Saturday, 31 January 2009

In Passing

Beggar your suppliers: Not good for the long term

Monday’s Wall Street Journal featured a front-page article, “Bankruptcy Fears Grip Auto-Parts Companies.[1]”  The tale: Slumping production by the Big Three has put pressure on the auto industry’s parts makers, some of which may be forced into bankruptcy or out of business altogether.  Either event could generate production problems for other carmakers (Toyota and Volkswagen, in particular, were mentioned), due to delays in supplies or, at worst, the disappearance of suppliers.

One factor that received only a passing mention is the automakers’ continued push for rock-bottom prices, often with special concessions on top of them.  (The Detroit companies have long been particularly noted for this.)  A parts contract with a Big Three company can be extremely tempting: Enormous potential volumes, although at minimal margins.  And once a supplier gains one, it can be sure that the buyer will be back next year, looking for a price cut.

The Big Three’s attitude towards their parts suppliers has traditionally been, “Take it or leave it.  Don’t like our business on our terms, fine.  Somebody else will be happy to get it.”  If you asked industry executives if their suppliers were profitable, the answer would often be, “What do we care?”

But things have changed since the 50s.  The narrow margins (and declining volumes) of the parts business forced the less-astute suppliers out of it:  Some closed, others moved into less cutthroat markets.  Meanwhile cars became more complex.  More sophisticated engineering and the press for improved quality meant fewer commodity parts, and fewer still that could be successfully produced by a run-of-the-mill metal basher.  And the American economy’s shift away from manufacturing left fewer domestic vendors capable of fulfilling an auto maker’s requirements, or interested in doing so.

Many of the parts manufacturers that remain have little financial reserve.  The endless push for lower prices produces an endless cycle of spending the majority of this year’s profit on technology and innovation needed to keep next year’s contract, on which the profit will be less.[2]  All of which is exacerbated by bad economic conditions: While a healthy company can survice a canceled order or a delayed payment, either can put a fragile company on the ropes.

Beggar-thy-vendor may have been a successful strategy in the past. It may still be one, provided your company is a WalMart, selling commodity consumer goods obtained from a seemingly endless collection of interchangable Asian suppliers.  It’s less wise when the business involves custom-made items for which an alternate supply– or supplier– may not be readily available.

The irony is that, at a time they find themselves in a fight for their existence, the Big Three have to start worrying about the health of their suppliers, and realizing that, in a truly successful business relationship, everybody involved has to make money.

Related, later (090203 01:41):  C.G. Hill explains why car companies can’t be run like Google (and, maybe, why Google doesn’t want to run a car company):

...Almost all decisions, design and otherwise, in the auto industry have to be filtered through the interminable mesh of governmental mandates before coming to any sort of fruition at all...

[Auto manufacturers will never be flexible and nimble]... until Congress gets out of the regulation business — or until Google buys Congress and shuts it down entirely...
The latter idea is becoming increasingly attractive.
[1]  No link, couldn’t locate on the WSJ site.  The article is: “Bankruptcy Fears Grip Auto-Parts Companies” by John D. Stoll and Jeffrey McCracken, published January 26, 2009.

[2]  Another group in precarious financial condition are the now-independent parts suppliers which were formerly divisions of the auto manufacturers.  Many of these companies were spun off in an effort to raise cash while getting out from under onerous union contracts; for some, their ability to survive was questionable even before the current economic crisis.

Posted by: Old Grouch in In Passing at 23:46:14 GMT | Comments (1) | Add Comment
Post contains 634 words, total size 5 kb.

1 Agreed.

With Wal Mart, if the are out of pink polka dot shower curtains because their supplier folded, then aw shucks. I guess they don't sell any.  The store does not close down that day.

With GM, if they are out of Tahoe instrument panel wiring harness bundles because the supplier just went under this morning (JIT delivery) then the Tahoe assembly line shuts down this afternoon and everyone can go home.  No big SUV for you!

Most auto manufactures do not have stable second line suppliers because they can't survive under that business model.  There really ARE no other suppliers of widgits out there to fall back on.

Posted by: Carteach0 at 02/01/09 13:24:25 (yXCaD)

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