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The automotive industry is struggling to make a profit but the supply chain is getting squeezed

The worldwide automotive manufacturing industry is comprised of nearly 20 large multinational corporations while the automotive supply sector is made up of thousands of suppliers, from small niche distributors to the largest Tier 1 suppliers. Therefore, supplying the automotive industry is a multifaceted proposition.

One major factor affecting the entire industry is the loss of value in the automotive value chain which affects the automakers and the entire supply chain, says Accenture partner Randy Barba. Between 1990 and 2000, the industry saw a compound annual growth rate of three percent, or an increase from $665 billion to $893 billion, according to Accenture, a management consultant firm.

So why is the auto industry struggling? Barba says the value is being squeezed out of the supply chain.

"There has been a migration of value from the supply chain, largely to the consumer," says Barba. "In other words, the auto industry hasn't been able to pass on the increasing costs of the upgrades in vehicle content and inflation to the consumer."

For example, the vehicle content now includes more safety equipment like airbags, regulatory equipment including enhanced emissions controls and improved systems. The disparity between increased value and increase in price over the past decade is nearly $1,100 per vehicle, says Barba.

Meanwhile, the OEMs have retained $22 billion which should have accrued to suppliers, says Barba. The average return on assets for suppliers has dropped from 8.5 percent in the mid 1990s to 5.7 percent in 2000. This was during record level production.

"This value didn't increase the automakers' profitability due to the OEMs' structural flaws," say Barba. "Essentially, automakers have made the suppliers pay for their own inefficiencies."

Structural flaws run the gamut from inflexibility on the part of the OEMs, poor productivity, overcapacity, to an overabundance of suppliers. With so many suppliers, many with a weakened cash position due to merger activity in the 1990's, they also cannot maintain their value, says Barba.

Despite auto industry efforts to reduce the supply chain, there are still too many suppliers. The squeeze will continue as long as the current structure remains.

"It's not a healthy situation," says Barba. "The auto industry is propping up certain Tier 1 suppliers to keep up the competition."

Purchasers are trying to maintain their suppliers to squeeze out the lowest price, says Barba. In the end, this will cause the industry to suffer.

With the industry constrained for cash, the answer to reducing the supplier base won't likely come from further merger activity. If nothing is done, the whole chain will suffer until enough companies go out of business, says Barba.

He suggests the answer for suppliers is to concentrate on their portfolio management. By making objective, strategic decisions based on criteria like core capabilities, differentiation, growth potential, competitive intensity and return on assets, suppliers can determine where they can best compete.

"Suppliers must concentrate on a single goal." says Barba. "Try to gain dominance in a single area."
He says if suppliers willingly narrow their focus and cooperate with other suppliers to do the same or form alliances, they can compete on their core products.

Detroit-based Mahar Tool Supply uses this strategy. CEO Barbara Lincoln says Mahar has become successful supplying the automakers and metalworking industries with commodity management of metal removal products.

Unlike integrated supply or a generalline distributor, commodity management focuses on expertise in its core product. With this philosophy, the company has won a place in other integrators' supply contracts as well as profitable contracts with the auto industry, says Lincoln.

"We concentrate on our customers' need to reduce cost-per-piece and that has driven the success of commodity management," says Lincoln. "We remove cost through our expertise in the engineering and application of metalworking products and processes."

The company has a tech team of eight experts trained in the best metal removal practices. The tech team visits customers on a regular basis, says Lincoln.

While Lincoln admits that the automakers have placed heavier demands on Mahar, the company has continued to grow and acquire new contracts, even in the current economy.

"Though some of their requests were hard to comply with, we took every effort to meet their expectations," says Lincoln. "We try to keep our customers healthy."

Stretching the chain

With the consolidation of Tier 1 suppliers, many found their own supply base was too large, says Sean McAlinden, director of the economic and business group at Ann Arbor, Michigan-based Center for Automotive Research. This has resulted in a rationalization of the supply chain down through the lower tiers.

Ford and Daimler-Chrysler have 800 or 900 suppliers, but their target is less than 400, he says. GM has about 4,000 direct suppliers but is making progress in rationalizing its supply base.

This is reflected by suppliers like Johnson Controls, which plans to reduce its own suppliers by 90 percent, says McAlinden.

"The supply chain is getting narrower at every level," he says. "The smaller suppliers aren't going away, it just makes the supply chain longer."

McAlinden says the supply chain is trying to improve efficiency and fewer suppliers means less confusion. Companies without automotive divisions trade with suppliers further down the line.

"Supplying the Big Three is difficult right now. Perhaps 60 percent of the new projects are on delay," he adds. "GM is taking some projects back in-house and Daimler-Chrysler is sending some tooling to Stuttgart."

Even though the automakers claim they are reducing suppliers, they are keeping certain bankrupt firms afloat with monthly bridge loans. McAlinden says this is to secure a low price from month-to-month.

"The purchasing managers claim that they cannot allow an interruption in supply," he says. "However with their weak cash positions they cannot keep the industry afloat long-term in this manner."

Squeezing back

Detroit-based E&R Industrial Sales isn't being squeezed out, says director of marketing Paul Thomas. The company is providing savings to the auto industry through adoption of e-commerce and is doing business through e-commerce portals and other initiatives.

While the global automotive industry exchange has not been able to fully meet the industry's expectations, the portal does provide cost savings, says Thomas.

"Whether through Covisint or not, the auto industry is committed to an e-commerce model," says Thomas. "It is driving down the cost of doing business by providing less expensive data transfer than paper transactions."

He says e-commerce allows easier and more efficient order fulfillment. Covisint and other initiatives are a natural evolution in the business process, says Thomas.

"The intent of solutions like Covisint, iProcure, Ariba and CommerceOne wasn't so much to drive down prices as it was to communicate and transact business at a lower cost," he says. "We try to make ecommerce do everything a catalog cannot."

COPYRIGHT 2002 Cahners Business Information in association with The Gale Group and LookSmart.