard modules, brake systems, and other items, ready for just-in-time installation on the their assembly lines, it was just a matter of time before these practices became institutionalized.

Dana has not only become a leader in modules and systems supply, but we have also taken just-in-time supply to a new level. For example, a few months ago Dana opened its second facility that is completed dedicated to advanced line sequencing techniques to supply Toyota with frames for a variety of models. Our Parish Structural Facilities builds and ships these frames in sequence to match Toyota's order. In our facility in Owensboro, Kentucky, eleven different frame models are built on one Dana manufacturing line, exactly when they are ordered electronically by Toyota. The entire process from order to delivery takes only nine hours. To ensure this just-in-time delivery, these facilities are on-line with Toyota and located within an hour's drive.

Modular manufacturing and just-in-time delivery has enabled car manufacturers to be more cost-effective and efficient, while simultaneously allowing them to take advantage of the supplier's specialized expertise in their respective component areas and capabilities.

Today, automakers are even trading technology amongst themselves. In December, GM announced it would be buying V-6 engines from Honda, while it plans to sell Honda diesels from its Isuzu subsidiary. The automakers are willing to buy technology when necessary and automotive suppliers have stepped up to auctioneer's block to show their stuff.

For the suppliers, the benefits of modular manufacturing include the opportunity to increase content, provide value-added services, advance technology and further develop systems integration expertise. And, there's a lot of business to be gained with the changing trends of searching for outside technology.

In 1998, automakers spent around $490 billion on the components they assembled in their vehicles. Around $280 billion of that was outsourced to suppliers, like Dana. If just one more percent of automotive components were outsourced, it would add up to nearly $5 billion more in business for suppliers. That's quite a chunk of change to be gained by the right suppliers.

For the OEs, modular manufacturing offers cost reductions and improved capital efficiency while shortening development times and lowering administrative expenses. It can be a win-win proposition (or as they say in the dot-com world, there's a lot of traction here!).

Who knows how far this relationship will expand in the next few years?

One likely result will be that as the OEMs increasingly look to reduce time-to-market by compressing the design and manufacturing processes, they will ask suppliers to assume an even larger role as systems integrators. At Dana we have already taken on a number of non-traditional functions, such as warranty administration, invoice consolidation, supply-chain management, and logistics.

Of course, the driving force behind so many of the changes that we are seeing is the continuing consolidation of the industry. Yes, we are seeing a tremendous amount of consolidation – major deals – in the automotive industry, and in the supplier business. And this can be a very positive development. I believe the automotive industry that emerges from this period of change will be healthier, more efficient, and better able to serve a developing global market.

Surely consolidation though mergers and acquisitions has dramatically changed the automotive industry. Some speculate that we could see the 28 or so OEMs consolidating into 10, or even eight global players. Heck, Ford is all set to compete with GM for Daewoo, and there are rumors swirling about a number of other major deals that could happen.

And, while the number of automakers is slimming down, the number of automotive suppliers is getting even thinner. While today Dana is one of over 9,000 Tier I suppliers, we expect to be one of only 150 Tier I suppliers by 2010.

One result of all this consolidation is that the remaining suppliers are working more closely together. Even historical competitors are finding creative ways to offer the best overall product solutions to their common OEM customers.

A real sea change partnership for us, and perhaps one of the most exciting, is our collaboration with GKN wherein we even exchanged some of our driveshaft operations. In this partnership, Dana will focus on cardan operations, and GKN will focus on constant-velocity joints.

But that's not the extent of the plan. We have co-located engineers at a new R&D center near Detroit, and we are going to market together under the name Drive Tek.

The motivation for the alliance was easy: make it simple for our customers by allowing both companies to focus on core technologies and going to market together to present OEMs with the best driveshaft products for any application.

Many suppliers have similar stories to tell. They're all looking for ways to be more effective, and they're not afraid to set aside long-standing protocols to do it. We believe that the formation of strategic partnerships is one of the most capital efficient ways that Dana can grow in support of our customers at this time.

The strategy allows us to offer more choices to our customers without the need for additional capacity. The result is better use of capital and more efficient asset utilization, which ultimately serves the shareholder.

Looking further over the horizon, our industry has to plan and prepare for continued global growth and new technologies to speed our success.

The first thing we might all do in our planning, is to accept that there is a clear imperative for growth. Global manufacturers are going to have increased advantages over smaller players as we move forward – not only in market penetration, but also in asset utilization and capital efficiency. Technology is going to be critical to sustaining real growth. As I said earlier, I truly believe that expanding technology is the only way manufacturers will be able to survive in our rapidly changing world.

Probably every company represented here today uses the Internet for something other than e-mail. One of the more useful tools we have developed is an extranet connection with our customers and supply base.

This connection enables us – and our customers – to track shipments, inventories, and orders (in real time) 24 hours a day using the Internet.

However, it will be e-commerce that will have the greatest impact on our business, and on all business in coming years. I believe that most of these developments will help us to increase the speed at which business is conducted.

E-commerce as it applies to business-to-business transactions is growing at an extraordinary pace. But, the idea of using computers to generate and fill orders isn't new. Actually, we've all been doing it for years. The real difference today is that we can leverage the power of the Internet to speed our efficiency.

In 1999, business-to-business transactions over the Internet accounted for $109 billion, by 2003 that figure will be closer to $1.7 trillion. And the fastest growing portion of that amount is e-purchasing. It's true – and it's growing at a phenomenal rate. In the automotive industry, e-commerce accounted for less than one percent of all business-to-business transactions in 1997. This year its expected to double to two percent, and by 2003 it's anticipated that e-commerce will account for 15 percent of all business-to-business transactions in the auto industry. That's quite a leap.

At Dana, we recently announced an initiative to develop our own unique global e-procurement system. This new web-enabled system will allow us to manage Dana's $8 billion in annual worldwide purchases more efficiently. In fact, we plan on saving quite a bit through this initiative.

And, it's easy to see where the savings will come from. A normal transaction might cost in the neighborhood of $100 to complete once you figure in paperwork and other time-consuming activities. Compare that with a transaction made electronically that might cost less than $10 to complete, and you can see how valuable this initiative will be. In addition to significantly reduced transaction expenses, we anticipate other benefits.

These include better relationships with preferred suppliers, consolidated information on supplier performance, and reduced inventory requirements.

Dana is one of the first OEM suppliers to undertake this e-commerce initiative. And I believe our new global e-procurement system will enable us to utilize the Internet to further increase or capital efficiencies.

To make all this possible, Dana has selected Ariba, Inc. and Aspect Development, Inc. as strategic technology partners. So, you can see how changing and emerging technology is also creating collaborations across the board to drive change in industry.

It's only a matter of time until we're all dot-com companies – doing business over the web. The only minor differences being that, as manufacturers, we actually make things and have profits.

Use of computer-based technology, as well as the Internet, are increasing at speeds never before seen in industry. And everyone is trying to get on board before they are left in the dust.

Today, more than half of all U.S. households have access to the world wide web, and Internet traffic doubles about every 100 days. That's better than three times a year. As a matter of fact, the BBC – just about two weeks ago – reported that there are now more than a billion unique web pages on the net.

Technology will also play a major role in the development of safer vehicles, and vehicles with more of the features customers want.

Today, we have completely intelligent systems for everything from fuel control, and environmental control, to the monitoring of the performance characteristics of vehicles.

Suspension and braking systems will be integrated to provide safer, smoother, and easier-to-drive vehicles. Sensing of tire pressures, pavements, loads, weather, horsepower, etc. will all be harmonized to bring further safety improvements to the highway.

Finally, I believe that in planning the future of manufacturing, we have to look very far over the horizon to plan for the emergence of the developing world.

By the year 2030, most U.S. baby boomers will be retired, and frankly, we do not know how this will affect the U.S. economy.

But with a steadily aging population base in North America, businesses had better be engaged in nations with young and growing populations – simply to fill labor needs.

There is a real need and benefit in looking so far over the horizon when charting a course for the future.

Regional economies will continue to develop at the expense of national boundaries. These regional economies will continue to be anchored by the familiar economic powers: Japan, Germany, and the U.S.

But we could also see the emergence of some very interesting regional economies based on the sleeping population giants of China, India, and Indonesia. In fact, it's been estimated that 70 percent of the automotive industry's new growth will come from markets outside of North America and Western Europe. That means that Eastern Europe, and more so Asia, will be the next hot spots for new business.

While I don't believe we are quite to the point where we should be building a bunch of new factories and distribution centers in these regions, they may very well emerge as the most important growth markets of the first quarter of the 21st century. It’s easy to see why I feel this way. While our current developed markets have one vehicle for every 1.7 citizens, these emerging markets only have one vehicle per every 23 people. There's quite a bit of room for automakers to expand there.

As you can see, the automotive industry is going through quite a period of change. Trends such as globalization, speed to market, and modular manufacturing have virtually created a new industry – one that has evolved to encompass a wide range of technologies. And, speaking of "virtual," we can't ignore the impact the Internet has had on each of our businesses. It has offered us each a great potential to better serve our customers while maintaining more efficient operations.

As we work together and even merge our organizations, we are seeing a time marked by new developments and better products. Consolidation has become a means of survival in the automotive industry, and it certainly has impacted other industries as well. This sharing of technologies is enabling us to serve our customers better while enhancing shareholder value, a goal for each us here in this room today.

I'd like to thank you for joining me this morning to discuss what I believe to be the evolution of modern manufacturing. I can't think of better or more critical topic for my last public address as Dana's chairman.

I truly appreciate your time, and now I'd really like to open up the discussion to hear your opinions and answer any questions.