COMMENT: Automakers have suppliers tightly in their grip

COMMENT
Franz W. Rother is Editor-in-Chief of Automobilwoche

Globalization is having some strange effects.

Since the start of the year, a German supplier has been shipping components made in Germany to Romania. These parts are repackaged by a newly created subsidiary in Romania, then sent back to the supplier's automaker customer in western Europe.

The supplier must play this game because its biggest customer demands that components be sourced from low-cost countries in central and eastern Europe and the parts maker does not have the capital to build a plant in Slovakia or Romania.

There is method in this madness.

A few months ago, a member of General Motors' purchasing department bluntly told one of the partners in a south German supplier that he need not bother submitting quotes from his company's German plants. The GM executive said components made in Germany were bound to be too expensive.

Ford of Europe seems to have a similar strategy. The U.S. automaker has sent a letter to its Tier 2 suppliers asking what quantity of their raw materials are sourced from Africa, Asia, South America and central and eastern Europe.

If the supplier refuses to answer, says the letter, then Ford will assume that the parts maker sources 100 percent of its raw materials from low-cost countries. Ford would then likely demand price cuts.

Mid-sized suppliers in Germany face more challenges. Francisco Javier Garcia Sanz, the Volkswagen board member in charge of supply, says he wants to lower VW's purchasing costs 10 percent by 2008. He says suppliers must contribute the bulk of these savings.

Last year VW asked its suppliers to help finance sales incentives for the new Golf. Parts makers did the company's bidding, through gritted teeth.

Now automakers are turning the screw more tightly on their suppliers.

Vehicle makers are dragging parts makers into new ventures in Romania, China and India. The result is job losses, as hardly a week goes by without news of another German factory closing.

Employees at large and mid-sized companies fear they will lose their jobs.

The works councils that represent these employees are in a difficult position when they try to negotiate for a guarantee that a factory will stay open. Management uses the threat of moving work to low-cost countries to push through lower wages, longer working hours and job cuts.

It is clear that costs must be kept under control to keep a company internationally competitive. But employees must think it is adding insult to injury when carmakers save money one way, then waste it in other ways.

For example, marketing consulting firm Simon-Kucher & Partners in Bonn says automakers are still making poor decisions on pricing new cars. The carmakers set the prices of their new models unrealistically high, then they are forced to make drastic reductions.

Automakers cannot blame globalization or "the market" for all of the industry's problems. Poor strategies also are part of the problem.

Tags: Automakers

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