Systems Thinking and Its Impact on the OEM-Supplier Relationship
Global Powertrain Conference
Detroit, MI
June 5, 2001

Remarks of B. Hunt
Vice Chairman and President
ArvinMeritor, Inc.
View the Corresponding Presentation

Good morning.

When I joined Arvin Industries - the world's largest exhaust systems supplier - in 1976, some of my friends questioned why I would choose to be in a business that was based on the future of the internal combustion engine, when it was "a sure thing" that we we're going to run out of oil by 1990.

While a great deal has changed since then, a great deal hasn't! Although reports of rising gas prices and short gas supplies again lead the evening news - the internal combustion engine is still the power plant of choice - both today and for the foreseeable future.

Obviously, none of us can accurately predict the future - even about something that looks like a "sure thing" today. We all know that dramatic change doesn't - and cannot - happen overnight in an industry as huge and capital intensive as ours. That's just as true for the petroleum distribution industry.

Although the emergence of alternative powertrains is both inevitable and desirable, ArvinMeritor believes that the internal combustion engine - be it gas or diesel - will be the most viable and economical source of motive power well through the 21st century. However, there remains much to be done to improve the internal combustion engine's fuel efficiency and emissions performance, and sustain its life even further into the future. It is an industry imperative that we do those things necessary to extend that life.

ArvinMeritor is committed to meeting the current needs of the consumer by continuing our efforts in combustion engine development, as well as investing in future technologies to meet the powertrain needs of tomorrow.
To make the kinds of incremental changes necessary to improve the internal combustion engine, and sustain and extend its life, we must develop a systems view toward powertrain development. This kind of broad, collaborative thinking will have a significant impact on the relationship between OEMs and suppliers.

This morning, I'd like to explore that relationship, how it is changing, and how systems thinking can help us meet these new realities with confidence.

Let's take a look at systems thinking in our industry - which Peter Senge of MIT calls the "Fifth Discipline" - from a historical perspective.

In the 1970s, many of us who were around know that the industry was focused on components - manufactured to OEM specifications by suppliers who could be easily replaced by other eager suppliers. The automotive industry was still attractive to new supplier entrants - not true today. It was a traditional arrangement in which the OEM maintained total control of design and final assembly. Suppliers concentrated their efforts on price, quality, on-time delivery and applications engineering. Suppliers were, in essence, contract manufacturers building to customer blueprints.

In the 90s, OEMs and suppliers started working together in systems development, and suppliers expanded their role by assuming system design and engineering responsibility. At that time, suppliers began developing and pushing broader, integrated systems made up of the components they had previously provided, as well as many components they had not traditionally manufactured or engineered.

While the potential for systems integration and systems control has yet to be fully realized and full implementation of systems thinking is a work in progress, indications are that full systems thinking will dominate the industry within 20 years. By then, OEMs will be concentrating their efforts on defining, developing and marketing the vehicle and its final assembly, rather than focusing on the design of vehicle systems and system assembly.

The result could be an effective, mutually beneficial partnership between OEMs and suppliers. This partnership should ultimately benefit the consumer by reducing total system cost and ensuring the freshest system technology.

When we take a look at the automotive industry as a whole, there are a number of trends that affect OEMs and suppliers, and are driving the systems approach. These trends include:

• Globalization and consolidation of OEMs and suppliers, 

• Outsourcing of OEM in-house production,

• Green issues - from fuel economy and emissions to recyclability,

• Cost and profitability pressures at all levels - which discourage new investment,

• Increased regulatory requirements - safety, emissions and CAFE, and

• Reduced development time, enabling increased speed to market

While these industry trends are encouraging the move toward systems, systems thinking is not yet a universal trend. There are significant cultural and social - not to mention contractual - barriers to its full implementation.
Because of this fluid state, there is no uniformity of deliverables required of the supplier across the industry and around the world. Moreover, the evolution to logical systems definition is currently challenged by the organizational structure of the OEMs, their existing infrastructure and the aforementioned contractual barriers.

OEMs continue to depend on components or subsystems in most applications, and the move toward full systems varies not only from one OEM to another, but from one vehicle system to another. Older, less flexible manufacturing and engineering operations present geographic and legacy obstacles at most OEMs.

Just where OEMs are on the broad continuum between components and full systems implementation also varies depending on the technology, time and freedom available to develop those systems.

We at ArvinMeritor understand this internal complexity and accept the challenge of working with each OEM - at their pace - to build integrated systems and modules that add value.

Adding maximum value is key to all of us. The more value we add, the greater the psychological and financial satisfaction across the board. We must move toward systems development as quickly as possible, because our old ways are killing value-creation opportunities.

Developing systems - rather than engineering individual components - reduces the time and cost of the development process, a primary focus for every OEM and supplier. Duplication of effort is virtually eliminated. System integration issues are dealt with during the design process rather than later in the development cycle. Working together in this way, we can reduce overall costs and improve quality and performance.

Simply stated, systems thinking reduces complexity and simplifies the development process, thereby reducing costs, improving quality and increasing speed to market.

For example, not too long ago, we evaluated an OEM project and discovered that they were using 11 different Tier One or designated Tier 2 suppliers to provide components for a complete exhaust system on a particular vehicle! Development time - numerous iterations and lengthy communication between the OEM and these various suppliers (including ArvinMeritor) - was long and costly.

You can imagine - or give personal testimony - as to how difficult it is to manage these complex interfaces!

As you can see from this visual example, combining air intake and exhaust, and using one supplier to develop one expanded system cut the development time in half.

Now, let's get into specifics and examine how systems thinking can have an impact on the entire industry. We'll use powertrain as an example, not only because it is the focus of this conference, but also because the powertrain concept illustrates how a number of subsystems work together.

The modern powertrain is a family of systems that involves the interrelationship and control of a number of interfacing subsystems. Addressed with systems thinking, customer performance demands, as well as emissions and fuel efficiency regulations can be better met.

Let's consider some of the trends that are being seen in a number of powertrain subsystems, such as those dealing with:

• Motive power,

• Emissions,

• Transmission,

• Braking,

• Suspension and

• Electrical power

As I have said before, ARM believes that customers will continue to want the ICE as a source of motive power well into the 21st century. As stated in a recent report by MIT, ICE will be a "moving (improving) target" to which all other alternatives are compared. There will be further and significant improvements to today's baseline ICE technology. Some of these technologies - such as variable valve timing, independent valve and cylinder operation and control, and improved combustion and emissions after-treatment processes, using direct injection and turbocharging - are already either commercialized or on the verge of commercialization.

These technologies can significantly improve ICE performance, emissions and efficiency when properly interfaced and controlled. The opportunity is great, but we must pursue it together to satisfy our consumers.

We believe that hybrid technology will offer a sensible and feasible motive power option. Its penetration will be driven by regulation, as well as by consumer preference.

Elements of a conventional drivetrain, augmented by electric motors and batteries, offer improved fuel economy and lower emissions through reduction of the internal combustion engine size and recovery of available energy. We do foresee further and continuous improvements in energy recovery, power control and battery technologies to improve the performance and affordability of hybrids and to enhance its market penetration.

Fuel cells have received considerable attention from transportation and distributed power industries within the last few years. A number of OEMs are working with both traditional automotive suppliers and formerly non-automotive suppliers to commercialize this technology. Although significant hurdles exist in the transportation market, fuel cells also offer promise for the long term.

ARM foresees significant advances (and opportunities) in emissions technology, in the near future. There is important ongoing research to clean up the spark-ignition and diesel engine emissions, utilizing pretreatment and improved after-treatment devices. These devices, coupled with the advancements in the combustion process will form the basis for the "next-generation baseline" internal combustion engine. Systems suppliers, like ARM, are looking forward to integrating these technologies into their systems, while minimizing the impact on powertrain performance and overall system cost. 

Leveraging Meritor's leading heavy truck position with Arvin diesel exhaust technology is a key focus for ArvinMeritor. The graph you are seeing demonstrates the heavy-duty diesel engine emissions reduction strategy designed to meet future U.S. and European regulations. The chart is fairly complicated, but the main point here is that we must reduce each variable (NOx on the X axis and particulate emissions on the Y axis) by an order of magnitude. And both variables must be reduced simultaneously!

Obviously, this presents an extraordinary challenge. However, ArvinMeritor's light vehicle diesel emissions technology - which we developed and delivered in Europe - provides us with a distinct competitive advantage.

Advances in automated transmission technology - including ZF Meritor's FreedomLine transmission - provide significant opportunities to integrate motive power, braking, traction, suspension and engine control. The result is optimal vehicle stability, fuel efficiency, performance and emissions reduction.

The industry continues to make progress in improving braking systems. It is critical, however, that suppliers understand the complete functionality of this system and the relationship to the powertrain in order to effectively impact stopping distances. This is the key focus in our truck braking systems business.

Active and semi-active control of suspension and damping functions affect pitch, roll and yaw - and their rates - as well as ride height control. In addition, improved suspension technology promises to enhance vehicle stability, speed and efficiency. ArvinMeritor's light and commercial vehicle suspension groups are leaders in this area.

Finally - and probably the most important powertrain element - we turn to the electrical system, which ties all the other elements together and provides control over: 

• The engine,

• Transmission - automatics, manuals and CVT,

• Torque distribution to wheels,

• Braking and traction, and

• Steering stability control

In addition, advances in motor/generator set performance and the development of the 42-volt system provide significant opportunities for performance and control of powertrain elements. These developments are driven by the increasing power demand of "green" and convenience features.

So, what does all this mean to suppliers?

How has the price of entry changed?

Suppliers who intend to survive in the coming economy must be ready to address these trends, including the issue of globalization and the importance of developing and leveraging global resources. Suppliers must also address "green" issues in a timely, competitive fashion, as well as develop the technological expertise - or partner with others - to yield the integrated systems demanded by the OEMs.

As for the differences in how business gets done from one geographical location to another, a number of factors come into play. Those factors include differences in the markets themselves, each with different needs and tastes, including driving preferences and road conditions from country to country, as well as rules, regulations, and taxes, which vary considerably across the globe.

Cultural differences must be taken into account, as well, and varying levels of sophistication play into a company's success in meeting international consumer tastes.

Add differences in product quality, due in part to differences in the levels of technical sophistication from place to place, and the complexity of doing business on a global scale becomes quite a challenge.

As president of ArvinMeritor, I'm often asked, "Just what does it mean to be a "global" automotive supplier today?"

Obviously the answer isn't simple, but I usually share an example that illustrates the complexity of a global operation in today's constantly changing business environment. First, we must be able to meet the needs of the consumer in each region of the world. At the same time, we must leverage geographic capabilities.

For example, at ArvinMeritor, we manufacture a manifold for the VW Beetle that was conceived in Warton, U.K., developed and produced as components in Finnentrop, Germany. Key components are shipped, assembled and incorporated into production in our exhaust plant in Mexico. The Beetle is then sold to customers in the U.S. and Canada, and, finally, to customers back in Germany.

Managing that kind of complexity is what global automotive suppliers must be prepared to do every day.

As we've said, suppliers are also being asked to rise to the challenge of being systems thinkers. That means enhancing supplier expertise in understanding systems architecture, as well as in the design, development and testing of integrated systems.

"Green" issues once were limited solely to environmental concerns. Now "green" concerns impact all aspects of vehicle design and production. Suppliers must now manage a number of additional attributes, including recyclability, efficiency and emissions. In addition, green now has universal implications, requiring a detailed life cycle analysis.

We are particularly proud of ArvinMeritor's recent breakthrough designs for the first mass-produced titanium exhaust system for the Corvette Z06. Besides significantly reducing weight without sacrificing performance, the titanium exhaust system is 100 percent recyclable.

Finally, a supplier's technological competencies are put to the test in a global business environment. Critical mass and system depth are critical to defining and understanding interface opportunities in today's environment. 

That critical mass includes software and hardware tools, as well as complete systems testing capabilities.

In developing the integrated corner module, for example, ArvinMeritor also developed technical capabilities for vehicle dynamic stability and control; active and passive systems; and algorithm development.

It must be said, however, that the most important factor in successful technological partnering is the integrity of early communications between OEM and supplier. There must be no "distortion" between "transmitter" and "receiver," with each party providing open, complete information.

Few organizations possess all the knowledge, capabilities and resources to do business on a global scale. That's why there is a widespread industry trend toward alliances, joint ventures, acquisitions and consolidations. When successful, these agreements not only add an important global presence to an organization, but also provide additional resources that expand a company's technology, market access and product line.

ArvinMeritor has a strong track record for establishing and maintaining successful joint ventures and alliances. We also work closely with a number of technical institutes and universities around the world. As a result, ArvinMeritor is stronger technically and has significantly greater market penetration than if we had not entered into these agreements.

We also know that being a global organization with deep bench strength provides us with the flexibility to be more responsive to customers' needs - wherever they do business.

Here are some examples of how ArvinMeritor combines its strength with other strong companies to provide superior products and customer service.

• Volvo (heavy duty axles)

• ZF Meritor (transmissions)

• Temic (electronics)

• PSI (tire inflation system)

• Meritor WABCO (brakes)

• Arvin Sango (exhaust)

• Sommer Allibert (interior trim)

• Zeuna Starker (exhaust)

• Arvin Kayaba (suspension)

So what does all this mean to the powertrain industry? It means that OEMS and suppliers must understand that we all have a great deal at stake. In an increasingly complex, competitive business environment, the implication of the OEM-supplier relationship has direct bearing on our reputation with our ultimate customer: the vehicle buyer.

This relationship touches every aspect of vehicle safety, design, performance, control, emissions, operation and durability. Warranty costs affect all of us at the bottom line - especially in decreased customer loyalty and satisfaction.

Systems thinking fosters solid working partnerships. I am confident that by adopting a systems approach to the design and manufacture of motor vehicles, we can enhance our ability to build the kinds of products that customers will buy - and buy again.

What must we do to make systems thinking a reality?

First, we must ensure that we, the suppliers, have fully demonstrated the capabilities necessary to do the job. The supplier must be credible.

Consistent, credible performance builds trust, which we all know is uneven in many OEM-supplier relationships. The supplier community realizes that we need to meet the quality and timing targets of the OEMs to gain trust. Of course, we would also welcome opportunities to communicate more openly with the OEMs with respect to pricing, and the protection of our intellectual property. We would like to see a more intimate relationship between the OEM engineering and purchasing communities, focused on total cost and total value.

Together, we can change. As trust in suppliers grows, OEMs must respond with openness and complete information, letting us become involved earlier in the design and manufacturing process. This kind of systems thinking and cooperation can affect the lifeblood of OEMs and suppliers: the customer.

I challenge the powertrain industry to learn to work differently. To re-examine priorities and resolve conflicts that become stumbling blocks to staying competitive.

We need to have purchasing and engineering teams working together to achieve the ultimate goal of improving the product and reducing cost.

Let's break the cycle of distrust and turf wars, and build strong, effective partnerships that will benefit us all.

If OEMs and suppliers learn to work differently - together - to serve our ultimate customer, we all win.

And that's as close to "a sure thing" as you can get these days.

In closing, I'd like to share this video we produced recently for an on-site customer technology fair. It sums up what I've been saying about the virtually limitless potential of systems thinking, and also gives you a little insight into ArvinMeritor's commitment to rising to the challenge of providing well-engineered, integrated systems to our customers. 

Thank you.