As a key player in this diminishing manufacturing base, change is something our industry has been dealing with for a long time.
I’ve been in this business for nearly thirty years and I’ve been involved with some very challenging situations, handled lots of crises and faced lots of unknowns. But I’ve never witnessed this much turmoil in the automotive industry, especially on so many fronts at one time.
Globalization in our industry has had an exponential effect on everything that we do. We’re seeing similar problems across multiple industries. Like the presence of private equity that are bringing competitors together and the influence of financial markets around the world and the impact that it’s had on material costs. Throughout my experience, I’ve maintained that our most important objective should be to ensure that our business is flexible enough to adapt to these changes while maintaining our ability to continue to provide value to our shareholders. While this goal may seem simplistic, executing can be more difficult than one might expect. We have to look at the entire spectrum of the total cost model.
It doesn’t matter what industry we’re in, we all have common requirements in maintaining flexibility to adjust to change. It’s required that we’ve had to strengthen our balance sheet; grow globally; create invest in core competencies; create and maintain a good technical workforce and of course, reduce costs. To stay ahead of today’s constant flux in the automotive industry, the requirements for running a successful tier I automotive supplier is nothing short of total transformation. Because of all the demands on suppliers today, I believe that simply steering through change is not enough.
Steering is avoidance; we react to the potholes; we steer around them. We get around the curve to move to the next change down the road, while defensive driving only gets you so far. Reactive management only gets you so far. We must and have to do more. We must get and stay ahead of the curve. We must anticipate change and plan accordingly. Jack Welsh once said, “When the rate of change outside exceeds the rate of change inside, the end is in sight.” The auto industry, in fact any manufacturing based industry, is past trying to adapt to change; we have to help drive change. What we have to do is to master change, anticipate it, plan for it, and accept it. We can get ahead of the curve on some of these major drivers of change, including the areas of healthcare and pension costs, innovation and technology, the presence of emerging markets, which quite frankly in a lot of ways have already emerged, and capital structure.
As we all know, healthcare’s an area that’s had a huge impact on industry and businesses throughout America and it’s in the midst of great change as we speak. As you know, healthcare was the centerpiece of the recent GM and United Auto Workers contract negotiation. It’s being debated from corporate offices, to kitchen tables, to Capital Hill. The reality today is that people can no longer depend on their companies to provide the same level of service and healthcare coverage that they’ve had in the past. We can’t afford to do it. To continue at the levels that we’ve had in the past, we’d literally break the back of industry. In 2005, total national healthcare expenditures rose 6.9%, two times the rate of inflation, with an annual spend of $2 trillion. At this rate of growth, healthcare spending is expected to reach $4 trillion by the year 2015. We must control these costs. It severely affects our bottom line as well as affects and impacts the consumer’s pocketbook and it calls for drastic measures. We’re talking about the need for societal change and frankly, corporations and industries have to drive it because it does indeed, affect more than costs.
For lifetime companies that have been taking care of their employees, both their healthcare and their retirement needs. Well as that benefit erodes, we can certainly expect employee commitment and loyalty to companies will also weaken and this is a crisis, not only for Detroit, but for every industrialized industry in our country. Saddled by the crushing weight of domestic legacy costs, we’re not competing on a level playing field against the emerging markets and U.S. transplants. It’s our responsibility to make this a serious priority and it’s up to us to take actions. We can’t wait for government intervention; we can’t steer through change; we have to drive change.
Arvin Meritor got ahead of the curve about two years ago when we introduced some aggressive changes to our healthcare plans. We increased individual contributions and we discontinued healthcare for retirees. We moved our current plans to a consumer driven initiative, shifting more of the responsibility to the employee, so they can indeed become educated consumers on healthcare. We’ve put several tools in place to help make it easier for our employees to take on more ownership and responsibility for driving down the cost and improving the quality of their care. Not only is the employee taking on more responsibility in helping to drive down costs, but company leadership needs to take more responsibility enforcing actions that will make a difference in costs as well.
First, we need to create an understanding of the true cost drivers in healthcare and identify practical and reasonable ways to contain these costs going forward. By looking at how the spending is distributed, to HMOs, to hospitals, to pharmaceutical companies and other parts of the value chain, we can find the areas that are most costly and least efficient. If we’re going to make a difference, we need a voice at the table and that means we need more people involved in the process. I, therefore, make sure I’m actively involved in organizations that I can count on to tend to our interests in Washington and help support our efforts going forward.