Delphi Automotive Systems Corp., Meritor Automotive Inc. and other large parts makers plan to cut their supply base by 50 percent or more in the next few years.
Suppliers that can't compete on price, quality, engineering or geographic reach will be slashed.
American Axle & Manufacturing Inc., based in Detroit, is following suit, with plans to cut 100 to 150 suppliers from its base of 330. American Axle, which spends $1.5 billion a year on parts and raw materials, next month takes over its purchasing program from former parent General Motors.
The cuts will put pressure locally on thousands of large Tier 2 suppliers plus smaller, often family-owned, parts makers, ranging from plastics companies to screw makers to small metal processors. The likely impact will be more mergers and acquisitions among this group, as the surviving suppliers buy up competitors that have lost or are in danger of losing key contracts.
BILLIONS AT STAKE
At stake are billions of dollars in worldwide purchasing. Delphi, of Troy, Mich., spends $13.5 billion annually in parts and raw materials and has begun a rationalization of its supply base, designed to cut more than 2,000 of 4,500 North American suppliers.
'That's just too many suppliers to manage,' said Ray Campbell, Delphi vice president of global purchasing. 'We've asked our purchasing teams to reduce our supply base by 50 percent. We don't want to break contracts and we want to minimize the trauma, but you can't manage that many suppliers and improve quality.'
Delphi, the world's largest auto supplier, with 1999 sales of $29.2 billion, began notifying suppliers of its plans late last year, Campbell said. Managers have begun reporting back to Campbell with proposals on where, when and what to cut.
Campbell said some of Delphi's largest purchasing areas are nonferrous metals, where it spends up to $2 billion; castings, $1 billion; plastic parts, $1 billion; and stampings. He said fastener purchasing is an area rich with opportunity to cut suppliers.
'It won't be a big bang, but there are certainly some suppliers that have earned our disrespect and will lose our business,' Campbell said. 'Some suppliers will gain while others don't see the opportunity in this. They are the ones that are probably going to be in trouble.'
The trimming of Tier 2 suppliers, which typically don't supply automakers but supply Tier 1 suppliers such as Delphi, is reminiscent of what automakers such as GM and Ford Motor Co. began about 10 years ago.
In the late 1980s and early 1990s, the automakers made major cuts in their supply base, saying such maneuvers saved time and money. The cuts resulted in the number of suppliers worldwide dropping from 30,000 to 8,000 and spurred acquisition-hungry companies such as Lear Corp. and Federal-Mogul Corp.
'What these big Tier 1 suppliers are talking about will put a real squeeze on the Tier 2 companies,' said Clifton Roesler, managing director of W.Y. Campbell & Co., a Detroit investment-banking firm. 'Now they will have to bulk up and consolidate. I think it means the focus for the next few years will be on which small Tier 2 supplier has bought which rival.'
Said Van Conway, president of Conway, MacKenzie & Dunleavy, a Birmingham, Mich., management and turnaround firm: 'What you'll see is `bigger is better.'
'Large suppliers don't want to depend on some small company with $40 million in sales. I'd say all of the companies with sales of $20 million to about $1 billion are at risk. Some billion-dollar supplier doesn't want his whole chain interrupted because some $20 million company is struggling.'
Another supplier that has begun a massive reduction of its suppliers is Meritor, a Troy, Mich., supplier of axles, brakes, transmissions and wheels. Meritor had 1999 sales of $4.5 billion.
Meritor has about 2,000 direct suppliers and wants to cut that down to 600 to 800 over three to five years, said Carl Soderstrom, senior vice president of engineering, quality and procurement.
He said the company sent a letter to its suppliers late last fall saying the company was 'making cuts and looking for suppliers than can support us.'
Meritor had been cutting its supply base by about 10 percent each year, but acquisitions brought new suppliers.
Once the large Tier 1 suppliers make the cuts, they'd like to negotiate longer contracts with the remaining suppliers. That's American Axle's plan, said David Demos, the company's vice president of procurement.
'Right now, GM has put most of our contracts in place, and about 75 percent of them are annual deals,' Demos said. 'We will move to lifetime or long-term contracts that run several years or the life of the part.'