The Board meeting held at Allison’s Indianapolis headquarters on 2nd November, 1998, was exceptional. The meeting included top management team at ATD, business managers and regional managers.
The challenge facing Allison has been the issue of penetrating the European market. There has been reshaping of competition dynamics in the commercial vehicle industry in Europe and other parts of the world. There has been tight competition from European competitors thus the need to find a lasting solution.
The main issues in the agenda meant to strengthen Allison’s strategic status in Europe include:
1.Creating a strategic alliance with Steyr. Steyr is an Australian-based company involved in the manufacture of transmissions and related components.
2.Setting up a Hungarian Manufacturing facility at a place called Szengothard.
The best solution is to create an alliance with Australian-based Company, Steyr. This company has had a vast manufacturing experience in gear products and excellent test facilities. It also has a strong reputation for quality. Steyr’s headquarter is in Graz, Austria and has roots in one of the oldest engineering companies in Europe.
Discussion of Alternatives & Recommendations
Steyr has close ties with European manufacturers and serves as a preferred partner to OEMs since it is an independent center of excellence for outstanding solutions. It has a culture which is mainly engineering focused. It has manufactured high-level components such as transfer cases, drop boxes and gear train products.
We have done some previous projects together which always produced positive results. A joint venture with them will significantly increase the growth of Allison in Europe and boost end user activities to different markets. This is in consistent of the main objectives.
We have possibilities of future growth and development through the joint venture. We also have positive analysis that indicates that European manufacturing project will break even, and financial results will improve with more experience.
We may reject the proposal of setting up Hungarian manufacturing facility. This is because the Hungarian automotive market is still extremely small. Automobile penetration rate is less than 25%. Allison is bound by union agreements such that it cannot import Hungarian-made transmissions for domestic consumption in the US. There is a challenge for long-term survival of this project. This is because of cost escalations in the future, with the ongoing developments in Hungary and emerging low cost manufacturing places. In addition, we have concerns of capacity utilization, and in case the volumes go down, Allison will pay fees to Opel to cover the unused capacity.
The problem with Steyr is that it has a low presence at the end user market outside Austria, and it faces bottlenecks in an engineering capacity. It does not have international sales, distribution and service structures. Dealing with these drawbacks will be easier than setting up a manufacturing facility at Hungary. This being a joint venture, both Allison and Steyr will collaborate in sharing opinions and costs thus expanding the business.
Steyr and Allison ought to decide on time for this alliance based on how prepared both parties are. The anticipated investment cost is approximately $14 million to 17$ million which depends on throughput speed. Financial result will improve with experience. There will be 2 phases in sourcing. The first phase comes from Allison while the second one will come from Steyr, Allison and European- sourced part.
There is a risk that the principal contact between the two companies will leave Steyr. We can use this contact person to find another one who can help us through the remaining part of forming an alliance. Even with the potential difficulties, the alliance presents an opportunity to exceed the business objectives. Collaboration will be better than a direct investment in an Allison-owned facility.