E-BUSINESS STRATEGIES IN THE TAIWAN AUTOMOBILE INDUSTRY - CASE STUDIES APPROACH

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1 International Journal of Electronic Business Management, Vol. 1, No. 2, pp (2003) 85 E-BUSINESS STRATEGIES IN THE TAIWAN AUTOMOBILE INDUSTRY - CASE STUDIES APPROACH JrJung Lyu 1* and Yi-Chen Lin 2 1 Department of Industrial and Information Management National Cheng Kung University Tainan (701), Taiwan 2 Department of Management and Information Technology National Cheng Kung University ABSTRACT Automobile industry in Taiwan has the characteristics of capital and technology intensive, strong operation management capability, close relationship supply chain and has played a critical role in the international market. Since there are hundreds of the first-tier suppliers and thousands of the second-tier suppliers, this leads automobile industry to be one of the most important industries in Taiwan. Besides setting up big R&D centers, aggressively participating international collaboration, and building up overseas plants to face up the challenge of globalization, many automobile manufacturers have adopted e-business strategy as a key driver to strengthen their competitive advantages. This research aims to analyze the e-business strategy and the implementation models of the automobile industry in Taiwan. Through a review of the global automobile industry e-business practice, possible e-business trends are discussed. Three representative cases, each with different e-business strategy and B2B EC project, are presented where an analysis framework is used to classify their implementation models. The results of this strategic analysis can be used to support the industry practitioners to develop their e-business strategies. Keywords: e-business, Automobile Industry, Supply Chain Management. 1. INTRODUCTION Automobile industry is a very competitive industry. In the past few years, many manufacturers of the automobile industry in Taiwan have relative high profit earning due to the characteristics of capital and technology intensive, strong operation management capability, and close relationship supply chain. These characteristics in Taiwan enable the total costs of the supply chains are lower compared to other countries and this industry has therefore played a critical role in the international market. However, most of the managers are still eager to looking for the opportunities to improve their values and to reduce their costs in the same time. One of the pressures is that, based on a recent survey, eleven auto makers currently in the Taiwan market may cut into five in the next few years primarily for the economic scale factor. In the era of globalization and Internet economics, business is facing volatile environment and fierce competition. In 1990, for example, it took around six years for a car to be in mass production after the new concept was proposed. However, the same process is shortened into two years. To deliver the car that can fulfill the demands of the market in the shorter time, intimate relationship with the dealers and suppliers, integrated with on-line information for interactive collaboration, becomes necessary. The emergence of e-business seems to * Corresponding author: jlyu@mail.ncku.edu.tw

2 86 International Journal of Electronic Business Management, Vol. 1, No. 2 (2003) bring the promise for auto manufacturers. That is, by building new business models, re-engineering the business processes, and implementation of e-business applications, companies in Taiwan are possible to produce higher value-added automobiles and to connect even closer with the global automobile industry. Specifically, purposes of this research are: (1) Provide a review of e-business trends in the global automobile industry. (2) Discuss three e-business projects and share their experiences with the practitioners. (3) Based on the proposed strategic analysis framework, perform comparative analysis on the empirical cases and justify the e-business strategy in auto industry. 2. E-BUSINESS IN THE GLOBAL AUTOMOBILE INDUSTRY 2.1 Industry Overview The automobile industry has been a representation of many nations manufacturing industry. The number of consumers who owns a vehicle is a common indicator of the national economic level. The industry has a wide range of related industries on which it means hundreds of the first-tier suppliers and thousands of the second-tier suppliers for a specific manufacturer in a country. The suppliers employ high percentage of manufacturing workers and work closely with the manufacturers to form a supply chain [6]. It is estimated that 17.4 million automobiles were sold in the U.S. market in 2000 where there are over 24 million vehicles built annually today a 40% over-capacity [14]. This is a major reason why the world automobile industry is in an unprecedented scale of change in the past decade. Assembly line production system, a way for mass production, is firstly applied in the auto industry. To provide a variety of vehicles for the demanding buyers, Alford et al. [2000] mentioned that more and more automobile manufacturers are transforming their systems for mass customization. The management of the costs and risks in the supply chain is a complex issue in such a new business model and it is therefore necessary to transform the traditional manufacturer-supplier relationship to be collaborative. A similar research is reported by Sandhya and Mrinalini [12] who have examined the types of the linkages between buyers and suppliers in India and indicates how the relationships have evolved into long-term, strong, and smaller number of suppliers based. Supplier management techniques become critical because of the enormous costs and risks associated with how to put suppliers capabilities together with the core competence of manufacturer itself. In Eurpope, Mellahi and Morris [9] have pointed out that the suppliers have stronger relationships with their buyers and are forming strategic alliances. The same argument was depicted by Caputo and Zirpoli [5] who reported their empirical observations on a leading European car manufacturer. They found out that suppliers involvement in the new product development (NPD) process is strategic important for the manufacturer to reduce the growing business complexity and to improve the design capability. May and Carter [8] also introduced a case study about how information and communication technology can support the operations for team-based manufacturers and suppliers to achieve dramatic cost saving and sales volume increasing. Many current practices in the auto industry are starting from Japan. All major manufacturers in Japan have stable ownership structures as well as long-team relationships with dealers, suppliers and banks [10]. The so called keiretsu relationship means they are lean and flexible yet with a hierarchical governance structure. Such relationship is under structural and strategic changes [2]. They explained the sources of changes through three case studies. For a complete survey of the global strategies in the automobile industry one can refer to Belis-Bergouignan, et al. [4]. They have developed a framework to analyze the strategy trajectories of the major multinational companies. By using statistical analysis of the data set collected from thirty-five largest global automobile manufacturers, Gracia-Pont and Nohria [7] found out that the possibility of an alliance between any two firms depends on the local density of alliances among the members of their strategic groups since the firms mimic the behavior of those they view as strategically similar or as belonging to the same strategic group. So the alliance formulation is not only between manufacturers and suppliers but also between manufacturers groups in the automobile industry. 2.2 E-Business Status The importance of information technology is well recognized in the automotive industry. Since the nature of the automotive supply chain is relative easy to implement Electronic Data Interchange (EDI), Big Three automobile manufacturers have strongly encouraged their first-tier suppliers to communicate with them through EDI since the end of A study executed by Rassameethes, et al. [11] has addressed the effects of EDI on the automobile industry. They showed that suppliers with high performance have a higher level of EDI integration where the size of a firm does not matter. Since Internet provides many cost-effective solutions such as EOI (EDI over Internet), it is possible nowadays to extend this B2B (Business-to-Business) relationship from the first-tier suppliers to their suppliers. Based on the information on their web sites, it

3 J. Lyu and Y. C Lin: E-Business Strategies in the Taiwan Automobile Industry - Case Studies Approach 87 is known that GM now runs a global network named EDSNET linking more than 30 GM data processing centers with over 2,000 suppliers via EDI. Ford uses a private telecommunication network named Ford Net for establishing EDI connections with its suppliers. Recently, Ford has built up an on-line website, to provide build-to-order (BTO) function that gives customers flexible combination of their needs. Tapscott [13] took Chrysler as an example to explain how to use information technology to connect the supply chain closely and creating efficiency. Chrysler runs the Extended Enterprise Network that is an internet-based system that allows its suppliers to access information in regarding to purchasing, delivery schedules, and invoices, where traditional communication methods such as telephone, fax, mail and courier service may be further reduced to a minimum level. Chrysler also uses Internet in the FastCar project to provide on line information for its new product development process. As stated, Japanese automobile manufacturers have formulated integrated groups known as keiretsu for decades. EDI has been used by keiretsu groups, such as Toyota Network System (TNS) is used by Toyota to communicate with its offices and major suppliers all over the world. More than 95% of Nissan first-tier suppliers communicate with keiretsu through EDI. Recently, North America factory of Nissan has used Internet to maintain customer information, to organize data warehouse, and to establish customer relationship management system in order to improve the marketing performance. Innovative design is also important for the global automobile industry. A worldwide car design project - OSCar has been developed to generate new ideas through Internet. The creator Markus realizes that design process costs most in its new product development phase. By connecting million of ideas from the Internet might converge to a perfect product. This project is still under experimentation and the interesting readers may refer to Afuah and Tucci [1]. 2.3 Trends A summary of the survey above can be listed below which suggests the possible trends of the automobile industry: (1) Closer collaboration relationship within the supply chain The JIT (Just-in-Time) model has been firstly implemented by Toyota and is now a common industry practice. Today, no matter which systems TPS from Toyota, FPS from Ford, or the ISO/TS quality system they all emphasize the partnership relationship between manufacturers and suppliers. Moreover, the relationship has been extended to R&D and logistics functions. The famous start-up Covisint developed web-based platform in strategic planning, idea development, testing, and mass production for the collaborative new product development. If it works, it can shorten the NPD form 42 weeks to weeks. (2) Applications in the Internet are ready Although the automobile industry has not used Internet widely compared to other industries, there are growing needs in e-business applications, such as SCM (supply chain management), CRM (customer relationship management) or PLM (product lifecycle management), in many manufacturers. Since the broad-band networking environment is becoming ready now and there are many commercial applications available, it is expected that the Internet-based solutions can attract many users in the automotive supply chain in the near future. (3) On-line transaction is feasible A large manufacturer can reduce purchasing cost and attract more suppliers through on-line transaction mechanism such as e-marketplace. However, for the OEM/ODM suppliers that may join the e-marketplace by the pressure of their buyers, the balance between quality and price competition is a difficult issue. The reason is that manufacturers may initiate bidding (lowest price wins) as a major way for cost cutting. (4) B2B electronic commerce is important to develop Many research agencies predict that B2B electronic commerce will increase many folds in the next few years. The e-procurement function is not too difficult to implement in the keiretsu structure. It is estimated that implementing B2B electronic commerce can improve the administrative efforts considerably and by adopting new business models (such as VMI, vendor-managed-inventory) the overall inventory level in the supply chain can be greatly reduced. 3. E-BUSINESS CASES IN TAIWAN 3.1 Industry Background Product design and development is critical for the survival of vehicle manufacturers in Taiwan. For example, Kuozui (Toyota) will invest more than 14.3 billions NT before 2005 for the new car development. Besides expanding R&D centers, aggressively participating international collaboration, and building up overseas plants to face up the challenge of globalization, many automobile manufacturers have adopted e-business strategy as a key driver to strengthen their competitive advantages. Before 2000, most of the suppliers communicated with their manufacturers (down stream) through a combination of telephone, fax, and EDI. As to their suppliers (up stream), traditional communication mechanisms such as telephone or fax are adopted. After the justification of the possible benefits and potential risks, many leading manufacturers did not want to be pioneers while some others considered

4 88 International Journal of Electronic Business Management, Vol. 1, No. 2 (2003) e-business could be a strategic weapon and started the pilot projects. Three case studies are presented in the next section. 3.2 Case Studies Recognizing the importance of e-business, Industrial Development Bureau in the Ministry of Economic Affairs has promoted the concept of B2B electronic commerce, setting up the EC standards, and encouraging leading automobile manufacturers to implement B2B electronic commerce projects. After conducting several intensive interviews with three case companies, this paper presents their company background, focus on the e-business projects, and benefits to implement the B2B EC project Case Company A Case company A established on Since then, it has grown and prospered. Its core business is vehicles manufacturing and sales and has contracted technical cooperation with Mitsubishi Motors of Japan. Its quality policy is Meeting Requirements, Mental Insistence, and Nil Defect or MR. MIND in short. Case company has ISO 9001 and ISO certified and won the National Quality Award. Case company A used the e-logistic as the e-business strategy. Through B2B EC mechanism, it had integrated component suppliers in the way of information sharing and on-line communication. It also implemented supply chain management system to re-engineering the processes of production management, quality management, after sales service, payment, technology development, materials sourcing, and purchasing. A cross-function team was form where the project was reviewed in a weekly basis by the top managers. This project had successfully reduced administrative costs 1.5 million NT and inventory costs 45.5 million NT annually for case company A. Similar benefits for the suppliers were also achieved. With this as a basis, case company A expected to cut the time to delivery of suppliers from three weeks in 2000 into one week in That is, this supply chain is possible to implement BTO (Build-to-Order) model in the future Case Company B Case company B was established in Besides heavily investment in R&D, it also developed a respectable global brand. It has built a worldwide distribution network and established several overseas plants. Case company is one of the few manufacturers in Taiwan in starting with the product data management (PDM) project. It has earned TPM (Total Product Management) excellence first category, Excellent Industrial Technology Development Award, National Quality Award and is also ISO 9001 accredited. The e-business applications Case company B implemented including four modules: e-pdm system, e-procurement system, distributors e-claim system and overseas control system. Case company B has an innovative IT team to design and develop the necessary modules. Through this project, average new product development time is reduced from 4,512 hours to 2,400 hours. The suppliers are becoming earlier involvement in the product design process. Inventory has a 9 million reduction where the sales volume is all time high. Case Company B is going to implement collaborative design community to further strengthen the ability of the design chain Case Company C Case company C founded in It has strong technical resources ($20 million R&D investment annually) and its factories are fully equipped with automatic facility capable to manufacture high quality cars and motorcycles. Case company C is now the biggest motorcycles producer in Vietnam. It started the ERP project several years ago that was among the pioneers in Taiwan and always has following the EC standard regulated by the government. The CEO of the case company C had committed to the e-business project since he realized its possibility to improve operation efficiency for the supply chain and to further strengthen competitive advantage of the company. The scope of the project includes production-sales integration system, suppliers electronic commerce application system, ASP solution application system (for micro suppliers) and e-procurement system. This project reduces its monthly inventory around 5% and the order response time is cutting form 2 days to half day. Case company C is planning to implement collaborative management system (primary collaborative logistics function) in the next phase. 4. STRATEGIC ANALYSIS OF E-BUSINESS IMPLEMENTATION IN THE AUTOMOBILE INDUSTRY Strategy is what the company does to sustain and to position itself into the future. Facing the challenges of globalization and emerging technologies, a manufacturer has to innovative in core process and find way to differentiate itself. Traditional industry used to work hard but ignore the importance to develop new business models. Automobile manufacturers in Taiwan have been strong on industry collaboration and have developed small keiretsu structure to enhance the value of supply chain. In the era of e-business, it is necessary to perform strategic analysis to position the company. A framework is therefore developed which includes four categories based on the

5 J. Lyu and Y. C Lin: E-Business Strategies in the Taiwan Automobile Industry - Case Studies Approach 89 innovation and performance level as shown in Figure 1. The framework can be used to identify the e-business position of a specific enterprise. Each category is described below specifically. High Performance Low Low High performance orginization Operations alignment II I IV III Innovation Figure 1: Direction of e-business Breakthrough Repositioning High Category I: Operations alignment Operations alignment involves incremental change. Companies employ this strategy may under the name of right-sizing and with the key objective of cost reduction. This strategy focuses on business process re-engineering within the enterprise. Many B2B EC projects have improved the buyer-supplier relation, faster or cheaper, but without changing the structure of the supply chain are belonging to this category. Taiwanese automobile manufacturers, in general, are looking for this strategy since it has clear goal and low risk involved. Case company C is in this category so far. Category II: High performance organization To be a high performance organization, an enterprise needs substantial change. Companies can adopt new business strategy with the basis of the previous projects. For example, case company A has cut supplier response time in three fold within three years with the basis of its ERP project and B2B EC project. Adopting this strategy apparently requires the strong support of the top managers, discipline of the project team, and the state-of-the-art technologies. The pay-off is relative good compared to other categories. Category III: Repositioning Repositioning as a strategy must also drive from operations alignment. This strategy needs to find new market segmentation and change the original business model for new profit resource. Case company B is belonging to this category. Case company is relative agile and innovative and has been successful to enter European market through the development of a niche-market vehicle and the support from local dealers. Category IV: Breakthrough To sustain value creation in today s highly competitive market, breakthrough strategy should be necessary. Toyota sets a good sample in creating LEXUS that now creates high profits for the company. Breakthrough strategy can lead companies to re-build its core competence and creates new opportunities with high profit. Case company A is so far the company that is closest to this category in Taiwan. It happens that for the past one decade, this company is the most profitable in the group of our case studies. 5. FUTURE PROSPECT In the era of globalization and Internet economics, business has to find ways to strengthen its value chain. The automobile manufacturers and suppliers in Taiwan need to change their business models and re-engineering business processes to avoid being eliminated. On the other hand, those enterprises that seriously build up new business strategy and re-position themselves, have better opportunities to sustain and, at least, to survive. The conclusions of this paper are as follows. (1) The trends of the global automobile industry include: closer collaboration relationship within the supply chain, applications in the Internet are ready, on-line transaction is feasible, and B2B EC should be developed. (2) All the leading manufacturers in Taiwan that have implemented e-business project have been successful. That is, the automobile industry is ready to adopt e-business strategy to improve its competitive advantages. (3) Three case companies are positioning different in the strategic analysis network. They all should pursue breakthrough strategy in the future but starting from the high-performance category is a good stepping stone. The automobile industry has been transformed from product-oriented to customer-oriented. This industry may adopt MTO strategy like PC industry and it will change the global market. For those manufacturers and suppliers in Taiwan they must have quick response ability and apply e-business strategy to improve the value-added of the automotive supply chain. REFERRNCES 1. Afuah, A. and Tucci, C. L., 2003, Internet business models and strategies: text and cases, McGraw-Hill, New York. 2. Ahmadjian, C. L. and Lincoln, J. R., 2001, Keiretsu, governance, and learning: case studies

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