The outsourcing v.v. insourcing debate has been waged for decades in the auto industry. GM just realized there is one. “The balance of power has shifted. The profits are made by the people who have the technological know-how, and that’s the suppliers,” quoth GM Europe VP Carl-Peter Forster last night, while Focus was taking notes.
Forster is expected to take over the CEO job of Opel, owned by the Magna/Sberbank/GM cabal. Is he just pandering to the new guys in charge? Oh no. Just the opposite . . .
“We all had the vision that the OEMs (original equipment manufacturers) should just assemble bits and pieces, do a little bit of marketing, a little bit of design and all the rest would be done by suppliers,” Forster said via Reuters. “That was a nice vision. It sounds very lean, but the profit making opportunity is also shifting to the ones that have the technological knowhow.”
Now wasn’t there all this hue and cry about the IP escaping to Russia? Now Forster says there never was much valuable IP—it’s all with the suppliers already.
In the world according to Forster, “volume carmakers in good years at best earn an operating margin of 4 to 5 percent; suppliers that control exclusive technology can make double-digit returns.” (Suppliers will have a different view.)
So Forster is looking for “areas you want to move back into. And interestingly enough one of the areas is electrical propulsion.” His big hope to bring technological know-how inhouse: the Volt.
Anyway, corporate amnesia must run rampant at GM. GM had started the outsourcing trend in the last century, some time in the 80s. Then, they lost their outsourcing champion Jose Ignazio Lopez to Volkswagen, where he infested Wolfsburg with the same bug. GM sued for industrial espionage and invoked the RICO act. Lopez was fired, VW paid $100M to GM . . . and had to outsource parts worth $1B to GM.
Forster: “…. suppliers that control exclusive technology can make double-digit returns.” (Suppliers will have a different view.)
Delphi have been making double digit returns???
Good thing that disclaimer was there from you Bertel.
I suppose it depends who’s the supplier.
When I was a worker for a supplier to Toyota, Toyota used to investigate every minute detail of the relevant business. It was because Toyota wanted to be assured that the company was healthy and turning a profit. A profitable supplier is a reliable supplier, makes sense, I’ve heard stories of Toyota paying MORE to suppliers because they weren’t convinced the supplier could turn a healthy profit at the prices they were offering. Likewise, Denso is making healthy margins, but that’s probably more to do with Toyota owning a huge chunk of the company.
Now let’s look on the other side of the coin. Delphi and Visteon. GM and Ford continually put the thumbscrews on their suppliers in order to drive down costs (not that the customer saw any of these cost savings, I think it was more for their shareholders).
It just goes to show you that nobody wins, unless everybody wins. Work together, everyone shares in the spoils; try to screw someone over and, eventually, it’ll bite you in the arse.
Also, I’d like to hear a retort from some suppliers (preferably GM suppliers, but they’d never agree to speak out against their customer) about how accurate, Mr Forster’s assertion is.
@PeteMoran
Herr Schmitt didn’t need that disclaimer as he was quoting someone else and not his opinion. Having said that….
@Herr Schmitt
You should have said “Suppliers MAY have their own opinion”. To say “will have” suggests that you know that they disagree. You don’t know that for a fact.
Jeez, it’s even simpler than that: the moronic management at GM (and much of America) boils down to this: it wants to make all the money without doing any work or taking any risk or using any imagination. So would anyone, except that anyone with any integrity above the age of 8 would know that that can’t work. Ipso facto, GM management has the mental age of 8 and the integrity of tapeworm. Q.E.D. And we’re supposed to be all fired up about buying cars from these %^$#@s?
My only surprise here is Forster actually knows and admits this. If you don’t have in-house expertise, you have to pay for it, and thus the higher profits and leverage the suppliers have over GM.
GM’s constant reorgs, and lately, mass layoffs, dilute the talent pool (not to mention The Peter Principle is very active there).
Nothing connected with GM’s poor management surprises anymore. GM lurches from one “brilliant idea” to another, and GM always ending up where it came from or going in circles.
Note to Big Ed Whitacre: “It’s the Managment Stupid.”
If suppliers make double digit returns in the OEM business, then Purchasing is asleep at the wheel, and Purchasing usually isn’t.
There ARE a few way to make double digit returns:
– In the first year of the contract. Purchasing of most OEMs wants a 10 % to 15% discount at the end of every year or contract period – it’s good for job security. Knowing that, a manufacturer sets the price higher in the first year, so that he won’t lose his shirt after then 2nd or 3rd round.
– As an OEM selling original parts. Parts are marked up ten times or more between production and final price to customer. And that’s for parts where the OEM has competition. Arcane parts for which there is no alternate offering are marked up by pornographic amounts. Original Parts sales are usually a HUGE profit center.
– As a supplier who sells the same parts as OEM parts under his own brand into the after sales channel. Similar mark-ups as above, but not as obscene, as there is competition.
I said “will,” because usually, selling parts to OEMs is a razor-thin margin business. It becomes good business when the same parts are sold into the after sales channel.
If companies with the know-how can command the profit that doesn’t bode well for the kings of “not invented here” does it?
OTOH, contract design houses should be around for a long time (Lotus, Porsche, Yamaha).
It sure is funny how much is forgotten. In the earlier days of the automotive industry, much of the engineering and production was outsourced. The Dodge Brothers, Budd and Fisher were all massive car body builders for other companies. Continental, Coventry Climax and others made engines for the car companies. Brakes, ignition parts, wheels and the rest came from a massive network of independent companies. Countless auto “makers” competed with one another, though most would better be called auto designers, marketers and integrators.
Then the vertically integrated producers by and large out competed the assemblers. GM was built not only by buying up car companies, but also by buying up component suppliers. Delco, for example, started as an independent company. Alfred Sloan joined GM when GM bought Hyatt Roller Bearing, the company at which Sloan was the President. GM bought Fisher body. Ford took the Do-If-Yourself integration model to the extreme in the famous River Rouge complex where iron ore and other raw materials went in one end and completed cars came out the other.
The cost savings and production control afforded by integrated manufacturing allowed a few companies to completely dominate the auto business.
A few decades later we have companies chasing the illusion of greater profits by doing less of the value added work.
As far as profitability, not all parts have the same profit opportunities. I bet that Bosch makes fine money selling fuel injection, engine control and other advanced electronic systems to the car companies. On the other hand, margins for ball joints and drive shafts are probably razor thin.
Delphi and Visteon (and Magna too) because of their shear size really aren’t traditional suppliers – rather they are best considered to be “Co-Manufacturers” with all the good and bad aspects that come with it.
Well, the suppliers don’t have to deal with:
-variable sales prices
-special financing
-rebates
-kickbacks
-CFC
-sales channel overhead
-commissions
-trade-ins
-service costs
-“I’ll talk to my manager”
No wonder they make money; they ought to.
I am a beancounter who has worked during my career for 5 tier-one automotive supply companies (1 public, 4 privately owned; 1 American-owned, 1 german-owned, and 3 Japanese-transplants)over the course of 16 years.
Only one of these companies had profits more than 5%….most were losers by design (Japanese transplants)….all were at the mercy of the OEM’s and their ridiculous business model.
I could rant all day about this issue, but anyone who would say that the SUPPLIERS have the upper hand in this industry doesn’t really know of what he speaks. Perhaps a FEW, specialty manufacturers have an upper hand, but by and large, suppliers have historically been treated like red-headed step-children by the auto OEM’s.
KatiePuckrik I totally agree.
At my previous job which I left just in the nick of time (THANKS TTAC) – we worked with Visteon and some of their competitors. I have a friend at a Japanese supplier that sells to OEMs Asian and domestic about three hours from here.
Both his experiences and mine are similar to what you report. Domestics squeeze every last penny out of their suppliers. Domestic OEMs seem surprised when the parts they get break b/c the supplier designed something cheap to turn a profit.
My friend says they test stuff to the nth degree and that the Asian customers test everything they receive. If ANYTHING is bad then the whole batch is sent back for testing at the supplier’s expense.
The domestics test SOME of the parts they receive. Much more lax and concerned about cost vs quality. If a few are good enough then good.
Exactly the same experience we had with the domestics.
In the US, the Onetime big 3 were horribly abusive towards their suppliers.
It wass obvious that the suppliers had zero power, while the big 3 had “Monopsony” power and starved the suppliers to death with it, and are still doing so when they can today. In the long run, this greedy strategy proved to be short-shighted and there is no wonder two of the three domestics went bankruot and still are in terrible shape.
On the conrtary, I used to read how TOyota and Honda had far more humane relationships with their own suppliers.