BY RICHARD S. MANDEL, SENIOR EDITOR
Maybe the American auto industry is not yet at the time to quote Shakespeare's lines that follow the death of a king, but the headlines on business pages of the last year do not inspire confidence, either. The 2006 US auto shows have not helped either, as foreign companies presented models that surpassed the offerings of American automobiles in their sophistication, and their fit and finish. Accusations fly—the fault lies in overseas outsourcing, in spiraling costs for health insurance and pensions, in unreliable suppliers, in bad management, in unreasonable union demands.
The problems in the US auto industry did not crop up overnight. One hundred years of dozens of company start-ups, mergers and failures have left just three survivors whose every move is highly visible to scrutiny. The primary players and their spun-off suppliers—Ford, GM, Visteon and Delphi—have been mired in questionable business decisions and practices, it seems, for years, and now the public is witnessing the results. In an article in the June 16, 2005 issue of The Economist, the situation was summed up with these comments: "While the troubles of General Motors and Ford have hogged the headlines, the real turmoil has been at their biggest parts suppliers, Delphi and Visteon. After years of being squeezed as the Detroit giants try to churn out ever-more complex cars for ever-lower prices, the two parts-makers have been forced to plead with their former parents for help. But given the car-makers' own problems, their ability to rescue their suppliers is limited...
Despite a short-term reprieve, ...the two parts-makers remain even closer to the brink than their troubled parents. More assistance will have to be forthcoming, because GM and Ford cannot afford to let their biggest suppliers go under. But neither can they afford a full rescue package. Indeed, all the signs are that the car-makers are devoting at least as much effort to finding cheap new suppliers in China and elsewhere, as to shoring up their old ones."
If your shop manufactures parts or assemblies destined for an American car, the crucial issue has become, what can you do to keep in business, especially if you've invested in sophisticated precision tooling and the training of machine operators?
Getting direction—Ford and GM
The natural response by Ford and GM would be to reassure suppliers that their production lines are "business as usual." For example, at the town hall meeting of the Automotive Industry Action Group (AIAG) and the Original Equipment Suppliers Council (OESA) that took place on October 7, 2005, Tony Brown, senior vice president of global purchasing for Ford, noted that their annual purchase costs supporting global production was more than $70 billion, distributed among 2,500 suppliers, while non-production buys came to more than $20 billion across more than 9,000 suppliers. Ford's commitment, said Brown, included long-term sourcing for the life of a program, improved product and process stability, and greater discipline in program execution. Cost issues would be a bilateral commitment between Ford and suppliers, with such items as detailed physical-based cost models, a focus on total costs, and primary attention on affordability (as Ford likes to say, "Job #1").
Lowering costs while ensuring commitments was an underlying theme a month later, when Bo Andersson, vice president of GM global purchasing and supply chain, addressed the OESA annual conference on 15 November with a lecture titled, "Growing the Best Suppliers." He emphasized GM sales leadership through 10 months of 2005, then spoke of the GM North America turnaround plan, listing product excellence, sales revitalization, cost reduction and attending to health care issues—topics that would befit any manufacturer in crisis.
After citing highlights from the 2005 vehicle launch, Andersson turned to an examination of the global supply chain as providing for large production volumes. Major opportunities exist, he hinted to the gathered suppliers in the room, for best performing suppliers. Ultimately, he concluded, relationships with GM suppliers will continue to focus on GM priorities while growing suppliers with strong management, operations and a sustainable cost structure.
It should be assumed that loyalty to either company would be very welcome, as implied by Andersson's remark that performing suppliers on key platforms would receive "first opportunity" status. Ford, on the other hand, offers suppliers long-term sourcing for the life of a program, in exchange for a commitment of a supplier's senior management to productive collaboration and "ongoing cooperation" with Ford.
Getting direction—The associations
At an Original Equipment Suppliers Association (OESA) business forum in mid-2003, Tom Stallkamp, the former Chrysler president who left to join MSX international, referred to the state of domestic OEM-supplier relations as "Adversarial Commerce," and listed four major problems with the approach:
- It puts tension into the system.
- It brings back mistrust, which results in manipulation.
- It increases overall systems cost (i.e., you may win on one component, but you lose elsewhere in the system).
- It institutionalizes inefficiencies in the system.
The OEM itself, declared Stallkamp, would be the one most damaged by this kind of approach. By creating an environment of mistrust and manipulation, suppliers would withhold needed innovations from the OEM (since suppliers would not be rewarded for them), and the overall cost structure of the OEMs' procurement process would remain higher than their Japanese competitors. The obvious long-term loser of this approach would be the domestic automotive industry.
Stallkamp ended his presentation with suggestions to improve success as an automotive supplier:
- Say no more frequently. Until more suppliers aggressively protect their position, the continuous downward pressure on supplier margins is unlikely to stop.
- Establish supplier alliances. This is not merger-and-acquisition activity, but a proactive strategy to align complementary suppliers.
- Involve management at all levels. Successful supplier positioning is not a salesperson selling to an engineer or purchasing agent. It is a multi-tiered customer development strategy that includes CEO to CEO.
- Share more information and product plans. Do not mimic the self-destructive behaviors of the customers. Integrate key suppliers into your system.
- Share componentry. The whole industry is over-capacitized, so the only way to be successful in many areas is to look for opportunities to share componentry.
- Demand adequate systems specifications from your customers. As more costs are being pushed lower in the supplier chain, suppliers must become more diligent in getting the necessary detail on the front end of every program.
- Significantly improve your program management capability. This is a necessity for both OEMs and suppliers.
- Diversify the customer base. Make sure that you are not betting your company's future on whether or not the Big 3 regain lost market share.
Three years later, associations for auto industry suppliers, such as the OESA and their Canadian counterpart, the Automotive Parts Manufacturers' Association (APMA), continue to advocate Stallkamp's suggestions. Rather than dedication to a single manufacturer, suppliers should keep options open by examining their core competencies and finding out what other markets they could serve. Metal stamping equipment can create appliance parts as readily as vehicle sub-structures, in many cases, while machining centers can produce components for after-market auto accessories.
Moreover, both associations continue to strongly encourage suppliers to take a tougher stance when negotiating contracts with the automakers. Ford and GM's history of demanding lower and lower prices from suppliers, a primary contributor to the industry's current problems, should now be met with "no, we can't reduce the price any further." Lower supplier margins have not increased loyalty to those suppliers —rather, the OEMs expected that they could demand still-lower costs on the next contract with the same supplier. In the words of APMA president Gerry Fedchun, "When you reach a point where you can't do the job any cheaper, it's likely that no one else can, either. If you lose the business, you're better off than operating at a loss."
In fairness, Ford and GM managements have recognized the damage caused by previous supply chain management, such as GM's legendary J. Ignacio Lopez de Arriortua, who left a stunning trail of damaged customer-supplier relationships, before a sudden exit to Volkswagen in the early 1990s. Unfortunately, the corporate spokespeople still speak in corporate legalese, which has not produced much in the way of reassurance for American supply houses.
The "New Domestics"
Then there are the new kids on the street. Toyota. Honda. Hyundai. Mercedes. Companies with established production - and expanding - plants in the U.S. While they came in with supply lines already in place, it was inevitable that they would use state-side suppliers for some of their components.
The difference between the "traditional" domestic OEMs and these new domestics may be cultural in nature. According to Fedchun, Honda and Toyota have a much more long-term view on life. While a supplier may experience greater difficulty getting onto a Honda or Toyota program than with Ford or GM, it is also difficult to leave a program.
Additionally, Fedchun notes, when Honda or Toyota wants cost savings, they send their own people to help out the supplier. The difference here is that a Toyota purchasing engineer usually has held the position for 10 years, rather than being moved around in the company. This makes the company buyer very knowledgeable about manufacturing process and cost, and it stresses the need for a potential supplier to do their "homework"— that is, costs, production methodology, return on investment, and other specific information areas—before presenting an offer.
The good news, then, for suppliers is that the problems in the auto industry are localized in only two of the OEMs. DaimlerChrysler's business health has even started to improve, thanks to vehicles like the Chrysler 300 and the Dodge Charger. A Chinese auto manufacturer is already on the horizon, and is expected to arrive in the US by the end of the decade. Suppliers with the right product, who contribute new ideas for production into the OEM-supplier relationship (a quality all OEMs look for), always will find themselves in high position on a supplier's Rolodex. The auto industry is not at a dead end.