Blue Paper Leadership in the Automotive Industry A study by Spencer Stuart s Automotive Practice
About Spencer Stuart Spencer Stuart is one of the world s leading executive search consulting firms. Privately held since 1956, Spencer Stuart applies its extensive knowledge of industries, functions and talent to advise select clients ranging from major multinationals to emerging companies to nonprofit organizations and address their leadership requirements. Through 50 offices in more than 25 countries and a broad range of practice groups, Spencer Stuart consultants focus on senior-level executive search, board director appointments, succession planning and in-depth senior executive management assessments. Spencer Stuart s Automotive Practice helps public and private, global and mid-sized organizations throughout Europe, North America, Asia Pacific and Latin America attract exceptional talent. During the past three years, consultants in the practice have completed more than 300 senior-level executive search and board director assignments. Our experienced consultants offer expertise across a broad array of functions in the following sectors: > Automotive Parts Manufacturers: Tier One, Tier Two & Other Suppliers > Automotive-Related Services > OEMs: Car, Truck & Other Vehicle Makers > Private Equity Funds Investing in Automotive Audibmw.info
introduction 1 automotive trends and strategic priorities 2 trends in automotive leadership 5 where are the leaders of tomorrow? 10 conclusion 13 Automotive industry executives are confronting a profoundly changing market, characterized by increasing complexity and less room for error and inefficiency. Having the right leader in place one who can identify the winning path and successfully lead the organization along that path is more important than ever. Against this backdrop, Spencer Stuart has launched a study exploring the personal and professional characteristics of successful automotive executives and the ways in which industry forces are shaping the leadership needs of the future. We surveyed 350 automotive executives globally to get their views on the primary challenges facing the industry, companies strategic priorities, the competencies and experience senior automotive leaders must possess today and in the future, and their companies talent development and succession planning efforts. We also examined the backgrounds of more than 500 senior-level automotive executives in order to identify commonalities in their educational backgrounds, personal development and careers. Finally, we interviewed chief executive officers of original equipment manufacturers (OEMs) and leading suppliers about the forces reshaping the industry and the leadership profile of the future. In this study, we explore the key industry challenges and their implications for leadership and succession planning, including: > The ongoing globalization of the industry and the imperative to establish operations in high-growth, low-cost regions for sourcing and to develop future markets > The drive to establish more flexible production and cost structures > The ongoing need to innovate, even as financial resources become more limited > The experience required for CEOs and other senior-level automotive executives as a result of these industry trends > The state of talent development and succession planning in the industry > The viability of recruiting outsiders to address talent gaps Audibmw.info
Leadership in the Automotive Industry An industry in flux: Automotive trends and strategic priorities globalization Hardly a new phenomenon, globalization in the automotive industry accelerated in the 1980s when Japanese automakers made significant headway in penetrating the U.S. market. Today, however, the pace of globalization has intensified and global sourcing has become a competitive imperative. At the same time, automotive companies see great potential in developing regions such as China and India as their consumer markets begin to emerge. Nearly three-quarters of the automotive executives who participated in our survey said the industry s greatest challenge is the redistribution of resources to highergrowth, lower-cost regions. Squeezed by intense competition increasingly from new competitors in low-cost countries as well as industry overcapacity, high labor costs in mature markets and customer resistance to price increases, automotive companies must establish sustainable and flexible cost structures, driving them to relocate global sourcing to low-cost regions, Asia, in particular. Forty-four percent of executives who participated in our survey cited locating global sourcing to low-cost countries as a top priority for their organizations. In addition, as they establish optimal global manufacturing capabilities, automotive companies also must refine their product development strategies to respond to the demands of these emerging markets. Globalization, intense competition and pricing pressures will continue. In the end, cost leadership will be decisive in the supply business, even more than innovation. Dr. Klaus Probst, CEO of Leoni AG It is a must that companies exploit the potential for cost reductions in low-cost countries. You have to have the right strategy for that, said Dr. Klaus Probst, chief executive officer of German automotive cable and wireless company Leoni AG. It is a strategy that Leoni has pursued in earnest. Today, 27,000 of the company s 30,000 employees work outside of its home country. Globalization, intense competition and pricing pressures will continue. In the end, cost leadership will be decisive in the supply business, even more than innovation. Others in our survey took a different view. They believe that, while controlling costs through means such as outsourcing will continue to be important, innovation will be critical to successfully fending off the challenges of globalization. They see an opportunity to distinguish their companies and stave off pricing pressure by developing new must-have 2 Audibmw.info
technologies or providing systems solutions to their OEM customers. There is excess capacity worldwide among the OEMs and this provides an opportunity for us to supply new technology, said Daniele Pecchini, CEO of Comau. The new investments made by OEMs are related to existing plants rather than green field projects. Moreover, in our industrial segment, we are experiencing the same phenomenon that automotive components suppliers did before: the purchasing mechanism is prevailing over technical choices. Added David Rayburn, president and CEO of Modine Manufacturing Company: Competitors in the automotive industry have to succeed through technology. We are working on long-term technology initiatives with customers and consistently working to push technology to gain a competitive edge. innovation with limited financial resources Automotive companies face another dilemma: how to maintain innovation when financing is tight. The need to develop new technologies and innovative products able to lure consumers and provide a competitive edge has never been more important for maintaining profitability over the long term. Car buyers are looking for new features such as navigation tools, in-car telematics, entertainment options and safety improvements, but resist paying premiums for these advancements. Yet, given the cost and pricing pressures, automotive companies are finding it difficult to free internal financial resources for investment in research and development. At the same time, securing external funding also is more challenging as the industry has become less attractive for investors compared to other sectors, particularly in the short term. Nearly half of survey respondents cited the need to innovate with limited financial resources as one of the automotive industry s greatest challenges. Private equity funds have played an increasingly important role versus industrial partners; they have been willing to accept a longer time for return on investment than stock markets, said Sarna CEO Matti Paasila. Generally speaking, though, as financial resources are short for financing R&D projects, and customers want innovation but are not ready to pay for it, we need more project managers and engineers with good financial competencies. With financing tighter, automotive companies must pursue creative product solutions, leverage their internal strengths and, more often, make acquisitions and cement partnerships with companies that can help enhance and expand product offerings and spread investments over more units. Overall, it is always a question of pursuing competitiveness, in terms of pricing, new technologies and design; the latter is key especially for OEMs because cars must be attractive to sell, said Emanuele Bosio, CEO of Sogefi, a producer of automotive filters and suspension components. The partnership philosophy along the supply chain is critical, 3 Audibmw.info
Leadership in the Automotive Industry and a challenge to change in certain situations. Automotive companies also must be looking continually for new opportunities in the market. Every four to five years, you need to move on, either by making acquisitions or finding new market niches, otherwise your profitability drops. This is a challenge, he added. Over time, these challenges may be a force for improving supplier-oem relationships, according to Marco von Maltzan, CEO and chairman of BERU Aktiengesellschaft. The move to Asia will continue, as will the consolidation among suppliers. To keep up the necessary speed of innovation is very expensive and many smaller suppliers cannot do it, he said. Stronger ties between the OEMs and their suppliers will come, together with longer term cooperation, higher transparency and profit sharing. flexible production and cost structure In response to the forces of globalization, competition and pricing constraints, a key priority for nearly half of the automotive companies we surveyed is establishing and maintaining a more variable cost structure. Another strategic priority, cited by more than 40 percent of respondents, is maintaining a flexible production system to position the company to respond quickly to shifts in global demand. My perspective is that of a machinery and equipment supplier; the main challenge for suppliers remains achieving a cost structure that assures the company s survival, as the margins have continuously eroded, Pecchini said. Automotive leaders must be able to manage cash and make costs more variable in order to adjust quickly to volatility in demand and respond to new opportunities. They do this through outsourcing, partnerships, technology innovation and new production methods. Consumers are more and more demanding, looking for everything at a very attractive price. You have to master revenues and costs very carefully to make a profit, said Bernhard Mattes, CEO of Ford Germany. You have to be aware that the classic segmentation is gone. The old focus on product and the subsequent platform organization is no longer valid; today, it is much more complex and production must be very flexible. The drive to cut costs and make expenses more variable also has profound implications for partner relationships. Automakers have taken equity stakes in each other and forged joint ventures and technology agreements. Suppliers are aligning themselves with new players amid shifts in the relative market share of automotive companies. In this environment of higher commodity costs, many companies are struggling to pass through these expenses, despite guarantees in supplier contracts. This causes strains in the partnerships between suppliers and OEMs, Rayburn said. As a result, Modine has 4
become more selective in our growth strategy and is prioritizing OEM relationships. We also are increasing our diversification efforts and accelerating sales growth outside of the light vehicle automotive market. most significant industry challenges* * Respondents ranked the top three challenges. top strategic priorities for automotive companies* * Respondents ranked the top three strategic priorities. Trends in automotive leadership With so much change in the industry, what are the skills automotive leaders must possess to successfully guide their companies today and in the future, and from where will the next generation of leadership come? 5
Leadership in the Automotive Industry Through discussions with CEOs, our survey of automotive executives and our own work with automotive clients, we have identified a number of critical competencies and areas of experience required by senior-level automotive leadership. CEOs and other top executives must have partner management experience, strong operational experience and capabilities, a strategic orientation, financial acumen, a global perspective and exceptional people management skills. alliance and partner management experience One-third of respondents said alliance and partner management is the most important functional experience for general management, the highest of all the experience categories. Automakers increasingly are relying on strategic alliances and partnerships to manage component costs and the development of new platforms and technologies. To ensure that their organizations strike beneficial alliances and partnerships, automotive leaders must be highly knowledgeable about the industry and its complex networks, understand the forces that are driving industry change and have a strategic mindset. Finally, as automotive companies are likely to build alliances with companies anywhere in the world, executives must be sensitive to the cultural differences that can foster mistrust, said Dr. Juergen Behrend, chairman and managing associate of Hella KGaA Hueck & Co. Especially in Asia, you have to be authentic and credible and keep your promises. You have to try to achieve win-win situations as often as you can. In each culture, you must learn the symbolism that builds trust, he said. operations experience and results orientation While experience in all corporate functions is valuable to senior automotive executives, operational experience is essential in light of the challenges and opportunities facing the industry, our survey found. Roles in operations, manufacturing and quality assurance provide exposure to a broad cross-section of the company and the opportunity to lead large and diverse teams. These roles also are great training grounds for future senior leaders as CEOs are spending more of their time on operational issues, particularly as many of the prime targets for cost reduction are in the operations side of the business. Competitors in the automotive industry have to succeed through technology. We are working on long-term technology initiatives with customers and consistently working to push technology to gain a competitive edge. David Rayburn, president and CEO of Modine Manufacturing Company 6 Not only are most of the cost reduction issues facing automotive companies driven by operating issues, but working in operations also is the place where one learns the most about leadership, given the large numbers of people involved and the closeness of the contact with people who are working on day-to-day issues and who are fundamentally
running the company, said Rodney O Neal, president and chief operating officer of Delphi Corporation. For Tenneco CEO Mark P. Frissora, operational experience surpasses in importance even the leadership qualities associated with best athlete executives. I used to think that an athlete was an athlete, but increasingly I have come to the point of view that hands-on operations experience is essential, he said. In interviewing candidates, Frissora said he asks very detailed questions about how individuals have used lean manufacturing strategies and asks them to describe in detail their product development process. He probes deeply to understand if they have really driven the process or simply have overseen it from a high level. strategic orientation and innovation leadership Automotive companies must continually reinvent themselves to take advantage of new market opportunities and maintain long-term profitability. The CEO needs to be able to recognize those opportunities and drive innovation in the company. Automotive leaders must have a passion for challenges, seek innovative ideas within the organization and externally, and be willing to make bold moves. I don t know if it is true more today than in the past, but, certainly, automotive companies need a CEO with vision, capable of anticipating the business cycles and managing through continuous reorganization. The CEO needs to be one who squeezes the cost structures, constantly challenges the internal structures to find better ways, keeps the pressure high and stimulates the organization to move even physically, Bosio said. Automotive leaders must possess the skills of an entrepreneur, according to Behrend. Entrepreneurial skills are essential, he said. Automotive CEOs must have the ability to identify solutions for issues related to organizing processes, pulling together the right team, creating value and ensuring that everyone in the company strives toward excellence and reliability. Those are the critical skills I would seek in a leader, he said. Automotive executives need a strong industry knowledge base gained from growing up in this complex and rapidly changing industry, according to John MacKenzie, managing director of Pacifica Group Ltd. They also must have the ability to conceive and develop the strategic direction for the company, while also managing the critical day-to-day details. finance and capital allocation The challenges of streamlining costs while maintaining R&D investment require that automotive executives be financially astute. They must lead efforts to variabilize costs, be thoughtful about capital spending and free up resources that do not provide competitive advantage. Twelve percent of survey participants ranked finance and capital allocation as the most important functional experience for senior general management during the next five years. 7
Leadership in the Automotive Industry Cash management is a critical skill, Frissora said. A strong balance sheet is important for funding investments in new technology. Companies also must be able to variabilize their cost structure through outsourcing and new production methods. international experience and a global perspective Automotive leaders must have a truly global perspective and be culturally and intellectually flexible. More than one-third of survey respondents cited global perspective as a critical competency for automotive leaders. This includes being sensitive to cultural differences and having a keen ability to identify and leverage international opportunities. Executives we interviewed frequently told us that they would have liked to have had more international experience. Others were grateful for the international exposure they received early in their careers. You have to be authentic and credible and keep your promises. You have to try to achieve win-win situations as often as you can. In each culture, you must learn the symbolism that builds trust. Juergen Behrend, chairman and managing associate of Hella KGaA Hueck & Co. Tomorrow s automotive leaders must have a global footprint from a manufacturing standpoint, and also must have global product development abilities as well, Rayburn said. 8 While many of the executives we interviewed said living abroad and serving in long-term overseas assignments are the best ways to gain international experience and a global perspective, Pecchini said international knowledge and sensitivity can be cultivated even without living abroad. It doesn t matter if one has actually been a resident for years in a country or not; you may stay two to three years in a different country without developing a real global vision, because today we need to interface with many cultures and several different countries. I have always managed the business in every part of the world, traveling extensively. Even though I always returned home, I have accrued a deep understanding of different markets and different cultures, Pecchini said. team-leading skills, people development experience Another recurring theme that emerged from our interviews and survey is the importance of strong team-building and effective people development skills. These include exceptional communication and interpersonal capabilities, internal networking skills, people management and team leadership experience, and the ability to choose the right team and get the maximum from it. Senior automotive leaders should combine personal authority with a humble and credible approach, our survey and interviews revealed. It is important for automotive leaders to continually motivate the organization to not rest on its laurels and to continue to work toward stretch targets, von Maltzan of BERU
Aktiengesellschaft said. Of his own leadership style, von Maltzan said he makes it a priority to recruit and develop young talent, delegate authority and responsibility, give as much room as possible to good people and tolerate mistakes as long as they are not made twice. People management and team leadership are first and foremost, and then business acumen, of course. But, more and more important is the capability to understand cultural differences. The world is our market today, said Mattes, of Ford Germany. Credibility and influencing skills also are essential when dealing with external audiences. The most effective leaders are those with balanced egos who are able to talk about their failures as well as their successes, Rayburn said. They are able to talk to the investment community with candor, blending details about what they do right with areas in which they need to improve. most important characteristics for future automotive leaders* * Top five responses. Respondents chose more than one. most important business experience for future automotive leaders* * Top five responses. Respondents chose more than one. 9
Leadership in the Automotive Industry most important functional experience for automotive leaders* * Top five responses. Where are the leaders of tomorrow? In addition to identifying the likely profile of future automotive CEOs and other seniorlevel leaders, we also wanted to know from where future leaders with these skills, experience and characteristics are likely to come. We asked survey participants about their companies internal succession planning programs as well as the willingness of their organizations to recruit executives from outside the industry. looking outside the industry First, hiring new talent seems to be a fairly low priority for the industry at this time. Just 15 percent of the executives we surveyed indicated that attracting top talent was one of their company s top three strategic priorities. However, when they do hire external candidates, the majority, 55 percent, said their organizations recruit within the automotive industry, yet only 16 percent said they predominately hire from within their own sector. Another 20 percent hire candidates with manufacturing and industrial backgrounds. About 3 percent look to the consumer goods and services sector. I used to think that an athlete was an athlete, but increasingly I have come to the point of view that hands-on operations experience is essential. Mark P. Frissora, CEO of Tenneco 10 Interestingly, while automotive companies are not doing so in large numbers now, threequarters of respondents believe it will be important for automotive companies to recruit from outside the industry, although not necessarily for positions at the highest levels of the organization. Top talent from other industries can help by injecting new and creative ideas that can break the traditionally insular industry out of old patterns, improve the talent pool and supply specialized knowledge in areas such as supply chain management, marketing, turnarounds, change management and electronics, automotive leaders told us.
Paasila points to his experience as a young manager at Nokia in different countries during the early stages of a fast-growing industry as the kind of development experience that is valuable to the automotive industry. In five years, I went from software engineer to sales manager to export manager to general manager of the German subsidiary, he said. The lesson here is that young talent should start their career in very dynamic, fast-growing industries, and automotive companies would benefit by recruiting more executives from these types of industries. Bosio agreed that recruiting executives from outside the automotive industry can infuse new ideas and provide a fresh perspective. I don t believe my successor must come from the automotive industry, although some experience here will help for sure. I would like someone who brings a different perspective, he said. Those who have been in the same industry for too long or, worse, in the same company become used to that standard and have trouble seeing a different or higher standard. Obviously, I wouldn t bring in someone who made pet food; there has to be some technology relevance, such as white goods, for example. Stronger ties between the OEMs and their suppliers will come, together with longer term cooperation, higher transparency and profit sharing. Marco von Maltzan, CEO and chairman of BERU Aktiengesellschaft Although they acknowledged exceptions, others were less confident that an executive from outside the industry would be successful as CEO because of the industry s complexity and the importance of building industry relationships. It takes time to develop the relational network in the auto industry, which is a key element for success, said Heinz Pfannschmidt, president of Europe and South America for Visteon Corporation. Rather than recruiting a CEO or other very senior executives from outside the industry, automotive companies would be better off bringing in that talent several levels below the CEO to give the individual the time to learn the industry and forge relationships, he said. It s important that future CEOs know the auto industry, MacKenzie said. It s too complex and dynamic for someone to learn it quickly and be successful. succession planning Are automotive companies developing the leaders they will need for the future? Our survey findings indicate that most companies are doing some succession planning and talent development, but the commitment to and quality of these programs vary. 11
Leadership in the Automotive Industry More than half of the respondents said their company does an average job of succession planning and talent development, while 17 percent felt that their organization s talent development and succession planning programs meet or exceed best-in-class standards. However, many of our respondents found room for improvement in their company s succession planning efforts. Nearly one-quarter of executives participating in the survey rated their company s efforts in this area as below average, and 7 percent said their company does no succession planning. The succession planning and talent development programs that were viewed as most effective were those that included the following elements: > Clear, well-managed and systematic processes > Executed widely throughout the company > Closely tied to company strategy > Results measured and leaders held accountable > Viewed as an important strategic initiative for the company > Attention to identifying and developing the skills of future leaders Delphi s O Neal said instituting initiatives that continually challenge individuals to grow is the key to talent development. As he said, In challenging situations, the talent is obvious. 12
Conclusion The automotive industry is dramatically more complex, more global and more interconnected through alliances and partnerships today than just five years ago. Our conversations with automotive leaders about the industry s challenges, opportunities and future leadership needs produced the following observations: > While automotive executives recognize the challenges posed by globalization and overcapacity, many companies are struggling to adequately respond. Automakers and suppliers continue to look for opportunities to streamline production and impose flexible cost structures that allow them to respond quickly to shifts in demands. Automotive leaders must possess strong operational experience and financial acumen to be in the position to identify these opportunities. > Automotive consumers have become ever more demanding, looking for new services and technologies, but they are not willing to pay a premium for these advances. In addition, automakers must produce vehicles to address the needs of emerging markets. These developments require automotive companies to focus on innovation, yet they must do this in an environment where financing is scarce. Automotive CEOs must be astute financial managers and the primary drivers of innovation in their companies. They also must ensure that technological innovation, which absorbs enormous financial resources, actually will be perceived by the end users. > Many automotive executives believe the industry could benefit by bringing in new talent from other industries, leaders with vision and the ability to anticipate business cycles and challenge internal structures to find more effective processes. However, because of the industry s complexity and dependence on relationships, most believe leaders from the outside would be better positioned to succeed if they were brought in one or more levels under the CEO and given time to learn the industry. > Today s automotive executives should ensure that their organizations have the leadership they need for the future by identifying areas ripe for improvement in their succession planning and talent development efforts. These programs are most effective when they have the support of the highest levels of management and the board, and are closely linked to company strategy and executed widely across the organization. They should include clear, well-managed and systematic processes, including processes for measuring results and holding managers accountable for success. 13
Leadership in the Automotive Industry About the survey We surveyed 352 automotive executives globally representing original equipment manufacturers, suppliers and other companies in the automotive industry. Participants included CEOs, executive vice presidents and other senior-level automotive leaders. Below are additional details about the survey participants. participants by company type * Includes other OEMs, finance, aftermarket and companies active in multiple categories participants by company size participants by location 14
About the authors simone maggioni Simone leads Spencer Stuart s Industrial Practice in Europe and co-leads the firm s global Automotive Practice. Prior to joining Spencer Stuart, Simone was a partner in a Detroit-based consulting firm that specialized in developing business in the U.S. market for medium-sized European companies, particularly in the automotive industry. He began his career in 1989 at Bocconi University of Milan, where he pioneered the research field of the economic transition of a centrally planned economy to a market economy. steven rivard A consultant in Spencer Stuart s Dallas office, Steve is a member of the firm s Industrial Practice, specializing in automotive, process and general industry. Prior to joining Spencer Stuart, Steve was a principal with another leading international executive search and management consulting firm, where he served as the U.S. leader of the firm s automotive and industrial practices. Before entering the search profession, Steve held several positions in Eaton Corporation s automotive components group, ultimately leading the division s strategic planning and growth initiatives. reinhold h. thiele Reinhold is a member of the firm s Industrial Practice and has more than 20 years of management consulting and executive search experience. He concentrates on search work within the industrial sector. Prior to joining the firm, Reinhold was a consultant for another international search firm, where he was an elected member of the executive committee and led the global industrial practice. Before that, he worked for Arthur D. Little International, working with automotive and manufacturing clients. He worked parttime for The Ford Motor Company in Dagenham, England, during his university studies. h. alvan turner Alvan co-leads Spencer Stuart s Automotive Practice and is a member of the firm s Industrial Practice. His clients include a diverse range of multinational manufacturers and distributors of automotive and industrial products, and companies dealing with significant manufacturing, logistics, purchasing and distribution issues. His searches primarily are for board directors, C-level executives and division presidents. Prior to joining Spencer Stuart, Alvan spent 15 years with McKinsey & Company, where he served industrial and consumer durables clients on strategy, operations, sourcing and supply chain issues. 15
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