WORKING DRAFT

Last Modified 11/6/2015 5:18 PM China Standard Time

Printed 11/6/2015 11:22 AM China Standard Time

Unlock the Value of Steel and Automotive Industry Collaboration

International Conference on Green Manufacturing

– the Future of Steel and Automobile 2015

Chongqing, 18th November, 2015

Steve Chen, Dr. Karel Eloot

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McKinsey & Company 2 |

Key trends in the Chinese automotive steel value chain

▪ China steel demand growth has stalled and is only expected to recover at a slow speed (~1%

p.a. until 2020) with cyclicality around this “plateau”; transportation remains a growth driver

(~4% p.a.), mainly driven by auto steel consumption

▪ This transportation growth drives rapidly expanding production capacity – the resulting cold

rolled auto sheet overcapacity (~30% in 2016) will put pressure on steel companies to

differentiate their products and services vs. competitors

▪ Increasingly strict CO2 emission regulations in automotive drive fast demand growth for

lightweight material

– High Strength Steel (HSS), the most cost effective lightweight material, is expected to

represent 40-50% of China’s automotive steel demand in 2020

– The downward price trend in aluminum and R&D developments require steel makers (esp.

in China) to accelerate capability development and innovation

▪ In this dynamic environment, collaboration between steel makers and automotive OEMs can

create win-wins to turn challenges into opportunities

– Successful supplier-customer collaboration starts from customer insights and requirements

to accelerate improvements across 4 dimensions: customer driven innovation, integrated

supply chain, consistent quality, and competitive costs

– The prize to gain for steel companies and OEMs is faster availability of superior solutions

vs. competing materials, savings across the supply chain, better purchase decisions, etc.

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McKinsey & Company 3 |

Successful supplier collaboration starts from customer insights and

requirements to accelerate improvements across 4 dimensions

Chinese steel companies need to

increase R&D capabilities (also with

support from car OEMs) to catch up

with the automotive innovation cycle

A

Both parties need to enhance supply

chain agility and reaction speed to

manage increasingly complex material

mix, while keeping inventory levels low

B

Besides internal cost reduction, steel

companies should collaborate more

with OEMs to provide latest material

know-how enabling material choices

from a total cost ownership perspective

D

Although improving already, Chinese

steel companies need to accelerate

their focus on meeting quality level and

consistency needs of OEMs, especially

for high end steels (HSS, SBQ, …)

C Customer

insights and requirement

Integrated

supply chain

Consistent

Quality

B

C D

A

Customer

driven

Innovation

Competitive

Cost

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McKinsey & Company 4 |

Areas for steel and auto industry collaboration – with China focus

(1/2)

Customer

driven

innovation

Integrated

supply chain

Domestic steel companies are lagging in R&D capabilities in comparison to

global leaders (e.g., share of R&D personnel in China is less than half of

that of steel companies outside China)

Chinese steel companies and OEMs can learn from collaboration

approaches used in other industries – e.g., in semi-conductor (also an

industry with thin margins and fast evolving technology) incentive schemes

for suppliers to invest in innovation are used, incl. premiums, forecast

transparency and purchase guarantees

Growing use of HSS increases material mix variety and reduces batch

sizes in steel plants and auto OEMs, leading to complexity in production

and inventory management

Both parties can jointly enhance supply chain agility by sharing improved

demand forecasts and shortening production planning

Leading steel companies in China have started to use Service Level

Agreements (SLA) to accelerate and monitor supply chain improvement

and gain competitive advantage (e.g., price premium)

A

B

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McKinsey & Company 5 |

Areas for steel and auto industry collaboration – with China focus

(2/2)

Consistent

quality

Competitive

cost

Benchmarking against global leaders shows that domestic steel companies

in China not only lag in quality levels, but often more importantly in

consistency

Besides equipment upgrade, steel companies should continue to enhance

quality management

– Establish a layered critical quality control points ownership system to

manage quality consistency; each control point must have an owner

while each staff member owns minimum 1 control point

– Deploy an equipment precision centered equipment maintenance

system on top of reliability improvement

– Set up quality KPI system cascading from GM to operators; implement

effective quality performance management using visual KPI boards

As for steel, automotive in China is challenged by increasing industry

fragmentation and overcapacity, making continuous cost reduction across

the value chain critical to remain competitive

Steel companies in China typically have 20-50 USD/t profit improvement

potential across operational and commercial levers

In addition, collaboration with OEMs offers an opportunity to proactively

provide latest material know-how to assist OEMs to reduce material cost

(and weight) from a Total Cost of Ownership perspective

C

D

WORKING DRAFT

Last Modified 11/6/2015 5:18 PM China Standard Time

Printed 11/6/2015 11:22 AM China Standard Time

If you would like to have the full presentation, please contact us:

Karel Eloot: Karel_Eloot@mckinsey.com; +86 21 6132 3040

Antonio Sun: Antonio_Sun@mckinsey.com; +852 2846 2028

Steve Chen: Steve_Chen@mckinsey.com; +86 21 6132 3045