TEACHING NOTEThis case has been prepared for classroom discussion and is not to be used as a source of data or illustration of effective or ineffective manage-ment practices. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise — without the permission of the editor and the authors.

Case Study

Coficab PortugalFrom supplier-by-demand to product innovator in the automotive industry

Vitor Corado SimõesNuno Fernandes Crespo

2015

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Introduction

This Teaching Note is intended to help the instructor in applying the ‘Coficab Portugal’ case in a Masters’ class. Its purpose is to help the instructor to fully develop the story, tease out its meaning and engage with students. So it is supposed to make the life easier to the instructor but also to make the students learning experience richer in a hands-on classroom setting.

The case is very rich and allows itself to be explored from a variety of angles and disciplines, namely International Business, International Management and Innovation Management. The focus here will be put on an Innovation Management course. Although the core perspective is innovation the case is designed in a way that a number of related issues will arise as the case unfolds, which may be related to the innovation perspective. A set of questions is put forward to be explored in class or in a formal written assignment. The Teaching Note leaves room for the instructor to adapt its teaching and assessment strategy.

When reading this Teaching Note, it is important to bear in mind that the questions have not undergone the ‘acid test’ of class application so far. This means that further development is still needed. However, having in mind our experience in carrying out this kind of cases in a class setting, we are convinced that no major problems will arise.

Another issue is the set of questions to be included as students’ assignment. In our opinion, experience shows that the ideal number is four questions. However, the case is rich enough to allow a larger set of questions. We thought that it would be preferable to raise the key questions in this Teaching Note, leaving the instructor room to choose the specific set of questions he/she envisages as more appropriate for the objectives of the course he/she is teaching. Therefore, a wide number of questions will be presented here.

The Teaching Note is organized in five sections, including the present introduction. The second section

presents a synopsis of the case study and its likely added value for learners. Section 3 provides questions for students (that may be used in classes standalone written examination or collective discussion in class), and suggested feedback by instructor. Section 4 indicates a set of essay challenges (non-classroom assignments or term paper topics). Finally, the last section provides a summary of the main lessons to be learned from this case.

The Coficab portugal case at a glanceBy 2000, the story of Coficab Portugal and Coficab Group was not likely to become a success case study about innovation and internationalization. All the odds pointed out in the opposite direction. First, Coficab Portugal is a subsidiary located in a European peripheral country which is part of a Group headquartered in Tunisia, a country in which capital flows are subject to various restrictions. Second, the company was created

as a joint-venture between the Coficab Group and one of the major automotive industry Tier 1 suppliers, Delphi Automotive Systems PLC. But this joint-venture came to an end in the year 2000. Third, the end of the joint venture raised three challenges for both Coficab Portugal and the Coficab Group: i) their automotive business experience was mainly as a supplier-by-demand to Delphi; ii) the international standing and the foreign market knowledge of Elloumi Group, the new wholly owner of Coficab Group, were very limited; and iii) the labour-advantage of the South European countries has eroded with the process of economic and political change in Eastern European counties in the 1990s. The automotive industry took advantage of the opportunities for locating the manufacturing of labour cost-sensitive components in these emergent countries of Eastern Europe.

So, how has Coficab Portugal been able to grow about seven-fold and four-fold revenues-wise and employment-wise, respectively, between 2000 and 2014? And how

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has Coficab Portugal been able to be, in 2012, the first-to-market in launching a worldwide innovative product?

The end of the joint-venture between the Delphi and the Elloumi Group led the Coficab Group to question its entire business model. It forced the company to think strategically about the future. As Mr. João Cardoso remembered in the case, after the decision of Elloumi Group acquired full ownership of Coficab, there was a long meeting in which a new firm strategy was defined. And at that time the strategic priorities were clear:

Ɩ Integration in terms of branding, since at that time the industrial unit in Tunisia still called Electric Cables;

Ɩ Diversification of clients: remember that Delphi accounted for around 95% of the turnover;

Ɩ Diversification of manufacturing locations, following the flow of relocation from South Europe towards Eastern Europe countries;

Ɩ Changing the product range: reducing the concentration on low value-added products or

commodities, and expanding the share of more valued products, with higher margins;

Ɩ Keeping the Coficab Portugal plant, using it as the pilot plant for the Group, due to the proximity of the European markets, but also to the knowledge absorbed by the Portuguese company during the period of close relationship with Delphi, it was decided to concentrate the R&D and innovation capabilities in this subsidiary. The objective was to use this plant as spearhead to develop and introduce new products in the portfolio of the company, as well as improve the manufacturing process. [The instructor may relate this to the concept of absorptive capacity, introduced by Cohen & Levinthal (1990)].

Mr. João Cardoso has played a critical role in shaping the evolution of Coficab Portugal as well as of the Coficab Group as a whole. Its pivotal role between Coficab Portugal, the Elloumi Group and also Delphi (with double line of report), in the first years of the company, enabled him to absorb a lot of knowledge about the business, the industry

dynamics, the supply chain and the OEMs strategy and requirements. His knowledge was essential in rethinking the business strategy after Delphi’s leave.

Being assigned the position of Operations Director and R&D Director of Coficab Group he had also the opportunity to provide a relevant contribution to the development of the Group. He had the vision of the two sides of the business, and understood the importance of manufacturing process efficiency for a low-margin business, while also promoting the development of new products, increasingly demanded by costumers and enabling higher margins.

In 2015, the Coficab Group is a relevant player in the automotive cables and wires manufacturing industry. With a global turnover exceeding €1,000 million, it has eight plants worldwide (two in Tunisia, one in Portugal, two in Morocco, two in Romania and one in Mexico), four advanced delivery centers (in USA, Romania-Macedonia, Tunisia and China) and two technological centers (in Portugal and Tunisia).

Coficab Group is now investing in a second plant in Mexico and also in the first industrial unit in China (Beijing). It declares to be the second largest wire producer worldwide, with a market share estimated around 11~15%, and the European market leader (market share estimated in 45%).

The decision to start the 0.13mm2 project was triggered by the confluence of two aspects. First, Mrs. Rosa Silva (the R&D Department Manager of Coficab Group) is a regular member of the ISO Technical Committee for Automotive Electric Cables (ISO/TC022/SC03/WG04). Through this participation, Coficab Portugal follows the trends in world standards in wires and cables for the automotive industry, and knows in advance which directions their innovation efforts should be targeted. Until 2010, the smallest sections of automotive wires in the market were the 0.50 mm2 and the 0.35 mm2, but the standards for the 0.22 mm2, 0.17 mm2 and the 0.13 mm2 had been approved with all the technical requirements. Second, there was the perception that the market was increasing looking for smaller section

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wires in order to reduce both the volume and the weight of the wiring harnesses.

This led the company to head towards the development of such smaller section wires. This decision entailed several risks. First, the type of material could not be pure copper, and in the automotive industry is not common to use copper alloys. Second, the industry adopted standard size depends not only on the development of the new wire by a cable and wire manufacturer, but also from the alignment of several partners in the supply chain (suppliers of terminals and connectors parts, wiring harnesses players, and OEMs). Third, the changes required to implement the new product in the manufacturing processes involve not just Coficab Portugal, but also its downstream supply chain (namely Tier 1 companies).

The project of the new product FLMRY 0.13mm2 was developed between 2010 and 2012. Three copper alloys were tested before selecting the copper-tin alloy. Since this was the first time the company use this material, the project suffered several

Ɩ Problem-solving and debate in class;

Ɩ Interesting and rich material for reflective thought and practice.

Coficab Portugal’s discussion

The case follows the trajectory of Coficab Portugal. The following general questions may be raised to the students as a basis to stimulate debate in class or structure a formal problem set. There are suggested talking points and possible answers to the questions posed. These should not be though as the only answers. The instructor and students are encouraged to have their own take.

Question 1. Origin of Coficab Group and Coficab PortugalIdentify the key characteristics of the company’s origin in the beginning of the 1990’s.

This is a kick-off and general question that appeals to students’ narrative skills and a broad understanding of the case.

The students are likely to raise some of the following issues:

difficulties, namely regarding the transition between the R&D laboratory and the shop floor, but also concerning the implementation on the wiring harnesses companies’ manufacturing processes. To solve these problems, the production process of this new wire had to be redesigned time and again. An interactive process between the R&D Centre, the shop floor and the customers was established, and the solution emerged after several adjustments in the manufacturing and packing processes. The final product, when compared to the traditional wire of 0.35mm2 weights less 53% and has a volume 41% smaller.

Highlights of the case study:

Ɩ A product innovation case that started at a subsidiary, in an European peripheral country (Portugal);

Ɩ The evolution of a company headquartered in a Maghreb country (Tunisia), moving from a marginal supplier-by-demand to a leading innovator in automotive cables;

Ɩ The growth and internationalisation trajectory of a Tier 2 automotive industry supplier;

Ɩ The move from non-innovative, standard products, to emergent innovation;

Key Concepts involved:

Ɩ R&D management and non-R&D management;

Ɩ Internationalization path; Ɩ Subsidiary influence and voice

in a multinational group; Ɩ Management of emerging

countries’ MNEs; Ɩ Leadership and initiative

inside MNEs; Ɩ Network-based growth

strategies; Ɩ Sectoral systems of innovation; Ɩ Absorptive capacity; Ɩ Resource-base view and

internal resources; Ɩ Dynamic capabilities; and Ɩ Competitive advantage.

Learning Benefits:

Ɩ Context-sensitive discussion of concepts related to innovation, internationalization and organization;

Ɩ Highly readable story for working outside the classroom;

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Ɩ The joint-venture between Delphi and the Elloumi Group in 1985, with the purpose of installing a plant for wiring harnesses in Tunisia - Cofat.

Ɩ To supply Cofat, Electric Cables was created in 1992 in Tunisia, and to supply Delphi, Coficab Portugal was created in 1993.

Ɩ Coficab Portugal started as a supplier-by-demand of Delphi, that in the beginning of the 1990’s had four plants located in Portugal.

Ɩ The location of Coficab in Portugal followed the flow of relocation of labour-intensive activities in South European countries. A large part of its equipment and machinery either came from the German plants of Delphi or was bought by Delphi from Rheinsager.

Ɩ The fact that Mr. João Cardoso, though being employed by Coficab Portugal, worked also for the whole Delphi Group provided him with a broader knowledge about the managerial challenges of a Tier 1 company, which

became very relevant for the future development of Coficab Portugal.

Question 2. Coficab Group’s EvolutionIdentify the salient aspects of the Coficab Portugal’s evolution.

This is a logical sequence of the previous question. It appeals to students’ narrative skills and a global understanding of the development of the company.

The following milestones may be singled-out:

Ɩ The most relevant fact is the end of the joint-venture between Delphi and the Elloumi Group in 2000 – this forced the company to change its strategy.

Ɩ With the acquisition of the whole Coficab Portugal’s equity by the Elloumi Group, leading to the end of the joint-venture, the company defined a new strategy and a new business model, with the purpose of surviving without its former main client.

Ɩ The positive effects of integration and harmonization of the Coficab Group’s existing manufacturing facilities (in Tunisia and Portugal), as well as the branding (with relevant effects in terms of homologation process).

Ɩ The commercial effort to diversify clients, since by 2000 95% of the sales of Coficab Portugal were to Delphi.

Ɩ A geographic diversification of the Coficab Group’s manufacturing locations, with the opening of new plants in Morocco, Romania and Mexico, a commercial subsidiary created in Germany (to be closed of the German OEMs) and advanced delivery centres in USA, Macedonia and China. Two new location are planned to start the production in 2015 (in Mexico and China).

Ɩ The product range also underwent a significant change. From the two lines of products with low-value added in 2000, the Group was able to enter new specialty products markets by the late 2000s, some of them with innovative characteristics.

Ɩ Coficab Portugal was assigned the role of ‘pilot plant’ for the development of the Group. A R&D Department was created at Coficab Portugal, with the purpose of making this subsidiary the know-how centre for new products and processes.

Ɩ The growth of Coficab Portugal between 2000 and 2014 was seven-fold in terms of revenues, and four-fold in terms of workers.

Ɩ The Coficab Portugal’s plant presents the best efficiency and the lowest waste indicators for all the Group.

The instructor is suggested to discuss this descriptive data with the help of the box presented in page 12 of the Case:

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advantages when compared with countries like France or Germany. This location was still the reflection of the 1980’s wave that led several wiring harnesses and cables and wires companies to establish in Portugal (and also Spain). This movement was inter alia the result of Portugal and Spain entering EU in 1986.

ȗ Afterwards, the emerging countries of the Eastern Europe present better labour-cost advantages as well as North-African countries, the automotive industry relocated towards those countries and Coficab Group set up two plants in Romania and two plants in Morocco. [The instructor may relate this to the EU-Morocco Association Agreement (entered into force in March 2000), which confirms the existence of free trade in manufactured goods and strengthens the free trade in industrial products, as well as to the prospects for Romania entering the EU (Romania is a EU country since January 2007)].

ȗ The company understood the need to deal with German OEMs using German language; this led the Coficab Group to open a commercial subsidiary in Germany. Interestingly, the man in charge of such subsidiary was an old acquaintance of Mr. Cardoso, from the times he worked for Delphi. [The instructor may relate this to the concept of ‘relationship sediments’, introduced by Agndal & Axelsson (2002)].

ȗ In order to be closer to American OEMs as well as to enter the American market, the Coficab Group opened a manufacturing unit in Mexico (with another projected to 2015).

ȗ With the increasing relevance of Chinese market within the world automotive board-game, the Coficab Group decided to invest there, first an advanced delivery centre in Shangai and next building up a manufacturing unit near Beijing (2015).

BOX 1.

New sites, new countries

Source: Coficab Portugal, 2015.

1992 Manufacturing unit in Tunisia (Tunis), called Electric Cables;

1993 Manufacturing unit in Portugal (Guarda), called Coficab Portugal;

2001 Manufacturing unit in Morocco (Tangier);

2005 Commercial subsidiary in Germany;

2006 Manufacturing unit in Romania (Arad);

2009 Second manufacturing unit in Tunisia (Medjez El Bab);

2012Second manufacturing unit in Marroco (Kenitra);

ADC in China (Shangai);

2013

2014

Second manufacturing unit in Mexico (Leon) - forecast;Manufacturing unit in China (Beijing) - forecast.

2015

Manufacturing unit in Mexico (Durango)Second industrial unit in Romania (Ploiesti)Commercial subsidiary and ADC in USA(El Paso)ADC in Macedonia

Question 3. Coficab Group within the wavePlease discuss how the evolution of the automotive industry as impinged upon Coficab Group’s strategy?

The discussion can be carried out with the purpose of value the key-role of international environment when a company is included in a international/global supply chain.

Discussion points:

Ɩ The evolution of the company in terms of locations is the consequence of two successive waves of relocation of the automotive industry:

ȗ The foundation of the company in Portugal happens in a moment when South European countries presented labour

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Ɩ The change from low value-added products or commodities to high-value added was decided by looking to the market, and understanding the different types of products that were used in a car. They understand that the margins of the speciality products were higher, and that OEMs recognize innovation efforts by paying extra money to use lighter, thinner or more performing cables and wires.

Ɩ This strategy based in following the automotive industry’s waves of location may raise some risks. In fact, although the strategy may have positive effects in the short-medium term (since the company is answering the customers’ current needs), in the long term, the company may be trapped and fail to identify and adopt a business model that will meet the customers’ future needs. [The instructor may relate this to the concept of ‘innovator’s dilemma’, introduced by Christensen (1997)].

Ɩ The role of Mr. João Cardoso should be highlighted, since he was one of the strategists, with the support of the Board of the Coficab Group, of the reorientation of the company, namely after the events of 2000. His pivotal role between Coficab Portugal and Delphi, enabled Mr. Cardoso to get a broader strategic perspective about the industry trends and developments as well as about their implications for Coficab and the Elloumi Group.

Question 4. Coficab Portugal’sinnovation intentDiscuss Coficab’s decision to establish a R&D centre (Technical Centre) in Portugal, in 2013. Does it match Coficab Portugal’s strategy?

The purpose is to explore the notion of innovation strategy1. Sometimes, as in the case of Coficab Portugal, companies start their activities as non-innovators. Only later, after having accumulated knowledge

1 · See Hamel & Prahalad (1994), Hamel

(2006), Prahalad & Krishnan (2008) or

Leonard-Barton (1995).

the business and the technology, namely the processes and the products, they are able to aim at new heights, namely to develop better processes or products. This seems to be essential to aspire to become innovative organisations.

Talking points:

Ɩ Sometimes, harmonization and standardization and ensuring the continuous improvement of processes are the main tactical objectives of the firm. That’s the way Coficab Portugal started, and Mr. João Cardoso main task was to ensure standardization of processes and continuous improvement within the plants of cables and wires in the Delphi sphere.

Ɩ Therefore, when the company shifts their strategy, it was perfectly aligned with competitors in terms of “process innovation”. The purpose was then to produce new types of products and sift up “product innovation”.

Ɩ Having in mind that in this business the opportunities for intellectual property protection are limited

(see case, page 16), Coficab Portugal start to imitate the products offered by the leaders of the segment. To do this, it was necessary to have some basic R&D facilities, specific machinery and equipments, knowledge and skilled workers dedicated to these activities.

Ɩ These resources were also essential to start responding to clients (Tier 1 and OEMs) demands for specific developments in the existing product range.

Ɩ It seems that the establishment of the Technical Centre served the purpose of enhancing Coficab Portugal’s capacity for identifying, assimilation and applying external knowledge or, in other words, its absorptive capacity2. The existence of a R&D Centre will promote innovation and new products, but also improve the ability to further learning from clients and competitors. [The instructor may relate this to the concept of ‘two faces of R&D – innovation and learning’, introduced by Cohen & Levinthal (1989)].

2 · Cohen & Levinthal (1989, 1990).

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Ɩ It may be also considered that Coficab Portugal had a “strategic intent” (Hamel & Prahalad, 1989), to become a reference, within the Group, and to the clients, through its capacity to develop new products, moving away from the imitator stage. It aspired to replace the former business model of process specialists by the product innovator’s one3...

Question 5. Coficab Group future strategyShould Coficab follow the earlier strategy, and launch a new R&D project to become the first-to-market with the 0.08mm2?

Taking into account that there are no right or wrong answers to this question, the purpose is to help students to identify the pros and cons associated to the decision.

Below a summary of the main pros and cons about following for the 0.08 mm2 wire a strategy similar to the 0.13mm2 wire:

PROS CONS

· It is in line with Coficab Portugal’s strategic intent to be increasingly focused in innovative products;

· The experience of the 0.13 mm2 product has shown that innovative products generate much higher margins than traditional products;

· To show that the 0.13 mm2 was not ‘one-hit wonder’;

· Being again the first-to-market has a very positive effect in terms of reputation and market recognition;

· Reduce the risks to be outdone by competitors.

· Need to invest a large amount of resources in R&D;

· There is no guarantee that the final solutions achieved by Coficab Portugal will be recognised by the market as the best solutions;

· Once again, the changes that would be required to implement the new product are not dependent from Coficab Portugal only;

· It was decided that within the Group the innovations related to wires will be managed by the R&D Technical Centre of Tunisia; therefore Coficab Portugal will not be exploit the learning advantages from its innovation.

3 · Roland Berger & Lazard (2013, 2014).

Question 6. Coficab Group future strategyAnalysing the automotive industry trends, two lines of products appear as presenting a significant potential for development: wires of high speed data and specialized wires for electric vehicles. Should Coficab invest in these product segments to complement the existing line of products? Which might be the role of Coficab Portugal on that regard?

Once again, there are no right or wrong answers to this question. The purpose is to help the students to identify pros and cons associated to the decision.

Here we present some thoughts about following this decision:

PROS CONS

· Is a recognition of the strategic intent of Coficab to be more focused in innovative products;

· According to the industry trends, these new segments of business will present high growth rates;

· Since the automotive industry prefers wider contracts, the acceptance of these new lines of products should be easy;

· Reduce the risks to be outdone by actual or new competitors in this industry;

· The development of these new segments should be facilitated by the existence of two Technical Centres.

· Invest a large amount of resources in R&D;

· There is no guarantee that Coficab can enter on these segments of business;

· These are different segments, with different standards of operation. The supply chain may be slightly different, because there are other relevant players in the business that came from electronics industry;

· Since this is a new segment that include core wire and coatings, it should be decided which R&D Centre (the Portuguese or Tunisian) will be the responsible for managing the development of these new products.

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PROS CONS

· By following this strategy, Coficab Group will have more market power, and upgrading within the automotive industry supply chain;

· The direct clients of the company start to be the OEMs;

· The solutions that the company can give to the OEMs include add more value than the actual offer;

· By integrating the operations, the margins should be higher;

· Some of the actual clients of Coficab Group (namely Leoni or Delphi) have also vertically integrated operations. This strategy can place Coficab Group in the same category of players, although these competitors are bigger.

· By promoting vertical integration strategy, the current clients of Coficab can start seeing the company as a competitor and decrease the acquisition of products;

· Although both companies are held by Elloumi Group, the organizational culture, the way they think market, as well as the market shares are very different. Coficab is a lot bigger than Cofat...

· The international locations of Coficab and Cofat are quite different. Cofat operates mainly in Tunisia, with recent operations in Egypt and Brazil.

The instructor is suggested to discuss this future strategy possibility, using the figure presented in the appendix of the Case:

( 2 plants in Tunisia: Tunis & Medjez El Bab )

ELLOUMIGROUP

CABLESHouse holdappliances

( 2 plants in Morocco: Tangier & Kenitra )

( 2 plants in Romania: Arad & Ploiesti )

( 2plants in Mexico: Durango & Leon )

Electrical & telecommunication

contrating

Agriculture & food processing

industry

Building promotion

(real estate)

Automotive wiring harness

Chakira Cable(Tunisia)

COFICABTUNISIA

ChakiraImmobilier

COFICABPORTUGAL

COFICAB NAFTA

TEM Tunisia SOTEE Tunisia STIFEN Tunisia COFAT Tunis

COFAT Egypt

COFAT Brazil

STIFEN Egypt

STIFEN IndustryTunisia

STIFEN FruitTunisia

COFAT MATEURTunisia

COFAT MEDTunisia

COFICAB ASIA(Forecasted - 2015)

COFICABMOROCCO

COFICAB EASTERN EUROPE

Question 7. Coficab Group future strategySince there is a company within Elloumi Group, Cofat, specialised in automotive wiring harnesses, should Coficab promote a vertical integration strategy with Cofat in order to become a relevant Tier 1 supplier worldwide?

Similarly to the previous questions, there are no right or wrong answers to this question. Here we identify some of the pros and cons related to the decision of promoting a vertical integration with Cofat:

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Question 8. Coficab Group future strategyHaving in mind that the Chinese market is growing much faster than European markets, would it make sense to establish a fully-fledged R&D unit in China? Which might be the consequences for Coficab Portugal?

According to the case, Coficab Group will set out a plant in China during 2015. But the Case did not present any decision regarding the role of the Chinese subsidiary in terms of R&D. The purpose of this question is to discuss with students that strategic decisions (namely the ones related to innovation) can be decided in terms of the Group advantages, but they have impacts in each of the existent subsidiaries.

Here we present some of the pros and cons of this possible decision:

PROS CONS

· To be close to the major OEMs that have operations already located in China;

· Due the existing environmental problems in China, the automotive industry in this country will have to find innovative solutions for alternative powertrains, in order to accomplish the regulations for C02 emissions. By being there, the Coficab Group can participate in the development of new innovative products.

· To be able to develop specific products for the Chinese markets, namely for the cars that have higher demand rates: the micro cars and the luxury cars;

· The Chinese business culture, promotes the use of Guanxi networks to do business. By being there, and developing the products there, Coficab Group may have access to several contracts.

· This strategy would put major challenges in terms of coordination of the activities by the head-quarters;

· The relevance of Coficab Portugal within the Coficab Group may be diluted, since the Chinese market is very impressive;

Essay issues

Some general topics for discussion:

i. The following article by the Wall Street Journal highlights the entry of new players into the auto industry, namely Samsung, LG and Panasonic, the well-known giants of electronic technologies. The intent seems to explore the opportunities related to the development of electric cars. Using this article as touchstone, what strategy would you suggested Coficab Group to take, in order to take profit from the likely development of this segment of electric and hybrid cars?

PHOTO: MATTHEW LLOYD/BLOOMBERG NEWS

By MIKE RAMSEYAUGUST 20, 2015

Luxury car maker Audi AG on Wednesday revealed its first all-electric car would go 310 miles on a charge using an advanced battery developed by South Korea’s LG Chem Ltd. and Samsung SDI Co., two of three Asian suppliers increasingly favoured by car makers.

Failed technology gambles and a half-decade of jockeying among suppliers have top auto makers increasingly choosing LG, Samsung SDI and Panasonic Corp. The three are emerging as the early winners amid a shift by car companies away from in-house efforts, traditional battery makers and startup ventures.

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Their quick rise as key suppliers to European, Asian and U.S. car makers is remarkable for an industry that typically insists on reducing risks by building key components such as engines in-house—or using lots of suppliers for less-critical parts.

In part, experts say few companies so far have shown they can meet the challenge of building advanced batteries with the quality, weight and cost expectations that auto makers demand. And the technology is moving so fast that few auto makers have tried to master the exotic chemistry required.

Of course, electric cars remain a niche market amid a lack of charging and other infrastructure, high development costs and low gas prices. But coming exhaust emissions regulations have encouraged Audi and others to bring all-electric vehicles to market. And they largely are picking the same three Asian companies to supply batteries.

This week, Boston-based emerging technology researcher Lux Research Inc. forecast the market for electric-vehicle batteries will grow to $30 billion by 2020, from $5 billion this year, and predicted the three suppliers will split most of that pie.“If we look out in a five-year time frame, we are looking at Panasonic, LG and Samsung SDI making up about 80% of the market” said Cosmin Laslau, a battery expert with Lux Research.

Companies that once vied for electric-vehicle contracts, including Johnson Controls Inc. and A123 Systems LLC, changed course after losing out to the larger rivals. They now supply smaller batteries for hybrid cars that combine battery power with an internal combustion engine.

Japan’s NEC Corp. remains the No. 2 battery provider for electric-vehicles from its contract supplying Nissan Motor Co.’s Leaf car. That contract appears to be at risk based on recent statements by Nissan Chief Executive Carlos Ghosn, who indicated the next-generation Leaf could use LG batteries.

“We have opened to competition our battery business in order to make sure we have the best batteries,” Mr. Ghosn said in a recent interview. “For the moment, we consider that the best battery maker is LG.”

An NEC spokesman declined to comment about the contract.

Panasonic is the top battery maker, supplying Tesla Motors Inc., Volkswagen AG and Ford Motor Co. It supplied 38% of the electric vehicle batteries over the past 12 months, according to Lux and likely will continue to grow if Tesla’s sales go higher.

Tesla, aiming to sell at least 50,000 vehicles this year and 500,000 annually by 2020, is building a battery plant with Panasonic in Nevada.

LG Chem, however, is surging as it has notched contracts with several car companies and could overtake Panasonic by 2020 if it wins the Leaf deal and Tesla falls short of its sales goals.

LG, holding 11% of the market, counts General Motors Co., Renault SA, Volvo Car Corp., Daimler AG and VW as customers. Some of those companies also use smaller LG batteries for plug-in hybrids, and soon will move to more capable versions.

GM currently relies on LG for batteries powering the Chevrolet Volt, which achieves 50 miles of driving on a charge. The Chevrolet Volt, due in 2017, will be capable of going 200 miles on a charge using a LG battery.

‘We’ve seen what I would call pharmaceutical levels of quality in [battery] cell production.’

— Larry Nitz, GM vice president

Lux Researcher’s Mr. Laslau said the shrinking and common supply base could stifle innovation, forcing smaller companies to attempt more exotic chemistries to compete.

“The effect will likely be to force the smaller innovators that much further to the bleeding edge of next-generation batteries, since disruptive technology will be their real shot at overcoming the incumbents’ scale advantage,” he said.

Unlike most of its competitors, LG is a materials and chemical supplier, not an electronics company. Its ability to craft very specific chemistry for different applications and cells with low failure rates has made it popular with auto makers.

Larry Nitz, vice president of transmissions and electrification at GM, said a study of Volt customers using LG batteries showed almost no loss of range performance after nearly three years of ownership

“We’ve seen what I would call pharmaceutical levels of quality in cell production. Of the more than 20 million cells that have been produced for the first generation Chevrolet Volt we’ve seen less than two problems per million cells produced,” he said.

Panasonic has said it also has high quality batteries from its long experience as a battery supplier with a broad range of capabilities and customers.

Corrections & Amplifications

Samsung SDI, which is 19% owned by Samsung Electronics, is sharing a contract to supply Audi with advanced batteries. An earlier version of this article omitted it as an Audi supplier and incorrectly described it as a unit of Samsung Electronics.

Write to Mike Ramsey at michael.ramsey@wsj.com

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ii. According to Barney4, an academic who is among the pioneers of the Resource Based Theory (or RBV), in order to a company develop sustainable competitive advantages, it must have internal resources that are i) valuable, ii) rare, iii) imperfectly imitable, and iv) not substitutable. Discuss whether Coficab Group’s internal resources meet the criteria suggested by Barney.

iii. In light of the recent drop in the Chinese market, should the Coficab Group revise its strategy on this market? Discuss this issue on the basis of this piece from the Wall Street Journal.

4 · Barney (1991); Barney et al. (2001; 2011).

AUG. 23, 2015

SHANGHAI – China’s foreign-car factories, once among the world’s busiest, are starting to slack off.

New weakness in the world’s largest car market has led companies such as General Motors Co. and Volkswagen AG to run their plants there at less than full capacity for the first time, according to industry data.

The global auto makers, which have been some of the biggest beneficiaries of Chinese consumers’ increasing appetite for upscale goods, have already announced a slowdown in sales there as the economy cools. Though the auto makers expect the market to grow over the long-term, the production curb suggests the easy boom times are over, signalling a bumpier ride for global companies that made large bets on soaring Chinese demand.

During the first half of 2015, the aggregate utilization rate of 23 significant car-making joint ventures—China requires foreign companies to build cars with local partners—fell below 100% for the first time, averaging 94.3% utilization versus 107.4% a year earlier, according to a study by Sanford C. Bernstein. Plants are able to exceed 100% capacity utilization by adding extra work shifts to meet high demand.

SAIC General Motors, a joint venture between GM and China’s largest auto maker SAIC Motor Corp., built 2.4% fewer cars in the first half of the year compared with a year earlier, according to data from the China Passenger Car Association, a trade organization. FAW-Volkswagen Automobile Co., one of Volkswagen’s joint ventures in China, produced 1.2% fewer cars over the same period.

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SAIC VW

SAIC GM

Dongfeng PSA

FAW VW

Beijing Benz

Beijing Hyundai

GAC Toyota

BMW Brilliance

GAC Honda

Kia

Changan Ford

FAW Toyota

Dongfeng Honda

Changan Mazda

Dongfend Nissan

0% 25 50 75 100 125 150

1H 2015 1H 2014

Cutting BackMost auto-manufacturing joint ventures in China are reduncing capacity

Production capacity

Note:Please can exceed 100% capacity by adding extra work shifts to meet high demand.

Source: Bernstein ResearchTHE WALL STREET JOURNAL.

Volkswagen’s joint venture with SAIC was one of only three manufacturers to increase capacity utilization during the first half, according to Bernstein.

“From July through year-end we can have 10 days off a month. We were usually given two days off [a month],” said Eric Shi, an engineer for a General Motors plant in Shanghai, who said he used to work a lot of weekends. “The situation seems worse than that of 2008” during the global financial crisis.

SAIC GM, owner of the plant, directed inquiries to GM’s Chinese headquarters, which said it manages production volumes to maintain inventories within a healthy range, and it is closely monitoring market conditions.

Global car makers such as GM, Volkswagen and BMW AG have been particularly sensitive to slowing China growth because after years of chasing rising sales there, they now get a significant amount of their revenue from the country. China accounts for 35% of the Volkswagen group’s global vehicle sales, 35% of GM’s and 20% of BMW’s, according to the companies’ corporate filings.

China passenger-vehicle sales fell for a second consecutive month in July, registering a 6.6% year-to-year decline. Sales of foreign branded cars fell 1.5% in the first half from a year earlier, compared with a 4.8% year-to-year rise in the overall Chinese car market—a disappointing growth figure compared with booming double-digit percentage growth in prior years.

The percentage declines in production are in line with first-half losses in sales volumes. SAIC GM shipped 4.8% fewer cars to dealers compared with a year earlier, and the Volkswagen Group—the No. 1 foreign car maker in China by sales volume—sold 4% fewer cars in China. Volkswagen generates more than half of its profit in the country.

Global car makers have built more plants in China than anywhere else since 2008, but now they are canceling shifts and curtailing hours, as well as increasing incentives for dealers and cutting car prices.

Car makers reap big profits if their factories run near 100% of capacity, but their losses mount rapidly if the utilization rate falls below 80%.

Companies such as Volkswagen and GM are now slashing prices to boost sales. In the second quarter of this year cars in China were sold at a discount of more than 10%, compared with 7% a year earlier, according to Ways Consulting, a Guangzhou-based consulting firm focused on the Chinese automotive industry.

The plants are still operating near full capacity and the industry is still profitable, so the companies are nonetheless planning to add capacity, banking on continued growth in China, albeit at a slower pace.

GM plans to raise its capacity in China to five million vehicles a year by 2018 from about 3.5 million now. Volkswagen intends to raise its China capacity to five million vehicles a year by 2019, a rise of more than 40% from current levels. Toyota Motor Corp. is spending $440 million to add a manufacturing line to an existing facility in China, while Hyundai Motor Co. is building two new plants in the country, each with an annual production capacity of 300,000 vehicles.

“We expect a more volatile market in China as growth moderates,” a spokeswoman for GM said. “It hasn’t changed our long-term view of China. We continue to believe that the market will grow.”

A Ford spokeswoman said: “Given the overall industry slowdown in China, we have made production adjustments to balance supply and demand.” Ford’s China capacity doubled to more than 1.2 million vehicles in the past three years.

VW didn’t immediately respond to a request for comment.

Bill Peng, a Beijing-based partner with Strategy&, the global strategy consulting team at PricewaterhouseCoopers, said many auto executives made expansion plans based on an expectation that at least 30 million cars could be sold in China per year by 2020. But he said that with the economic slowdown making that target look challenging, companies that haven’t expanded yet should think twice.

“If their products or managing executives are not overwhelmingly competitive, cutting production will be inevitable when the factories are completed,” he said. “It’s time for foreign car makers to consider how to control cost.”

– Rose Yu

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iv. Cohen and Levinthal define absorptive capacity as the firm’s ability “to recognize the value of new, external information, assimilate it, and apply it to commercial ends” (1990, p. 128). Discuss this concept in the context of the Coficab Group evolution. How do you understand the relevance of R&D activities in the development of the Coficab Group between 2000 and 2015, taking the arguments of Cohen and Levinthal (1989)?

Main lessons learned

The Coficab Portugal Case shows that interesting innovation stories may appear where they are not supposed to. Besides this, this case illustrates several innovation concepts relevant for students of an Innovation Management course.

Regarding strategic issues, here are some of the lessons this case yields:

Ɩ Gain position/location to gain contracts: In a global supply chain like the one of automotive industry assemblers, the most relevant aspect is to be present in the sites they are located. For the components, systems and subsystems that have big weight, to be near the assembly line is essential when discussing new projects. Therefore the growth strategy of the Coficab Group was based in the diversification of manufacturing locations;

Ɩ To add value, you must talk their language... If the objective is to develop new products with higher value-added, in close relationship with the direct clients and OEMs, then is necessary to have R&D capabilities. Although Coficab is a Tier 2 supplier (according to the commercial relationship with the OEMs), the development of new products is made in close relationship with the Engineering Departments of the OEMs (Tier 1 type relationship);

Ɩ One product, two products, three products... It was made clear in the case that the OEMs, and therefore the automotive industry in general, prefers to establish wider contracts with one supplier only, including several types of products, than a host of smaller contracts with different suppliers. Therefore the expansion of the product range was a way to increase the revenues, maintaining the commercial effort to secure contracts;

Ɩ Process precedes product: The efficiency of Coficab Portugal is still clear nowadays, since this is the manufacturing unit within the Coficab Group presenting the best ratios of efficiency and waste. Thus, the case suggests that, in the context of multinational enterprises, before going a step further, subsidiaries should show that they do it right what they are supposed to do. Only after this, they may aim to be assigned more demanding activities, such as manufacturing specialty products and developing new products, with an increasing value added, and higher margins;

Ɩ The maestro must know how to play: In 2000, Coficab and the Elloumi Group had more weaknesses than strengths: lack of international standing, problems with the major (and almost exclusive) client, and peripheric manufacturing locations. Although he was not the ‘owner of the band’, Mr. João Cardoso has shown to know how to ‘play’. His early experience with double lines of report to both Coficab Portugal and Delphi enabled him (and also other managers, like Mrs. Rosa Santos) to absorb knowledge (about the automotive sector, the supply chain, the network within the industry, the OEMs, etc.) that was essential later, when there was the need to rethink about the strategy and the business model not just of his company but also of the Coficab Group as a whole;

Ɩ To be the ‘mould’ has its advantages: Since the Portuguese subsidiary of Coficab Group was the pilot-plant when it comes to develop new sites, the Portuguese managers gain fully access to the development process.

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Coficab Portugal has been part of the solution, namely in terms of financial support of new subsidiaries, of training of the local workers, and of designing, setting up facilities and achieving operational development.

Regarding other relevant research issues, this case also enables to advance some insights:

Ɩ First be efficient then innovative: This case shows that when a company is small and we are operating in a market segment in which it is not possible to protect the intellectual property, the right way is to start to imitate the products offered by the leaders and to develop the existing products as a response to the challenges offered by the clients (Tier 1 and OEMs). Only when the company moves forward in their learning curve was possible to present innovative products;

Ɩ The Power of strategic intent: In this Case the strategy was clear. The decision

to change was clear. In 2000 the company define clearly their path: moving away from the imitator stage and enter in the specialty products segment, where the value-added is higher. The decision to follow the world trends in wires and cables by belonging to the ISO Technical Committee for Automotive Electric Cables was a demonstration of this intent;

Ɩ The power of Absorptive Capacity: In the turning point of the history of the company, the year 2000, all appears to indicate a shadow future for the company. Even so, the first years of relationship with Delphi, where several managers (namely Mr. João Cardoso) of Coficab Portugal have to work simultaneously to Coficab Portugal and to Delphi, turn to be a major advantage when it comes to rethink the future of the company. They absorb a lot of external information or knowledge in Delphi (a Tier 1 supplier that operates in different market segments

- several types of products for auto industry), they assimilate it and use it to define the new strategy of the company;

Ɩ Innovation demands network innovation: When a company is located in the second-line of the supply-chain and as specialized in just one segment of products, the innovation could not be a solo action. As the development of FLRMY 0.13 mm2 shows, after Coficab Portugal developed the product, the company had to wait for the suppliers of terminals and connectors to develop the compatible solution, to help the wiring harnesses players to adapt their assembly process, and to convince the key players in the industry, the OEMs, to accept the new solutions.

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REFERENCES Ɩ Agndal, Henrik e Björn Axelsson (2002), ‘Internationalization of the firm – The influence of relationship sediments’, In Virpi Havila, Mats Forsgren e Hǻkan

Hǻkansson, coords., Critical Perspectives on Internationalisation, Amesterdam, Pergamon Press, pp. 437-456.

Ɩ Barney, J. B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1): 99-120.

Ɩ Barney, J. B., Wright, M., & Ketchen Jr, D. J. 2001. The resource-based view of the firm: Ten years after 1991. Journal of Management, 27: 625-641.

Ɩ Barney, J. B., Ketchen, D. J., & Wright, M. 2011. The Future of Resource-Based Theory: Revitalization or Decline? Journal of Management, 37(5): 1299-1315.

Ɩ Christensen, C. (1997). The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Cambridge: MA, Harvard Business School Press.

Ɩ Cohen, W. M. & Levinthal, D. A. 1989. Innovation and Learning: the Two Faces of R&D. Economic Journal, 99: 569-596.

Ɩ Cohen, W. M. & Levinthal, D. A. 1990. Absorptive Capacity: A New Perspective On Learning And Innovation. Administrative Science Quarterly, 35(1): 128-152.

Ɩ Hamel, G. (2006). ‘The why, what and how of management innovation’. Harvard Business Review, 84, 72–84.

Ɩ G. Hamel & C. K. Prahalad (1989), ‘Strategic Intent’, Harvard Business Review, May/June, 63-78 (1989).

Ɩ Hamel, G. & C. K. Prahalad (1994). Competing for the Future. Boston: Harvard Business School Press.

Ɩ Leonard-Barton, D. A. (1995). Wellsprings of Knowledge: Building and Sustaining the Sources of Innovation. Boston: Harvard Business School Press.

Ɩ Prahalad, C.K. and Krishnan, M.S. (2008), The New Age of Innovation: Driving Co-created Value through Global Networks, McGraw-Hill, New York, NY.

Ɩ Roland Berger & Lazard (2013), “Global Automotive Supplier Study 2013: Driving on thin ice”, Lazard & Co. GmbH and Roland Berger Strategy Consultants;

Ɩ Roland Berger & Lazard (2014), “Global Automotive Supplier Study 2014: Record profits versus increasing volatility”, Lazard & Co. GmbH and Roland Berger

Strategy Consultants;

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Case Study

Coficab Portugal

THIS TEACHING NOTE COMPLEMENTS CASE STUDY “COFICAB PORTUGAL:

FROM SUPPLIER-BY-DEMAND TO PRODUCT INNOVATOR IN THE AUTOMOTIVE INDUSTRY” (ISBN 978-989-95583-8-0).

2015