Another nice mention of GMGC this morning, this time by Prudential Securities (see point #3):
-- PB: B2B CONFERENCE: INFORMATION AND EXECUTION--THE AUTO PARTS INTERNET DUO --
08:18am EST 9-Feb-00 Prudential Securities (R.TADROSS 212-778-2433) F GM ORCL
B2B CONFERENCE: INFORMATION AND EXECUTION--THE AUTO PARTS INTERNET DUO
R E S E A R C H N O T E S February 9, 2000
Subject: Original Equipment Auto Parts
OPINION
=======
Current: HOLD
Analysts: Ronald A. Tadross, CFA (212) 778-2433
Brian Delaney (212) 778-4471
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*Suppliers Indicate GM and Ford E-Commerce Strategies Are Very Similar-Oracle
Discussion Confirms Wide Availability of E-Commerce Tools
*Its Execution Stupid-Data Flow Integrity And Management Likely To Be A Key
Differentiator Amongst Automotive Industry Participants
*Opportunities Include: Reduced Warranty Costs, Lower Inventories, Brand
Strength, Electronics Content
*Plans to Continue To Outsource Commodity Manufacturing Indicates These Parts
Are Most At Risk
We would like to thank everyone that helped coordinate, market and participate
in our "E-Commerce and the Auto Industry" Conference on February 8, 2000. In
summary, the participants helped us understand that the Internet should enhance
supply chain information flow about consumer demand, production sequencing and
vehicle warranty claims. Equally important, we learned that the integrity of
the data and what the dealers, suppliers and automakers do with the information
(i.e. execution) will differentiate strategies. On a separate note, we also
believe the suppliers will more aggressively outsource commodity parts
manufacturing in the future. The following points detail our findings:
1. It's The Execution Stupid-The Suppliers And Oracle (ORCL-$59 9/16, rated
Strong Buy by PSI analyst Doug Crook)Helped Us Believe That The Automakers'
E-Commerce Tools Are Very Similar. We learned at our February 8 e-commerce
conference that proper use of the enhanced information flow, as opposed to which
software provider a company is using, should be a critical component of success
for the automakers and suppliers in the future. According to participants from
Dana (DCN-$23 5/16, rated Accumulate), Lear (LEA-$26 1/8, rated Strong Buy) and
Magna (MGA-$40 7/16, rated Accumulate), there are not many differences between
the GM (GM-$79, rated Accumulate by PSI analyst Michael Bruynesteyn) and Ford
(F-$48 1/8, rated Accumulate by PSI analyst Michael Bruynesteyn) e-commerce
strategies today. This is interesting considering Magna and Lear are active
participants on the automaker e-commerce supplier advisory committees-they're
tuned in. In addition, Oracle indicated that a few months ago it did not have
e-procurement capabilities, but on February 7 the company conducted its first
online auction for the Ford Motor Company. This showed us that entrenched B2B
software providers will fill their product portfolio holes quickly, and get the
customer what they need. Equally important, i2 (ITWO-$235 1/8, rated Strong Buy
by PSI analyst Doug Crook), Freemarkets (FMKT-$246 3/16, not rated), Oracle and
Priceline (PCLN-$57 7/8, rated Strong Buy by PSI analyst Mark Rowen)
acknowledged that execution and first mover advantage has been a critical
component of each company's success thus far. So, from this vantage point the
automotive e-commerce playing field looks even, but it probably won't stay that
way.
2. More Warranty, Consumer Demand And Production Sequencing Data Could Be A
Boon Or A Bust. We learned that e-commerce should dramatically enhance
information flow, and the companies should be able to differentiate themselves
by insuring the integrity of the data and using it properly-execution. For
example, the Internet should empower the vehicle buyer with more information on
the invoice price and dealers that are willing to take a lower gross margin
(through Priceline). The automaker could learn from Priceline which
configurations a consumer selects most. This way the automaker may be able to
better advertise and reduce its incentives. Suppliers should know when a
vehicle is sold off the dealer lot, and have real-time access to the
manufacturer new product launch schedules and regular production releases. The
tier one supplier may be able to lower its 20 days of inventory if it gains
access to and uses better production sequencing data from its customers,
suppliers and own facilities. Warranty data should be sent directly from the
dealer to the supplier, so the supplier can fix the problem immediately instead
of the traditional 6 weeks. According to Lear, the systems are in place to get
a lot of this data now, but it requires a willingness on the part of both the
suppliers and automakers to have an open exchange. All the supplier
participants maintained that increased information flow is critical to
harnessing the potential the Internet offers. However, an open exchange will
not insure the quality of the data or whether or not a supplier/automaker uses
it properly. Going forward, we think analysts need to monitor when the data
starts to get exchanged and then figure out who is using it the best.
3. Brands and Onstar-Maybe Some Supplier Relief; Transaction Price Picture
Remains Fuzzy. Most participants agreed that transaction charges for the
Internet exchanges are likely to decline quickly, and one major supplier (who
apparently is not alone) boldly stated that his company does not like the idea
of paying to do business with his customer. GM indicated that it would not
limit supplier brands on its website, and this should be good for suppliers that
have a branded product. Johnson Controls, (JCI-$55 5/8, rated Accumulate) not
at the conference, for example, has been able to leverage its co-branded LEGO
child seat to win extra volume with GM. If consumer awareness of supplier
brands improves, at a minimal cost to the supplier, that should be positive for
the supplier. GM also indicated that it has agreed to install its Onstar (in
vehicle navigation/communications) service in certain U.S. Toyota (TM-$91, not
rated) and Honda (HMC-$73 _, not rated) models. We like the content growth
story of interior electronics, and think Gentex (GNTX-$32 , Strong Buy/SBI)
should continue to be a key beneficiary of this trend because at least 1/3 of
GM's 1 million Onstar interface units should go in Gentex's mirror. GM's goal
is 4 million Onstar units by 2003. Delphi (DPH-$17 5/8, rated Accumulate) also
makes the satellite link and communications brick for Onstar. As far as we
know, GM plans to use General Magic (GMGC-$10 3/8, not rated) for most of the
voice recognition capabilities. We anticipate that Ford will utilize Visteon,
its captive supplier, and potentially Nokia (Ford recently appointed Nokia's
Chairman to its Board) for its telematics push beginning in September 2000 with
the Lincoln brand.
4. The Supplier Verdict: There Are Pluses And Minuses For All, And We Think
Execution Will Indicate Who Wins And Who Loses Big. Our concluding thought is
that the Internet will accelerate information flow, probably at the similar rate
for most companies in the automotive space (sure, there will be some companies
that just don't get it), but companies will be able to differentiate themselves
principally on how they use the data that the Internet provides. In addition,
commodity parts status could be a differentiator as most of the suppliers
indicated they will outsource more commodity part manufacturing and Dana went as
far to indicate it would be aggressive in this arena. What the companies all
seemed to have in common was the belief that improved internal information flow
and communication with their suppliers should result in reduced inventories and
salaried headcount reductions. On the flip side, no supplier or B2B company was
able to point to a mechanism that will allow the tier one suppliers to keep the
cost reductions they negotiate with their tier two suppliers. However, if the
purchasing manager at the automakers is responsible for insuring that the
supplier transacts over the exchange, then this could be a bargaining chip for
the supplier in the future.
Stocks Mentioned: F, GM, ORCL, ITWO, FMKT, PCLN, DCN, LEA, MGA, DPH, GNTX, JCI,
GMGC, HMC, TM |
