Wang, Jiajun

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MIT	Global	Scale	Network	MIT SCALE RESEARCH REPORT The MIT Global Supply Chain and Logistics Excellence (SCALE) Network is an international alliance of leading-edge research and education centers, dedicated to the development and dissemination of global innovation in supply chain and logistics. The Global SCALE Network allows faculty, researchers, students, and affiliated companies from all six centers around the world to pool their expertise and collaborate on projects that will create supply chain and logistics innovations with global applications. This reprint is intended to communicate research results of innovative supply chain research completed by faculty, researchers, and students of the Global SCALE Network, thereby contributing to the greater public knowledge about supply chains.  For more information, contact MIT Global SCALE Network Postal Address:  Massachusetts Institute of Technology 77 Massachusetts Avenue, Cambridge, MA 02139 (USA) Location:  Building E40, Room 267 1 Amherst St.  Access:  Telephone: +1 617-253-5320 Fax: +1 617-253-4560 Email: scale@mit.edu Website: scale.mit.edu Research Report: MISI-2014-13Evolution of Mega Suppliers in the Automotive Industry Jiajun WangMIT	Global	Scale	Network	For full thesis version please contact: Professor Shardul Phadnis Director of Research MISI No. 2A, Persiaran Tebar Layar, Seksyen U8, Bukit Jelutong, Shah Alam, 40150 Selangor, Malaysia. Phone: +6 03 7841 4845 Email: sphadnis@misi.edu.my © 2014 Jiajun Wang Page 1 of 6 By: Jiajun Wang Thesis Advisor: Dr. Javad Feizabadi Summary: By using a comparison between two mega-suppliers in automotive industry, this research verifies the applicability of Evolution of Business Ecosystem (EBE) theoretical framework in the middle stream of automotive value chain, as well as proposes diversification as the new factor that should be considered when examining a firm’s business architecture and its impact on performance of the firms in this stage of value chain. Jiajun holds a Bachelor of Business in Transport and Logistics Management from Royal Melbourne Institute of Technology and a Bachelor of Management in Logistics Management from Shanghai Institute of Foreign Trade. While working as a Project Manager at Staples Inc. (China), Jiajun helped building the first Staples China Fulfillment Center in Shanghai, facilitated several supply chain consolidation projects around eastern coast of China and led several successful business process improvement initiatives.  Following his education in Malaysia Institute for Supply Chain Innovation, Jiajun will work in the Asia Operation Practice at McKinsey & Company as a Junior Associate. Evolution of Mega Supplier in Automotive Industry KEY INSIGHTS 1. As automotive, airlines, aerospace and steel industries have been studied, the superiorfirm performance in automotive component industry also relies on how the firminteracts with its environment, i.e. in the network architecture of the firm’s extendedenterprise, Modular and Integral are two fundamental business architectures firmsfollows when compete with each other.2. The Evolution of Business Ecosystem (EBE) framework, which would help a firm toidentify its business architecture, could be applied in the middle stream of value chainand explain the Mega suppliers’ activities and firm performance.3. Diversification as one of the key factors in product markets of business ecosystemshould be evaluated when configures a firm’s strategy aligning with its businessarchitecture in the middle stream of the value chain due to the nature of productdiversification in this stage.© 2014 Jiajun Wang   Page 2 of 6  Emergence of Mega Suppliers The Mega supplier or “0.5 tier” supplier emerged in the background of the long boom in auto markets in Europe and the USA which created the long-overdue consolidation and alliances such as Daimler-Chrysler, Ford-Volvo, Renault-Nissan and GM – Fiat, who set an accelerating pace for change in cost reduction, a proliferation of niche models and shortening product life cycles. And under the new pressures, many new consolidation affected “tier 1” suppliers: Federal Mogul and TRW swallowing up smaller players like LucasVarity and T&N, Delphi bought Lucas Diesel Systems from TRW, Nissan reduced its supplier globally by 50%. And in this situation, some “tier 1” suppliers took on total design and market research as well as logistics integration for complete modules, assumed full responsibility for tooling and for warranty, who then evolved to “0.5 tier” suppliers or Mega suppliers. These firms supply major system to the assemblers, they designs, engineers and manufactures a wide variety of component, integrated systems and modules on a world basis. Such system also called “black-box solutions” which are solutions created by the suppliers using their own technology to meet the performance and interface requirements set by assemblers.   Table 1: Mega-suppliers capabilities summary Source: (Humphrey & Memedovic, 2003) Under this specific background, this research is performed under the sponsorship from ZF Friedrichshafen AG, who is famous for their chassis and transmission technology, listed as one of the top 10 global automotive supplier, aim to enhance their understanding of the future dynamics of the market to better position themselves for the potential challenge and opportunities.  Evolution of Business Ecosystem Theoretical Framework In order to have a better understanding of the competition environment in automotive component industry, a theoretical framework was utilized in this research: the Evolution of Business Ecosystem. Piepenbrock1 from London School of Economies proposes that the architecture of firms could be seemed as their most fundamental defining characteristic, based on two well-defined and largely immutable species Integral and Modular. Piepenbrock (2009) defines Business Architecture in terms of the strength, closeness and the specific morphology of relationships that exist between the core firm and the four markets that are its key stakeholders – Product Markets, Capital Markets, Supplier Markets and Labor Markets. Integral and Modular, also known as Blue (Modular) and Red (Integral) Architectural typologies, which are define around (1) the influence of a firm’s Objective Function (Shareholder Value vs. Stakeholder Surplus), and (2) Enterprise Boundaries (Narrowly Defined vs. Broadly Defined) to highlight the importance of Architectural Leadership as a key strategic capability in building and sustaining competitive advantage. Piepenbrock (2009) draws on Darwin’s theory of evolution of natural and biological ecosystems to examine and explain the Evolution of Business Ecosystems. The question of which architecture is inherently better is less important than which one is better suited to the prevailing environment, in which determines which species will prevail in the competition between species.                                                                1 http://www.ii-sl.org/ii-sl/Theodore_%28Ted%29_Piepenbrock.html Players Assemblers Mega-suppliersFirst-tier suppliersBranding & FinanceY N NInnovation and design capabilitiesY Y YGlobal reach Y Y LimitedProcess-engineering Y Y YRudimentary engineeringY Y YMajor competencyBrandGlobal reach & "Black box" solutionDesign and innovation capabilities© 2014 Jiajun Wang   Page 3 of 6   Figure 1: Modular vs. Integral summary Source: (Piepenbrock, 2009) The evolution cycle as illustrated in Figure 2, includes two main causal loops describe the co-evolution of the ecosystem and its constituent enterprises in terms of both product quantity (solid outer loop) and quality (dashed inner loop) that is demanded and supplied, with two clockwise revolutions of the causal loop diagram to describe  how  the  ecosystem  grows  and  eventually  matures, and  how  concurrently  incumbent  firms’ enterprises build the industry and are ultimately overtaken by late-entrant challenger firms’ enterprises.  Figure 2: Evolution of Business Ecosystem Framework Source: (Piepenbrock, 2009) Diversification as a key indicator in middle stream of value chain One major challenge as all Mega Suppliers are facing is that the new mega-companies that have been and will be created through acquisitions and mergers might or might not be managed effectively from the center, as the scope and complexity of activities may simply be too great. A further study in diversification is also required for a better understanding in business ecosystem of automotive component industry. Two key indicators were measured in the research to evaluate both the diversification status and the net synergies it gains from the different industries it diversified to.  The Herfindahl index (also known as Herfindahl–Hirschman Index, or HHI) is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them, and in this research the HHI is used to understand the internal concentration of the business in different industry  The Excess Value originates from the finance literature and can be used to examine whether diversified firms trade at a discount or premium relative to imputed values of portfolios of stand-alone firms. Thus, it promises high content validity in terms of capturing whether corporate wholes may indeed add up to more than the sum of their parts, i.e. if net synergies are realized. Sample firms in this research Thus four samples firms were compared based on the Evolution of Business Ecosystem theoretical framework as well as the diversification analysis.  Table 2: Samples firms Source: Author Key findings The applicability of Evolution of Business Ecosystem in the middle stream of value chain, TypeCompany NameCountryCompany TypeMega-Supplier; DiversifiedMagna International Inc.CanadaPUBLIC - PARENTMega-Supplier; DiversifiedAisin Seiki Co., Ltd.JapanPUBLIC - PARENTTier-1 Supplier; DiversifiedZF Friedrichshafen AGGermanyPRIVATE - PARENTTier 1 Supplier; FocusedWanxiang Group CorporationChinaPRIVATE - PARENT© 2014 Jiajun Wang   Page 4 of 6  the automotive component industry was evaluated in four different sets of comparison between the findings and Piepenbrock’s theory.   Enterprise Architecture: Magna International as Modular incumbent and Aisin Seiki as Integral late-entrant was identified and verified based on the corresponding quantitative data Magna All of our key stakeholders – investors, employees, management and society – continue to share a predetermined portion of our annual profits, as guaranteed by the Corporate Constitution. All Magna employees continue to enjoy the workplace rights guaranteed under the Employee’s Charter. And our decentralized and entrepreneurial operating principles remain the same, with day-to-day operating control in the hands of our divisional and group managers.  Aisin To make AISIN a preeminent global brand, we must acquire an unwavering level of trust from society, customers and business partners by ensuring that all employees engage wholeheartedly in mono-zukuri with a constant awareness of the obligations of trust we operate under. AISIN will become a truly powerful brand only when customers view us as being “totally reliable” and hold us in high esteem. As we move beyond this milestone, I believe that now is the best time to solidify our foundation so that we can resolutely pursue that contributes to the prosperity of society.  Table 3: Sample qualitative data Source: Magna & Aisin’s Annual books  Firm Operational Stability: the operational relative instable of Modular firm compare to Integral firm was verified based on the revenue per vehicle production.   Figure 3: Key Firm Performance Comparison Source: Author  Firm Performance: Market Cap was used to evaluate the firm’s performance in business ecosystem while 2003 – 2009 data verified the pattern concurrently incumbent firms’ enterprises build the industry and are ultimately overtaken by late-entrant challenger firms’ enterprises. While year 2010 to 2012 data suggested the disruption / evolution from the market has a significant impacts on the inter species competition, which also bridging the further research in diversification.   Figure 4: Market Cap Comparison Source: Yahoo Finance2  Industrial evolution: Two market evolution factors was identified that the 2008-2009 economy crisis and the geographical change (China became the number one automotive manufacture site around the world) change the competition environment.                                                               2 https://finance.yahoo.com/  © 2014 Jiajun Wang   Page 5 of 6   Figure 5: Global Vehicle production 1950 – 2012 by major countries of production Source: www.oica.net  Diversification bridging the Firm strategic position and industrial Output: Modular and Integral firms made different diversification selection with different result and further study is required to verify the findings.   Figure 6: Diversification analysis Source: Author Recommendations  The following managerial implications for both business architectures were proposed based on the analysis of Evolution of Business Ecosystem framework. It is highly recommended that the firm should not only understand its own business architecture, but also have a thorough understanding of its upstream and downstream of the value chain to identify the strategic partners and long term investment opportunities, such as the strategic supplier alliance by Integral firms and merger and acquisition by Modular firms.   Business Ecosystem Integral Modular Product Market Superior quality Technology leadership Decentralized structure Work with Modular OEM Supplier Market Strategic alliance with Integral suppliers Strategic M&A to reinforce core competency Labor Market Trust and life-long working relationship Entrepreneurial culture, empowerment and ownership Capital Market Work with investors for long term returns Maintain profitability to satisfy the stock market Table 4: Recommendations for firms with different business architecture Source: Author Further implications in the ZF as Integral firm based on the EBE analysis was proposed as follows.  Understand the customer’s business architecture and put centric focus on Integral customers to develop long-term collaboration  Scrutinize its business ecosystem to align the customer-centric focus to meet the diversified needs  Leverage its technology leadership toward further growth in synergetic diversification  Focus on China market to leverage the growth opportunity Future Research Thanks to the depth, width and intactness of the EBE theoretical framework and aforementioned research limitations, further research could be approached from different levels and different lens.  First of all, a wider research in the Automotive Component Industry could be further developed © 2014 Jiajun Wang   Page 6 of 6  from either expanding the total samples within the same sector or in-depth research based on the similar selection criteria in other top 10 suppliers to verify the EBE application findings such as the implications of the disruption and/or market evolution with new product evolving. Secondly, a similar focus of middle stream of automotive value chain could be further explored in different industries such as food industry (Hershey’s vs. Mars), computer industry (Intel vs. AMD), and Office supply industry (HP vs. Canon), and the impacts of diversification could be further evaluated in different cases. Thirdly, a shifting in the stream of the value chain could be further explored, namely shifting from manufacturing sector to service sector such as financial service, consulting service and distribution service.  Finally, a further investigation between the diversification and business ecosystem could be further researched in all the aforementioned industries and in different streams. Key Takeaways The applicability of the Evolution Business Ecosystem in automotive component industry provided validated theoretical framework for firms to evaluate the competitions and firm strategies from a longitudinal aspect, while not only providing an explanation why firms in the middle stream of the value chain performs different and prepare the firm to better configure itself for the future dynamics. The findings of how diversification could better bridge the firm’s strategic position and its growth opportunity shed a light on the importance of the synergetic diversification selection in the middle stream players. Last but not least that the disruption from the market evolution hopefully would trigger a further analysis toward the building of theory of evolution of business ecosystem.   

Evolution of Mega Suppliers in the Automotive Industry

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Evolution of Mega Suppliers in the Automotive Industry

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