In a series of ongoing commentaries we have noted how some global manufacturers seem to be turning more towards closed vs. open supply chain deployment models. We noted the evolving concept of closed vs. open supply chain deployment models from a past article published in the Financial Times. A closed supply chain is described as a highly integrated set of networks in which many of the technologies being applied are developed at least partially by the company orchestrating the supply chain. This is a contrast with an open supply chains, where the emphasis is on standardized components that fit together in a modular fashion. In the open concept, suppliers are generally encouraged to be the main innovators and sell the same components to a range of other customers.
The latest clear example of movement toward a closed strategy has some rather interesting modern day parallels to the classic former Ford River Rouge complex. Ford constructed the Rouge River complex in the late twenties to control the entire supply chain including the production of specialty steel it required. Henry Ford’s strategy was to control all of the key value-chain aspects for manufacturing a motor vehicle, including the control of raw materials.
Hyundai Motor, which operates under the umbrella of a family-owned group of companies consisting of Hyundai Motor, Kia Motors and Hyundai Steel, recently announced a strategic supply agreement for supply of one of the most crucial aspects of its value-chain, the supply of steel. According to a published article appearing in the Financial Times, (paid subscription required or free metered view) Hyundai is seeking innovation in specialty alloys that can decrease the weight of its new model cars by 10 percent while continuing to enable more innovative vehicle design and fuel economies.
Rather than solely depend on two existing global steel suppliers, Nippon Steel and Posco, Hyundai is leveraging an $8 billion a family capital investment in Hyundai Steel to increase capacity for more innovative and modern blast furnaces. Hyundai Steel currently supplies approximately 30 percent of steel supply for both Hyundai and Kia, and plans to increase that number to as much as 45 percent by 2013. The new blast furnace capacity coming online and dedicated to Hyundai and Kia is designed to allow greater flexibility and speed to forge higher density steel for specific design needs and consequently more fuel efficient vehicles.
The announcement has fueled the classic debate of whether Hyundai Motor, by its increased reliance on its own steel supplier, will have too much of a dependence and exposure to the cyclical up and down market tends of the steel industry. Then again, having a friendly and stable supplier may serve as an advantage for Hyundai Steel, especially given the current market growth trajectory of Hyundai and Kia Motors.
This is a development worth watching in automotive supply chains. It may produce evidence of whether a closed focused supply chain strategy in automotive provides a competitive advantage over the coming years.