What is the impact of Cost Cutting among suppliers? Automotive News World Congress April 21, 2005

Questions to be addressed 1.Is China truly as cost competitive as is said, or are there hidden costs that erode savings? 2.How has the push towards lower cost product affected suppliers?

Traditional Elements of Cost Element Labor Material Overhead Tooling/Equipment Support Costs Working Capital Other

Traditional Elements of Elements of Cost Element Labor Material Overhead Tooling/Equipment Support Costs Working Capital Other Potential 20:1 savings Motivated and educated workforce Additional labor costs – fringe and bonuses Extensive Training and development requirements.

Traditional Elements of Elements of Cost Element Labor Material Overhead Tooling/Equipment Support Costs Working Capital Other Savings from high labor input Availability of material may be limited or not competitive now

Traditional Elements of Elements of Cost Element Labor Material Overhead Tooling/Equipment Support Costs Working Capital Other Savings Salaried Workforce Skilled Technical People Facility costs Tooling and equipment Costs Energy, inefficiencies

Traditional Elements of Elements of Cost Element Labor Material Overhead Tooling/Equipment Support Costs Working Capital Other Up to 90% savings Immediate savings to program Substantial support and follow-up.

Traditional Elements of Elements of Cost Element Labor Material Overhead Tooling/Equipment Support Costs Working Capital Other Varying degrees of Supplier development Considerable support costs – time and resources Extra logistics Freight Ground transportation Repackaging Washing

Traditional Elements of Elements of Cost Element Labor Material Overhead Tooling/Equipment Support Costs Working Capital Other Payment terms Up-front program costs Prototypes Tooling Program development Increased supply chain inventory

Traditional Elements of Elements of Cost Element Labor Material Overhead Tooling/Equipment Support Costs Working Capital Other Facility/Equipment Relocation costs Trailing liabilities Decreased asset utilization Effects to current home country supply base Risk

Commodity Price Higher Lower DevelopedDevelopingUnder-developed Supplier Development Stages Risk Higher Lower Development Support HigherLower

How to define the opportunity for Cost Savings? Not all commodities appropriate Considerations Size and Mass Raw material availability Manufacturing process Volume Total Purchasing Mass

Effect of Cost Cutting to Suppliers Forcing changes to the business model Changes to the value chain What could be purchased vs. What is purchased. Move up the Bill of Material Re-evaluate Core Processes Develop Integrated Strategies

Moving up the Bill of Material Final Assembly Sub-assemblies Manufactured Components –Final component manufacturing »Raw materials Add Labor content to the Material Purchased from China

An Integrated Strategy Purchase of Components only Emphasis is to reduce product cost from the existing supply base Strategic Sourcing Changes to the Business Model and a re-evaluation of the value chain Integrated China Sourcing Strategy Consideration of China’s domestic market potential Integrated Supply chain and Global Manufacturing Strategies

What is the Impact of Cost Cutting? Relocation of the Supply Base Changes to the Business Models Regional and global supply models Greater role for supplier support and development New Partnerships and Relationships

Do Chinese Factories really Produce the Cheapest Parts? The entire value chain must be addressed Labor costs offset by additional factors These factors may be only temporary Must move to an integrated strategy Yes…….But,……..

Thank You!