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One of the major losers in the recent “Carpocalypse” was the supplier sector, which lost hundreds of business to bankruptcy as OEMs clamped down on costs and the government refused to stop the bleeding with an effective bailout. Relationships have re-stabilized over recent months,as both the surviving suppliers and OEMs have swung back to the black, but profits aren’t enough to stop the oldest management profit-inflating move in the book: putting the screws on suppliers. Since the US market doesn’t appear on-track to regain its old 16m annual sales level, suppliers and OEMs can’t simply grow together.
According to several Automotive News [sub] sources, the supplier wars are on their way back:
“A lot of the fundamentals are coming back, and it forces those folks that are watching the dollars and cents to take a longer look at pricing. Purchasing groups are going to come back into the fray and start looking at long-term (purchasing) agreements again.”“As volumes improve and the level of new business awards are ramping up and supplier health is more robust, customers (manufacturers) will naturally return to a more aggressive stance on product price-down, and we see this happening now with our customers.”“You’re going to continually see increased pressure on every program to get the best absolute cost structure in place to make it profitable for both parties,” he said. “OEMs want to get back to investment-grade ratings, and lowering the cost or optimizing the cost is best for both sides instead of artificially pushing prices that will swing margins back to the crisis period of 2009.”
Meanwhile, the economy is recovering enough to drive up prices for commodities just as OEMs start crunching on prices, a sure-fire recipe for more supplier bankruptcies. The only silver lining: any supplier company that survived the bloodletting of 2008-09 knows that it has to fight hard to stay in business, and keep its margins healthy. And with overproduction under better control, there may be room on the margins for maneuvering. Still, anytime the OEMs look towards suppliers as a way to improve the bottom line, you know things are going to get ugly.
25 Comments on “Despite Profits, OEMs Still Squeezing Suppliers...”
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You state “government refused to stop the bleeding with an effective bailout.”
I thought TTAC and some others on here were against any Government bailouts. So what is the issue?
The bailouts of GM and Chrysler were justified as a way of preventing cascading bankruptcies down the supply chain… and yet the OEMs got bailouts and the suppliers didn’t, forcing hundreds of firms into bankruptcy. When the government did roll out a supplier bailout, is was basically a stick to beat down suppliers with. Though we are generally against bailouts, by the time the bailout ship had left the dock, we were already arguing that suppliers had borne the brunt of the carpocalypse burden, and that they were at least as deserving of assistance as the OEMs.
And Ayn Rand would smile fondly…
The company I work for is squeezing its suppliers, and shopping for replacements if they don’t capitulate. China has not been a silver bullet in this regard, with several nightmare episodes happening just this year.
Unfortunately, the bean counters don’t care how many engineers have to travel around the world, or spend time constantly monitoring the quality of a low cost supplier. And they don’t care about quality issues until it begins to make a difference in repairs, but by then our customers are unhappy and we’ll spend millions to fix the problems. This is not mere flagwaving rhetoric, but a serious problem that will not go away.
As my manager says… “Let me know when you’re about to save me money”.
It must be profitable, or they would not keep on doing it. Would they? It seems like a mistake to me also. How much can a parts safety factor be reduced before there is a backlash. I don’t know if I’m going to want a new car in the future.
@BMWFan you mean profitable like those sub-prime mortgages were?
Exactly! LOL
Evidently, despite everything, auto companies still haven’t taken to heart the wisdom of the words “Penny Wise…Pound Foolish”.
That’s ok, the car-buying public will teach ’em. Again. Hopefully, the lesson will actually stick this time.
God is in heaven and the Emperor far away. By the time they find out I’ll be gone with your money and you’ll be dead. – Chinese saying
I wonder where supplier supplied component quality ranks in the overall scheme of things.
What happens when overseas supplied components best in-the-USA created components regarding price with component quality variable non-existent?
Many possible variable with a possible eventual migration of ALL auto and/or truck manufacturing plants relocated outside the USA.
Will We, the People…. well, the power-broker decision makers running the “show” in the USA simply relocate every possible manufacturing unit outside the USA and eventually create a “new type” of USA with a HUGE destitute underclass clamoring for survival but with a small minority of extremely wealthy decision makers atop the socio-economic pile?
When only a small minority within the USA can afford the overseas-made-goods what will happen THEN to the corporations that relocated to outside the USA and so greatly altered USA socio-economic demographics?
Will outside the USA sales allow those corporations to continue providing a wealth stream?
What about the possible incredibly HUGE number of social and economic changes within the USA, many unpredictable? Is it not conceivable that large numbers of USA citizens will be wallowing in an economic mire; living akin to a 3rd-world life-style?
Could any of the scenarios painted within a plethora of science-fiction writings based upon future horrors of a country/society in severe turmoil come true?
Alas and oh well. By the time the worst occurs I will assuredly be long dead and gone.
My gut, steadily decreasing in size partially due to a continued lack of income requiring me to cut down food expenditures but viewed as an actual benefit since skinniness equates with a healthier Old Coot body, nibbles at my mind that the USA’s future could possibly be a horrid place for the majority to dwell within.
My main fear is that the powerful/very wealthy few will have the wealth needed to isolate themselves from the turmoil that may develop while the average folks are unable to escape their fate.
I observed what happened in Fort Wayne, Indiana during a lengthy strike at the International Harvester factory there when many sub-contractors had to lay-off employees due to the orders ceasing.
Many laid-off sub-contractor workers were never called back as that event with one plant had permanent repercussions, but ONE event that led to the creation of the “Rust Belt.”
If the social turmoil I predict is eminently possible eventually does occur it could lead to an immense amount of inner imbalance that could conceivably lead to the end of the Founders’ Great Experiment.
Could much or even all of the “blame” eventually be placed at the feet of the greed for wealth and power of a relatively small number of USA citizens?
How much blame can be placed in front of the well-cared-for lackeys and minions and various cohorts of the immensely wealthy and powerful? The politicians and bureaucrats and all those who are relatively well-tended such as the jack-booted thugs who will use force to compel the masses to obey along with others who isolate the ruling class from the horde of commoners.
Much conjecturing but since the USA tends to concentrate upon micro-views while ignoring macro-views I believe my questions and pondering leads to legitimate questions and doubts about the future.
And the goings-on in the complex immense USA auto industry provides a portal to view aspects of a much larger picture of a future USA economy, society, etc.
Meanwhile, my dumpster food sources are staked out and I will bite to defend my comestible sources as the inevitable shortages arise in the not-too-distant but possibly after my demise, future.
Grrrrrrrrrrrrr………….
Are you kidding?
Moving manufacturing to China wasn’t solely the decision of the overlord capitalist pigs you know…
Plenty of overpaid Union brothers had no problem holding a flag wrapped gun to the heads of various manufacturers, demanding “fair” (read: above market) wages and benefits…
Wages and benefits those same workers were MORE THAN HAPPY to stretch to the last penny buying cheap Chinese made goods at WalMart and Costco. So manufacturers, under tremendous price pressure from the consumer and equal pressure from their workers (and the government) for higher “fair” wages often threw their hands up, shut down USA manufacturing and called China.
It is and was a vicious cycle. Today, the vast majority of consumers no longer care. “Made in China” no longer applies to cheap schlock, but iPhones and other high quality goods, so the stigma has all but disappeared. Everyone still prattles on in lamentation of the American manufacturing sector… right up until they whip out their credit card to actually buy something.
The initial transfer of American industry to China was a geopolitical strategic play. Ever hear of the Ussuri River border “clash” of 1969? If not, Google it. Actually, it was more than a “clash”, closer to a mini-war. The Chinese got their clocks cleaned by the Russians, and they (the Chinese) went into panic mode. Nixon/Kissinger saw this as an opportunity for rapprochement with China. The goal was to use China as a counterweight against the USSR. The Chinese were receptive to this American outreach. Mao was desperate to modernize China even before the Ussuri River humiliation. China needed a transfer of American technology/industrial knowhow. China was also in need of Western currency. China was granted most favored nation trading status, even though Washington knew that it would kill off some portion of US industry. This was considered and acceptable cost of containment of the USSR..cheap compared to starting a shooting war with the Russians. Eventually the American strategy of building up China, increasing US military power, while encouraging radical Islam in the Near East and Central Asia(Osma and Saddam were both on the CIA payroll at one point) brought the USSR to its knees. The USSR was gone, but US business was hooked on the dope of cheap Chinese imports. This type of unintended consequence is what the CIA refers to as “blow back”. I’ll take a guess and say that this will end in a war. A war that will end the USA as we know it.
@Gregory Koenig:
You’re exactly right. Nobody wants to be the first to have a more expensive product. Politicians make hay about bad companies that are ‘shipping jobs overseas’, but those cheaper goods are now the reason so many Americans remain employed.
If I develop an “American-made” product that costs 2X its foreign-made counterpart, my company sells nothing, and I end up unemployed.
Recalls will tell the story. Somebody needs to spill the beans on yard holds. NA manufacturers are still having a hell of a time trying to figure out whose responsible for the design and testing of any particular part since they change employees and their positions every few months nobody seems to know who authorized what and when. Some of the upcoming defects are ridiculous. These manufacturers who are pushing their suppliers are driving them way too far too fast but the funny thing is they are hanging on to the hood instead of being behind the wheel.
You know how the game works. Detroit squeezes the suppliers. The suppliers deliver the cheapest product possible. Detroit saves money so they can feed the UAW. But, the cheap parts create reliability issues. The result is every Detroit brand is less reliable than every Toyota and Honda brand in Consumer Reports.
Oh well. I guess Detroit hopes NHTSA can steer people back to Detroit vehicles by launching a Toyota Recall Attack.
That is how our once great auto industry now works. What a shame.
Grinding your suppliers may produce short term gains, but unless you were letting them get away with murder in the first place it will backfire on you. If you grind them too hard they will comply-at the cost of lowered quality. Since the product you are buying is going to be used in your product, that lowered quality will flow through to your customer. GM and Chrysler should be able to quote you chapter and verse on what that can contribute to.
I had a recent experience along these very lines. A particular type of temperature sensor is used on some of our equipment. About 3 years ago the quality of one of it’s components became noticeably worse than it used to be. Then the failure rate went through the roof, often during the warranty period, or else soon enough afterwards that I went after the supplier. Replacement parts became difficult to get and soon the word was out that they were in trouble.
Everyone in the industry was having trouble with a previously bulletproof item, and soon enough a competitor capitalized. I’m not going to name the company, as it is small and they are nice enough folks, but they have done irrepairable harm to their reputation and business. I wonder how the person who made the decision to grind their supplier feels now? Dumb Dumb Dumb.
You see cheap components often in a place not expected: like some products designed and/or made in advanced European countries.
Because they face high costs for generous socialist programs and obsessive green goals which can not be avoided, they seek to lower production cost by thinning out the product in the most trivial ways.
Thus you get great designs stunted with oddly thin material where surely 40 cents more material would have made it more solid and durable.
Examples are Swiss kitchen tools maker Kuhn Rikon and the FN57 handgun from Belgian arms maker FN Herstal. Others cite the price for small brackets for Euro motorcycles.
Their engineers can probably point to some passable MTTF specs but the fit and feel of the object is not what it should be especially given the high price.
The other side effect of the downturn is the loss of smaller businesses who can’t afford to ride out the storm (so putting on my tinfoil hat, I’d say that the downturn benefited those larger suppliers that are “too big to fail”). I know waaa waaa, free market, yada yada, but a diversity of suppliers, both large and small, is beneficial to everyone in the long run. Small, hungry suppliers will take on jobs (high mix/low volume parts, for example) that larger suppliers won’t even look twice at. And they’ll hold onto tooling used every now and then that the larger shops will write off and scrap within a year of non-use. Now what do you do when those smaller suppliers aren’t there any longer? Or maybe they are, but are now half way around the world, 8 time zones away with the cultural/language barrier in between to boot.
Look at Detroit 100 years ago. Anything and everything that went into an automobile could be had locally, and probably was manufactured within 50-100 miles if not closer. There was a real synergy in that kind of environment that does NOT exist today with global suppliers having plants scattered about the globe. What are the chances of a Tier 3 design engineer actually talking to somebody at the part’s end purchaser/assembler?
Given all the talk from NA automakers regarding “quality”, I wonder how squeezing suppliers, etc. squares with Demings principles (ie supplier development).
Also, I think Gregory Koenig hit the nail on the head. All too many people, union or not, who demand the very best in “fair” wages, then scurry to the big-box stores to buy cheap import (read:China) stuff. It seems Adam Smith’s invisible-hand can also be used to (collectively) slit our own throats.
Instead of bitchin like over-sugared little school girls about those evil “rich” people you could do what they do and start a corporation and compete…When you get “rich” you will then be resented by the little Envy-ridden, Lazy, Beer-guzzling, TV-watching, Bratty, and Psychotic public school parasites…Does that sound like fun?
….Yeah!….it does
I think this is leading to the “Throw Away Car”. A car that lasts say for only a 100,000 miles or 5 years and is then recycled. This is what happened to the electronics industry (try getting your new LCD TV fixed).
A car that only lasts for 100k miles or 5 years? I think that’s most cars made prior to about 1990. Didn’t odometers used to only go up to 99,999.9 miles?
Seriously, auto makers (and all other large manufacturers, frankly) have been beating up their suppliers on price for at least 80 years, ever since cars became mass market consumer goods rather than luxury toys.
Over this time span, cars have gotten better and better and their effective life spans have increased dramatically. There’s nothing new happening here, and I don’t see any reason to expect a different outcome from the consumer end this time.
The difference between the American manufacturing model and the Japanese manufacturing model is a fundamental one.
The American engineer is taught to think in these terms:
“How can I make a component with the same functionality but make it more cheaply?”
The Japanese engineer is taught to think:
“How can I make a component with the better functionality but not make it more expensive?”
Neither engineer ever succeeds completely. The American component gradually decreases in quality. The Japanese component gradually increases in price.
However, the Japanese can put a lower cost model below the unit with the increased cost – Think of the history of Honda: Accord as small car, Civic as small car, Fit as small car.
The Americans end up with the diminished quality working its way upward through the product line – think Cadillac.
Unfortunately, we have taught the Chinese the American model and that is therefore our future as consumers.
Yep, good ol’ GM – leaders in the race to the bottom.
Another wasted IPO,,,