PORT HURON, Mich. - Through the past decade, small to mid-sized molders watched as industry leaders merged and acquired their way to the top of the auto supply chain.
Now those same pressures to either grow or sell out are about to hit them full force. They must decide if they will develop a unique niche, or hang on as a shoot-and-ship molder, and whether they can lead a business that can fight pricing cutbacks pushing their way down the value chain.
'The price squeeze is real,' said Daniel Luria, vice president for strategy and measurement with the Michigan Manufacturing Technology Center of Plymouth, Mich., during a conference on Profits in Plastics Processing sponsored by the Society of the Plastics Industry Inc.'s Midwest regional office in Port Huron.
'You either have to figure out a way to decrease costs and live with the price squeeze, or figure out a way to reduce the impact of the price squeeze by adding value,' Luria said. 'There are two - and only two - bullets in the chamber.'
Companies with less than $100 million in sales are the next target in the auto industry's goal to cut the supplier base and pass on the demand for innovations, Luria said.
PRICE CUTS HIT
The next round of price cuts already is hitting the biggest businesses, with Tier 1 suppliers receiving demands from automakers for cost cuts ranging from 3 percent to 9 percent.
'We don't see that lightening up at all,' said William Maclean, president of Textron Automotive's trim division at the Executive Forum 2001 in San Antonio. 'We see it intensifying.'
A top system integrator already in a price squeeze cannot afford to continue paying premium prices to its own suppliers, so more cost pressures will ripple down the value stream, said Tim Hamashuk, product line director for Delphi Automotive Systems Corp.'s interior systems. 'It's going to be around,' he said. 'It's not going to go away.'
It is part of a tough lesson that companies must learn, said consultant Jeff Mengel, a partner with Plante & Moran LLP's Auburn Hills, Mich., office during the discussion in Port Huron.
'Your customer doesn't care if you make money,' he said. 'This is not a partnership.'
EXPANSION NOT ENOUGH
So to survive, suppliers must develop a strategy.
The best one is to take the same one that Tier 1 suppliers already have - come up with the new products your customers want to buy, Luria said. A molder selling something new can control his own price better than someone making the same product as his rival.
'Value added is income,' he said. 'If you can add value, you can justify premium prices.'
That means companies need to invest in new designs or specialty processing. They have to make themselves valuable to their customers.
That does not merely mean rapid expansion, though, Mengel said. Businesses need not be giants, but they have to bring something unique to the table.
'I don't care what size you are, you've got to be a gorilla in something,' he said. 'You've got to find your niche and own it.'
And, Luria said, companies must reinvest the income earned from that niche into new product development to make certain they are ready when interest in that part either wanes, or competitors pick up on production techniques.
'Get very good at what you're doing. Harvest your money and put it where it can make even more money,' he said.
Businesses also should shave any fat off their processing techniques rather than waiting for any downturn, and invest in improvements that will reduce scrap and improve cycle time, Luria said. That will cut costs in the long run.
Hamashuk encourages processors to walk through their plants, following their parts through each stage of production, from the moment resins arrive on site to the point a finished piece leaves. It is one of the most basic ways to cut costs by cutting travel time in-house.
'I'm amazed at how many times I cross the same path,' he said. 'It's about thinking beyond the traditional concepts of processing and looking at the entire life cycle of the part.'
CUTTING SUPPLIER BASE
Both design and processing skills will come into wider play as systems integrators look to reduce their supplier base to just a smaller group of strategic companies, Mengel said.
Textron and Delphi are cutting back on the number of Tier 2 suppliers. Magna International Inc. in Aurora, Ontario, has a 40-page list of requirements for its key suppliers, calling for companies that can hit quality and delivery quotas as well as play a part in design.
'We want to do a whole lot less of the things that are not core to us,' said Keith Angelocci, director of purchasing for Magna's interior systems. 'We're not the best people to design plastic parts. That's where we want our suppliers to be.'
Small molders - with less than $10 million in sales - will not be able to meet all of Magna's demands, he said.
Some processors have made the decision not to change, and voluntarily move further down the supply chain, Maclean said.
Others will find it hard to develop a niche, especially in a business where engineers are in high demand by automakers and Tier 1 suppliers.
'There is not a wealth of engineers sitting around waiting to be tapped,' Hamashuk said.
But there is another potential risk awaiting those companies that do not invest in new technology or systems, Mengel said. They will be the first and hardest hit by any decreases in auto sales.c
As the industry slows, orders for components to shoot-and-ship molders will decrease, he said. Small parts that are not considered to be worth a multibillion-dollar integrator's time will come back in-house if that same integrator needs extra volume to keep plants open and employees busy.
Processors cannot control their future if they do not take the initiative to create future products, he said.
Said Mengel: 'If you don't have design responsibilities, you're just renting machine time. That's all.'