Straight - It was written by the auto parts analyst, with additional insights provided by the auto analyst in the following report. (They aren't tech types, and you can't take their comments as perfectly literal or accurate. But it's interesting info nonetheless.)
-- PB: AUTOS: E-COMMERCE & THE AUTO INDUSTRY CONFERENCE HIGHLIGHTS --
08:27am EST 9-Feb-00 Prudential Securities (M.BRUYNESTEYN 212-778-1323) GM F
AUTOS: E-COMMERCE & THE AUTO INDUSTRY CONFERENCE HIGHLIGHTS
R E S E A R C H N O T E S February 9, 2000
Subject: Auto Industry
OPINION
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Current: HOLD
Analyst: Michael Bruynesteyn (212) 778-1323 RISK: LOW
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* Execution Is Key; Technology Is Not The Issue;
Six Years To Change Business Models.
* 10-15 Day Build To Order At Least Two Years Away;
Build For Stock Improvements More Immediate.
* OnStar Growth Boosted By Addition Of Toyota And Honda
* Vertical Trade Exchanges Starting Up; Transaction Pricing To Fall
* GM Relationship With Dealers To Change By Mid-Year;
Price Transparency An Issue.
Prudential hosted a conference on E-Commerce And The Auto Industry on February
8. General Motors (GM, $79, Accumulate), Ford (F, $48 1/8, Accumulate), Lear
(LEA, $26 1/8, rated Strong Buy by Prudential Auto Parts analyst Ron Tadross),
Magna (MGA, $40 7/16, rated Accumulate by Ron Tadross), Dana (DCN, $23 5/16,
rated Accumulate by Ron Tadross), Oracle (ORCL, $59 9/16, rated Strong
Buy\SBI\Select by Prudential B2B analyst Doug Crook), i2 (ITWO, $235 13/16,
rated Strong Buy by Doug Crook), Priceline(PCLN, $58 1/16, rated Strong Buy by
Prudential Internet Retailing analyst Mark Rowen), Freemarkets (FMKT $247 Not
rated) and AMR Research made presentations on how e-business would affect the
auto industry. What we heard and concluded is as follows:
Execution Is Key; Technology Is Not The Issue; Six Years To Change Business
Models. Goals for changing the core business of the automakers are facilitated
by the internet, however the associated technology is not the roadblock to
implementation. Dramatic changes are required to redesign the manufacturing and
design processes to reduce inventories, cut costs, and get more efficient at
bringing new models to market. The production process, for example, needs to be
simplified at the assembly stage - meaning that some variation of modular
concepts will likely be applied. The rollout of new vehicle and plant designs
is constrained by the long lead times and long lives of current vehicle
programs, so we estimate that it will take at least one generation of vehicle
program life, i.e., six years, to revamp the automakers' design and production
processes.
10-15 Day Build To Order At Least Two Years Away; Build For Stock Improvements
More Immediate. Less than 15% of vehicles are ordered for customers from the
factory, largely because it takes 6-8 weeks until the customer receives the
vehicle. Reducing the need to build for a forecast of demand would cut
inventory holding costs, reduce the need to incentivize slow-moving field stock
and improve customer satisfaction, however the automakers realize that the 100%
build-to-order (BTO) model used by Dell will never apply to their business.
Oracle sees BTO through Ford dealers as 2 years away, and then only on selected
models. GM is starting three BTO pilots this year, however we estimate that
widespread application of the concept will not be possible for any automaker
until the design and production processes have been reconfigured (six years for
the entire product range) to enable rapid build to customer specifications.
Even when BTO in a reasonable time, say 10-15 days, is possible, many customers
will continue to buy in the traditional way, although most will have researched
their vehicle over the internet before arriving at the dealership. In the
meantime, companies like Priceline can already sell the automakers information
allowing them to better understand true demand for configurations of their
vehicles so that they can improve the accuracy of their build-for-stock.
OnStar Growth Boosted By Addition Of Toyota And Honda. GM has a goal of 1
million OnStar subscribers by the end of 2000 (starting from 100,000 in place at
end of 1999) and 4 million by 2003. The latter number now seems more
achievable with Toyota and Honda confirmed to employ OnStar in some of their
North American models starting in 2001. Vehicle purchasers will not be charged
much more than $300 for the hardware (in many cases this will be built into the
vehicle price) and will receive 1 year of the service for free. Fees will range
from $20 for the basic safety package (seems a bit expensive) to $40 for the
Virtual Advisor with full concierge service and internet access. Income from
cellphone airtime reselling will come on top of that. It is conceivable that GM
could generate 5% or more of its earnings from OnStar services by 2003 (Rough
calculation: $500/year * 4 million units * 15% estimated net margin = $300
million).
Vertical Trade Exchanges Starting Up; Transaction Pricing To Fall.
Auto-xchange.com, Ford and Oracle's trading exchange, commenced procurement and
product development operations on January 31. GM's TradeXchange, a partnership
with Commerce One and i2, has been used since December, 1999 to auction off
excess production equipment and will ramp up procurement over the next several
quarters. DaimlerChrysler has yet to announce its exchange. Already, however,
we are seeing signs that pricing for transactions will come under pressure.
DaimlerChrysler (DCX, $65 5/16, Hold) has stated that there will not be a charge
for participating suppliers, and GM does not plan to collect fees on its
dealings with suppliers (although it will charge suppliers to use their exchange
for their own procurement from lower tiers). Oracle concedes that fees that
they plan to charge suppliers to deal with Ford (and a soon-to-be announced
second automaker) will quickly drop to single digit basis points. This implies
that, while the trading exchanges will be valuable to the automakers' core
businesses, their standalone value may not be very important.
GM Relationship With Dealers To Change By Mid-Year; Price Transparency An Issue.
Automakers are currently not permitted to publish transaction prices or
negotiate directly with consumers for vehicles. Therefore, visitors to their
sites are directed to a single dealer (the one with the right to market to their
zip code) for discussions on pricing. Third party service providers, like
Priceline, are bridging the information gap by providing consumers with dealer
invoice costs for vehicles, and they are even able to determine "street prices"
for vehicles on a regional basis. The automakers and the dealers cannot ignore
this, and must amend their business models to allow customers to obtain real
transaction prices from the manufacturer and from more than one dealer at a
time. Mark Hogan, President of e-GM, estimates that GM will agree on a revised
operating model with its dealers by mid-year, and we suspect that transparency
of real pricing will be a major faucet of the change. Note that DaimlerChrysler
is experimenting with directing customers from their website to a remote site
with offer prices from multiple dealers. |
