Once a year the auto industry in Detroit treks northwest to Traverse City, a friendly resort town on Lake Michigan, for the Management Briefing Seminars (MBS). The conference is organized by the Center for Automotive Research, led by David Cole – the influential former head of the University of Michigan’s automotive office. Jeremy Burne was there.
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The event draws senior executives from the automakers and their suppliers, as well as industry analysts and service providers. They come heavily armed with PowerPoint presentations and some form of message for the attendees, the vast majority of whom are in the supply side of the business. For those who resist the urge to take advantage of Traverse City’s many recreational opportunities (golfing seems almost obligatory), the conference agenda includes four and a half days of presentations and panel sessions in a large darkened room, interspersed with coffee breaks, lunches, receptions and dinners for the professional networkers and media to enjoy.
In essence, the MBS is an opportunity for the two sides of the industry, the automakers and suppliers, to discuss collective issues in a friendly and comfortable neutral environment. Thus, themes discussed at the event tend to reflect of current state of OE/supplier relationships, which appear to have reached a critical point, depending on whose views you believe.
The Automotive Perfect Storm
This year’s conference theme was ominous. Although the impact of the analogy had worn thin by the week’s end, the discussion of stormy weather in the conference hall seemed appropriate despite the lovely weather outside. To further set the tone for the week, the results of a new OEM – Tier One supplier relationship study by Planning Perspectives were released the moment the conference opened. Here is the gist:
- North American suppliers overwhelmingly prefer to do business with Honda and Toyota over GM, Ford and Chrysler.
- They are shifting resources and refocusing business plans accordingly
- Supplier trust of the US automakers has never been lower
According to some suppliers, the seeds of this discontent were sown by Inaki Lopez, many moons ago, and built upon by cost-down demands and other inflammatory practices by the OEMs. Suppliers are concerned about an apparent lack of regard among US automakers for protecting a supplier’s proprietary technology, and believe that there is too much focus on reducing costs instead of improving quality and technology. In the margins of the conference you hear the suppliers complain about their technology being shopped around the world, a practice that automakers have vehemently denied. The study also concludes that in five key areas of measurement – Relationship, Communication, Help, Hindrance, and Profit Opportunity — the US and Japanese automakers are diametrically opposed. With that level of unhealthy mistrust all the way around, it will take some doing by the automakers to reverse this trend.
There is, of course, another good reason to for North American suppliers to expand or divert their business with the Japanese and Koreans – the continuing erosion of the Big Three’s domestic market share. Indeed, the study implies that the Japanese approach to working with their suppliers is part of their competitive advantage over the US domestics. Another automotive manufacturing consulting firm has predicted that Big Three domestic market share will shrink from 65% in 2000 to 52% by 2008. Perhaps this is why Ford’s Jim Padilla emphasized his intentions to address the company’s excess capacity and to refocus on building profitable market share.
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There are a number of ways to describe the OE/supplier relationship. Suppliers to the Japanese generally consider their relationships as partnerships, while US automakers’ relations with suppliers are on the adversarial end of the spectrum. Another interpretation from IRN, an automotive supplier consulting firm, characterizes the relationship as similar to a parent and child. Regardless of how you describe the relationship, there was consensus on one issue: if the US automakers are able to ride out the storm, win back market share and make consistent profits, they will certainly require the proactive support of the supply chain.
And so it is hard to believe that given this dependence, the US automakers would deliberately behave in such a manner that would encourage all but the most desperate of suppliers to seek the safer, more profitable harbours of the Japanese. One can only conclude that the programmes the Big Three have implemented to shore up supplier relations are not working well, if at all.
So it was of considerable interest to MBS attendees that Chrysler’s COO, Tom LeSorda, announced a new partnership with three major suppliers as part of the $2.1 billion development of the Jeep manufacturing facilities in Toledo. The plan is for Kuka, Durr and Hyundai Mobis to own and operate the paint, body and chassis shops in the plant. By turning equipment suppliers into product producers, DaimlerChrysler will save an estimated $300 million from the investment, at the risk of raising a host of quality issues. Such an arrangement does not fit the “adversarial” nature of the OE/Supplier relationship, at least at first blush. Executives from Ford and GM were certainly taking note of this development, although Ford President Jim Padilla wondered who will ultimately pay for the $300 million the suppliers will be investing in the project.
Riding Out the Storm
To be fair, not all suppliers are complaining. One should also not forget that since 9/11 the US automakers have used aggressive incentives to keep volumes up, and that helps suppliers with their capacity utilization and profitability, and helps pay for some sizeable executive salaries. Most of the mega Tier One suppliers have been making moderate profit margins – often more than their customers. Further downstream the picture is not so good. According to Kim Korth, President of IRN, 25% of the Tier One suppliers make 60-70% of the supply industry’s profits. Suppliers in the middle are squeezed by increases in raw materials costs at one end, and cost down pressures on the other. This is why some supplier execs at MBS predicted the end of the mandatory cost downs, although this might be wishful thinking.
It was interesting to note that Delphi, which purchases $14 billion from suppliers, is adopting the Japanese model. Ex-Honda purchasing director David Nelson described how Delphi has embarked on a four year programme to weed out 3,000 suppliers. The remainder will enjoy a stronger relationship based upon principles learned from Toyota and Honda.
There was no evidence that any of the US automakers will do anything similar. Indeed, some of the most interesting conference sessions to address the meatier supply chain issues (in particular the Friday morning graveyard session orchestrated by the Original Equipment Suppliers Association – OESA) were attended exclusively by supplier representatives. But this is to be expected. The top car company executives are busy people, and flying in from Detroit to do a 30 minute presentation and lunch with the media is perhaps as much as they can be expected to contribute to such public proceedings.
There are two possible entities that can possibly help rebuild the bridges between the Big Three and its suppliers. OESA has positioned itself as the chief proponent of increasing the spirit of collaboration and partnership on behalf of the supplier community, although not all suppliers believe it can make much of an impact. The Automotive Industry Action Group, the people behind QS 9000, can possibly expand OE/supplier collaboration on pre-competitive and technical issues in a less political framework.
Ultimately, the market will sort itself out. Most industry watchers expect to see continued consolidation and rationalization of the Tier Two supply base, with increasing participation from private equity funds. Don’t be surprised, however, if you make the journey to Traverse City to attend next year’s event only to discover that the Perfect Storm is still brewing.
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Jeremy Burne is the US Automotive Sector Specialist for the British government and North American Director of the Motorsport Industry Association (MIA).
