The Tier 1 Revolution – Inevitable in the Off-highway Industry

Fortaco is the leading brand independent strategic partner to the heavy o-highway equipment and marine industries oering technology, vehicle cabins, steel fabrications and vehicle assemblies. Fortaco’s President & CEO Lars Hellberg sees the off-highway industry is evolving the way the automotive industry did in the 1980s and ‘90s. It challenges OEMs to either adapt to the new way of working – or perish.

Some call it simplification. Others call it supplier consolidation or supply chain management. Whatever you choose to call it, it’s inevitable in the off-highway industry.

In the 1990s it was nearly impossible to find an automotive manufacturer which wasn’t making its own engines. OEMs produced everything in their own factories and had literally thousands of Tier 2- and Tier 3 component suppliers that enabled them to do so. Today, “standard” engines for many car manufacturers are produced by a single OEM, effectively serving as a Tier 1 supplier for its own competition, in order to maximize cost synergies. High-performance engines, on the other hand, are mostly manufactured in-house by the OEM.

From component to systems knowledge. The 1990s saw the automotive industry shift dramatically from having detailed knowledge about each of a car’s components to possessing deep knowledge about the customers who drove their products. In the off-highway industry, this is analogous to an OEM reaching the understanding that it could sell more trucks thanks to a silent cabin or superior cabin design. “No consumer is going to refuse to buy a truck because the OEM didn’t make the cabin seat,” says Hellberg.

Today, the automotive industry outsources at least two-thirds of the production value that it sells. The modern auto industry buys systems, not components. By contrast, the off-highway industry is still component-focused and outsources on average 40 percent of its production value.

Today, the automotive industry is able to design and bring a car to market in approximately two years. The off-highway industry requires at least ve. “Off-highway is a legacy industry in large part,” says Hellberg. “Many products are 15 to 20 years old in their basic structure. The mining and material handling industries, for example, simply haven’t seen the need for fresh, basic structures in their products.

Macro pressures: emissions. Times are changing and the off-highway industry is under pressure from external forces. The South American market, for example, is aligning its emissions laws with Europe and will soon call for the use of clean fuels like those used in Europe. “But these clean fuels aren’t available yet in South America,” says Hellberg, “so we see the possibility that our OEM customers there will want to jump immediately to battery-powered vehicles.”

But the steel structures used in off-highway equipment are often 20 to 30 years old, and simply too heavy to be powered by batteries. And the OEMs no longer possess the engineering knowledge required to design new, lightweight structures. They have rather shown a tendency to commit resources to autonomous drive, electrification, and more loading capacity, for example.

Macro pressures: manufacturing costs. Pressures exist to reduce manufacturing costs, as well. Last year, as one example, Fortaco Technology began working with major OEM companies in design-to-manufacturing advisory projects.

The projects involve Fortaco consulting in an over-the-shoulder capacity. Fortaco’s ability to 3D model the manufacturing process has already eliminated instances where welding robots would not have been able to replicate the design and would have required assembly line pauses for human intervention.

The result is the expectation that OEMs will reduce their total manufacturing costs via improved quality based on standard- and automatized processes thanks to Fortaco’s advisory work.

What enabled the transition. Macro pressures aecting the o-highway industry are both ubiquitous and relatively new. “For example, who wanted a large electric forklift five years ago?” says Hellberg. “But today our OEM customers are seeking large, electric-driven forklifts!” There is pressure to reduce CO2. Tesla has raised consumer awareness that the world can indeed be electrified. All this has become a theme of politicians.

But with a legacy industry and its lost engineering knowledge, the transition is not an easy one. Off-highway OEMs still maintain thousands of component suppliers chosen on a best-cost basis. OEMs must escape this “best-cost box” and move toward fewer suppliers which can oer strategic partnerships and the best total offering in terms of design capabilities, product quality, delivery, and cost.

How to transition. Fortaco’s Hellberg says the transition to using Tier 1 suppliers isn’t always easy. It means that OEMs have to treat suppliers the same whatever the prevailing market conditions. “In the past, we worked closely with a large, multinational provider of power units. Every time they had an order they’d ask ‘What’s your cost today?’ We’d lay out the investments we’d made and they’d say, ‘Oh, no, we have this partner that will do it cheaper.’ So we were forced to reduce our capabilities for that customer. When there’s overcapacity in the market OEMs can do that if they wish, but in a hot market it comes back to bite them.”

But once the way of thinking is changed, benefits rapidly accrue. Improvement in capacity, technology, performance, delivery, quality, and cost savings. Improved payment and delivery conditions. Improved protability. “Supplier consolidation is about re-dening supplier value,” says Hellberg.

Close relationships with Tier 1 suppliers will also result in previously unexpected efficiencies. Fortaco, for example, is now shipping plug-and-play vehicle cabins from a European factory to the United States for assembly. It’s not a geographic journey one would expect, but when the quality and total costs are such that it creates a “driving experience” for the end user, it can make financial sense.

A simple choice. Part of Hellberg’s job is traveling and evangelizing about simplication and supplier consolidation. He estimates that about of the potential customers he meets with clearly see the future, because it’s been thrust upon them.

“Off-highway suppliers are generally small and family-owned. They may clearly see the need to change, but they aren’t always aware that we have the capabilities to help them,” he says. “Fortaco is the largest Tier 1 supplier in Europe. Our eight factories offer huge design-to-manufacturing capabilities. We’re benchmarking Toyota when it comes to safety, quality, and operational excellence.”

Within the next few years consumers and regulators will hold OEMs to a much higher standard. “We’ve reached the point where the off-highway industry will have to catch up,” says Hellberg. “Players in the industry will either make the transition or they’ll not stay competitive.”

 

This article has been published originally by Fortaco Group.

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