According to Canada’s Financial Post, Toyota and and Honda are freaking-out about the potential failure of Detroit’s three car companies. “We’re very concerned” about a Detroit meltdown, ToMoCo spokesman Mike Goss told the Post. “In the past couple of days I’ve been asked ‘Wouldn’t it be great for Toyota if others fail?’ We think the opposite is true.” Toyota is concerned about a Motown meltdown’s catastrophic effect on its NA supplier base; “The vehicles Toyota builds in North America contain an average of 75% domestically sourced parts and systems, and Toyota is reliant on many of the same suppliers used by GM, Ford Motor Co. or Chrysler LLC. The Japanese automakers are working to identify which suppliers have the biggest exposure to the Detroit firms. They are also developing emergency plans in the event they need to replace a company providing them with parts. “Everything’s on the table about what we might have to do,” Mr. Goss said. Meanwhile, the industry shills at the Center for Automotive Research seized on the comments to predict, you guessed it, carmageddon…
“Should one or more of the Detroit three go bankrupt next year, all U. S. automotive operations, including those of the so-called new domestic manufacturers like Honda and Nissan MotorCo., will be paralyzed for at least one year because of the high likelihood many suppliers will run out of money, according to an analysis by the Center for Automotive Research, a think-tank based in Michigan.” So no new cars for you for a whole year, you tight-fisted taxpayers!
“We’re very concerned” about maintaining the stability of the supply base, said Edward Miller, spokesman for American Honda Motor Co. “Obviously this is very disruptive.” Disruptive or cataclysmic? Big difference.
Motown Mowdown?
I dont know about Toyota using the same parts people but I do know that Honda has there own Parts supplier base, all over this part of SW Ontario they have Parts manufacturers that are wholly owned by Honda, every day there is a stream of large Trucks on the roads in this area of Ontario moving parts between these plants, in Alliston, Ontario the Honda plant has a plant that makes Engines for many of the Honda line.
Geo Levecque,
All of the car companies use the same supplier base. Everyone who builds cars does so with parts from Denso, Delphi, Federal Mogul, Siemens, Bosch, etc. (For example: there isn’t a car maker extant that makes their own radiators or starters.) There are only so many companies in the world that make these kinds of specialized components at competitive cost and quality levels. In sum, more than 70% of a car’s components are sourced from the supply base. So, no, Honda does not buy parts from companies that only sell parts to Honda. Take it from a guy that sells parts to these companies for a living.
The Companies that supply Honda in Alliston, Ontario are Japanesse Companies, like the one in this area at Elora, Ontario also the one in Mount Forest Ontario, so maybe they supply parts to other manufactures besides Honda, I dont know! I do know that Honda has a Specialized Engine plant at Alliston, Ontario. Check out honda at hondacanada.ca
I read an excellent biography of Walter P. Chrysler a few years back. The book noted that before the Great Depression, there were many auto manufacturers, but most of them produced what was derisively called “assembled cars,” or cars produced largely from purchased parts. Not one of these companies survived the 1930s. Only the “Big 3” plus a couple of others who actually manufactured vehicles made it.
I know this is not an apples to apples comparison with today’s environment, but I can’t help but wonder if there is a lesson here somewhere.
Mike Stevens: Roger that. There is enough turmoil in the parts business already. One car maker going under won’t be more disruptive than the purchasing depts. of the D3 that wiped most parts manufacturers from the American earth, drove them to set up manufacture in China, and are now reaching out to the Chinese subcontractors. We both know: There will be no shortage of alternators or brakepads. Different with makers of whole subassemblies. A hiccup with one of them can ruin the whole day.
They’ll weather this ‘parts problem’ storm. Especially given current weak sales.
The nightmare scenario for Honda and Toyota is a post liquidation “sale” of $8K Silverados and $2.5K Cobalts…
I cannot imagine parts suppliers will adjust and I think Toyota and Honda know that. The good suppliers will find their way through these times. I think Toyota and Honda need the “Big 3” to continue to make their cars look impressive. Every time I hear a someone talking about how great their Toyota or Honda is, it usually involves statements like “My Buick was not as good as this” or “That Ford I owned cost me twice as much to keep on the road” or “After owning a Dodge, I have had my fill of American made.”
If the USA does bail out the auto industry, I hope it includes quality improvements. If the “Big 3” cannot match or beat the imports they will just go belly up again in a couple of years.
What some call “freaking out”, I call supplier base risk management.
I’m sure there are supply chain managers at Toyota and Honda who are very concerned about the what-ifs, and are making plans for how to deal with the possibilities.
A few years ago a factory in Japan which supplies the lion’s share of piston rings for the Japanese companies went down due to an earthquake. Massive scrambling ensued and there were some temporary work stoppages … but the problem was managed and very little production was lost. Toyota and Honda have the capacity and know how to swoop in and pick up the management of making anything automotive, so if need be they could buy the tooling and/or production equipment from any toes up suppliers and start running the stuff again.
Even if the supplier company shuts down, the tooling, production machinery and trailed workers still exist. In that way it is less of a problem than an earthquake or fire actually destroying critical equipment. Of course there would be lawyers and judges to deal with :(.
Several major suppliers like Delphi and Dana have had at least their US operations in Chapter 11 already, yet cars keep getting made.
A GM flame out would like mean more business for the remaining car companies, and I’m sure the industry would sort through it in a matter of months.
While it may be disruptive to lose new car production for a period of time, even a year, it is not as if people will be forced back to the horse and buggy era. There are plenty of new and unsold cars, as well as used cars, sitting on dealers’ lots.
So goes the Niavette of the public.
Its the eletronics and wiring side of the equation that has them hosed. I work in the domestic industry for one of the three (the biggest one) and do electronic controls development. Toyota,Honda and Suzuki essentially ues the same suppliers we do. Delphi, Hitachi, Bosch, Continental,Seimens,Sumitomo and about 50 more. The shock of no sales to our company will take a few of these into the abyss. The fixed overhead these companies have is amoritized over a lengthy period. Its so specialized that (ie totally custom) that it just can’t be sold off. (ie the payments go on even if its not producing anything.
(ie were talking serious financial loss on a monthly basis) Until that equipment can start making components again its a loss. If said suppliers could find an outlet to produce somthing on these specialized machines it would be no problem. However its highly unlikley. Even if they could it takes 12 to 24 months to tool, engineer and design (write software)to produce a viable component. Its not hard parts that will take the import transplants down, thats easy stuff. Its the electronics!
For folks not in the industry this is the time it takes to resource a supplier for an Item like a body controller which is one of many in todays automobiles. Most automobiles today carry as many as 25 to 26 control modules on board the car interlinked through a LAN network.
It only takes one Item to shut production at a plant, It is these items that are the achilles heel. The result of this is that if the foreign transplants have to source a retool of one of these type items the plant that uses said item will shut for 12 to 24 months. During that time said automaker will again pay for the plant which is amoritized while it is not making auto’s. Typical losses at an auto plant that stops producing is 1 million dollars an hour in losses.
a short list of some of those 26 modules
Body Computer
Engine Control Module
Air Bag Module
Memory seat module
Instrument panel cluster
Radio
Passive entry passive start module
Theft deterrent module
Intrusion sensor
Ride control module
Parking aid module
Electric power steering module
Sunroof Module
Distance sensing cruise control module
Pedestrian protection module
Telematics service module
Heated/cooled seat module
Suspension control module
Fuel system control module
Transmission control module
and the list goes on.
since the year 2000 your car has literally become a rolling PC Network. This is the achille’s heel for all of them and the same group of suppliers make the stuff. Most of which is based here in the US. Most of the micro’s are made overseas and it only takes one or two of those two to fail to short circuit the system.
I don’t think parts will be a problem, image will be. If the domestics go under, I predict a huge wave of anti-Japanese xenophobia. Huge tariffs will be levied, and Toyotas and Hondas and Kias and anything that sounds Asian will be vandalized across America. Probably including my 2001 Civic. Count on it.
ferrarimanf355 :
November 15th, 2008 at 12:29 pm
I don’t think parts will be a problem, image will be. If the domestics go under, I predict a huge wave of anti-Japanese xenophobia. Huge tariffs will be levied, and Toyotas and Hondas and Kias and anything that sounds Asian will be vandalized across America. Probably including my 2001 Civic. Count on it.
I’m not so sure about that. Toyota execs have feared various forms of “backlash” for years. I remember hearing of hand-wringing over the release of the T100 several years ago as Toyota was about to enter the sacred domain of the full-size truck market. Result? We know how that turned out. There is no real nationalist pride in the domestic auto industry, though I wish there were. Look at how enormously popular writers and thinkers (?) such as Tom Friedman are, who absolutely villify GM et al.
Rightly or wrongly, the Big 3’s management and blue collar workforce are looked upon largely as prima donnas and receive little if any sympathy.
br549,
The backlash they’re fearing WILL happen if any of the Detroit domestics go under, count on it.
Why just Asian? MB, VW, Porsche, Ferrari – they all are “foreign”, aren’t they?
There may be some silliness in certain areas but I think so many people are pissed off at the concept of making handouts to companies who pay their CEO $12 million a year (GM) or $24 million (Ford) to run them into the ground, they should be storming the doors of the remains of the big 3.
@Bubba Gump: You are ABSOLUTELY right on that. Some cars have multiple CAN busses, because one is not enough. The current Golf has 30odd computers. High end models 50+
“ferrarimanf355 :
The backlash they’re fearing WILL happen if any of the Detroit domestics go under, count on it.”
I doubt it. Think of all the Asian produced electronics that people have in their homes. Are we going to see a patriotic backlash against Asian automakers when people have Sony and Samsung TV’s in their house, and Sony Playstations ?. I don’t think so.
The patriotic backlash was pretty much a 1970’s phenomenon, it’s over and it’s not coming back. People today are smart enough to realise that Detroit’s problems were created by Detroit, not the Japanese. That’s why you see so many “f*ck ’em !” replies in the comments section of news articles about Detroit.
correct bertel
This will bring the North America/Canada transplants down. Being intimately involved in this area and knowing how tight of a financial string some of these criticals suppliers are on. I am 100% confident that the transplants production will be disrupted for at least 12 months.
I’m not saying this to create fear or spin. The reality stands on its own merits. I’ve been in this business 25 years. I know how the gig works.
Significant commonality of electronic systems occured beginning in 1996 with the advent of OBD1 and 2.(on board diagnostics generation1 and 2) Since the year 2000 there has been consolidation across almost all manufacturers in this area creating specialized suppliers that run on super tight budgets and create the real sophisticated electronics in the vehicle. However even though there has been software methodology consolidation component consolidation is still not there. The loss of income from one of these high end components at a manufacturer has the distinct possibility to bankrupt the supplier to such an extent that renders them unable to manufacture for the other surviving manufacturers.
I saw some discussion in another thread about the military and NS. The sophisticated components that these vehicles use are sourced and manufactured through the same supply chains as the automakers.
Just go take a peek at Delphi Aerospace, which represents just 1. They make the wiring harnesses for a great many DOD vehicles. Hughes aerospace and Raytheon though spun off from GM years ago use the same suppliers as the auto industry. I’m talking about the high tech stuff. FLIR, Vehicle to vehicle communications, Targeting and aquisition systems etc. The DOD has significant risk and they know it. For NS reasons their not even going to whisper about it though.
Interesting exchange between Schmitt and Gump. One question: Could the transplants prop up these suppliers to keep them running even if, say, GM halts its manufacturing? Or would that be so ridiculously expensive to put it out of the realm of possibility? It just seems like if I were Toyota and were faced with watching a supplier going under and as a result being unable to manufacture cars for 1-2 years, I would do anything possible to keep that supplier in business. Or does that just turn into an bottomless money pit, a la GM and Delphi?
I’d just like the insights of some of you industry folk on this question. Thanks.
The DOD has significant risk and they know it. For NS reasons their not even going to whisper about it though.
I found it odd in that other thread that some believe contractors such as Lockheed and AM General are completely self-supporting manufacturing and engineering-wise.
But anyway, I’m sure that our elected representatives will be not-so-subtly reminded of these industry connections to national security by Detroit 3 agents next week.
Or would that be so ridiculously expensive to put it out of the realm of possibility?
Bingo you have your answer,
This is the exact situation GM has been in with Delphi, (ie money pit.)
However you can bet right now they are running OT on production of mission critical components to buy time in the event of a disruption. However there is a substantial chance of it turning into an money pit because though the part may be sourced through a tier 1 supplier that provides the completed component assembly there can be up to 50 tier 2,3,4 and 5 suppliers that feed into it that could fail short circuiting the tier 1
craiggbear,
I don’t know why, but I’m certain that there’s this perception that Toyota made GM look bad, or something like that, irregardless of GM making themselves look bad. I think.
Usta Bee,
After all the flag-waving patriotism in the election campaign, I’d say that it probably won’t be just a ’70s phenomenon…
br549
Hence the common misunderstanding between assembly being called manufacturing and engineering and sub supply being the mechanism that makes assembly possible. Commonly quoted as manufacturing but in reality this word is over used in a general sense
Ferrariman
To the contrary, the domestic three and their employees per se don’t have ill will toward the asian manufacturers. However there is tremendous Ill will towards the federal government.You can’t make a car get better fuel mileage and make it heavier at the same time.
One washington group drives the cafe standards and another drives the safety side. Those two are at odds with each other. Safety adds weight and reduces attainable Cafe and Cafe drives safety risk.
Another washington group has legislated the currency repatriation act which penalizes US industry that is global with a 40% tax on any funds in made in an overseas market if they want to bring those funds back into the US market for use in their US operations. I believe and Opel indicated as much that they don’t have a liquidity issue today as we speak. Even though this is a wholly owned subsidary of GM they cannot use the funds from that division to support its US operations. Same way with China. Now ain’t that a bitch!!
If this was not an issue GM North America would not be standing in line in Washington right now. Occasionally you will read even as they are in the throws of BK right now that they are spending money in overseas operations, buying plants and expanding which makes you say WTF.
Recent headlines: GM to up stake in SAIC, GM to begin construction on China Technical Center, GM looks to acquire 300 million stake in Russian Manufacturer.
So I’m watching CSPAN the other night on the housing crisis and some Goldman dude the Feds Hired to allocate the 700 bill TARP getting roasted in a hearing and the Repatriation act was brought up and discussed at length. I said to myself AH HA. Now it all makes sense to me.
Well the repatriation act is exactly why. The funds are locked up overseas where its better spent VS taking a 40% haircut to bring the funds here. Call it a capital tariff.
Yen manipulation is another issue and I’m not even going to go there. Its simple to understand unless your totally and simply blind.
Yen manipulation is another issue and I’m not even going to go there. Its simple to understand unless your totally and simply blind.
I guess that the Federal Reserve must be blind, because the yen is three times stronger today than it was thirty years ago: http://research.stlouisfed.org/fred2/data/EXJPUS.txt
Apparently, the Japanese are really bad at this manipulation business because they’ve manipulated their currency upward by a factor of three, when they should be doing the opposite. Oops.
Upward actually helps their industry. Their government knows which side of the bread has the butter on it. Below 99 they start to loose their azz on exported products. Anytime they can exchange a us made dollar for over 100 yen they make more money. Call it built in intrest.
Did you miss the headline not 2 weeks ago when Honda asked the Japanese government to intervene in the yen price??
They conviently do the opposite when the stuff hits the fan. Their government knows which side of the bread has the butter on it.
Thanks for sidestepping the point, but let’s stay on it, as this could make for a useful learning experience for those who are apparently unfamiliar with how foreign exchange markets work.
The Japanese are so lousy at currency “manipulation” that they’ve managed to triple the value of their currency in thirty years. That’s a pretty good indication that they have pretty much blown it.
Governments routinely attempt to manage their exchange rates, but the free market ultimately determines where they end up. Governments can adjust them slightly, but they can’t fundamentally change their value, as the market will determine that.
The yen is a strong currency, not a weak one. The situation is actually the opposite of what you describe.
Why give money to the 2.8 in order to prop up the suppliers. Why not just prop up the suppliers directly.
PCH your correct which was why I corrected my statement while you were typing yours. When the yen is high currency repatriation from dollars to yen helps them. Thats why they get all jacked when it falls below 100. Which is what happened in the last 2 weeks.
Or am I having a mental moment and I’m looking at it backwards.
Without the 2.8 the suppliers have no reason to exist. Specifically the very specialized ones.
Pch101 :
November 15th, 2008 at 2:34 pm
“They conviently do the opposite when the stuff hits the fan. Their government knows which side of the bread has the butter on it.
Thanks for sidestepping the point, but let’s stay on it, as this could make for a useful learning experience for those who are apparently unfamiliar with how foreign exchange markets work.”
ok, i’m game. educate me–i’m unfamiliar with how these markets work. the way i understand it is a weak currency makes you desirable for manufacturing things to export. a strong currency allows you to import products from other countries.
it stands to reason that on a personal level, it would be better to be the rich guy who can pay the boy to mow the lawn rather than be the boy.
if you’re a country and all you do is import, you may wind up like the USA without a manufacturing base. how bad is that really if you can buy things (provided you don’t inflate your currency like zimbabwe)?
i can see why japanese manufacturers like honda or toyota would want a weak national currency–it would help their exports personally. what’s in it for the government to have a weak currency?
since, as you pointed out, the yen is strong, is that bad for honda and toyota because they have to sell good cars for crap dollars? is it only viable because US cars are just as expensive due to the UAW?
ok, your turn–i’m listening.
Sorry PCH I am wrong. What it does is the oppsite from what I said which makes vehicles and parts manufactured there and shipped here for assembly, or the manufacture of cars there and imported here cheaper for them to produce hence giving them a dollar cost value advantage when its sold here.
Yes I had it backwards.
Damn I’m gettin a headache LOL
See I said I wasn’t going to go there, damn I did it anyway and I probably got it wrong both ways LOL
the way i understand it is a weak currency makes you desirable for manufacturing things to export. a strong currency allows you to import products from other countries.
That’s exactly right. An exporter should want to have a weak currency, because a weak currency makes those exported goods relatively cheap to those who are importing them.
since, as you pointed out, the yen is strong, is that bad for honda and toyota because they have to sell good cars for crap dollars?
It presents more of a challenge, because it doesn’t allow them to compete strictly on price, otherwise they would lose money.
This requires them to make a product that they can sell for a premium. This also encourages them to build outside of Japan, so that they can reduce their exposure to changes in exchange rates.
That was ‘flaming’ fellow commentators, and removed?
One of the points though is that “suppliers” is not a monolithic term. Many are built on the Magna mold where there are a ton of small companies that make up the total corporation. Magna has over 150 of them. Each is specialized and though some may go down, which happens more frequently than you might expect, it won’t take the whole corp with it.
Just because GM or Cryco craters doesn’t mean that Honda still can’t get their Magna parts. For the OneCorp type parts co.s, like Budd say, if the local viable assembly plant is threatened by another competitors lack of purchasing of chassis to the point that Budd would be shut down then the courts would be called in very quickly. Look at what happened earlier this year with Cryco and Plastitech. Even tho that was headed off at the last minute with a cheque, the seizing of the tooling was well on its way.
I don’t think that any transplant will be shut down for a year just because the terrible twosome go titsup. It won’t be pretty tho. The only bright spot (?) is the fact that this has been going on in slow motion. Everyone has had lots of warning and a ton of prep time. I wager that things will move *very* fast once it starts to disintegrate.
“Essay: Just Say No to Detroit” Given the abysmal performance by Detroit’s Big Three, it would be better to send each employee a check than to waste it on a bailout, says David Yermack, professor of finance at New York University’s Stern School of Business in the Wall Street Journal on November 15, 2008[$$$$]:
In 1993, the legendary economist Michael Jensen gave his presidential address to the American Finance Association. Mr. Jensen’s presentation included a ranking of which U.S. companies had made the most money-losing investments during the decade of the 1980s. The top two companies on his list were General Motors and Ford, which between them had destroyed $110 billion in capital between 1980 and 1990, according to Mr. Jensen’s calculations.
* * *
Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM’s physical plant during this period was $128 billion, meaning that a net $182 billion of society’s capital has been pumped into GM over the past decade — a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998. Yet one can only imagine how the $465 billion could have been used better — for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.
* * *
The implications of this story for Washington policy makers are obvious. Investing in the major auto companies today would be throwing good money after bad. Many are suggesting that $25 billion of public money be immediately injected into the auto business in order to buy time for an even larger bailout to be organized. We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future.
* * *
If the government diverts our national savings into businesses that have long track records of destroying investment capital, eventually we’ll end up with an economy like France’s — or Zimbabwe’s.
* * *
Usta Bee:
The patriotic backlash was pretty much a 1970’s phenomenon, it’s over and it’s not coming back. People today are smart enough to realise that Detroit’s problems were created by Detroit, not the Japanese. That’s why you see so many “f*ck ‘em !” replies in the comments section of news articles about Detroit.
You may well be right at least initially – BUT if we really wind up losing jobs in the millions as has been suggested, the backlash could be still be very powerful.
Bertel Schmitt :
November 15th, 2008 at 10:42 am
Mike Stevens: Roger that. There is enough turmoil in the parts business already. One car maker going under won’t be more disruptive than the purchasing depts. of the D3 that wiped most parts manufacturers from the American earth, drove them to set up manufacture in China, and are now reaching out to the Chinese subcontractors. We both know: There will be no shortage of alternators or brakepads. Different with makers of whole subassemblies. A hiccup with one of them can ruin the whole day.
Bertel: about every part of an automobile needs to undergo a process called homologation, i.e. approval by an OEM that this part may be used for production. The high risks associated with cars require the OEMs to be very strict on this. Accordingly, even an alternator cannot simply be switched. Typically the OEM try to avoid problems by having more than one supplier for specific parts. But if the demise of the D3 would trigger a bigger fallout with parts suppliers, this would easily affect the transplants for a long time.
Bubba-I’m impressed, It takes a big man to admit he’s wrong. Kudos.
Robert Schwartz- Bullseye!
This is where the “keep the money here” argument falls apart. Just because money doesn’t leave the country does not mean it continues to exist.
America cannot afford companies like GM, as it exists today and indeed this past decade, to be in operation.
Having been through a years layoff (with a wife, newborn and house) I can relate to the pain. But I am glad that I was, well…”liberated”, and an am now with a productive company. With healthy exports!
Any money poured into GM (i’m giving Ford benefit of the doubt on Mulally), whether by the government or through customers is just fuel on the fire. When anyone, individual or company, does not know how to handle finances more money tends to deepen, rather than resolve, the problems. IMHO.
Bunter
Bubba has hit the nail on the head. There are so many shared suppliers, a disruption wll be tough to manage for everybody. Once a supplier declares bankruptcy, the tools (typically owned by the OEM) get locked up until the courts can determine true ownership. The courts will be overwhelmed with the size and number of bankruptcy’s. It fine to say the number of unsold cars is high, but as people begin to lose their jobs all over the country, it will get very ugly. People love to blame the over paid union workers, but those over paid union workers typically work long hours collecting OT to make the kind of money that so many love to hate them for. Those over paid union workers like to buy stuff, stuff that other people make and sell. I am very very familar with the plastech and blue water bankruptcy. The OEM I work for had an army of engineers, managers, and lawyers to make sure our OEM’s interest was protected and to minimize supply disruption… and that was only two suppliers that happened nearly consecutively. Multiply that times THOUSANDS of parts, it will become a logistics nightmare… all while the OEM is paying all these peoples salaries while not actually selling anything, because the plants are shut down. Delphi shutting down will be absolutely devestating, they are in so many systems and in so deep, by themselves they literally control the future. It’s easy to say, bankruptcy will solve the problem, but the cascade failures will be UGLY.
Wow, great message board: some terrific points.
But I think you guys have it backwards. If GM and Chrysler go Chapter 11, the issue for transplants won’t be lack of production, but rather over-production.
If the Detroit losers get to cut their structural costs by writing down debt and reducing pay to unions and suppliers, then they will have the incentive to INCREASE production. They’ll run all their plants on triple shifts knowing that whatever revenues they get, it will be higher than their costs.
If I led Toyota USA, my fear would be $8,000 Silverados and $7,000 Caravans.
The inter dependencies of the automakers utilizing the same suppliers illustrates the inherent dangers in such a stupid (short sighted) arrangement. IF an auto company manufactured ALL of their own parts, they wouldn’t have anything to fear from the failure of another automaker or supplier.
Part of this problem has been caused by the government creating laws that made it onerous to own the complete supply chain inhouse.
This inter dependency of the automakers is just a microcosm of the same scenario that has been created between the worlds developed countries. By making each country dependent on all the rest, you can bring the whole developed world down by just disrupting one of them. While international trade is good, being DEPENDENT on another country for ANYTHING is just F___ing stupid. Oil is currently the best example of the result of this stupidity.
Why would Toyonda be worried? After all, can’t they just buy out these companies with their profits, or hire their laid off workers?
I think there will be some short term turmoil, but, in the end, not much will matter. The number of new vehicles purchased each year in the United States is more or less stable (less lately, but that’s a short term thing due to the bad economy). That is, the instant one of the Detroit 3 goes poof (not chapter 11, but completely out of business), everybody else’s sales will rise (overall) by the total amount of sales that company made. The only difference will be a slight increase in imports, but not by much. The Detroit companies import a fair amount of their vehicles, and the foreign companies make a large number of their vehicles domestically, but, in the event of, say, GM going away, most of the sales will go from domestically built Cobalts to domestically build Focuses, Civics, and Corollas, or from domestically built Silverados to domestically built Tundras, Rams, and F-150s. The net increase in imports will be very minimal. So, the overall net decrease in sales by parts manufacturers in the US will also be minimal.
IF an auto company manufactured ALL of their own parts, they wouldn’t have anything to fear
None of the automakers do this, because it’s too expensive and inefficient to do so.
Why would Toyonda be worried? After all, can’t they just buy out these companies with their profits, or hire their laid off workers?
They don’t need the workers, they need the parts. Buying out the companies would be way too expensive. If it was just one or two, they could do it, but not at the level we’re talking about here. GM has 2100 suppliers. You can choose any really low percentage number you want…if only 10% BK’d because GM BK’d…you’re still talking about about 210 suppliers the auto industry would have to figure out how to replace.
Bubba has hit the nail on the head here, and if anyone doubts it, just look at how the other automakers are acting. Think about it, if GM going down simply meant more sales for everyone else, then everyone else would just be conspicuously quiet.
Think about Ford…they have more cash than GM, they’re headed down too, but everyone knows GM will run out of money first. Remember the saying, you don’t have to outrun the bear, you just have to outrun the other guy that’s running from the bear. If this was a simple zero-sum game, Ford would sit back, argue against funding, wait for GM to go out of business, and instantly see their volumes go up, saving the day…right?
Same with Nissan/Toyota/Honda/etc…
But the reality as all the automakers see it, is that GM goes down, drags a number of suppliers with them, and the other automakers have to stop production while they figure out how to re-source parts.
Don’t buy the “there’s been plenty of warning” argument, because many parts take years to tool and validate, even if the specifications already exist.
If half of Ford’s portfolio had to stop production due to lack of a single part, they would be out of business very quickly. I don’t know how quick, but my guess would be less than 2 months (remember how the American Axle strike affected GM?).
Chrysler of course would be gone quicker, and by the time all three companies were out, so many more suppliers would be gone with them.
EVERY automaker sees this scenario coming and NONE of them want it to happen.
Ghosn was on CNN today talking about how precarious the situation is.
Toyota, Honda, et al don’t have enough cash to prop up an industry. And besides, their revenue would come screeching to a halt as their assembly lines stop.
This is not pretty, and industry insiders know it.
I’ll try to be more congenial in my comment . . .
It’s easy to second-guess the decisions of the domestics’ top management . . . after all, how smart can they be given their current financial straits? I guess I can understand how the average internet pundit might really think they could make better decisions.
But when the rest of the industry — including those that are held up as paragons of management excellence — are saying things and more importantly acting in accordance with the domestics’ views, isn’t it time to re-think your position?
Do the posters here who still insist that a BK by GM would be ‘no big deal’ and have little impact on the industry and economy really think they’re smarter than the management at GM and Ford . . . and the management at Toyota and Honda?
Or maybe Toyota’s and Honda’s PR departments are secretly shills for GM . . .
If you refuse to see the world as it is . . . if you continue to stand by your opinions even as it becomes more and more obvious that you are wrong . . . then aren’t you guilty of the same hubris that you accuse Rick Wagner et al of?
in the event of, say, GM going away, most of the sales will go from domestically built Cobalts to domestically build Focuses, Civics, and Corollas, or from domestically built Silverados to domestically built Tundras, Rams, and F-150s. The net increase in imports will be very minimal. So, the overall net decrease in sales by parts manufacturers in the US will also be minimal.
This is exactly the argument that scares all the automakers because it sounds plausible enough that some in the press and government believe it. However, it would only be true if the parts were interchangeable. They’re not, and that’s the whole point of why so many suppliers are going to die if you take away a big part of their business.
So if GM’s American suppliers go under that means only their imported cars like the Korean Aveo and the Australian built G8 would be unaffected, or would they be affected too ?.
How about those Karmann/Mercedes built $18,000 Crossfires, would they be affected ?.
This is the problem with outsourcing everything these days, one domino falls and it takes the rest of them with it.
The way the media crows about how much money ToyHonNiss makes, you’d think they could just buy the g-d suppliers they’d need! I think this situation is being way overblown, as the remaining manufacturers will make up a lot of the slack created by the one or two that may downsize considerably. None of them will stop operating even if they go b-k, and the suppliers will still get their money eventually, and that’s all they’ll need to keep operating as they can get loans on the receivables, especially from the gov’t the way they’ve been doling it out.
The backlash has hardly started yet? Hell, most people are against the bailout. Half the country is buying foreign, and half the people who buy domestic only did so because they were the only people who would lend them money.
The days of strong Japanese antipathy are pretty well past imo. The 90s were the last hurrah. Even if you don’t like buying imports, its such a common sin that it’d be hard to get excited about it.
Now, if you own a Honda in Michigan… be very afraid. Everywhere else, not so much.
I’m positive that everyone but the D3 has the coin to manage their supply chain. At the very least with critical suppliers they would loan bridge money to help them cope with that gaping hole in their finances.
But really, does anyone really think the suppliers haven’t been prepping for this moment too? I can’t believe they weren’t aware that the domestics were in trouble.
I’m positive that everyone but the D3 has the coin to manage their supply chain.
GM spends $31B a year on supplied parts. Since suppliers make very low margins, that’s how much it would take to keep them all in business. For a year.
But really, does anyone really think the suppliers haven’t been prepping for this moment too?
How do you prep? Put money away for a rainy day? You have a business that operates on low margins, then a significant part of your business goes away and you’re stuck with an idled plant and all the overhead that goes with it. Your cashflow immediately goes very negative.
Again, if this wasn’t a big deal, why aren’t all the competitors just licking their chops and waiting for their volumes to skyrocket? Because it won’t work that way!
It’s in a company’s best interest to indicate to the press and financial community when their outlook is credibly positive. It helps their stock price. Which automaker is standing up right now and saying that the impending BK by GM and possibly others is a good thing for their outlook?
Anyone? Bueller?
@MichealJ:
I don’t think your argument is valid that because Toyota thinks a GM bankruptcy might be harmful to them, a bailout is needed.
If you remember, the point of the Death Watch series that started three years ago on TTAC was that going through Chapter 11 would make GM a leaner, competitive company that could finally make profits again. And it was argued early on that Toyota, Nissan, etc. won’t like it.
For them, an ailing American car industry is the best that can happen to them.
I’m not saying it won’t be a big deal. It will be a very big deal.
But manageable? Probably.
And between all the other companies besides GM who need these guys to stay in biz, 31 billion isn’t too bad.
Bunter
as a Gm engineer what does that say? Were not as arrogant as people would lead you to believe.
Sherborn
Thanks for calling me a loser, I appreciate that. Not
Say there really is the possibility of certain critical suppliers going toes up if one or more of the 2.8 suddenly stopped paying it’s bills. Wouldn’t Toyota, Honda, Nissan, VW and the other surviving auto makers put up whatever money is needed to keep the lights on, perhaps in the form or prepayment for future deliveries?
Aren’t the underlying custom integrated circuits for these many devices already built at one or more sub-contract wafer fabs in Taiwan, Singapore, etc.? The days when a Delphi runs it’s own in house wafer fab ended two decades ago.
I don’t see a scenario where the transplants shut down for a year or more as a result of GM, et. al. going bust. Also, GM wouldn’t go bust worldwide, probably just in the US. Since the majority of GM’s sales volume is outside the USA, that means that GM’s purchases of parts wouldn’t go to zero either.
This one falls, everyone falls argument reminds me too much of the Y2K scare which turned out to be much ado about very little.
The number one issue in all this is who owns the IP? Is it the OEM or the designer? Can the assembler negotiate? If the OEM loses enough volume to become nonviable, can the assembler negotiate/appropriate enough to transfer to someone else?
Sounds like expensive court time to me but not unworkable. Those in the industry posting; can you give a timetable for startup if you had to make a new part, similar to what you’re already making, with all the available components available to you, dies, files, molds etc. Surely not a year.
6 to 8 months. Thats the lead time for a supplier switch given the tooling and dies are transfered.
If you have to make dies and tooling its 12 to 18 for first shot prototypes. 24 to 36 to get validation done.
I don’t think your argument is valid that because Toyota thinks a GM bankruptcy might be harmful to them, a bailout is needed.
That’s not my argument. My argument is that the ripple affects are much bigger than people who are outside the industry understand. Pointing at the reactions of Toyota and others is evidence of that point.
I don’t see a scenario where the transplants shut down for a year or more as a result of GM, et. al. going bust.
I do. What people don’t realize is that when you lose a supplier, it’s not like KMart going out of business so you just go to Walmart instead. It takes a considerable amount of time to re-source, tool, and validate components. Or it will take a shitload of cash to prop up suppliers that are on the edge of going out.
Aren’t the underlying custom integrated circuits for these many devices already built at one or more sub-contract wafer fabs in Taiwan, Singapore, etc.?
This is only one factor. When it comes to electronics, you not only have to have the subcomponents, you also have to ensure the robustness and functionality of the assembly under a ton of different conditions. You don’t plug and play this stuff.
can you give a timetable for startup if you had to make a new part, similar to what you’re already making,
It’s too bad this posting is getting old and not many are going to be reading this deep, because this is a great question.
The answer is different for every part.
On some parts, especially complicated castings, tooling alone can take more than a year.
Other parts can be retooled faster. But even if you save the tooling (the purchase of which will take some time, quick estimate – 1 month), move it to another location and install (1-month), start building the parts and work out the kinks in the production process (1 month), you still have to validate the parts. You don’t just look at it, say “Looks good!” and start building production cars with it. That’s suicide. You’ll get away with it sometimes, but not every time, so you’re talking 6 months of validation under accelerated testing.
So that’s 9 months. And no matter how much money you throw at it, it won’t go faster.
The only solution to do things quickly is to keep the supplier in business by throwing money at them. But that is big, big money when you spread it across a number of suppliers.
Either solution is not trivial, and both are very very expensive.
Horner brought up the piston ring earthquake in Japan, which shut down lines in Toyota and Honda. This was a damage issue, and Toyota and Honda sent hundreds of engineers to the supplier to fix things as quickly as possible. They lost tens of thousands of vehicles.
This was one supplier. It took hundreds of engineers from the OEMs to right the ship. And they got the supply chain moving again in a couple weeks through repairs. And they lost well over $1B in revenue.
Spread that across lots of suppliers, some of which will be down for more than a couple weeks, and do the math.
Okay, this is a useful discussion. It looks like everyone whose livelihood depends on getting bailed-out is in favor of the bailout. Good to know.
“Apres Moi, Le Deluge” – you hear it every time.